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Text: With me on the call today is Jeff Powell, our President and Chief Executive Officer.
Before we begin, let me read our safe harbor statement.
These non-GAAP measures are not prepared in accordance with generally accepted accounting principles.
Following the remarks, I will give an overview of our financial results for the quarter and the year, and we will then have a Q&A session.
I'll begin by discussing our operational highlights and our fourth quarter financial results.
The fourth quarter was a solid finish to a challenging year.
Despite the uncertainties brought about by the pandemic, we had a solid execution during the quarter and generated strong cash flow while safeguarding our employees.
Strong capital project activity across all our operating segments and robust demand for our Parts & Consumables led to record bookings and cash flow in the fourth quarter.
I'll provide more details about this activity when I discuss the results of our operating segments.
Our balance sheet remains healthy and our liquidity position has strengthened throughout the year.
Robust cash flows have always been a strength of Kadant, and we expect this will continue as economies recover from the effects of the pandemic.
Turning now to our Q4 performance.
We achieved a notable turnaround from the prior quarter's weak business levels.
Our Q4 bookings were a record $197 million, up 23% compared to the prior year, with our Industrial Processing segment driving this growth.
Strong demand led to a 9% sequential increase in Parts & Consumables revenue, which made up 67% of total Q4 revenue.
Total revenue was down 8% compared to the fourth quarter of 2019.
We were particularly pleased that our adjusted EBITDA margin increased to 19.1%, and our free cash flow was up 7% to a record $38 million in the fourth quarter.
Overall, the quarter was better-than-expected and I'm pleased with how our employees delivered these solid operating results.
While 2019 was a record year on many fronts, and we began 2020 with positive momentum, no one could have anticipated the full impact that the pandemic would have on the world and the global economies.
Full year revenue declined 10% to $635 million, while our bottom line performance benefited from a favorable product mix along with cost containment measures and government systems programs.
Cash flow from operations strengthened throughout the year, and free cash flow was near a record $85 million for the full year 2020.
Our diluted earnings per share was $4.77 and on an adjusted basis, declined 7% to $5 compared to our record of $5.36 per share in 2019.
Our workforce around the globe deserves a tremendous amount of credit for these results as they adapted to a new way of work and performed exceptionally well under very challenging circumstances.
I'm extremely proud of our talent and dedicated employees for the work they've done and continue to do to serve our customers.
Next, I'd like to review the performance of our three operating segments.
Our Flow Control segment benefited from a rebound in capital project activity in the fourth quarter, which led to bookings increasing nearly 9% compared to the prior year period.
Our quarterly bookings performance moved in the right direction as the year progressed and positions us well for a solid start to 2021.
Our Parts & Consumables revenue was up 5% sequentially and made up 68% of total Q4 revenue.
As many of you know, our aftermarket parts business has a more favorable margin profile compared to capital business, and the product mix combined with improved operating leverage led to a 13% increase in adjusted EBITDA compared to Q4 of 2019 and represented 26% of revenue.
Looking ahead, we expect the first quarter of 2021 to show stability in terms of both capital project bookings and demand for Parts & Consumables.
We believe market conditions are improving and will continue to strengthen as the COVID-19 vaccine becomes more widely available and businesses are permitted to fully reopen.
Turning now to our Industrial Processing segment.
We continue to experience strong demand for our wood processing equipment and also for our stock prep equipment, with capital bookings in this segment more than doubling compared to the prior year.
This demand was largely driven by two factors.
One was a robust U.S. housing market, which saw single-family homebuilding, the largest share of the housing market, increased 12% in December.
The other was a significant increase in our stock prep capital project activity in China and North America, which more than doubled compared to the prior year.
Revenue in this segment declined 13% to $69 million year-over-year, but increased 11% sequentially.
Parts & Consumables revenue was up 12% compared to the same period last year, and made up 70% of total revenue in the fourth quarter.
A favorable product mix and good execution led to a 250-basis point improvement in our adjusted EBITDA margin.
While government systems programs were significantly reduced in the fourth quarter, we did have some remaining benefit that helped allow us to retain our talented workforce.
In our Material Handling segment, we continue to see relatively stable yet moderate order activity.
Revenue was down 7% to $39 million, and Parts & Consumables revenue in the fourth quarter made up 58% of total revenue.
Capital bookings in our Material Handling segment increased 23% compared to the same period last year and were up 18% sequentially.
We are encouraged to see our customers showing increased confidence in the economic outlook by awarding us these larger capital orders.
As in all other segments, we are seeing increasing market activity.
Looking ahead to 2021, we believe this segment will continue to strengthen throughout the year.
As we look ahead to the first quarter of 2021 and the full year, we are seeing signs of increased project activity and expect industrial production to continue its modest rebound.
Our strong cash flows combined with a strengthening balance sheet have us well positioned to capitalize on opportunities that may emerge with the improving global economy.
While we are hopeful the worst of the pandemic is behind us, there is still a great amount of uncertainty, particularly in Europe, regarding how economies will respond to pandemic given the unevenness in the vaccine distribution.
This uncertainty limits our ability to forecast the timing of orders and as a result, we will not be providing guidance at this time.
I would like to pass the call over to Mike for a review of our Q4 performance.
I'll start with some key financial metrics from our fourth quarter.
Consolidated gross margins were 44.1% in the fourth quarter of 2020 compared to 40.9% in the fourth quarter of 2019, up 320 basis points.
The increase was primarily due to higher gross margins on Parts & Consumables in the quarter and a higher percentage of Parts & Consumables.
Our overall percentage of Parts & Consumables revenue increased to 67% of total revenue in the fourth quarter of 2020 compared to 60% in the fourth quarter of 2019.
Also contributing to the increase in gross margins was approximately 50 basis points due to the receipt of government assistance benefits related to the pandemic.
SG&A expenses were $47.4 million in the fourth quarter of 2020, down $0.2 million from the fourth quarter of 2019.
SG&A expense as a percentage of revenue was 28.1% in the fourth quarter of 2020 compared to 26.1% in the fourth quarter of 2019.
There was an unfavorable foreign currency translation effect, which increased SG&A expenses by $1.1 million, and we received government assistance benefits of $0.4 million in the fourth quarter of 2020.
Excluding these items, along with backlog amortization and the SG&A from our acquisition, SG&A expenses for the fourth quarter of 2020 were down $1.3 million or 3% compared to the fourth quarter of 2019, primarily due to reduced travel-related expenses.
Our GAAP diluted earnings per share was $1.40 in the fourth quarter compared to $0.76 in the fourth quarter of 2019.
Our GAAP diluted earnings per share in the fourth quarter includes $0.12 from an intangible asset impairment charge, $0.01 of restructuring costs and $0.01 of acquired backlog amortization.
In addition, our fourth quarter results included pre-tax income of $1.2 million or $0.07 net of tax attributable to government employee retention assistance programs.
Our tax rate in the fourth quarter was 20.4% and included approximately $0.12 of tax benefits related to the following items.
A reversal of tax reserves associated with uncertain tax positions, the exercise of previously awarded employee stock options and return to provision adjustments.
Excluding these items, our tax rate would have been 27%.
For the full year 2020, gross margins increased 200 basis points to 43.7% compared to 41.7% in 2019.
Excluding the government assistance benefits, which contributed approximately 60 basis points to the 2020 gross margins and the amortization of profit and inventory in 2019, gross margins were up 90 basis points, primarily due to higher gross profit margins on Parts & Consumables and a higher overall percentage of Parts & Consumables.
Our percentage of Parts & Consumables revenue increased to 66% in 2020 compared to 63% in 2019.
SG&A expenses decreased $10.6 million or 6% to $181.9 million in 2020 compared to $192.5 million in 2019.
As a percentage of revenue, SG&A expenses were 28.6% in 2020 compared to 27.3% in 2019.
We had $0.6 million of SG&A from our acquisitions in 2020 and incurred acquisition-related costs of $1 million and $2.2 million in 2020 and 2019, respectively.
In addition, there was a favorable foreign currency translation effect of $0.4 million and we received government assistance benefits of $2.2 million in 2020.
Excluding SG&A from our acquisition, acquisition-related costs, the impact of foreign currency translation and government assistance benefits, SG&A expenses were down $7.4 million or 4% compared to 2019, primarily due to a decrease in travel-related costs.
Our GAAP diluted earnings per share in 2020 was $4.77, up 5% compared to $4.54 in 2019.
Our GAAP diluted earnings per share in 2020 includes $0.12 from an intangible asset impairment charge, $0.07 of restructuring costs, $0.04 of acquired backlog amortization, $0.03 of acquisition costs and $0.03 from a discrete tax benefit.
In addition, our 2020 results included pre-tax income of $6.1 million or $0.39 net of tax attributable to government employee retention assistance programs.
In the fourth quarter of 2020, adjusted EBITDA was $32.1 million or 19.1% of revenue compared to $32.2 million or 17.6% of revenue in the fourth quarter of 2019.
On a sequential basis, adjusted EBITDA increased 7% due to increased profitability in our Material Handling segment.
For the full year, adjusted EBITDA was $115.9 million or 18.3% of revenue compared to the record set in 2019 of $127.1 million or 18% of revenue.
In the fourth quarter of 2020, operating cash flow was a record $40.3 million and included a positive impact of $12.8 million from working capital compared to operating cash flows of $39.2 million in the fourth quarter of 2019, which included a positive impact from working capital of $17.9 million.
For the full year, operating cash flow was $92.9 million, down 5% compared to the record of $97.4 million in 2019.
We had several notable nonoperating uses of cash in the fourth quarter of 2020.
We repaid $30.1 million of debt, paid a $2.8 million dividend on our common stock and paid $2.2 million for capital expenditures.
For the full year, we repaid $72 million of our debt.
Free cash flow was a record $38.1 million in the fourth quarter of 2020, increasing 69% sequentially and 7% compared to the fourth quarter of 2019.
For the full year, free cash flow was $85.3 million, down $2.2 million or 2% compared to the record of $87.5 million in 2019.
Let me turn to our earnings per share results for the quarter.
In the fourth quarter of 2020, GAAP diluted earnings per share was $1.40 and adjusted diluted earnings per share was $1.54.
The $0.14 difference relates to an intangible asset impairment charge of $0.12, restructuring costs of $0.01 and amortization of acquired backlog of $0.01.
The $0.12 intangible asset impairment charge is associated with our timber harvesting product line, which is part of our Wood Processing Systems business.
This is an ancillary product line that was part of our acquisition of NII FPG's Forest Products business in 2017 and represents less than 1.5% of our consolidated revenues in 2020.
We experienced a decrease in demand for these products in 2019, which continued into 2020 due to several factors including a general softening in demand for equipment used in steep slope logging due to reduced availability of timber, higher stumpage fees and the resulting closure of some sawmills in Western Canada.
We evaluated the recoverability of the intangible asset related to this business, which resulted in a pre-tax impairment charge of $1.9 million in the fourth quarter of 2020 and $2.3 million in the fourth quarter of 2019.
After these impairment charges, the remaining intangible asset for this product line is $0.5 million.
In the fourth quarter of 2019, GAAP diluted earnings per share was $0.76 and adjusted diluted earnings per share was $1.32.
The $0.56 difference relates to a $0.55 charge for the settlement of a pension plan, an intangible asset impairment charge of $0.16, and restructuring costs of $0.01, which were partially offset by a $0.16 tax benefit associated with the exercise of previously awarded employee stock options.
The increase of $0.22 in adjusted diluted earnings per share in the fourth quarter of 2020 compared to the fourth quarter of 2019 consists of the following: $0.21 due to higher gross margins, $0.15 from a lower recurring tax rate, $0.07 due to government assistance programs, $0.06 due to lower interest expense, $0.02 due to lower operating expenses and $0.01 from the operating results of our acquisition.
These increases were partially offset by $0.29 due to lower revenue and $0.01 due to higher weighted average shares outstanding.
Collectively, included in all the categories I just mentioned was a favorable foreign currency translation effect of $0.03 in the fourth quarter of 2020, compared to last year's fourth quarter due to the weakening of the U.S. dollar.
Now turning to our earnings per share results for the full year on slide 17.
We reported GAAP diluted earnings per share of $4.77 in 2020, and our adjusted diluted earnings per share was $5.
The $0.23 difference relates to an intangible asset impairment charge of $0.12, restructuring costs of $0.07, amortization of acquired backlog of $0.04, acquisition costs of $0.03 and a discrete tax benefit of $0.03.
We reported GAAP diluted earnings per share of $4.54 in 2019 and our adjusted diluted earnings per share was $5.36.
The adjusted diluted earnings per share excludes $0.55 from a pension settlement charge, $0.32 for the amortization of acquired profit and inventory and backlog, an intangible asset impairment charge of $0.16, acquisition costs of $0.06, $0.01 of restructuring costs and $0.29 of tax benefits from the exercise of previously awarded employee stock options.
Decrease of $0.36 in adjusted diluted earnings per share from 2019 to 2020 consists of the following: $1.87 from lower revenue and $0.05 from higher weighted average shares outstanding.
These decreases were partially offset by $0.45 from lower operating expenses, $0.39 from government assistance programs, $0.35 due to lower interest expense, $0.33 from higher gross margins, $0.03 from the operating results of our acquisition and $0.01 from a lower recurring tax rate.
Collectively, included in all the categories I just mentioned, was an unfavorable foreign currency translation effect of $0.04 in 2020 compared to 2019.
Now let's turn to our liquidity metrics, starting on slide 18.
Cash conversion days measure, calculated by taking days in receivables plus days in inventory and subtracting days in accounts payable, was 125 at the end of the fourth quarter of 2020, down from 140 at the end of the third quarter of 2020, but up from 104 days in the fourth quarter of 2019.
The increase in cash conversion days from the prior year was driven by a higher number of days in inventory and lower number of days in accounts payable due to a number of factors, including delays in capital project deliveries, weakness in capital project activity and delays in maintenance spending by our customers.
As I've noted on past calls this year, our subsidiaries managed their inventory supply to ensure that critical components are available for our customers as needed and the timing of these purchases has been difficult to predict in the current environment.
Working capital as a percentage of revenue was 14.2% in the fourth quarter of 2020 compared to 15.6% in the third quarter of 2020 and 12.2% in the fourth quarter of 2019.
Net debt, that is debt less cash, at the end of 2020 was $166.8 million compared to $232.8 million at the end of 2019.
We were able to lower our net debt by $66 million due to the excellent free cash flow generated in 2020.
Our interest expense decreased 42% or $5.4 million to $7.4 million in 2020 compared to $12.8 million in 2019 due to our ability to successfully leverage cash generated around the world to pay down debt and lower interest rates.
Our leverage ratio calculated defined in our credit agreement was 1.61 at the end of the fourth quarter of 2020, down from 2.03 in the fourth quarter of 2019, as we continue to make excellent progress in paying down debt.
Regarding guidance, our current environment continues to make forecasting difficult.
Given the current uncertainty, we'll not be providing formal guidance at this time for 2021.
We will reevaluate providing guidance as we progress through the year.
While we are not providing guidance, I would like to provide a few directional comments on our outlook for 2020.
We had a significant increase in demand for our Parts & Consumables and especially our capital products in the fourth quarter, and we anticipate an overall increase in bookings in 2021.
We currently anticipate an overall increase in revenue of 9% to 12%, with stronger performance in the second half of the year.
We anticipate the first quarter will be our weakest quarter and the fourth quarter will be our strongest.
I would caution here that this is predicated on the COVID-19 vaccination rollout improving business conditions in the second half of 2021.
We also anticipate the mix will be weighted more toward capital in 2020.
Excluding the government assistance programs, our gross margins came in at 43.1% in 2020.
For 2021, despite the heavier mix toward capital, we anticipate gross margins will be close to this level.
As a percentage of revenue, we anticipate SG&A will be approximately 27% to 28%, while the percentage of R&D expense will be the same as 2020.
Overall, we expect minimal benefit from government assistance programs in 2021 compared to the $0.39 we received in 2020.
We expect our recurring tax rate will be approximately 27% to 28% in 2021.
Our recurring tax rate in the first quarter of 2021 may be lower than the remaining quarters as we anticipate receiving a tax benefit from the vesting of equity awards.
We anticipate capex spending in 2021 will be approximately 2% of revenue.
In addition, we expect depreciation and amortization will be approximately $30 million to $31 million in 2021.
We hope these directional comments will help provide insight into how we see our current business environment.

user
q4 adjusted earnings per share $1.54.
q4 gaap earnings per share $1.40.
qtrly revenue decreased 8% to $168 million.
will not be providing guidance at this time.

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