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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 Jeff's remarks, I'll give an overview of our financial results for the quarter, and we will then have a Q&A session.
I'll begin by reviewing our operational highlights for the second quarter, and I'm pleased to report that we had our best quarter ever with strong demand and excellent execution across all of our operating segments.
Widespread business reopenings and pent-up demand led to a high level of economic activity and our record financial performance in the second quarter.
Our aftermarket parts and consumables business was exceptional in the second quarter and capital project activity was also moving at a record-setting pace.
Our new order activity was driven by strong demand for our stock preparation and wood processing product lines, both of which are included in our Industrial Processing segment.
And this led to another great quarterly performance for this segment.
I'll provide more details on this when I review our operating segments.
They've done a superb job.
Before moving on to review our second quarter financial performance, I wanted to update you on the progress of our recent acquisition of Clouth that was announced in June.
I am pleased to tell you that last week, we completed the acquisition of Clouth and most of its related companies and are moving forward with integrating this business into Kadant.
Clouth's first-class management team has built a solid reputation in its core markets.
And their quality products complement and extend our doctor blade offerings.
Turning now to slide six and our Q2 financial performance.
You can see we had significant increases across all of these financial metrics compared to Q2 of last year.
Our bookings were up 60% compared to Q2 2020 and were a new record for the third consecutive quarter.
Q2 revenue was up 28% compared to the second quarter of 2020 and up 14% sequentially and to a record $196 million.
Our aftermarket parts and consumables revenue was also up 28% compared to the same period last year and up 6% sequentially to a record $125 million in Q2.
The consistently high operating rates of our customers, combined with lower store room inventory, a part contributed to this record aftermarket performance.
Solid execution contributed to boosting our adjusted EBITDA margin to 21% which led to a record operating cash flows of $44 million in Q2.
We continue to benefit from strengthening industrial activity in Q2, especially in North America and Europe.
Our businesses executed well and our global workforce continue to safely meet our customers' needs, despite challenging circumstances in many areas of the world.
All three of our operating segments experienced an improved adjusted EBITDA margin performance despite the growing inflationary pressures for materials and supply chain constraints.
Next, I'd like to discuss our three operating segments, beginning with our Flow Control segment.
Our Flow Control segment had record revenue and strong bookings in the second quarter with a solid revenue contribution in the capital projects.
Bookings and revenue were up 45% and 38%, respectively, compared to the same period last year and parts made up 65% of total revenue in the second quarter.
Improved operating leverage led to a record adjusted EBITDA and an adjusted EBITDA margin of nearly 30%.
Our Flow Control segment's strong start to the first half of the year is expected to moderate somewhat in the second half.
However, the record backlog and strong bookings heading into Q3, we still expect a strong second half of the year.
Our recent acquisition of Clouth will further add to our overall performance and will be included in this segment going forward.
Our Industrial Processing segment continued to experience strong demand with bookings in this segment up 92% to a record $102 million.
New orders for our fiber processing systems in China led this increase in bookings in the second quarter.
Strong end market demand for wood products continued throughout the quarter as U.S. housing starts increased 23% in June 2021 compared to June 2020.
Although housing starts were down 5% from May to June of this year, overall demand for housing and wood products is high and is expected to remain strong throughout the second half of 2021.
Revenue in this segment increased 26% to $83 million with parts and consumables leading to growth, up 32% compared to the same period last year and 11% sequentially.
A favorable product mix and good execution led to a 340 basis point improvement in our adjusted EBITDA margin.
We ended the quarter with another record backlog and this positions us well for the remainder of the year.
In our Material Handling segment, we had strong demand for aftermarket parts and saw a strong uptick in orders for our high-performance balers that prepare materials for secondary processing and transport.
European markets led the way to our record revenue performance in Q2.
Revenue in the second quarter was up 18% to $42 million and parts and consumables revenue was strong, making up 60% of total revenue.
Capital bookings in our Material Handling segment were up compared to the same period last year and are back to pre-pandemic levels.
Although not a record, total bookings were up 29% at the top end of our historical bookings.
Solid execution by our businesses in this segment helped boost our EBITDA by 30% and adjusted EBITDA margin by 180 basis points to its highest level since Q4 of 2019.
Capital project activity remains at a good level, and we expect capital projects in the second half of 2021 to be similar to the strong performance in the first half of the year.
As we look ahead to the second half of 2021, we continue to see signs of healthy project activity and an optimism in our customers as the economic recovery takes hold.
As more regions of the world begin to experience an improved economic outlook, we expect to see strong demand for our products and technologies.
With the extent of the spread of COVID-19 Delta variant still a big unknown, our record backlog has us well positioned as we look ahead to the second half of the year.
I'd like to pass the call now over to Mike to review our Q2 performance.
I'll start with some key financial metrics from our second quarter.
Consolidated gross margins were 43.6% in the second quarter of 2021 compared to 43.5% in the second quarter of 2020.
Our parts and consumables revenue represented 64% of revenue in both periods.
SG&A expenses were $49.3 million and 25.2% of revenue in the second quarter of 2021 compared to $45.1 million and 29.5% of revenue in the second quarter 2020.
The $4.2 million increase in SG&A expenses includes a $2.6 million unfavorable foreign currency translation effect and increases in incentive compensation outside labor and travel-related costs due to improved business conditions.
We received $1 million from the government assistance programs in the second quarter of 2021 compared to $0.8 million in the second quarter of 2020.
I would like to note for guidance purposes, that we do not expect to receive any meaningful government assistance payments going forward.
Our GAAP diluted earnings per share was a record $1.96 in the second quarter, up 96% compared to $1 in the second quarter of 2020.
Adjusted EBITDA increased 56% to $41.3 million or 21.1% of revenue compared to $26.6 million or 17.4% of revenue in the second quarter of 2020 due to strong performance in our Flow Control and Industrial Processing segments.
I would like to note that both adjusted EBITDA of $41.3 million and the 21.1% of revenue were records.
Adjusted EBITDA is an important metric for us as we assess the returns achieved on our business initiatives.
Operating cash flow increased 101% to a record $44.4 million in the second quarter of 2021 compared to $22 million in the second quarter of 2020.
Free cash flow was also a record at $42.3 million in the second quarter of 2021 compared to $21.1 million in the second quarter of 2020.
During the quarter, we were able to utilize our strong cash flows to pay down our existing debt by $27 million.
We had several other notable nonoperating sources and uses of cash in the second quarter of 2021.
We borrowed $78.7 million at the end of the second quarter to fund the third quarter acquisition of Clouth.
We also paid $2.1 million for capital expenditures and paid a $2.9 million dividend on our common stock.
Let me turn to our earnings per share results for the quarter.
In the second quarter of 2021, our GAAP diluted earnings per share was $1.96, and after adding back acquisition costs of $0.05 our adjusted diluted earnings per share was $2.01.
In the second quarter of 2020, our GAAP diluted earnings per share was $1, and our adjusted diluted earnings per share was $1.06.
The $0.06 difference includes restructuring costs of $0.03 and acquisition costs of $0.03.
As shown in the chart, the increase of $0.95 in adjusted diluted earnings per share in the second quarter of 2021 compared to the second quarter of 2020 consists of the following: $1.15 due to higher revenue, $0.08 due to higher gross margin percentage and $0.05 due to lower interest expense.
These increases were partially offset by $0.27 due to higher operating expenses, $0.04 due to a decrease in the amounts received from government assistance programs and $0.02 due to higher weighted average shares outstanding.
Collectively, included in all the categories I just mentioned, was a favorable foreign currency translation effect of $0.16 in the second quarter of 2021 compared to the second quarter of last year due to the weakening of the U.S. dollar.
Looking at our liquidity metrics on slide 15.
Our cash conversion days, which we calculate by taking days in receivables plus days in inventory subtracting days in accounts payable decreased to 109 at the end of the second quarter of 2021 and compared to 128 at the end of the second quarter of 2020.
This decrease was primarily driven by a lower number of days in inventory.
Working capital as a percentage of revenue was 12.7% in the second quarter of 2021 compared to 14.8% in the second quarter of 2020.
Our net debt, that is debtless cash, decreased $40 million or 26% sequentially to $116 million at the end of the second quarter 2021.
We paid down $27 million of our debt in the quarter.
And as previously mentioned, we also borrowed $79 million of debt at the end of the second quarter to fund our acquisition of Clouth, which was largely completed in mid-July.
The closing in mid-July relates to the majority of the Clouth's entities that we are acquiring.
We borrowed an additional $4 million at the end of July associated with the acquisition of the remaining legal entity, which we expect will be completed in mid-August.
Our leverage ratio calculated in accordance with our credit agreement increased to 1.71% at the end of the second quarter of 2021 compared to 1.5% at the end of the first quarter of '21.
Our net interest expense decreased $0.9 million or 47% to $1 million in the second quarter of 2021, compared to $1.9 million in the second quarter of 2020.
At the end of the second quarter of 2021, we had $141 million of borrowing capacity available on our revolving credit facility which matures in December of 2023.
Our record bookings activity in the second quarter of 2021 has resulted in an increase in our revenue expectations for the year.
While we have had record booking results over the last three quarters, we remain cautious about the future potential impact on our business of increasing COVID cases in certain regions of the world and supply chain disruptions, which could impact the timing of delivery on projects.
Travel and visitation restrictions have continued to impact our ability to timely execute some projects in certain parts of the world, especially where COVID travel restrictions are still in place.
In addition to an increase in our revenue expectation due to continued strength in the market and the record bookings in the second quarter, our 2021 estimates now include the acquisition of Clouth.
As a result, we are updating our revenue range for the year to an increase over 2020 of approximately 23% to 25% and or $783 million to $793 million, up from our previous estimated range of $710 million to $730 million.
The majority of this increase is organic with approximately 1/3 of the revenue range increase related to the addition of Clouth.
We anticipate that revenue in the fourth quarter will be the strongest for the year due to both strong capital project activity and our recent acquisition.
For the third quarter, we anticipate revenue between $195 million to $200 million and for the fourth quarter revenue of $220 million to $225 million.
For the third quarter, if we exclude the additional revenue from Clouth, we anticipate revenue will be down compared to the second quarter of 2021 due to the projected timing of revenue recognition on capital projects.
As mentioned earlier, this guidance is, of course, predicated on the pandemic and supply chain issues having little impact on our customers' activities or the delivery of shipments to them.
We now anticipate gross margins for the year will come in at approximately 42.5%, down from our prior estimate of 43%, principally, as a result of including the amortization of the acquired profit and inventory related to our Clouth acquisition.
As I have noted on the last two calls, the mix will be more weighted toward capital in the second half of the year, especially in the fourth quarter.
As a result, we anticipate gross margins will be 42% in the second half of the year, which includes the impact of amortization of the acquired profit and inventory.
Our current estimate for the inventory write-up is approximately $3.5 million with $1.4 million or $0.09 turning in the third quarter and the remaining $2.1 million or $0.12 turning in the fourth quarter.
We anticipate SG&A expenses will be a little over $54 million per quarter in the third and fourth quarter.
We now anticipate that SG&A expenses as a percentage of revenue will be lower than we projected at the beginning of the year and will be approximately 26% of revenue for the full year 2021.
This includes backlog amortization expense of approximately $400,000 or $0.03 in the third quarter.
Our interest expense will be approximately $1.3 million per quarter in the second half of 2021 due to the incremental borrowings related to our recent acquisition.
We anticipate the tax rate for the year will be approximately 28% and the third and fourth quarter of '21, approximately 28.5% to 29%.
We anticipate that our adjusted earnings per share will be lower in the third quarter compared to the second quarter of 2021 due to several factors, including a lower anticipated gross margin percentage versus the second quarter and the lack of payments received from government programs that contributed $0.10 to the second quarter results.
I hope these directional comments will help provide insight into how we see our current business environment.
Before concluding my remarks, I wanted to comment on our first quarter 2021 results.
We have recast our first quarter 2021 non-GAAP financial metrics to reflect that our SG&A expense included $1.3 million of acquisition costs related to our acquisition of Clouth, which was announced in June.
We reported diluted earnings per share of $1.43 in the first quarter of 2021.
With these acquisition costs added back, our adjusted diluted earnings per share was $1.53 in the first quarter of 2021.
Also, we reported adjusted EBITDA of $31.1 million or 18% of revenue in the first quarter of 2021.
With the addition of these acquisition costs, our adjusted EBITDA was $32.4 million or 18.8% of revenue.

user
compname reports q2 adjusted earnings per share of $2.01.
q2 adjusted earnings per share $2.01.
q2 gaap earnings per share $1.96.
q2 revenue $196 million versus refinitiv ibes estimate of $178.1 million.
sees fy 2021 revenue $783 million to $793 million.

assistant