Kadant Reports Results for Third Quarter 2010 and Raises Full Year 2010 Revenue and EPS Guidance

Kadant Inc. (NYSE:KAI) reported revenues from continuing operations of $66.5 million in the third quarter of 2010, an increase of $12.8 million, or 24 percent, compared to $53.7 million in the third quarter of 2009. Revenues in the third quarter of 2010 included a $1.6 million, or 3 percent, decrease from foreign currency translation compared to the third quarter of 2009. Operating income from continuing operations in the third quarter of 2010 was $6.3 million compared to $0.8 million in the third quarter of 2009. Operating income in the third quarter of 2010 included a pre-tax gain of $0.7 million and operating income in the third quarter of 2009 included pre-tax restructuring costs of $0.5 million. Net income in the third quarter of 2010 was $4.5 million, or $.36 per diluted share, versus a net loss of $0.1 million, or $.01 per diluted share, in the third quarter of 2009. Net income in the third quarter of 2010 included an after-tax gain on the sale of real estate of $0.7 million, or $.06 per diluted share. Net loss in the third quarter of 2009 included a $0.4 million, or $.03 per diluted share, incremental tax provision, and a $0.3 million, or $.03 per diluted share, after-tax restructuring charge.

"We are very encouraged with our operating performance in the third quarter,” said Jonathan W. Painter, president and chief executive officer of Kadant. "Diluted EPS was $.36 in the third quarter of 2010 and, excluding the real estate gain of $.06, was $.30 compared to our guidance of $.21 to $.23. The stronger performance was due to higher revenues in our fluid-handling and stock preparation product lines and to another quarter of strong gross margins. Gross margins were 44 percent, slightly lower than the record gross margins in the second quarter of 2010.

"Revenues of $66.5 million were well above the high end of our guidance for the quarter of $62 million, as fluid-handling revenues reached their highest level in two years. Operating income was 9.4 percent of revenues, or 8.3 percent excluding the real estate gain. Operating cash flows were $6.0 million, and we ended the quarter with over $26 million in net cash, or approximately $2.13 per diluted share.

"We noted in our press release in July that we expected a slowdown in bookings in the second half of 2010 compared to the first half, and indeed this was the case in the third quarter. Bookings of $58.4 million were 6 percent lower than last year’s third quarter, and were 21 percent below the second quarter of 2010. Sequential bookings were essentially flat in the parts and consumables portion of our business, but were significantly lower in the capital business. We believe that some of this decline in capital may be due to the timing of orders, especially in China, where we saw a significant sequential decline in capital orders in the third quarter. Encouragingly, after the quarter closed we were awarded several large contracts for stock preparation systems in China, totaling $14.1 million. We expect to record these pending orders as bookings in the fourth quarter upon receipt of the down payments.

"Although we expect sequentially stronger capital bookings in the fourth quarter of 2010, based on the anticipated shipment dates these will not materially affect revenues in the fourth quarter. With that in mind, we expect to report revenues of $64 to $66 million in the fourth quarter of 2010, essentially flat with third quarter 2010. With a higher proportion of capital business, we expect some decline in gross margins from the levels of the past three quarters, resulting in diluted EPS of $.26 to $.28 in the fourth quarter. For the full year, we are raising both our revenue and EPS guidance. We expect to achieve GAAP diluted EPS of $1.33 to $1.35 from continuing operations, revised from our previous estimate of $1.20 to $1.25, on revenues of $261 to $263 million, revised from our previous estimate of $255 to $260 million.”

Use of Non-GAAP Financial Measures

In addition to the financial measures prepared in accordance with generally accepted accounting principles (GAAP), we use certain non-GAAP financial measures, including increases or decreases in revenues excluding the effect of foreign currency translation, adjusted operating income, earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted EBITDA, and diluted EPS excluding the gain on the sale of real estate.

We present increases or decreases in revenues excluding the effect of foreign currency translation to provide investors insight into underlying revenue trends. In addition, we exclude from certain financial measures restructuring costs and certain gains and losses to give investors additional insight into our quarterly and annual operating performance, especially when compared to quarters in which such items had greater or lesser effect, or no effect. In addition, these items are excluded as they are either isolated or cannot be expected to occur again with any regularity or predictability and we believe are not indicative of our normal operating results.

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

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

Adjusted EBITDA and adjusted operating income exclude a pre-tax gain of $0.7 million in the three-month period ended October 2, 2010 and pre-tax restructuring costs of $0.5 million in the three-month period ended October 3, 2009. Adjusted EBITDA and adjusted operating income exclude pre-tax gains of $1.3 million and restructuring costs of $0.2 million in the nine-month period ended October 2, 2010 and pre-tax restructuring costs of $2.3 million in the nine-month period ended October 3, 2009. Adjusted diluted EPS excludes the after-tax gain on the sale of real estate of $0.7 million, or $.06 per diluted share, in the three-month period ended October 2, 2010.

Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are set forth in the accompanying tables.

Conference Call

Kadant will hold its earnings conference call on Thursday, October 28, 2010, at 11 a.m. Eastern time. To listen, call 800-709-2159 within the U.S., or 973-582-2810 outside the U.S. Please reference Event ID number 16651862. You can also listen to the call live on the Web by visiting www.kadant.com and clicking on "Investors.” An audio archive of the call will be available on our Web site until November 26, 2010.

About Kadant

Kadant Inc. is a leading supplier to the global pulp and paper industry, with a range of products and services for improving efficiency and quality in pulp and paper production, including paper machine accessories and systems for stock preparation, fluid handling, and water management. Our fluid-handling products are also used to optimize production in the steel, rubber, plastics, food, and textile industries. In addition, we produce granules from papermaking byproducts for agricultural and lawn and garden applications. Kadant is based in Westford, Massachusetts, with revenues of $226 million in 2009 and 1,600 employees in 16 countries worldwide. For more information, visit www.kadant.com.

The following constitutes a "Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995: This press release contains forward-looking statements that involve a number of risks and uncertainties, including forward-looking statements about our expected future financial and operating performance, demand for our products, industry and economic outlook, and pending orders. There can be no assurance that we will be able to record bookings or recognize revenues on the pending orders described in this release. Important factors that could cause actual results to differ materially from those indicated by such statements are set forth under the heading "Risk Factors” in Kadant’s quarterly report on Form 10-Q for the period ended July 3, 2010. These include risks and uncertainties relating to our dependence on the pulp and paper industry; significance of sales and operation of manufacturing facilities in China; international sales and operations; competition; soundness of suppliers and customers; our debt obligations; restrictions in our credit agreement; soundness of financial institutions; litigation and warranty costs related to our discontinued operation; our acquisition strategy; future restructurings; factors influencing our fiber-based products business; protection of patents and proprietary rights; fluctuations in our share price; and anti-takeover provisions. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise.