Kadant Inc. (KAI)

Q2 2010 Earnings Call

July 29, 2010 11:00 a.m. ET

Executives

Thomas O'Brien - CFO

Jon Painter - President & CEO

Analysts

Claudia Hueston - JPMorgan

Walter Liptak - Barrington Research

Eric Prouty – Canaccord

Rick Hoss - Roth Capital Partners

Brent Miley - Rutabaga Capital

Presentation

Operator

Good morning. My name is Letricia and I will be your conference operator today. At this time I would like to welcome everyone to the Kadant Incorporated Second Quarter Earnings Business Update. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. (Operator Instructions).

Thank you. I would now like to turn the conference over to Mr. Thomas O'Brien, CFO of Kadant Incorporated. Please go ahead sir.

Thomas O ' Brien

Well thank you operator and good morning everyone and welcome to Kadant's second quarter 2010 earnings call. With me on the call today is Jon Painter, our President and Chief Executive Officer.

Before we begin, let me read the Safe Harbor statement. Various remarks that we may make today about Kadant's future expectations, plans and prospects are forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Our actual results may differ materially from these forward-looking statements as a result of various important factors, including those discussed in our quarterly report on Form 10-Q for the fiscal period ended April 3rd, 2010, which is on file with the SEC and is also available in the Investors section of our website at www.kadant.com under the heading SEC Filings.

In addition, any forward-looking statements we make on this call represent our views only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change and you should not rely on these forward-looking statements as representing our views on any date after today.

During this call, we may refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is contained in our second quarter earnings press release issued yesterday, which is available in the Investor section of our website at www.kadant.com under the heading Recent News.

And with that, I will turn the call over to Jon Painter, who will give you an update on Kadant's business and future prospects. Following Jon's remarks, I will give an overview of our financial results for the quarter and we will then have the Q&A session. Jon?

Jon Painter

Thanks Tom. Good morning everyone. It's my pleasure to give you an update on Kadant's second quarter performance and comment on our outlook for the rest of the year. We had an excellent second quarter by almost any measure.

Let me start with the financial highlights from our continuing operations and I'll then provide you with an overview of the trends we expect to play out during the second half of the year. Second quarter revenue of $69 million was up 38% from a very weak quarter of last year and our fourth consecutive quarterly increase. On a sequential basis our revenues increased 13% from Q1.

This increase was led by our stock preparation and water management product lines with sequential revenue increases of 41% and 32% respectively. Our bookings for the quarter were $74 million, an increase of 57% compared to the same period last year and up 6% from Q1. This was our fourth consecutive sequential bookings increase as well.

Our bookings in the second quarter benefitted from strong performance in our stock product line that recorded sequential increases of 46% compared to the first quarter. This bookings increase however was offset by a 14% decline in our fluid handling business compared to a very strong Q1 bookings level.

Parts and consumable bookings were also down 6% sequentially, compared to the strong first quarter pace due to weaker demand in North America and Europe. As I noted in our Q1 earnings call, we believe the pent up demand from 2009 contributed to a significant increase in order activity in Q1 and the subsequent softening in our bookings levels for parts and consumables was expected.

One of the most impressive results for the second quarter was our gross margin performance of 45%. This was the highest gross margin recorded in our company's history and was the result of solid execution and lower manufacturing cost for both capital projects and parts and consumables.

Our operating income was nearly 11% of revenues for the quarter and diluted earnings per share was $0.42, compared to our guidance of 38 to $0.40. Despite increasing revenue we generated $9 million of cash flow from operations, bringing our net cash position to over $24 million. And finally I'm pleased to report that earlier this month we completed an acquisition or a small screen basket manufacturer and a dewatering equipment product line. I'll provide additional detail on this transaction at the end of my remarks.

As I commented in our April earnings call, we maintain a relatively guarded outlook with respect to the world economic recovery and the ability to global markets to sustain the positive momentum generated at the end of 2009 and into the first quarter of 2010.

In North America, mill operating rates have remained high and inventories are being well managed. In Containerboard for example where we generate approximately 40% of our revenue, machine operating rates exceeded 95% in June. Operating rates in demand in Europe and Asia across most grids were also relatively high.

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