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

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Kadant Inc. (KAI - Free Report) 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
 

Kadant Inc Price, Consensus and EPS Surprise | Kadant Inc Quote

Zacks Rank & Stocks to Consider

With a market capitalization of approximately $1.1 billion, Kadant currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the industry are Altra Industrial Motion Corp. (AIMC - Free Report) , Chart Industries, Inc. (GTLS - Free Report) and DXP Enterprises, Inc. (DXPE - Free Report) . While both Altra Industrial Motion and Chart Industries sport a Zacks Rank #1 (Strong Buy), DXP Enterprises carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the last 60 days, earnings estimates for each of these stocks improved for the current year and the next year. Also, the average positive earnings surprise for the last four quarters was 4.01% for Altra Industrial Motion, 29.36% for Chart Industries and 70.97% for DXP Enterprises.

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