UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended September 28, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-11406
KADANT INC.
(Exact name of Registrant as specified in its charter)
Delaware 52-1762325
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Acton Place, Suite 202
Acton, Massachusetts 01720
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 776-2000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at October 25, 2002
---------------------------- -------------------------------
Common Stock, $.01 par value 13,546,952
PART I - Financial Information
Item 1 - Financial Statements
- -----------------------------
KADANT INC.
Consolidated Balance Sheet
(Unaudited)
Assets
September 28, December 29,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $101,741 $102,807
Available-for-sale investments, at quoted market value (amortized cost
of $18,927 and $16,625) 18,927 16,625
Accounts receivable, less allowances of $2,774 and $2,515 30,265 39,178
Unbilled contract costs and fees 14,127 10,126
Inventories:
Raw materials and supplies 12,918 13,625
Work in process 5,376 6,962
Finished goods (includes $1,071 and $1,917 at customer locations) 10,909 12,947
Deferred tax asset 8,379 6,991
Other current assets 3,194 3,198
-------- --------
205,836 212,459
-------- --------
Property, Plant, and Equipment, at Cost 71,529 71,710
Less: Accumulated depreciation and amortization 46,104 43,225
-------- --------
25,425 28,485
-------- --------
Other Assets 9,175 10,441
-------- --------
Goodwill (Note 7) 117,664 116,269
-------- --------
$358,100 $367,654
======== ========
2
KADANT INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
September 28, December 29,
(In thousands except share amounts) 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Current maturities of long-term obligations $ 585 $ 573
Accounts payable 20,641 18,661
Accrued payroll and employee benefits 8,686 7,990
Accrued warranty costs 3,839 4,598
Customer deposits 2,729 3,070
Accrued merger consideration - 2,824
Other accrued expenses (Note 5) 12,161 15,360
-------- --------
48,641 53,076
-------- --------
Deferred Income Taxes and Other Deferred Items 11,574 11,457
-------- --------
Long-term Obligations:
Subordinated convertible debentures (Note 6) 86,176 118,138
Notes payable 580 1,129
-------- --------
86,756 119,267
-------- --------
Minority Interest 300 297
-------- --------
Shareholders' Investment:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none issued - -
Common stock, $.01 par value, 150,000,000 shares authorized;
14,045,550 and 12,745,165 shares issued (Note 8) 140 127
Capital in excess of par value (Note 8) 98,657 81,229
Retained earnings 147,401 143,504
Treasury stock at cost, 498,598 and 505,146 shares (21,042) (21,345)
Deferred compensation (53) (5)
Accumulated other comprehensive items (Note 2) (14,274) (19,953)
-------- --------
210,829 183,557
-------- --------
$358,100 $367,654
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
3
KADANT INC.
Consolidated Statement of Income
(Unaudited)
Three Months Ended
----------------------------------
September 28, September 29,
(In thousands except per share amounts) 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $50,084 $56,085
------- -------
Costs and Operating Expenses:
Cost of revenues 31,576 35,458
Selling, general, and administrative expenses 12,490 14,613
Research and development expenses 1,149 1,644
Restructuring costs (Note 5) 101 588
------- -------
45,316 52,303
------- -------
Operating Income 4,768 3,782
Interest Income 676 1,574
Interest Expense (1,084) (1,872)
------- -------
Income Before Provision for Income Taxes, Minority Interest,
and Extraordinary Item 4,360 3,484
Provision for Income Taxes 1,657 1,452
Minority Interest (Income) Expense 1 (13)
------- -------
Income Before Extraordinary Item 2,702 2,045
Extraordinary Item (net of income taxes of $3; Note 6) 5 -
------- -------
Net Income $ 2,707 $ 2,045
======= =======
Basic and Diluted Earnings per Share Before Extraordinary Item $ .20 $ .17
======= =======
Basic and Diluted Earnings per Share (Note 3) $ .20 $ .17
======= =======
Weighted Average Shares (Note 3):
Basic 13,547 12,273
======= =======
Diluted 13,716 12,348
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
4
KADANT INC.
Consolidated Statement of Income
(Unaudited)
Nine Months Ended
----------------------------------
September 28, September 29,
(In thousands except per share amounts) 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $139,802 $171,717
-------- --------
Costs and Operating Expenses:
Cost of revenues 87,141 107,738
Selling, general, and administrative expenses 37,757 45,054
Research and development expenses 3,589 5,307
Restructuring and unusual costs (Note 5) 3,738 588
-------- --------
132,225 158,687
-------- --------
Operating Income 7,577 13,030
Interest Income 1,954 5,527
Interest Expense (3,720) (5,616)
-------- --------
Income Before Provision for Income Taxes, Minority Interest,
and Extraordinary Item 5,811 12,941
Provision for Income Taxes 2,202 5,407
Minority Interest (Income) Expense 3 (87)
-------- --------
Income Before Extraordinary Item 3,606 7,621
Extraordinary Item (net of income taxes of $178; Note 6) 291 -
-------- --------
Net Income $ 3,897 $ 7,621
======== ========
Basic and Diluted Earnings per Share Before Extraordinary Item $ .28 $ .62
======== ========
Earnings per Share (Note 3):
Basic $ .31 $ .62
======== ========
Diluted $ .30 $ .62
======== ========
Weighted Average Shares (Note 3):
Basic 12,744 12,276
======== ========
Diluted 12,911 12,311
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
5
KADANT INC.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
----------------------------------
September 28, September 29,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 3,897 $ 7,621
Adjustments to reconcile net income to net cash provided by operating activities:
Noncash restructuring and unusual costs (Note 5) 2,441 -
Extraordinary item (Note 6) (291) -
Depreciation and amortization 3,893 7,093
Provision for losses on accounts receivable 233 1,081
Minority interest (income) expense 3 (87)
Other noncash items 522 (17)
Changes in current accounts:
Accounts receivable 9,225 4,046
Unbilled contract costs and fees (3,404) (2,629)
Inventories 5,352 (3,737)
Other current assets (1,259) (3,968)
Accounts payable 1,155 1,998
Other current liabilities (4,593) (1,490)
-------- --------
Net cash provided by operating activities 17,174 9,911
-------- --------
Investing Activities:
Acquisition of minority interest in subsidiary (1,364) -
Purchases of available-for-sale investments (2,302) -
Proceeds from maturities of available-for-sale investments - 69,350
Advances from former affiliates, net - 5,704
Purchases of property, plant, and equipment (2,215) (3,750)
Proceeds from repayments of note receivable 200 1,800
Other, net (178) 5
-------- --------
Net cash provided by (used in) investing activities (5,859) 73,109
-------- --------
Financing Activities:
Repurchases of Company subordinated convertible debentures (Note 6) (31,369) -
Net proceeds from issuance of Company common stock in public offering (Note 8) 17,648 -
Net proceeds from issuance of Company and subsidiary common stock 472 490
Purchases of Company common stock - (587)
Acquisition of subsidiary common stock (1,461) -
Repayments of long-term obligations (537) (509)
Transfer from former parent company - 1,309
-------- --------
Net cash provided by (used in) financing activities $(15,247) $ 703
-------- --------
6
KADANT INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
----------------------------------
September 28, September 29,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Exchange Rate Effect on Cash $ 2,866 $ 1,262
-------- --------
Increase (Decrease) in Cash and Cash Equivalents (1,066) 84,985
Cash and Cash Equivalents at Beginning of Period 102,807 62,461
-------- --------
Cash and Cash Equivalents at End of Period $101,741 $147,446
======== ========
Noncash Activities:
Amounts forgiven in exchange for the acquisition of 49%
minority interest in Kadant Composites Inc. $ - $ 2,053
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
7
KADANT INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. General
The interim consolidated financial statements and related notes presented
have been prepared by Kadant Inc. (also referred to in this document as "we,"
"Kadant," "the Company," or "the registrant") without audit and, in the opinion
of management, reflect all adjustments of a normal recurring nature necessary
for a fair statement of the Company's financial position at September 28, 2002,
the results of operations for the three- and nine-month periods ended September
28, 2002, and September 29, 2001, and cash flows for the nine-month periods
ended September 28, 2002, and September 29, 2001. Interim results are not
necessarily indicative of results for a full year.
The consolidated balance sheet presented as of December 29, 2001, has
been derived from the consolidated financial statements that have been audited
by the Company's former independent auditors. The consolidated financial
statements and related notes are presented as permitted by Form 10-Q and do not
contain certain information included in the annual financial statements and
related notes of the Company. The consolidated financial statements and notes
included herein should be read in conjunction with the financial statements and
related notes included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 29, 2001, as amended, filed with the Securities and
Exchange Commission.
2. Comprehensive Income
Comprehensive income combines net income and "other comprehensive items"
that represent certain amounts that are reported as components of shareholders'
investment in the accompanying balance sheet, including foreign currency
translation adjustments, unrealized net of tax gains and losses on
available-for-sale investments, and deferred gains and losses on foreign
currency contracts. During the third quarters of 2002 and 2001, the Company had
comprehensive income of $4,361,000 and $4,041,000, respectively. During the
first nine months of 2002 and 2001, the Company had comprehensive income of
$9,576,000 and $8,879,000, respectively.
3. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 28, September 29, September 28, September 29,
(In thousands except per share amounts) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Basic
Income Before Extraordinary Item $ 2,702 $ 2,045 $ 3,606 $ 7,621
Extraordinary Item (net of income taxes of $3 and $178) 5 - 291 -
------- ------- ------- -------
Net Income $ 2,707 $ 2,045 $ 3,897 $ 7,621
------- -------- ------- -------
Weighted Average Shares 13,547 12,273 12,744 12,276
------- ------- ------- -------
Basic Earnings per Share:
Income Before Extraordinary Item $ .20 $ .17 $ .28 $ .62
Extraordinary Item - - .03 -
------- ------- ------- -------
$ .20 $ .17 $ .31 $ .62
======= ======= ======= =======
8
KADANT INC.
Notes to Consolidated Financial Statements
(Unaudited)
3. Earnings per Share (continued)
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 28, September 29, September 28, September 29,
(In thousands except per share amounts) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Diluted
Income Before Extraordinary Item $ 2,702 $ 2,045 $ 3,606 $ 7,621
Extraordinary Item (net of income taxes of $3 and $178) 5 - 291 -
------- ------- ------- -------
Net Income $ 2,707 $ 2,045 $ 3,897 $ 7,621
------- ------- ------- -------
Weighted Average Shares 13,547 12,273 12,744 12,276
Effect of Stock Options 169 75 167 35
------- ------- ------- -------
Weighted Average Shares, as Adjusted 13,716 12,348 12,911 12,311
------- ------- ------- -------
Diluted Earnings per Share:
Income Before Extraordinary Item $ .20 $ .17 $ .28 $ .62
Extraordinary Item - - .02 -
------- ------- ------- -------
$ .20 $ .17 $ .30 $ .62
======= ======= ======= =======
Options to purchase approximately 400,700 and 509,100 shares of common
stock for the third quarters of 2002 and 2001, respectively, and 507,600 and
447,000 shares of common stock for the first nine months of 2002 and 2001,
respectively, were not included in the computation of diluted earnings per share
because the options' exercise prices were greater than the average market price
for the common stock and their effect would have been antidilutive.
In addition, the computation of diluted earnings per share for each
period excludes the effect of assuming the conversion of the Company's 4 1/2%
subordinated convertible debentures, convertible at $60.50 per share, because
the effect would be antidilutive.
4. Business Segment Information
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
September 28, September 29, September 28, September 29,
(In thousands) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues:
Pulp and Papermaking Equipment and Systems $ 46,322 $ 55,174 $128,822 $165,847
Composite and Fiber-based Products 3,762 911 10,980 5,870
-------- -------- -------- --------
$ 50,084 $ 56,085 $139,802 $171,717
======== ======== ======== ========
9
KADANT INC.
Notes to Consolidated Financial Statements
(Unaudited)
4. Business Segment Information (continued)
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
September 28, September 29, September 28, September 29,
(In thousands) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes, Minority
Interest, and Extraordinary Item (a):
Pulp and Papermaking Equipment and Systems (b) $ 5,839 $ 6,773 $12,746 $20,156
Composite and Fiber-based Products (c) (d) (272) (2,204) (2,647) (4,440)
Corporate (e) (799) (787) (2,522) (2,686)
------- ------- ------- -------
Total Operating Income 4,768 3,782 7,577 13,030
Interest Income (Expense), Net (408) (298) (1,766) (89)
------- ------- ------- -------
$ 4,360 $ 3,484 $ 5,811 $12,941
======= ======= ======= =======
Operating Income, Excluding Restructuring and Unusual Costs
and Goodwill Amortization:
Pulp and Papermaking Equipment and Systems $ 5,940 $ 8,146 $14,845 $23,138
Composite and Fiber-based Products (d) (272) (2,127) (1,008) (4,246)
Corporate (e) (799) (787) (2,522) (2,686)
------- ------- ------- -------
$ 4,869 $ 5,232 $11,315 $16,206
======= ======= ======= =======
Capital Expenditures:
Pulp and Papermaking Equipment and Systems $ 266 $ 399 $ 897 $ 1,131
Composite and Fiber-based Products 583 961 1,173 2,619
Corporate 18 - 145 -
------- ------- ------- -------
$ 867 $ 1,360 $ 2,215 $ 3,750
======= ======= ======= =======
(a) Includes consolidated goodwill amortization of $862 and $2,588 in the three- and nine-month periods ended September 29, 2001,
respectively.
(b) Includes goodwill amortization of $803 and $2,412 in the three- and nine-month periods ended September 29, 2001, respectively.
(c) Includes goodwill amortization of $59 and $176 in the three- and nine-month periods ended September 29, 2001, respectively.
(d) Includes operating losses from the composite building products business, excluding restructuring and unusual costs, of $376 and
$1,331 in the three-month periods ended September 28, 2002 and September 29, 2001, respectively, and $2,107 and $2,969 in the
nine-month periods ended September 28, 2002 and September 29, 2001, respectively.
(e) Primarily general and administrative expenses.
10
KADANT INC.
Notes to Consolidated Financial Statements
(Unaudited)
5. Restructuring and Unusual Costs
During the first nine months of 2002, the Company recorded restructuring
and unusual costs of $3,738,000. Restructuring costs of $1,129,000, which were
accounted for in accordance with Emerging Issues Task Force (EITF) Pronouncement
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)," related to severance costs for 68 employees across all
functions primarily at the Company's Pulp and Papermaking Equipment and Systems
(Papermaking Equipment) segment, all of whom were terminated as of September 28,
2002. These actions were taken in an effort to improve profitability and were in
response to a continued weak market environment and reduced demand for our
products. Unusual costs of $2,609,000 include noncash charges of $2,441,000 for
asset writedowns, consisting of $953,000 for the impairment of a laboratory in
Ohio held for sale at the Papermaking Equipment segment, and $1,488,000 for the
writedown of fixed assets held for sale at the Composite and Fiber-based
Products segment; and $168,000 for related disposal and facility-closure costs.
A summary of the changes in accrued restructuring costs, which are
included in other accrued expenses in the accompanying consolidated balance
sheet, follows:
(In thousands) Severance
- -----------------------------------------------------------------------------------------------
Balance at December 29, 2001 $ 56
Provision 1,129
Usage (1,031)
Currency translation adjustment 5
-------
Balance at September 28, 2002 $ 159
=======
The Company expects to pay the remaining accrued restructuring costs primarily
during the remainder of 2002.
6. Extraordinary Item
During the first quarter of 2002, the Company repurchased $2,875,000
principal amount of its 4 1/2% subordinated convertible debentures for
$2,806,000 in cash, resulting in an extraordinary gain of $29,000, net of
deferred debt charges, and net of income tax provision of $18,000. During the
second quarter of 2002, the Company repurchased $26,987,000 principal amount of
these debentures for $26,385,000 in cash, resulting in an extraordinary gain of
$257,000, net of deferred debt charges, and net of income tax provision of
$157,000. During the third quarter of 2002, the Company repurchased $2,100,000
principal amount of these debentures for $2,079,000 in cash, resulting in an
extraordinary gain of $5,000, net of deferred debt charges, and net of income
tax provision of $3,000. In the first nine months of 2002, the combined
extraordinary gain resulting from these transactions was $291,000, net of
deferred debt charges, and net of income tax provision of $178,000. As of
September 28, 2002, $86,176,000 principal amount of the debentures remained
outstanding.
7. Recent Accounting Pronouncements
"Business Combinations" and "Goodwill and Other Intangible Assets"
- ------------------------------------------------------------------
In July 2001, the Financial Accounting Standards Board (FASB) released for
issuance Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets."
11
KADANT INC.
Notes to Consolidated Financial Statements
(Unaudited)
7. Recent Accounting Pronouncements (continued)
SFAS No. 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS No. 141 also requires that the
Company recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria.
SFAS No. 142 requires, among other things, that the Company no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS No. 142 requires that the Company identify reporting units for
the purpose of assessing potential impairments of goodwill, reassess the useful
lives of other existing recognized intangible assets, and cease amortization of
intangible assets with indefinite useful lives. Intangible assets with
indefinite useful lives are to be tested for impairment in accordance with the
guidelines in SFAS No. 142. SFAS No. 142 is to be applied for fiscal years
beginning after December 15, 2001, to all goodwill and other intangible assets
recorded as of January 1, 2002, regardless of when those assets were initially
recognized. The Company is currently evaluating goodwill for impairment using
the two-step process as prescribed in SFAS No. 142. The first step is an initial
evaluation for potential impairment, while the second step measures the amount
of the impairment. The Company completed the first step of the goodwill
impairment test in the second quarter of 2002. Having completed step one, the
Company expects that a portion of the goodwill related to both of its segments
may be impaired. The Company currently has $113,488,000 and $4,176,000 of
goodwill in the Papermaking Equipment segment and the Composite and Fiber-based
Products segment, respectively. The Company has not yet determined the amount of
the potential impairment, but plans to complete the measurement of the
impairment in the fourth quarter of 2002. In accordance with the SFAS No. 142
transition procedures, an impairment that is required to be recognized when
adopting the standard will be reflected as the cumulative effect of a change in
accounting principle in the first quarter of 2002.
Pro forma results as if SFAS No. 142 had been adopted at the beginning of
2001 are as follows:
Three Months Ended Nine Months Ended
(In thousands except per share amounts) September 29, 2001 September 29, 2001
- ---------------------------------------------------------------------------------------------------------------------------
Net Income, as Reported $2,045 $7,621
Add back: Goodwill Amortization 584 1,757
------ ------
Net Income, as Adjusted $2,629 $9,378
====== ======
Basic and Diluted Earnings per Share, as Reported $ .17 $ .62
Add back: Goodwill Amortization .05 .14
------ ------
Basic and Diluted Earnings per Share, as Adjusted $ .22 $ .76
====== ======
Accounting for the Impairment or Disposal of Long-lived Assets
- --------------------------------------------------------------
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets." The standard provides guidance on
measuring impairment of long-lived assets and applying accounting for
discontinued operations upon adoption. The Company adopted the standard during
the first quarter of 2002. Adoption of the standard did not affect the Company's
financial statements.
12
KADANT INC.
Notes to Consolidated Financial Statements
(Unaudited)
7. Recent Accounting Pronouncements (continued)
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections
- ----------------------------------------------------------------------------
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Adoption of the standard is generally required in the fiscal year
beginning after May 15, 2002. Under the standard, transactions currently
classified by the Company as extraordinary items will no longer be treated as
such but instead will be reported as other nonoperating income or expenses.
Accounting for Costs Associated with Exit or Disposal Activities
- ----------------------------------------------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which supersedes EITF 94-3. The
standard affects the accounting for restructuring charges and related
activities. The provisions of this statement are required to be adopted for exit
or disposal activities that are initiated after December 31, 2002. The
provisions of EITF 94-3 will continue to apply with regard to the Company's
previously announced restructuring plans.
8. Public Offering of Common Stock
In June 2002, the Company sold 1,300,000 shares of its common stock in a
public offering at $14.62 per share, for net proceeds of $17,648,000.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Throughout this report on Form 10-Q, we make forward-looking statements,
which are statements concerning possible or assumed future results of
operations. When we use words such as "believes," "expects," "anticipates,"
"intends," "plans," "estimates," "should," "likely," "will," or similar
expressions, we are making forward-looking statements. Forward-looking
statements are not guarantees of performance. They involve risks, uncertainties,
and assumptions, and are based on the beliefs and assumptions of our management,
using information currently available to our management. Our future results of
operations may differ materially from those expressed in the forward-looking
statements. Many of the important factors that will determine these results and
values are beyond our ability to control or predict. You should not put undue
reliance on any forward-looking statements. For a discussion of important
factors that may cause our actual results to differ materially from those
suggested by the forward-looking statements, you should read carefully the
section captioned "Forward-Looking Statements" in this report on Form 10-Q. We
assume no obligation to update any such forward-looking statements.
Overview
Company Background
Kadant operates in two segments: the Pulp and Papermaking Equipment and
Systems (Papermaking Equipment) segment and the Composite and Fiber-based
Products segment. Through our Papermaking Equipment segment, we develop,
manufacture, and market a range of equipment and products for the domestic and
international papermaking and paper recycling industries. We have been in
operation for more than 100 years and have a large, stable customer base that
includes most of the world's paper manufacturers. We also have one of the
largest installed bases of
13
KADANT INC.
Overview (continued)
equipment in the pulp and paper industry, which provides us with a higher-margin
spare parts and consumables business that we believe is less susceptible than
our capital equipment business to the cyclical trends in the paper industry.
Through our Composite and Fiber-based Products segment, we manufacture
and sell agricultural carriers derived from cellulose fiber, and develop,
manufacture, and market fiber-based composite products for the building
industry.
Prior to our incorporation, we operated as a division of Thermo Electron
Corporation. We were incorporated in Delaware in November 1991 as a wholly owned
subsidiary of Thermo Electron. In November 1992, we completed an initial public
offering of our common stock and became a majority-owned public subsidiary of
Thermo Electron. On July 12, 2001, we changed our name from Thermo Fibertek Inc.
to Kadant Inc., and on August 8, 2001, we were spun off from Thermo Electron and
became an independent public company.
Pulp and Papermaking Equipment and Systems Segment
Our Papermaking Equipment segment consists of three primary product
lines: stock-preparation equipment, paper machine accessories, and
water-management systems. Principal products manufactured by this segment
include:
- custom-engineered systems and equipment for the preparation of
wastepaper for conversion into recycled paper;
- accessory equipment and related consumables important to the efficient
operation of papermaking machines; and
- water-management systems essential for the continuous cleaning of
papermaking machine fabrics and the draining, purifying, and recycling
of process water for paper sheet and web formation.
Composite and Fiber-based Products Segment
Our Composite and Fiber-based Products segment consists of two product
lines: our fiber-based granular products and our composite building products. We
employ patented technology to produce biodegradable absorbing granules from
papermaking byproducts. These granules are primarily used as agricultural
carriers and for home lawn and garden applications. In our composite building
products business, we develop, produce, and market fiber-based composite
products, primarily for the building industry, used for applications such as
decking and railing systems and roof tiles. In January 2001, we acquired the
remaining 49% equity interest that we did not already own in Kadant Composites
Inc., which comprises our composite building products business.
International Sales
During 2001, approximately 55% of our sales were to customers outside
the United States, principally in Europe. We generally seek to charge our
customers in the same currency in which our operating costs are incurred.
However, our financial performance and competitive position can be affected by
currency exchange rate fluctuations affecting the relationship between the U.S.
dollar and foreign currencies. We seek to reduce our exposure to currency
fluctuations through the use of forward currency exchange contracts. We may
enter into forward contracts to hedge certain firm purchase and sale commitments
denominated in currencies other than our subsidiaries' functional currencies.
These contracts hedge transactions principally denominated in U.S. dollars.
14
KADANT INC.
Overview (continued)
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from these estimates under
different assumptions or conditions.
Critical accounting policies are defined as those that reflect
significant judgments and uncertainties, and could potentially result in
materially different results under different assumptions and conditions. We
believe that our most critical accounting policies, upon which our financial
condition depends and which involve the most complex or subjective decisions or
assessments, are those described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" under the section captioned
"Critical Accounting Policies" in Exhibit 13 to our Annual Report on Form 10-K
for the fiscal year ended December 29, 2001, as amended, filed with the
Securities and Exchange Commission. There have been no material changes since
year-end 2001 that warrant further disclosure, except with respect to the
valuation of goodwill under Statement of Financial Accounting Standards (SFAS)
No. 142. The Company is currently evaluating goodwill for impairment using the
two-step process as prescribed in SFAS No. 142 (Note 7). The first step is an
initial evaluation for potential impairment, while the second step measures the
amount of the impairment. The Company completed the first step of the goodwill
impairment test in the second quarter of 2002. Having completed step one, the
Company expects that a portion of the goodwill related to both of its segments
may be impaired. As of September 28, 2002, the Company had $113.5 million and
$4.2 million of goodwill in the Papermaking Equipment segment and the Composite
and Fiber-based Products segment, respectively. The Company has not yet
determined the amount of the potential impairment, but plans to complete the
measurement of the impairment in the fourth quarter of 2002. In accordance with
SFAS No. 142 transition procedures, an impairment that is required to be
recognized when adopting the standard will be reflected as the cumulative effect
of a change in accounting principle in the first quarter of 2002.
Industry and Business Outlook
Our products are primarily sold to the pulp and paper industry. The
paper industry has been in a prolonged downcycle, characterized by weak pulp and
paper prices, decreased capital spending, and consolidation of paper companies
within the industry. As paper companies continue to consolidate in response to
market weakness, they frequently reduce capacity and postpone or even cancel
capacity addition or expansion projects. This trend, along with paper companies'
actions to quickly reduce operating rates and restrict capital spending and
maintenance programs, has adversely affected our business. Over the long term,
as the markets recover, we expect that consolidation in the paper industry and
improved capacity management will have a positive effect on paper companies'
financial performance and, in return, will be favorable to both paper companies
and their suppliers, such as Kadant.
There has been a significant amount of papermaking downtime in the pulp
and paper industry in 2001 and 2002. This, coupled with weakened conditions in
the world economy, has produced a difficult market environment resulting in
deferrals of capital projects by the paper companies and pricing pressure in
some of our product lines. The combination of these factors has caused a
reduction in our revenues throughout 2002, and resulted in our lower operating
results in the first nine months of 2002 versus the same period last year. To
mitigate the effects of these difficult market conditions, we are concentrating
our efforts on several initiatives to improve our product gross margins,
including focusing on the higher-margin parts and consumables business across
all our product lines, sourcing the manufacture of non-proprietary components
from third party suppliers, shifting more production to our lower-cost
manufacturing facility in Mexico, and lowering our manufacturing overhead costs
throughout the business.
15
KADANT INC.
Overview (continued)
In addition, we continue to focus our efforts on managing our operating costs,
capital expenditures, and working capital. The modest gain in momentum we saw
midyear in the pulp and paper industry has stalled, and recovery will likely be
slower than expected. In the third quarter of 2002, we experienced a 17%
decrease in total bookings compared to last year. This is largely due to a
decrease in orders for our stock preparation equipment, which include large
orders for complete custom-engineered systems. The timing of these orders is
difficult to predict. Therefore, we expect earnings in the fourth quarter of
2002 to be $.15 to $.18 per diluted share on revenues of $43 to $46 million. For
the fiscal year ending December 28, 2002, we expect earnings per share,
excluding restructuring and unusual costs and extraordinary items (Notes 5 and
6), to be $.60 to $.63 per diluted share on revenues of $182 to $185 million.
The earnings estimate for 2002 includes the favorable effect of ceasing goodwill
amortization ($.19 per diluted share in 2001) resulting from the adoption of
SFAS No. 142, but excludes other possible effects on earnings in 2002 resulting
from the adoption of SFAS No. 142, which may include an impairment charge to be
determined in the fourth quarter of 2002 in accordance with that standard (Note
7). We believe the composite building products business will generate
approximately $2.0 to $3.0 million of revenues, with operating losses of $0.3
million to $0.5 million, in the fourth quarter of 2002. We expect to generate
from $8 to $9 million of revenues, with operating losses (excluding
restructuring and unusual costs) of $2.4 to $2.6 million, from this business in
2002.
In October 2001, we terminated for nonperformance a distributor's
exclusive rights to market and sell certain of our composite building products
due to failure to meet minimum purchase commitments. We are now building and
expanding our distribution network for composite building products and are
advertising in trade magazines, conducting in-store promotions, and exhibiting
at trade and home shows. We now have numerous distribution centers throughout
the U.S. for our products. We believe that the market for composite building
products will grow as consumer awareness of the advantages of these products
increases their acceptance as an alternative to traditional wood products,
especially in light of the phase-out of widely used CCA pressure-treated lumber
that contains potentially harmful chemicals.
Results of Operations
Third Quarter 2002 Compared With Third Quarter 2001
- ---------------------------------------------------
Revenues
Revenues decreased to $50.1 million in the third quarter of 2002 from
$56.1 million in the third quarter of 2001. Excluding the favorable effects of
currency translation in 2002 of $1.6 million due to a weaker U.S. dollar
relative to the functional currencies in countries in which we operate, revenues
decreased by $7.6 million, or 14%.
Pulp and Papermaking Equipment and Systems Segment. Excluding the effect
of currency translation, revenues at the Papermaking Equipment segment decreased
to $44.7 million in the third quarter of 2002 from $55.2 million in the third
quarter of 2001. Revenues from the Papermaking Equipment segment's
stock-preparation equipment product line decreased by $6.4 million in 2002
primarily as a result of a decrease in export sales to China and, to a lesser
extent, a decrease in sales in North America due to adverse market conditions.
Revenues from the segment's water-management and accessories product lines
decreased by $3.0 million and $1.2 million in 2002, respectively, primarily due
to a decrease in demand in North America as a result of machine shutdowns and
mill closures caused by industry consolidation and capacity rationalization, as
well as pricing pressures.
Composite and Fiber-based Products Segment. Revenues at the Composite
and Fiber-based Products segment increased to $3.8 million in the third quarter
of 2002 from $0.9 million in the third quarter of 2001 largely due to an
increase of $2.6 million in sales of our composite building products due to
increased marketing efforts resulting in higher demand and expansion of our
distribution channels.
16
KADANT INC.
Third Quarter 2002 Compared With Third Quarter 2001 (continued)
- ---------------------------------------------------
Gross Profit Margin
Gross profit margin remained constant at 37% in the third quarters of
2002 and 2001. The gross profit margin at the Papermaking Equipment segment
decreased to 38% in 2002 from 39% in 2001 primarily due to lower revenues and
increased pricing pressures, offset in part by a favorable change in product mix
toward higher-margin products. The gross profit margin at the Composite and
Fiber-based Products segment increased to 27% in 2002 compared to negative gross
margins in 2001 primarily due to positive gross profit margins from our
composite building products resulting from an increase in revenues. In addition,
gross profit margins from our fiber-based granular products increased primarily
due to a decrease in 2002 in the cost of natural gas used in the production
process and, to a lesser extent, an increase in revenues and a change to a more
favorable product mix.
Other Operating Expenses
Selling, general, and administrative expenses as a percentage of revenues
decreased to 25% in the third quarter of 2002 from 26% in the third quarter of
2001. Selling, general, and administrative expenses decreased to $12.5 million
in 2002 from $14.6 million in 2001 primarily due to cost-reduction efforts at
the Papermaking Equipment segment, as well as the absence in 2002 of $0.9
million of goodwill amortization that was recorded in 2001.
Research and development expenses as a percentage of revenues were 2% in
the third quarter of 2002 compared with 3% in the third quarter of 2001.
Research and development expenses decreased to $1.1 million in the third quarter
of 2002 compared with $1.6 million in the third quarter of 2001, primarily at
the Papermaking Equipment segment due to restructuring efforts taken in 2002 and
the closure of a redundant laboratory (Note 5).
Restructuring Costs
The Company recorded additional net restructuring charges of $101,000
during the third quarter of 2002. Restructuring charges of $157,000 related to
severance costs for six manufacturing and sales employees at the Company's
Papermaking Equipment segment, all of whom were terminated as of September 28,
2002. Restructuring income of $56,000 resulted from the reversal of severance
costs that are no longer required related to restructuring efforts taken in the
first quarter of 2002 at the Papermaking Equipment segment (Note 5). During the
third quarter of 2001, the Company recorded restructuring costs of $0.6 million
for severance costs relating to 52 employees primarily in the manufacturing and
sales functions at the Papermaking Equipment segment's domestic subsidiaries,
all of whom were terminated by September 29, 2001.
Operating Income
Operating income was $4.8 million in the third quarter of 2002 compared
with $3.8 million in the third quarter of 2001. Excluding restructuring and
unusual costs and goodwill amortization in the 2002 and 2001 periods, operating
income at the Papermaking Equipment segment decreased to $5.9 million in 2002
from $8.1 million in 2001, and operating losses at the Composite and Fiber-based
Products segment decreased to $0.3 million in 2002 from $2.1 million in 2001,
due to the reasons discussed above.
Interest Income and Expense
Interest income decreased to $0.7 million in the third quarter of 2002
from $1.6 million in the third quarter of 2001. Of the total decrease in
interest income in 2002, approximately $0.5 million was due to lower prevailing
interest rates, and $0.4 million was due to lower average invested balances. The
decrease in average invested balances primarily relates to repurchases of our
subordinated convertible debentures (Note 6), the redemption in September 2001
of our Thermo Fibergen subsidiary's common stock and, to a lesser extent,
consideration paid to Thermo
17
KADANT INC.
Third Quarter 2002 Compared With Third Quarter 2001 (continued)
- ---------------------------------------------------
Fibergen shareholders for the acquisition of their minority interest. Interest
expense decreased to $1.1 million in the third quarter of 2002 from $1.9 million
in the third quarter of 2001 as a result of repurchases of our subordinated
convertible debentures (Note 6).
Income Taxes
The effective tax rate was 38% in the third quarter of 2002 and 42% in
the third quarter of 2001. The effective tax rates exceeded the statutory
federal income tax rate primarily due to the impact of state income taxes and
nondeductible expenses. The effective tax rate decreased in 2002 as a result of
the elimination of goodwill amortization, including nondeductible goodwill,
under SFAS No. 142 (Note 7) and various tax planning initiatives.
Minority Interest
Minority interest (income) expense in the third quarters of 2002 and
2001 represents the minority investors' share of earnings or losses in our
majority-owned subsidiaries.
Extraordinary Item
During the third quarter of 2002, we repurchased $2.1 million principal
amount of our 4 1/2% subordinated convertible debentures for $2.1 million in
cash, resulting in an extraordinary gain of $5,000, net of deferred debt
charges, and net of income tax provision of $3,000 (Note 6).
First Nine Months 2002 Compared With First Nine Months 2001
- -----------------------------------------------------------
Revenues
Revenues decreased to $139.8 million in the first nine months of 2002
from $171.7 million in the first nine months of 2001. Excluding the favorable
effects of currency translation in 2002 of $1.0 million due to a weaker U.S.
dollar relative to the functional currencies in countries in which we operate,
revenues decreased by $32.9 million, or 19%.
Pulp and Papermaking Equipment and Systems Segment. Excluding the effect
of currency translation, revenues at the Papermaking Equipment segment decreased
to $127.8 million in the first nine months of 2002 from $165.8 million in the
first nine months of 2001. Revenues from the Papermaking Equipment segment's
stock-preparation equipment product line decreased by $25.8 million in 2002
primarily as a result of a decrease in sales in North America and Europe due to
adverse market conditions and, to a lesser extent, a decrease in export sales to
China. Revenues from the segment's water-management and accessories product
lines decreased by $7.6 million and $4.9 million in 2002, respectively,
primarily due to a decrease in demand in North America as a result of machine
shutdowns and mill closures caused by industry consolidation and capacity
rationalization, as well as pricing pressures.
Composite and Fiber-based Products Segment. Revenues at the Composite
and Fiber-based Products segment increased to $11.0 million in the first nine
months of 2002 from $5.9 million in the first nine months of 2001, primarily as
a result of an increase of $4.4 million in sales of our composite building
products due to increased marketing efforts resulting in higher demand and
expansion of our distribution channels. In addition, revenues from our
fiber-based granular products increased by $0.7 million in 2002 primarily due to
the introduction of two new applications of our agricultural carrier products.
18
KADANT INC.
First Nine Months 2002 Compared With First Nine Months 2001 (continued)
- -----------------------------------------------------------
Gross Profit Margin
Gross profit margin increased to 38% in the first nine months of 2002
from 37% in the first nine months of 2001. The gross profit margin at the
Papermaking Equipment segment was 39% in both periods. The gross profit margin
at the Composite and Fiber-based Products segment increased to 26% in 2002 from
negative gross margins of 6% in 2001 primarily due to the reasons discussed in
the results of operations for the third quarter of 2002 compared with the third
quarter of 2001.
Other Operating Expenses
Selling, general, and administrative expenses as a percentage of
revenues increased to 27% in the first nine months of 2002 from 26% in the first
nine months of 2001 due to lower revenues. Selling, general, and administrative
expenses decreased to $37.8 million in 2002 from $45.1 million in 2001 primarily
due to cost-reduction efforts at the Papermaking Equipment segment, as well as
the absence in 2002 of $2.6 million of goodwill amortization that was recorded
in 2001.
Research and development expenses as a percentage of revenues were 3% in
both periods. Research and development expenses decreased to $3.6 million in the
first nine months of 2002 compared with $5.3 million in the first nine months of
2001, primarily at the Papermaking Equipment segment due to restructuring
efforts taken in 2002 and the closure of a redundant laboratory (Note 5).
Restructuring and Unusual Costs
During the first nine months of 2002, the Company recorded restructuring
and unusual costs of $3.7 million. Restructuring costs of $1.1 million, which
were accounted for in accordance with Emerging Issues Task Force Pronouncement
No. 94-3, related to severance costs for 68 employees across all functions
primarily at the Company's Papermaking Equipment segment, all of whom were
terminated as of September 28, 2002. These actions were taken in an effort to
improve profitability and were in response to a continued weak market
environment and reduced demand for our products. Unusual costs of $2.6 million
include noncash charges of $2.4 million for asset writedowns, consisting of $1.0
million for the impairment of a laboratory in Ohio held for sale at the
Papermaking Equipment segment, and $1.4 million for the writedown of fixed
assets held for sale at the Composite and Fiber-based Products segment; and $0.2
million for related disposal and facility-closure costs (Note 5). During the
first nine months of 2001, the Company recorded restructuring costs of $0.6
million for severance costs relating to 52 employees primarily in the
manufacturing and sales functions at the Papermaking Equipment segment's
domestic subsidiaries, all of whom were terminated by September 29, 2001.
Operating Income
Operating income was $7.6 million in the first nine months of 2002
compared with $13.0 million in the first nine months of 2001. Excluding
restructuring and unusual costs and goodwill amortization in the 2002 and 2001
periods, operating income at the Papermaking Equipment segment decreased to
$14.8 million in 2002 from $23.1 million in 2001, and operating losses at the
Composite and Fiber-based Products segment decreased to $1.0 million in 2002
from $4.2 million in 2001, due to the reasons discussed above.
Interest Income and Expense
Interest income decreased to $2.0 million in the first nine months of
2002 from $5.5 million in the first nine months of 2001. Of the total decrease
in interest income in 2002, approximately $2.1 million was due to lower
prevailing interest rates, and $1.4 million was due to lower average invested
balances. The decrease in average
19
KADANT INC.
First Nine Months 2002 Compared With First Nine Months 2001 (continued)
- -----------------------------------------------------------
invested balances primarily relates to repurchases of our subordinated
convertible debentures (Note 6), the redemption in September 2001 of our Thermo
Fibergen subsidiary's common stock and, to a lesser extent, consideration paid
to Thermo Fibergen shareholders for the acquisition of their minority interest.
Interest expense decreased to $3.7 million in the first nine months of 2002 from
$5.6 million in the first nine months of 2001 as a result of the repurchases of
our subordinated convertible debentures (Note 6).
Income Taxes
The effective tax rate was 38% in the first nine months of 2002 and 42%
in the first nine months of 2001. The effective tax rates exceeded the statutory
federal income tax rate primarily due to the impact of state income taxes and
nondeductible expenses. The effective tax rate decreased in 2002 as a result of
the elimination of goodwill amortization, including nondeductible goodwill,
under SFAS No. 142 (Note 7) and various tax planning initiatives.
Minority Interest
Minority interest (income) expense in the first nine months of 2002 and
2001 represents the minority investors' share of earnings or losses in our
majority-owned subsidiaries.
Extraordinary Item
During the first nine months of 2002, we repurchased $32.0 million
principal amount of our 4 1/2% subordinated convertible debentures for $31.3
million in cash, resulting in an extraordinary gain of $291,000, net of deferred
debt charges, and net of income tax provision of $178,000 (Note 6).
Liquidity and Capital Resources
Consolidated working capital was $157.2 million at September 28, 2002,
compared with $159.4 million at December 29, 2001. Included in working capital
are cash, cash equivalents, and available-for-sale investments of $120.7 million
at September 28, 2002, compared with $119.4 million at December 29, 2001. Of the
total cash, cash equivalents, and available-for-sale investments at September
28, 2002, $7.6 million was held by a majority-owned subsidiary, and the
remainder was held by us and our wholly owned subsidiaries. At September 28,
2002, $57.5 million of cash, cash equivalents, and available-for-sale
investments was held by our foreign subsidiaries.
During the first nine months of 2002, cash of $17.2 million was provided
by operating activities compared with $9.9 million in the first nine months of
2001. A decrease in accounts receivable provided cash of $9.2 million in 2002
primarily at the Papermaking Equipment segment largely due to a decrease in
revenues and improved collection efforts, offset in part by a use of cash of
$3.4 million resulting from an increase in unbilled contract costs and fees at
the Papermaking Equipment segment due to the timing of progress billings on
large contracts. A decrease in inventories provided cash of $5.4 million in 2002
primarily at the Papermaking Equipment segment as a result of our efforts to
match inventory levels with demand. In addition, an increase in accounts payable
provided cash of $1.2 million in 2002 primarily at the Papermaking Equipment
segment due to the timing of payments. A use of cash of $4.6 million in 2002
resulted from a decrease in other accrued liabilities, primarily accrued
interest, accrued warranty costs, deferred revenues and, to a lesser extent,
accrued income taxes.
Our investing activities, excluding available-for-sale investments and
advances to former affiliates, used $3.6 million of cash in the first nine
months of 2002, compared with $1.9 million in the first nine months of 2001.
During the first nine months of 2002, we purchased property, plant, and
equipment for $2.2 million, including $1.1 million at our composite building
products business, the effects of which were slightly offset by our collection
of $0.2 million
20
KADANT INC.
Liquidity and Capital Resources (continued)
from a note receivable related to the September 2000 sale of a fiber-recovery
and water-clarification services plant. In addition, we paid $1.4 million in
2002 in connection with the acquisition of the minority interest of our Thermo
Fibergen subsidiary.
Our financing activities used cash of $15.2 million in the first nine
months of 2002, compared with $0.7 million provided in the first nine months of
2001. During the first nine months of 2002, we used $31.4 million to fund
repurchases of our subordinated convertible debentures (Note 6), as well as $0.5
million to fund the payment of other long-term obligations. In addition, we paid
$1.5 million in connection with the acquisition of common stock of our Thermo
Fibergen subsidiary. These uses of cash were offset in part by $17.6 million of
cash provided from the June 2002 issuance of 1.3 million shares of our common
stock in a public offering (Note 8). In September 2001, our board of directors
authorized the repurchase, through September 24, 2002, of up to $50 million of
our debt and equity securities in the open market or in negotiated transactions.
In April 2002, our board of directors authorized the repurchase, through April
9, 2003, of up to an additional $50 million of our debt and equity securities in
the open market or in negotiated transactions. As of September 28, 2002, we had
$34.6 million remaining under this authorization.
At September 28, 2002, we had $85.3 million of undistributed foreign
earnings that could be subject to tax if remitted to the U.S. If we repatriate
undistributed foreign earnings into the U.S., we do not expect that this will
have a material adverse effect on our current liquidity.
Our net cash (calculated as cash, cash equivalents, and available-for-sale
investments less total short- and long- term debt) was $33.3 million at
September 28, 2002, compared with net debt of $0.4 million at December 29, 2001.
Although we currently have no material commitments for capital
expenditures, during the remainder of 2002, we plan to make expenditures for
property, plant, and equipment of approximately $1.6 million, including $0.7
million at our composite building products business. The expected composite
expenditures largely relate to refinements and improvements we are making to
optimize the production process and expand capacity at our manufacturing
facility.
Our ability to use our cash and to incur additional debt is limited by
financial covenants in our distribution agreement, as amended, with Thermo
Electron. These financial covenants require that (1) the ratio of our net
indebtedness to net capitalization not exceed 40% and (2) on a rolling four
quarter basis, that the sum of our (a) operating income (excluding restructuring
and other unusual items, such as gains on sales of assets, included in operating
income), (b) amortization of goodwill and other intangible assets, and (c)
interest income, be at least four times greater than interest expense. In
instances where the ratio of our net indebtedness to net capitalization is less
than or equal to 20% for any measurement date, the coverage ratio of four times
greater than interest expense is lowered to three times greater than interest
expense. As of September 28, 2002, we were in compliance with all the financial
covenants of the agreement, as amended. If we fail to comply with the financial
covenants, Thermo Electron could require us to refinance our debentures, conduct
an exchange offer for the debentures, or repay in full the underlying
obligation. If we were required to take any of these actions, we might not have
sufficient cash or credit capacity to engage in transactions, such as a
significant acquisition, that might otherwise benefit our business. These
circumstances could also impair our ability to continue to engage in
transactions that have been integral to our historical operations. In the
future, our liquidity position will be primarily affected by the level of free
cash flows from operations and the amount of cash expended on repurchases of our
subordinated convertible debentures and acquisitions, if any. We believe that
our existing resources, together with the cash we expect to generate from
operations, are sufficient to meet the capital requirements of our existing
operations for the foreseeable future.
21
KADANT INC.
Forward-Looking Statements
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, we wish to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, our actual results and could cause our actual results
in 2002 and beyond to differ materially from those expressed in any
forward-looking statements made by us, or on our behalf.
Our business is dependent on the condition of the pulp and paper industry, which
is currently in a downcycle.
We sell products primarily to the pulp and paper industry. Generally,
the financial condition of the global pulp and paper industry corresponds to the
condition of the general economy, as well as to a number of other factors,
including pulp and paper production capacity relative to demand. The global pulp
and paper industry has been in a prolonged downcycle, with depressed pulp and
paper prices, decreased spending, mill closures, consolidations, and
bankruptcies. The North American pulp and paper industry has been particularly
adversely affected by higher energy prices and slowing economies. As paper
companies continue to consolidate in response to market weakness, they
frequently reduce capacity and postpone or even cancel capacity addition or
expansion projects. This cyclical downturn has adversely affected our business.
Mill closures, consolidations, and bankruptcies of customers have caused our
sales to decline and, if we are unable to collect from our customers, our
profitability may be adversely affected. The financial condition of the pulp and
paper industry may not improve in the near future, and the severity of the
downturn could expand to our European and Asian businesses.
Our business is subject to economic, currency, political, and other risks
associated with international sales and operations.
During 2001, approximately 55% of our sales were to customers outside
the United States, principally in Europe and China. International revenues are
subject to a number of risks, including the following:
- agreements may be difficult to enforce and receivables difficult to
collect through a foreign country's legal system;
- foreign customers may have longer payment cycles;
- foreign countries may impose additional withholding taxes or otherwise
tax our foreign income, impose tariffs, or adopt other restrictions on
foreign trade; and
- the protection of intellectual property in foreign countries may be more
difficult to enforce.
Although we seek to charge our customers in the same currency in which our
operating costs are incurred, fluctuations in currency exchange rates may affect
product demand and adversely affect the profitability in U.S. dollars of
products we provide in foreign markets where payment for our products and
services is made in their local currencies. Any of these factors could have a
material adverse impact on our business and results of operations.
An increasing portion of our international sales has and may in the
future come from China. We are currently planning to establish an assembly
facility in China for our stock preparation equipment and related aftermarket
parts. An increase in revenues, as well as operation of an assembly facility in
China, will expose us to increased risk in the event of changes in the policies
of the Chinese government, political unrest or unstable economic conditions in
China, or developments in China or in U.S.-China relations that are adverse to
trade, including enactment of protectionist legislation or trade restrictions.
In addition, orders from customers in China, particularly for large systems that
have been tailored to a customer's specific requirements, involve increased risk
of cancellation prior to shipment due to payment terms that are applicable to
doing business in China. The timing of these orders is difficult to predict.
22
KADANT INC.
Forward-Looking Statements (continued)
We are subject to intense competition in all of our markets.
We encounter significant competition in each of our principal markets.
We believe that the principal competitive factors affecting the markets for our
products include quality, price, service, technical expertise, and product
innovation. Our competitors include a number of large multinational corporations
such as Voith Paper GmbH and Metso Corporation. Competition, especially in
China, could increase if new companies enter the market or if existing
competitors expand their product lines or intensify efforts within existing
product lines. Competitors' technologies may prove to be superior to ours. Many
of these competitors may have substantially greater financial, marketing, and
other resources than we do. As a result, they may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements, or to
devote greater resources to the promotion and sale of their services and
products. Our current products, those under development, and our ability to
develop new technologies may not be sufficient to enable us to compete
effectively. In addition, our composite building products business is subject to
intense competition, particularly in the decking market, from traditional wood
products and other composite lumber manufacturers, many of whom have greater
financial, technical, and marketing resources than we do. As a result, we may be
unable to compete successfully in this market.
Our composite building products business is a new entrant into a new market. Our
success will depend on our ability to manufacture and commercialize our
composite building products.
In 2000, we began to develop, produce, market, and sell composite products
primarily for the building industry. Development, manufacturing, and
commercialization of our composite building products require significant
development and testing of the products, and our efforts may not be successful.
Further, our composite building products may not gain market acceptance. We
expect to incur significant branding and distribution expenses to successfully
market and distribute these products. Our ability to market these products
successfully depends on the willingness of consumers to purchase fiber-based
composite products as an alternative to traditional building products. To
penetrate the market and gain market share, we need to educate consumers,
including wood suppliers, distributors, contractors, and homebuilders, regarding
the benefits of our fiber-based composite products over products made of wood,
slate, and other traditional materials. This strategy may not be successful. We
have little or no experience manufacturing these products at volume, cost, and
quality levels sufficient to satisfy expected demand, and we may encounter
difficulties in connection with any large-scale manufacturing or
commercialization of these new products. If we were to exit this business, we
would incur significant losses.
Our composite building products business may not be able to obtain effective
distribution of its products and may experience seasonal fluctuation in sales
and quarterly operating results.
The composite building products business is subject to intense
competition, and we rely on distributors in the building products industry to
market, distribute, and sell our products. We may be unable to produce our
products in sufficient quantity to interest these distributors or to retain and
add new distributors. If we are unable to distribute our products effectively,
our revenues would decline and we would have to incur additional expenses to
market these products directly.
In general, the building products industry experiences seasonal
fluctuations in sales particularly in the fourth quarter, in which holidays and
adverse weather conditions in some regions usually reduce the level of home
improvement and new construction activity. As our business grows, we would
expect our sales in the fourth quarter to reflect this seasonal variation.
Operating results will tend to be lower in quarters with lower sales, which are
not offset by a corresponding reduction in operating costs. In addition, we may
also experience lower gross profit margins in the fourth quarter and first
quarter due to seasonal incentive discounts offered to our distributors. As a
result of these factors, we believe sequential period-to-period comparisons of
our operating results are not reliable indicators of future performance, and the
operating results for any quarterly period may not be indicative of operating
results to be expected for a full year.
23
KADANT INC.
Forward-Looking Statements (continued)
The failure of our composite building products to perform over long periods of
time could result in potential liabilities.
Our composite building products are new, have not been on the market for
long periods of time, and may be used in applications for which we may have no
knowledge or limited experience. Because we have limited historical experience,
we may be unable to predict the potential liabilities related to product
warranty or product liability issues. If our products fail to perform over their
warranty periods, we may not have the ability to protect ourselves adequately
against this potential liability, which could reduce our operating results.
We are dependent on a single mill for the raw material for our composite
building products and fiber-based granules, and we may not be able to obtain raw
material on commercially reasonable terms; and the manufacture of our
fiber-based granules is subject to commodity price risks.
We are dependent on a single paper mill for the fiber used in the
manufacture of our composite building products and fiber-based granules. This
mill has the exclusive right to supply the papermaking byproducts used to
manufacture the granules used in our process. Although we believe our
relationship with the mill is good, the mill could decide not to renew its
contract with us in 2003, or may not renew on commercially reasonable terms, and
we would be forced to find an alternative supply for this raw material. We may
be unable to find an alternative supply on commercially reasonable terms or
could incur excessive transportation costs if an alternative supplier were
found, which would increase our manufacturing costs and may prevent our products
from being competitive. Our composite building products also contain recycled
and off-spec plastics, which are subject to wide fluctuations in pricing and
availability. We may be unable to obtain sufficient quantities at reasonable
prices, which could adversely affect our ability to produce a sufficient
quantity of our products or produce our products at competitive prices.
In addition, we use natural gas in the production process for our
fiber-based granular products. We manage our exposure to natural gas price
fluctuations by entering into short-term forward contracts to purchase specified
quantities of natural gas from a supplier. There can be no assurance that we
will be effective in managing our exposure to natural gas price fluctuations.
High natural gas prices will have an adverse effect on our results of
operations.
Our inability to successfully identify and complete acquisitions or successfully
integrate any new or previous acquisitions could have a material adverse effect
on our business.
Our strategy includes the acquisition of technologies and businesses
that complement or augment our existing products and services. Promising
acquisitions are difficult to identify and complete for a number of reasons,
including competition among prospective buyers and the need for regulatory,
including antitrust, approvals. Any acquisition we may complete may be made at a
substantial premium over the fair value of the net assets of the acquired
company. We may not be able to complete future acquisitions, integrate any
acquired businesses successfully into our existing businesses, make such
businesses profitable, or realize anticipated cost savings or synergies, if any,
from these acquisitions. The size and selection of suitable acquisition
candidates also may be limited due to the financial covenants we have with
Thermo Electron Corporation, our former parent company.
In addition, we have previously acquired several companies and businesses.
As a result of these acquisitions, we have recorded significant goodwill on our
balance sheet, which amounts to approximately $117.7 million as of September 28,
2002. In accordance with SFAS No. 142, we assess the carrying value of the
goodwill that we have recorded at least annually or whenever events or changes
in circumstances indicate that its current carrying value has diminished.
These events or circumstances generally would include operating losses or a
significant decline in earnings associated with the acquired business or asset.
SFAS No. 142 transition procedures state that an impairment charge that is
required to be recognized when adopting the standard will be reflected as the
cumulative effect of a change in accounting principle in the first quarter of
2002. We are currently evaluating goodwill for impairment using the two-step
process as prescribed in SFAS No. 142. The first step is an initial evaluation
for potential impairment, while the second step measures the amount of the
impairment. We completed the first step of the goodwill impairment test in the
24
KADANT INC.
Forward-Looking Statements (continued)
second quarter of 2002. Having completed step one, we expect that a portion of
the goodwill related to both of our segments may be impaired. We have not yet
determined the amount of the potential impairment, but plan to complete this
measurement in the fourth quarter of 2002. Any future impairment losses recorded
after the transition period will be recorded as a reduction to operating income,
which could have a material adverse affect on our results of operations. Our
ability to realize the value of the goodwill that we have recorded will depend
on the future cash flows of these businesses. These cash flows in turn depend,
in part, on how well we have integrated these businesses.
Our inability to protect our intellectual property could have a material adverse
effect on our business. In addition, third parties may claim that we infringe
their intellectual property, and we could suffer significant litigation or
licensing expense as a result.
We place considerable emphasis on obtaining patent and trade secret
protection for significant new technologies, products, and processes because of
the length of time and expense associated with bringing new products through the
development process and into the marketplace. Our success depends in part on our
ability to develop patentable products and obtain and enforce patent protection
for our products both in the United States and in other countries. We own
numerous U.S. and foreign patents, and we intend to file additional
applications, as appropriate, for patents covering our products. We have filed
for a patent relating to our composite building products business. Patents may
not be issued for any pending or future patent applications owned by or licensed
to us, and the claims allowed under any issued patents may not be sufficiently
broad to protect our technology. Any issued patents owned by or licensed to us
may be challenged, invalidated, or circumvented, and the rights under these
patents may not provide us with competitive advantages. In addition, competitors
may design around our technology or develop competing technologies. Intellectual
property rights may also be unavailable or limited in some foreign countries,
which could make it easier for competitors to capture increased market position.
We could incur substantial costs to defend ourselves in suits brought against us
or in suits in which we may assert our patent rights against others. An
unfavorable outcome of any such litigation could materially adversely affect our
business and results of operations. In addition, as our patents expire, we rely
on trade secrets and proprietary know-how to protect our products. We cannot be
sure the steps we have taken or will take in the future will be adequate to
deter misappropriation of our proprietary information and intellectual property.
We seek to protect trade secrets and proprietary know-how, in part,
through confidentiality agreements with our collaborators, employees, and
consultants. These agreements may be breached, we may not have adequate remedies
for any breach, and our trade secrets may otherwise become known or be
independently developed by our competitors.
Third parties may assert claims against us to the effect that we are
infringing on their intellectual property rights. We could incur substantial
costs and diversion of management resources in defending these claims, which
could have a material adverse effect on our business, financial condition, and
results of operations. In addition, parties making these claims could secure a
judgment awarding substantial damages, as well as injunctive or other equitable
relief, which could effectively block our ability to make, use, sell,
distribute, or market our products and services in the United States or abroad.
In the event that a claim relating to intellectual property is asserted against
us, or third parties not affiliated with us hold pending or issued patents that
relate to our products or technology, we may seek licenses to such intellectual
property or challenge those patents. However, we may be unable to obtain these
licenses on commercially reasonable terms, if at all, and our challenge of the
patents may be unsuccessful. Our failure to obtain the necessary licenses or
other rights could prevent the sale, manufacture, or distribution of our
products and, therefore, could have a material adverse effect on our business,
financial condition, and results of operations.
Fluctuations in our quarterly operating results may cause our stock price to
decline.
Given the nature of the markets in which we participate and the effect
of Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB No. 101), which became effective as of January 2000, we cannot
reliably predict future revenues and profitability, and unexpected changes may
cause us to adjust our
25
KADANT INC.
Forward-Looking Statements (continued)
operations. A significant proportion of our costs are fixed, due in part to our
significant selling, research and development, and manufacturing costs. Thus,
small declines in revenues could disproportionately affect our operating
results. Other factors that could affect our quarterly operating results
include:
- failure of our products to pass contractually agreed upon acceptance
tests, which would delay or prohibit recognition of revenues under
SAB No. 101;
- demand for and market acceptance of our products;
- competitive pressures resulting in lower sales prices of our products;
- adverse changes in the pulp and paper industry;
- delays or problems in the introduction of new products by us;
- our competitors' announcements of new products, services, or
technological innovations;
- contractual liabilities incurred by us related to guarantees of our
equipment performance;
- increased costs of raw materials or supplies, including the cost of
energy; and
- changes in the timing of product orders.
Anti-takeover provisions in our charter documents and under Delaware law and the
potential tax effects of our spinoff from Thermo Electron could prevent or delay
transactions that our shareholders may favor.
Provisions of our charter and by-laws may discourage, delay, or prevent
a merger or acquisition that our shareholders may consider favorable, including
transactions in which shareholders might otherwise receive a premium for their
shares. For example, these provisions:
- authorize the issuance of "blank check" preferred stock without any need
for action by shareholders;
- provide for a classified board of directors with staggered three-year
terms;
- require supermajority shareholder voting to effect various amendments to
our charter and by-laws;
- eliminate the ability of our shareholders to call special meetings of
shareholders;
- prohibit shareholder action by written consent; and
- establish advance notice requirements for nominations for election to our
board of directors or for proposing matters that can be acted on by
shareholders at shareholder meetings.
In addition, our board of directors has adopted a shareholder rights
plan intended to protect shareholders in the event of an unfair or coercive
offer to acquire our company and to provide our board of directors with adequate
time to evaluate unsolicited offers. Preferred stock purchase rights have been
distributed to our common shareholders pursuant to the rights plan. This rights
plan may have anti-takeover effects. The rights plan will cause substantial
dilution to a person or group that attempts to acquire us on terms that our
board of directors does not believe are in our best interests and those of our
shareholders and may discourage, delay, or prevent a merger or acquisition that
shareholders may consider favorable, including transactions in which
shareholders might otherwise receive a premium for their shares.
The tax treatment of the distribution of our common stock by Thermo
Electron under the Internal Revenue Code and regulations thereunder could also
serve to discourage an acquisition of our company. An acquisition of our company
within two years following the distribution, which took place in August 2001,
could result in federal tax liability being imposed on Thermo Electron and, in
more limited circumstances, on shareholders of Thermo Electron who received
shares of our common stock in the distribution. In addition, even acquisitions
occurring more than two years after the distribution could cause the
distribution to be taxable to Thermo Electron if the acquisitions were
determined to be pursuant to an overall plan that existed at the time of the
distribution. As part of the distribution, we have agreed to indemnify Thermo
Electron, but not the shareholders of Thermo Electron, for any resulting tax
liability if the tax liability is attributable to certain acts by us, including
an acquisition of our company. The prospect of that tax liability and our
indemnification obligation may have anti-takeover effects.
26
KADANT INC.
Forward-Looking Statements (continued)
A number of actions following our spinoff from Thermo Electron could cause the
distribution to be fully taxable to shareholders of Thermo Electron who received
shares of our common stock in the distribution and/or to Thermo Electron, and to
us.
The IRS has issued a ruling that no gain or loss will be recognized by
us, Thermo Electron, or its shareholders upon the distribution of our common
stock as of the date of the distribution, except with respect to cash received
in lieu of fractional shares of our common stock and distributions of our common
stock acquired by Thermo Electron within the past five years in taxable
transactions. However, the distribution could become fully taxable if we, Thermo
Electron, or the shareholders of Thermo Electron who received shares of our
common stock in the distribution, take any of a number of actions following the
distribution. We have entered into a tax matters agreement with Thermo Electron
that restricts our ability to engage in these types of actions. If any
conditions of the IRS ruling are not satisfied, the distribution could become
taxable to the shareholders of Thermo Electron who received shares of our common
stock in the distribution and/or Thermo Electron. As part of the distribution,
we have agreed to indemnify Thermo Electron, but not the shareholders of Thermo
Electron, for any resulting tax liability if the tax liability is attributable
to certain acts by us.
Sales of substantial amounts of our common stock may occur from time to time,
which could cause our stock price to decline.
Our shares were distributed pro rata to the shareholders of Thermo
Electron, and from time to time, these shareholders have sold and may in the
future sell substantial amounts of our common stock in the public market if our
shares no longer meet their investment criteria or other objectives. Any sales
of substantial amounts of our common stock in the public market, or the
perception that such sales might occur, whether as a result of the distribution
or otherwise, could cause the market price of our common stock to decline.
If we are unable to comply with the financial covenants contained in our
distribution agreement with Thermo Electron, we may be required to take certain
actions that could compromise our ability to execute our business plan.
We have agreed to certain financial covenants contained in our distribution
agreement with Thermo Electron that restrict our use of cash and our ability to
incur additional debt as part of Thermo Electron's continued guarantee of our
subordinated convertible debentures. If we fail to comply with these financial
covenants, Thermo Electron could, among other things, require us to refinance
our debentures, conduct an exchange offer for the debentures, or repay in full
the underlying obligation. If we are required to take any of these actions, we
might not have sufficient cash or credit capacity to engage in transactions,
such as significant acquisitions, that might otherwise benefit our business.
Continuing low interest rates, coupled with declines in operating income, could
cause us to no longer be in compliance with the financial covenants contained in
our distribution agreement with Thermo Electron, and we may be unable to
renegotiate the covenants or obtain a waiver from Thermo Electron.
The unexpected decline in interest rates in the fall of 2001, coupled
with lower invested cash balances and lower operating income, resulted in our
non-compliance with one of the financial covenants originally negotiated in our
distribution agreement with Thermo Electron. We were able to negotiate an
amendment to the agreement that resulted in our compliance with the financial
covenants, as amended. If we should again fail to comply with the financial
covenants, there is no assurance that Thermo Electron would either renegotiate
the covenants on terms satisfactory to us or grant a waiver.
27
KADANT INC.
Forward-Looking Statements (continued)
We may have potential business conflicts of interest with Thermo Electron with
respect to our past and ongoing relationships that could harm our business
operations.
Conflicts of interest may arise between Thermo Electron and us in a
number of areas relating to our past and ongoing relationships, including:
labor, tax, employee benefit, indemnification, and other matters arising from
our separation from Thermo Electron; and restrictions related to our use of cash
and our ability to incur indebtedness in connection with Thermo Electron's
continuing obligations under its guarantee of our subordinated convertible
debentures. We may not be able to resolve any potential conflicts
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Our exposure to market risk from changes in interest rates, equity
prices, and foreign currency exchange rates has not changed materially from our
exposure at year-end 2001.
Item 4 - Controls and Procedures
- --------------------------------
Within the 90 days prior to the filing of this quarterly report, our chief
executive officer (CEO) and chief financial officer (CFO) performed an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, our CEO and CFO concluded
that our disclosure controls and procedures are designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms and are operating in an effective manner. There have been no significant
changes in our internal controls or in other factors that could significantly
affect these internal controls subsequent to the date of the most recent
evaluation by our CEO and CFO.
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds
- --------------------------------------------------
For a description of restrictions on our working capital that may be imposed
due to the financial covenants contained in our distribution agreement with
Thermo Electron, refer to the section captioned "Liquidity and Capital
Resources" in Item 2 of Part I in this report on Form 10-Q.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
None.
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KADANT INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 6th day of November 2002.
KADANT INC.
/s/ Thomas M. O'Brien
-----------------------------------------------------
Thomas M. O'Brien
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
CERTIFICATIONS
I, William A. Rainville, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kadant Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
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KADANT INC.
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 6, 2002 /s/ William A. Rainville
----------------------------------------------------
William A. Rainville
Chief Executive Officer
I, Thomas M. O'Brien, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kadant Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
30
KADANT INC.
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 6, 2002 /s/ Thomas M. O'Brien
----------------------------------------------------
Thomas M. O'Brien
Executive Vice President and Chief Financial Officer
31
KADANT INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
99.1 Certification of the Chief Executive Officer of the Registrant
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer of the Registrant
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of Sarbanes-Oxley Act of 2002.
32