Kadant Reports Third Quarter 2022 Results

Kadant Inc. (NYSE: KAI) reported its financial results for the third quarter ended October 1, 2022.

Third Quarter Financial Highlights

  • Revenue increased 12% to $225 million.
  • Bookings decreased 14% to $211 million.
  • Net income increased 34% to $27 million.
  • GAAP diluted EPS increased 34% to $2.35.
  • Adjusted diluted EPS increased 21% to a record $2.38.
  • Adjusted EBITDA increased 17% to a record $48 million and represented 21.3% of revenue.
  • Operating cash flow decreased 34% to $25 million.
  • Backlog was $350 million.

Note: Percent changes above are based on comparison to the prior year period. Adjusted diluted EPS, adjusted EBITDA, adjusted EBITDA margin, and changes in organic revenue are non-GAAP financial measures that exclude certain items as detailed later in this press release under the heading “Use of Non-GAAP Financial Measures.”

Management Commentary“We delivered strong revenue and earnings performance in the third quarter despite the challenging macroeconomic environment,” said Jeffrey L. Powell, president and chief executive officer of Kadant Inc. “Organic revenue growth was 19 percent in the third quarter with excellent contributions across all operating segments. Solid execution led to a fourth consecutive quarterly record for adjusted EBITDA and record adjusted earnings per share.

“Throughout the quarter we successfully navigated increasingly complex market conditions fueled by inflationary pressures, the strengthening U.S. dollar, lingering global supply chain constraints, and China's zero-COVID policy. Our operations teams around the globe continued to do an excellent job proactively managing these challenges.”

Third Quarter 2022 compared to 2021Revenue increased 12 percent to $224.5 million compared to $199.8 million in 2021. Organic revenue increased 19 percent, which excludes a seven percent decrease from the unfavorable effect of foreign currency translation. Gross margin was 42.5 percent compared to 41.9 percent in 2021. Gross margin in 2021 included a negative 110 basis point impact from the amortization of acquired profit in inventory.

GAAP diluted earnings per share (EPS) increased 34 percent to $2.35 compared to $1.75 in 2021. Adjusted diluted EPS increased 21 percent to a record $2.38 compared to $1.97 in 2021. Adjusted diluted EPS excludes $0.02 of acquisition costs and $0.01 of restructuring costs in 2022. Adjusted diluted EPS excludes $0.22 of acquisition-related costs in 2021. Net income increased 34 percent to $27.5 million compared to $20.5 million in 2021. Adjusted EBITDA increased 17 percent to a record $47.8 million and represented a record 21.3 percent of revenue compared to $40.9 million and 20.5 percent of revenue in the prior year quarter. Operating cash flow decreased 34 percent to $24.9 million compared to $37.9 million in 2021 due to an increase in working capital.

Bookings decreased 14 percent to $210.9 million compared to $244.7 million in 2021. Organic bookings decreased ten percent, which excludes a five percent decrease from the unfavorable effect of foreign currency translation and a one percent increase from an acquisition.

Summary and Outlook“As we look ahead to the remainder of 2022, we are well positioned to finish the year strong,” Mr. Powell continued. “We have a significant amount of capital projects to deliver in the upcoming quarter, and our backlog remains at a near-record level. However, we expect macroeconomic headwinds to strengthen and order activity to continue to moderate through the remainder of the year.

"We are narrowing our revenue and adjusted diluted EPS guidance and we now expect revenue of $890 to $896 million in 2022, revised from our previous guidance of $890 to $905 million. Our GAAP diluted EPS guidance is now $10.02 to $10.19 revised from our previous guidance of $10.05 to $10.25. This guidance includes a $1.30 gain on the sale of a facility, $0.06 of acquisition-related costs, and $0.02 of impairment and restructuring costs. Excluding these items, we expect adjusted diluted EPS of $8.80 to $8.97, revised from our previous guidance of $8.80 to $9.00. For the fourth quarter of 2022, we expect GAAP diluted EPS of $1.90 to $2.07 on revenue of $217 to $223 million."

Conference CallKadant will hold a webcast with a slide presentation for investors on Wednesday, November 2, 2022, at 11:00 a.m. eastern time to discuss its third quarter performance, as well as future expectations. To listen to the call live and view the webcast, go to the “Investors” section of the Company’s website at www.kadant.com. Participants interested in joining the call’s live question and answer session are required to register by clicking here or selecting the Q&A link on our website to receive a dial-in number and unique PIN. It is recommended that you join the call 10 minutes prior to the start of the event. A replay of the webcast presentation will be available on our website through December 2, 2022.

Prior to the call, our earnings release and the slides used in the webcast presentation will be filed with the Securities and Exchange Commission and will be available at www.sec.gov. After the webcast, Kadant will post its updated general investor presentation incorporating the third quarter results on its website at www.kadant.com under the “Investors” section.

Use of Non-GAAP Financial MeasuresIn addition to the financial measures prepared in accordance with generally accepted accounting principles (GAAP), we use certain non-GAAP financial measures, including increases or decreases in revenue excluding the effect of acquisitions and foreign currency translation (organic revenue), adjusted operating income, adjusted net income, adjusted diluted EPS, earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted EBITDA, adjusted EBITDA margin, and free cash flow.

We use organic revenue to understand our trends and to forecast and evaluate our financial performance and compare revenue to prior periods. Organic revenue excludes revenue from acquisitions for the four quarterly reporting periods following the date of the acquisition and the effect of foreign currency translation. Revenue in the third quarter of 2022 included $0.2 million from an acquisition and a $14.1 million unfavorable foreign currency translation effect. Revenue in the first nine months of 2022 included $40.1 million from acquisitions and a $27.0 million unfavorable foreign currency translation effect. Our other non-GAAP financial measures exclude impairment and restructuring costs, acquisition costs, amortization expense related to acquired profit in inventory and backlog, and certain gains or losses, as indicated. Collectively, these items are excluded as they are not indicative of our core operating results and are not comparable to other periods, which have differing levels of incremental costs, expenditures or income, or none at all. Additionally, we use free cash flow in order to provide insight on our ability to generate cash for acquisitions and debt repayments, as well as for other investing and financing activities.

We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our core business, operating results, or future outlook. We believe that the inclusion of such measures helps investors gain an understanding of our underlying operating performance and future prospects, consistent with how management measures and forecasts our performance, especially when comparing such results to previous periods or forecasts and to the performance of our competitors. Such measures are also used by us in our financial and operating decision-making and for compensation purposes. We also believe this information is responsive to investors' requests and gives them an additional measure of our performance.

The non-GAAP financial measures included in this press release are not meant to be considered superior to or a substitute for the results of operations prepared in accordance with GAAP. In addition, the non-GAAP financial measures included in this press release have limitations associated with their use as compared to the most directly comparable GAAP measures, in that they may be different from, and therefore not comparable to, similar measures used by other companies.

Third Quarter

Adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin exclude:

  • Pre-tax expense related to amortization of acquired profit in inventory and backlog of $2.8 million in 2021.
  • Pre-tax acquisition costs of $0.4 million in 2022 and $0.7 million in 2021.
  • Pre-tax restructuring costs of $0.1 million in 2022.

Adjusted net income and adjusted diluted EPS exclude:

  • After-tax expense related to amortization of acquired profit in inventory and backlog of $2.0 million ($2.8 million net of tax of $0.8 million) in 2021.
  • After-tax acquisition costs of $0.3 million ($0.4 million net of tax of $0.1 million) in 2022 and $0.6 million ($0.7 million net of tax of $0.1 million) in 2021.
  • After-tax restructuring costs of $0.1 million in 2022.

Free cash flow is calculated as operating cash flow less:

  • Capital expenditures of $6.4 million in 2022 and $3.4 million in 2021.

First Nine Months

Adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin exclude:

  • Pre-tax gain on the sale of a facility of $20.2 million in 2022.
  • Pre-tax acquisition costs of $0.5 million in 2022 and $2.6 million in 2021.
  • Pre-tax indemnification asset reversal of $0.6 million in 2022.
  • Pre-tax impairment and restructuring costs of $0.3 million in 2022.
  • Pre-tax expense related to amortization of acquired profit in inventory and backlog of $0.5 in 2022 and $2.9 million in 2021.

Adjusted net income and adjusted diluted EPS exclude:

  • After-tax gain on the sale of a facility of $15.1 million ($20.2 million net of tax of $5.1 million) in 2022.
  • After-tax acquisition costs of $0.3 million ($0.5 million net of tax of $0.2 million) in 2022 and $2.3 million ($2.6 million net of tax of $0.3 million) in 2021.
  • After-tax impairment and restructuring costs of $0.2 million ($0.3 million net of tax of $0.1 million) in 2022.
  • After-tax expense related to amortization of acquired profit in inventory and backlog of $0.4 million ($0.5 million net of tax of $0.1 million) in 2022 and $2.0 ($2.9 million net of tax of $0.9 million) in 2021.

Free cash flow is calculated as operating cash flow less:

  • Capital expenditures of $16.2 million in 2022 and $7.7 million in 2021.

Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are set forth in this press release.

Financial Highlights (unaudited)
(In thousands, except per share amounts and percentages)
Three Months Ended Nine Months Ended
Consolidated Statement of Income October 1,2022 October 2,2021 October 1,2022 October 2,2021
Revenue $ 224,510 $ 199,789 $ 672,639 $ 568,063
Costs and Operating Expenses:
Cost of revenue 129,154 116,096 383,034 323,337
Selling, general, and administrative expenses 53,153 52,316 167,640 151,014
Research and development expenses 3,245 2,649 9,574 8,547
Gain on sale and other costs, net (b) 72 (19,936 )
185,624 171,061 540,312 482,898
Operating Income 38,886 28,728 132,327 85,165
Interest Income 271 55 650 176
Interest Expense (1,721 ) (1,320 ) (4,321 ) (3,497 )
Other Expense, Net (19 ) (23 ) (60 ) (71 )
Income Before Provision for Income Taxes 37,417 27,440 128,596 81,773
Provision for Income Taxes 9,746 6,742 33,075 21,252
Net Income 27,671 20,698 95,521 60,521
Net Income Attributable to Noncontrolling Interest (184 ) (237 ) (672 ) (635 )
Net Income Attributable to Kadant $ 27,487 $ 20,461 $ 94,849 $ 59,886
Earnings per Share Attributable to Kadant:
Basic $ 2.36 $ 1.77 $ 8.14 $ 5.18
Diluted $ 2.35 $ 1.75 $ 8.12 $ 5.14
Weighted Average Shares:
Basic 11,662 11,580 11,651 11,571
Diluted 11,700 11,668 11,681 11,644
Three Months Ended Three Months Ended
Adjusted Net Income and Adjusted Diluted EPS (a) October 1,2022 October 1,2022 October 2,2021 October 2,2021
Net Income and Diluted EPS Attributable to Kadant, as Reported $ 27,487 $ 2.35 $ 20,461 $ 1.75
Adjustments for the Following, Net of Tax:
Acquisition Costs 276 0.02 595 0.05
Restructuring Costs 72 0.01
Acquired Profit in Inventory and Backlog Amortization (c,d) 1,978 0.17
Adjusted Net Income and Adjusted Diluted EPS (a) $ 27,835 $ 2.38 $ 23,034 $ 1.97
Nine Months Ended Nine Months Ended
October 1,2022 October 1,2022 October 2,2021 October 2,2021
Net Income and Diluted EPS Attributable to Kadant, as Reported $ 94,849 $ 8.12 $ 59,886 $ 5.14
Adjustments for the Following, Net of Tax:
Gain on Sale (b) (15,143 ) (1.30 )
Acquisition Costs 335 0.03 2,325 0.20
Impairment and Restructuring Costs 207 0.02
Acquired Profit in Inventory and Backlog Amortization (c,d) 387 0.03 2,043 0.17
Adjusted Net Income and Adjusted Diluted EPS (a) $ 80,635 $ 6.90 $ 64,254 $ 5.52
Three Months Ended Increase Excluding Acquisitions and FX (a,e)
Revenue by Segment October 1,2022 October 2,2021 Increase
Flow Control $ 86,880 $ 76,253 $ 10,627 $ 16,913
Industrial Processing 86,085 81,620 4,465 9,179
Material Handling 51,545 41,916 9,629 12,493
$ 224,510 $ 199,789 $ 24,721 $ 38,585
Percentage of Parts and Consumables Revenue 63 % 66 %
Nine Months Ended Increase Increase Excluding Acquisitions and FX (a,e)
October 1,2022 October 2,2021
Flow Control $ 257,926 $ 210,769 $ 47,157 $ 33,598
Industrial Processing 263,572 233,455 30,117 39,584
Material Handling 151,141 123,839 27,302 18,289
$ 672,639 $ 568,063 $ 104,576 $ 91,471
Percentage of Parts and Consumables Revenue 64 % 66 %
Three Months Ended Increase (Decrease) Increase (Decrease) Excluding Acquisitions and FX (e)
Bookings by Segment October 1,2022 October 2,2021
Flow Control $ 84,902 $ 76,661 $ 8,241 $ 14,294
Industrial Processing 77,878 118,896 (41,018 ) (39,200 )
Material Handling 48,093 49,137 (1,044 ) 1,250
$ 210,873 $ 244,694 $ (33,821 ) $ (23,656 )
Percentage of Parts and Consumables Bookings 68 % 53 %
Nine Months Ended Increase (Decrease) Increase (Decrease) Excluding Acquisitions and FX (e)
October 1,2022 October 2,2021
Flow Control $ 282,360 $ 224,479 $ 57,881 $ 42,859
Industrial Processing 294,105 307,401 (13,296 ) (6,105 )
Material Handling 166,408 130,468 35,940 20,327
$ 742,873 $ 662,348 $ 80,525 $ 57,081
Percentage of Parts and Consumables Bookings 62 % 59 %
Three Months Ended Nine Months Ended
Business Segment Information October 1,2022 October 2,2021 October 1,2022 October 2,2021
Gross Margin:
Flow Control 51.6 % 49.7 % 52.3 % 51.8 %
Industrial Processing 39.3 % 39.7 % 38.8 % 40.1 %
Material Handling 32.3 % 31.9 % 34.8 % 33.8 %
42.5 % 41.9 % 43.1 % 43.1 %
Operating Income:
Flow Control $ 22,874 $ 17,129 $ 67,306 $ 51,899
Industrial Processing 17,550 16,095 70,994 44,449
Material Handling 6,945 3,491 21,490 12,941
Corporate (8,483 ) (7,987 ) (27,463 ) (24,124 )
$ 38,886 $ 28,728 $ 132,327 $ 85,165
Adjusted Operating Income (a,f):
Flow Control $ 23,356 $ 19,835 $ 67,632 $ 55,841
Industrial Processing 17,550 16,128 51,561 44,622
Material Handling 6,945 4,290 22,207 14,352
Corporate (8,483 ) (7,987 ) (27,463 ) (24,124 )
$ 39,368 $ 32,266 $ 113,937 $ 90,691
Capital Expenditures:
Flow Control $ 868 $ 1,128 $ 2,424 $ 1,830
Industrial Processing (h) 4,654 1,725 11,679 4,720
Material Handling 854 505 2,081 1,121
Corporate 12 7 17
$ 6,376 $ 3,370 $ 16,191 $ 7,688
Three Months Ended Nine Months Ended
Cash Flow and Other Data October 1,2022 October 2,2021 October 1,2022 October 2,2021
Operating Cash Flow $ 24,897 $ 37,932 $ 67,462 $ 101,410
Less: Capital Expenditures (h) (6,376 ) (3,370 ) (16,191 ) (7,688 )
Free Cash Flow (a) $ 18,521 $ 34,562 $ 51,271 $ 93,722
Depreciation and Amortization Expense $ 8,456 $ 9,195 $ 26,387 $ 24,597
Balance Sheet Data October 1,2022 January 1,2022
Assets
Cash, Cash Equivalents, and Restricted Cash $ 75,114 $ 94,161
Accounts Receivable, net 128,253 117,209
Inventories 156,567 134,356
Contract Assets 16,064 8,626
Property, Plant, and Equipment, net 105,439 107,989
Intangible Assets 173,707 199,343
Goodwill 372,966 396,887
Other Assets 78,743 73,641
$ 1,106,853 $ 1,132,212
Liabilities and Stockholders' Equity
Accounts Payable $ 53,495 $ 59,250
Debt Obligations 207,885 264,597
Other Borrowings 1,782 4,917
Other Liabilities 234,187 237,832
Total Liabilities 497,349 566,596
Stockholders' Equity 609,504 565,616
$ 1,106,853 $ 1,132,212
Three Months Ended Nine Months Ended
Adjusted Operating Income and Adjusted EBITDA Reconciliation (a) October 1,2022 October 2,2021 October 1,2022 October 2,2021
Consolidated
Net Income Attributable to Kadant $ 27,487 $ 20,461 $ 94,849 $ 59,886
Net Income Attributable to Noncontrolling Interest 184 237 672 635
Provision for Income Taxes 9,746 6,742 33,075 21,252
Interest Expense, Net 1,450 1,265 3,671 3,321
Other Expense, Net 19 23 60 71
Operating Income 38,886 28,728 132,327 85,165
Gain on Sale (b) (20,190 )
Acquisition Costs 410 718 486 2,619
Indemnification Asset Reversal (g) 575
Impairment and Restructuring Costs 72 254
Acquired Backlog Amortization (c) 604 703 691
Acquired Profit in Inventory Amortization (d) 2,216 (218 ) 2,216
Adjusted Operating Income (a) 39,368 32,266 113,937 90,691
Depreciation and Amortization 8,456 8,591 25,684 23,906
Adjusted EBITDA (a) $ 47,824 $ 40,857 $ 139,621 $ 114,597
Adjusted EBITDA Margin (a,i) 21.3 % 20.5 % 20.8 % 20.2 %
Flow Control
Operating Income $ 22,874 $ 17,129 $ 67,306 $ 51,899
Acquisition Costs 410 507 472 1,743
Restructuring Costs 72 72
Acquired Backlog Amortization (c) 353 353
Acquired Profit in Inventory Amortization (d) 1,846 (218 ) 1,846
Adjusted Operating Income (a) 23,356 19,835 67,632 55,841
Depreciation and Amortization 2,229 2,333 6,873 5,473
Adjusted EBITDA (a) $ 25,585 $ 22,168 $ 74,505 $ 61,314
Adjusted EBITDA Margin (a,i) 29.4 % 29.1 % 28.9 % 29.1 %
Industrial Processing
Operating Income $ 17,550 $ 16,095 $ 70,994 $ 44,449
Gain on Sale (b) (20,190 )
Indemnification Asset Reversal (g) 575
Impairment Costs 182
Acquisition Costs 33 113
Acquired Backlog Amortization (c) 60
Adjusted Operating Income (a) 17,550 16,128 51,561 44,622
Depreciation and Amortization 3,122 3,341 9,476 10,082
Adjusted EBITDA (a) $ 20,672 $ 19,469 $ 61,037 $ 54,704
Adjusted EBITDA Margin (a,i) 24.0 % 23.9 % 23.2 % 23.4 %
Material Handling
Operating Income $ 6,945 $ 3,491 $ 21,490 $ 12,941
Acquisition Costs 178 14 763
Acquired Backlog Amortization (c) 251 703 278
Acquired Profit in Inventory Amortization (d) 370 370
Adjusted Operating Income (a) 6,945 4,290 22,207 14,352
Depreciation and Amortization 3,083 2,885 9,262 8,253
Adjusted EBITDA (a) $ 10,028 $ 7,175 $ 31,469 $ 22,605
Adjusted EBITDA Margin (a,i) 19.5 % 17.1 % 20.8 % 18.3 %
Corporate
Operating Loss $ (8,483 ) $ (7,987 ) $ (27,463 ) $ (24,124 )
Depreciation and Amortization 22 32 73 98
EBITDA (a) $ (8,461 ) $ (7,955 ) $ (27,390 ) $ (24,026 )
(a) Represents a non-GAAP financial measure.
(b) Includes a $20.2 million gain on the sale of a Chinese facility in our Industrial Processing segment pursuant to a relocation plan.
(c) Represents intangible amortization expense associated with acquired backlog.
(d) Represents expense (income) within cost of revenue associated with amortization of acquired profit in inventory.
(e) Represents the increase (decrease) resulting from the exclusion of acquisitions and from the conversion of current period amounts reported in local currencies into U.S. dollars at the exchange rate of the prior period compared to the U.S. dollar amount reported in the prior period.
(f) See reconciliation to the most directly comparable GAAP financial measure under "Adjusted Operating Income and Adjusted EBITDA Reconciliation."
(g) Represents an indemnification asset reversal related to the release of tax reserves associated with uncertain tax positions.
(h) Includes $2.2 million and $5.4 million in the three and nine months ended October 1, 2022, respectively, related to the construction of a new manufacturing facility in China.
(i) Calculated as adjusted EBITDA divided by revenue in each period.

About KadantKadant Inc. is a global supplier of technologies and engineered systems that drive Sustainable Industrial Processing. The Company’s products and services play an integral role in enhancing efficiency, optimizing energy utilization, and maximizing productivity in process industries. Kadant is based in Westford, Massachusetts, with approximately 3,000 employees in 20 countries worldwide. For more information, visit www.kadant.com.

 

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