Kadant(US:KAI)2025-10-09 16:02Summary of CADEN Inc. Acquisition of Applied Industries Conference Call Company and Industry Overview - Company: CADEN Inc. - Acquisition Target: Applied Industries, a manufacturer of boiler efficiency and cleaning system technologies - Industry: Boiler efficiency and cleaning technology, particularly in the pulp and paper sector Key Points and Arguments - Acquisition Details: CADEN Inc. acquired Applied Industries for approximately $175 million, with Applied's revenue for the last fiscal year being about $92 million [4][9] - Core Technology: Applied's main product is a boiler cleaning technology called Smart Clean, which uses sensors to determine when cleaning is necessary, thus optimizing energy efficiency and safety [5][6] - Financial Metrics: For the fiscal year ending February 28, 2025, Applied reported an adjusted EBITDA of $21.4 million, resulting in an EBITDA multiple of 8.2 times [9] - Revenue Composition: Approximately 75% of Applied's revenue comes from aftermarket sales, indicating a strong recurring revenue stream [9][25] - Market Position: Applied is a market leader in recovery boilers and serves various industries, with a significant presence in North America (55% of revenue) and the pulp and paper sector (60% of revenue) [24][25] Additional Important Insights - Growth Potential: The company has experienced a compound annual growth rate (CAGR) of 7-8% over the past three to four years, driven by the adoption of larger recovery boilers in Southeast Asia and South America [15][28] - Sustainability Initiatives: The acquisition aligns with CADEN Inc.'s sustainability goals, as Applied's technology can save $2 million to $3 million in energy costs annually and reduce CO2 emissions significantly [6] - Aftermarket Opportunities: The business model resembles a "razor blade" model, where initial sales lead to ongoing aftermarket sales, enhancing long-term revenue stability [19] - Competitive Landscape: The main competitor in this space is Diamond Power, with some smaller regional players also present [21] - Future Outlook: While the company expects growth to be more conservative in the lower single digits moving forward, the strong aftermarket component mitigates cyclicality risks [28][29] Financial Considerations - Funding: The acquisition was primarily funded through borrowing under CADEN Inc.'s revolving credit facility, with an estimated leverage ratio of approximately 1.5 [9] - Dilution and Accretion: The transaction is expected to be slightly dilutive on a GAAP EPS basis in Q4 2025 but accretive on an adjusted basis, with good free cash generation anticipated [10] - Intangible Assets: There will be a high level of non-cash intangible amortization expense associated with the acquisition, which is still being evaluated [10][38] Conclusion - The acquisition of Applied Industries is viewed as a strategic move for CADEN Inc., enhancing its product offerings and market position while aligning with sustainability initiatives. The strong aftermarket revenue model and growth potential in emerging markets present a favorable outlook for the combined entity moving forward [42]