Kadant (KAI) Q2 Earnings Beat, Forex & Tariff Woes Hurt View

Kadant Inc. KAI has kept its earnings streak alive in the second quarter of 2018, with earnings surpassing estimates by 8.08%. Including second-quarter results, the average earnings surprise for the last four trailing quarters was 13.95%.

This machinery company’s adjusted earnings in the reported quarter were $1.07 per share, surpassing the Zacks Consensus Estimate of 99 cents. Also, the bottom line increased 2.9% from the year-ago tally of $1.04.

Segmental Strength Drives Revenues

In the reported quarter, Kadant’s revenues totaled $154.9 million, reflecting year-over-year growth of 40.5%. Organic revenues, excluding the impact of acquisitions and foreign currency translations, grew 10.1% year over year.

Also, the top line surpassed the Zacks Consensus Estimate of $150 million by roughly 1.9%.

Bookings in the quarter under review totaled $176.4 million, increasing 46.7% from the year-ago quarter. The improvement was driven by strengthening North American economy, capacity expansion in Asia and synergistic gains from acquired assets. Exiting the reported quarter, backlog was at $194 million, reflecting sequential growth of 8%.

On a geographical basis, revenues from North America increased 46.2% year over year to $75.4 million while that from Europe grew 32.6% to $45 million and that from Asia expanded 54.1% to $25.5 million. Revenues generated from the Rest of World operations totaled $9 million, increasing 10% year over year.

The company has two reportable segments — Papermaking Systems and Wood Processing Systems. In addition, it also generates revenues from Fiber-Based Products business. The information on these three sources of revenues for the quarter under review is given below:

Revenues from the Papermaking Systems segment were approximately $118.5 million, increasing 23.7% from the year-ago quarter. Organic revenues, excluding the impact of acquisitions and foreign currency translations, grew 13.6% year over year. Bookings in the quarter under review grew 20.6% year over year to $129.6 million.

Of the segmental revenues, roughly $56.4 million was sourced from Stock-Preparation product line. It reflected growth of 22.1% from the year-ago tally. Revenues from Doctoring, Cleaning & Filtration product-line were $29.5 million, and from Fluid-Handling product-line was $32.5 million, reflecting a year-over-year increase of 9.3% and 44.5% from the respective tallies in the year-ago quarter.

Revenues from the Wood Processing Systems segment totaled $33.2 million, significantly surpassing $11.4 million generated in the year-ago quarter. Excluding the impact of acquisitions and foreign currency translations, the segment’s revenues declined 18.2% year over year. Bookings in the reported quarter surged 321.2% year over year to $44.4 million.

Revenues from the Fiber-Based Products business totaled $3.3 million, rising 6.2% year over year. Bookings in the quarter under review grew 9.1% year over year to $2.4 million.

Margin Profile Weakens

In the quarter under review, Kadant’s cost of revenues increased 51.2% year over year to $86.7 million. It was 56% of revenues versus 52.1% recorded in the second quarter of 2017. Gross margin in the reported quarter slipped 390 basis points (bps) to 44%.

Selling, general and administrative expenses, which was roughly 29.1% of revenues, increased 15.8% year over year to approximately $45.1 million. Research and development expenses in the reported quarter were $2.7 million versus $2.2 million in the year-ago comparable quarter.

Adjusted operating income increased 28.8% year over year to $20.3 million while adjusted margin slipped 120 bps to 13.1%. Interest expenses surged from roughly $0.4 million in the year-ago quarter to $1.9 million in the reported quarter.

Balance Sheet and Cash Flow

Exiting second-quarter 2018, Kadant had cash, cash equivalents and restricted cash of $61.2 million, down 17% from $73.7 million at the end of the previous quarter. Long-term debt balance decreased 14.3% sequentially to $202.2 million.

In the quarter under review, the company’s net cash generation from operating activities totaled $28.4 million, up 19.7% from $23.7 million in the year-ago quarter. Capital spending totaled $5.1 million versus $1.7 million in the year-ago quarter.

Outlook

Solid bookings in the first half of the year and favorable global economic conditions will be a boon for Kadant in 2018. However, the company fears forex woes and adverse impacts from tariff imposition to negatively impact its bottom-line results.

The company has raised its sales guidance for the year from the earlier projection of $625-$635 million to $630-$638 million. Meanwhile, adjusted earnings per share guidance have been lowered from $5.15-$5.25 to $5.00-$5.10.

For the third quarter, earnings per share, excluding restructuring costs (pre-tax impact), are predicted to be $1.36-$1.41. Revenues are anticipated to be $162-$166 million.

Kadant Inc Price, Consensus and EPS Surprise

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