Kadant Inc. (NYSE:KAI) Q3 2020 Earnings Conference Call - Final Transcript
Oct 28, 2020 • 11:00 am ET
Jeffrey L. Powell
continue to work under advanced safety protocols, I remain proud of our dedicated employees around the world for the work they have done and continue to do to serve our customers. We had solid execution by our businesses in the third quarter, along with various cost containment measures, which contributed to our strong margin performance. We also benefited from government employee retention assistance, which allowed us to maintain our talented workforce despite the lower business levels during the quarter.
Our balance sheet remains healthy, and our liquidity position is solid. Both cash flows have always been a strength of Kadant, and we expect this will continue as economies begin to recover. Turning now to our Q3 performance. We had better-than-expected EPS results due to our industrial processing and flow control segments. This was further enhanced by government employee retention assistance that contributed to our solid adjusted EPS of $1.31 a share. Our adjusted EBITDA margin was excellent at 19.4%, and our cash flow was strong at $24 million. Our parts and consumable revenue made up 66% of total revenue. On a sequential basis, parts revenue was up 6% to $103 million in the third quarter. As many of you know, growing our parts and consumable business is a key strategic focus. Overall, the quarter was better than expected, and I'm really pleased with how our employees performed to deliver these solid operating results. Next, I would like to review our performance in our three operating segments. While our Flow Control segment performed better than expected during the quarter, we continue to face a challenging market environment with industrial production weakening as the quarter progressed. Product mix improved operating leverage and solid execution led to a strong adjusted EBITDA margin of 27.5% for the third quarter, up 70 basis points from the same period last year. Although demand for aftermarket parts was solid and made up 69% of total revenue in the quarter, customer delays in capital project execution and the inability of our employees to engage face-to-face with customers and prospects due to the pandemic suppressed our bookings performance. Looking ahead to the fourth quarter, we expect Q4 to show improvement in terms of both capital project bookings and demand for parts and consumables. Turning now to our Industrial Processing segment. We experienced strong demand for our wood processing equipment, with bookings at their highest level since our record-setting 2018.
This demand was driven by our robust U.S. housing market and continued strong demand for wood-based products. Revenue in this segment declined 16% to $62 million year-over-year and down 5% sequentially. This decline was largely due to a slowdown in capital business during the quarter in certain end markets, particularly in paper and packaging. Parts and consumables revenue, on the other hand, was solid and made up 68% of total revenue in the third quarter. Encouragingly, U.S. housing starts continue to show strength and were $1.4 million in September, up 11% compared to the same period last year, which benefits