Kadant Inc

NYSE:KAI

Earnings Call Transcript 2017-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the Q4 2017 Kadant Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder this conference call is being recorded.

I would now like to turn the call over to Michael McKenney, Chief Financial Officer. Please go ahead.

[Michael McKenney, CFO]

Thank you, Ayala. Good morning everyone, and welcome to Kadant's fourth quarter and fiscal year 2017 earnings call. With me on the call today is Jon Painter, our President and Chief Executive Officer.

Before we begin, let me read our Safe Harbor statement. Various remarks that we may make today about Kadant's future expectations, plans and prospects are forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to know and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation, and those discussed under the heading Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2016, and subsequent filings with the Securities and Exchange Commission. Our Form 10-K is on file with the SEC and is also available in the Investor section of our Web site at www.kadant.com, under the heading SEC Filings.

In addition, any forward-looking statements we make during this webcast represent our views only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change, and you should not rely on these forward-looking statements as representing our views on any date after today.

During this webcast, we will refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our fourth quarter and full-year earnings press release and the slides presented on the webcast and discussed on the conference call, which are available in the Investors section of our Web site at www.kadant.com under the heading Investor News.

With that, I will turn the call over to Jon Painter, who will give you an update on Kadant's business and future prospects. Following Jon's remarks, I'll give an overview of our financial results for the quarter, and we will then have a Q&A session. Jon?

[Jon Painter, President and CEO]

Thanks, Mike. Hello, everyone. Thanks for joining us this morning to review our fourth quarter and full-year results and to discuss our business outlook for 2018. The fourth quarter was an outstanding finish to the best year in our history, and our record quarterly bookings provide a solid footing for 2018. Our fourth quarter results were driven by a combination of excellent performance by our newly-acquired businesses, as well as double-digit internal growth and solid execution from our existing businesses.

For the full-year 2017, we had record performance in nearly every key financial metric. I'll start with the highlights of the quarter. As you can see on slide five, our financial performance in Q4 was excellent. Bookings were a record $147 million and up nearly 30%. Revenue was up 49% to $149 million. Adjusted gross margins remained healthy at 44%.

Adjusted operating income was up 93% or 14% of revenue. Adjusted EBITDA was up 88% to $26 million, or 18% of revenue. GAAP diluted earnings per share was negatively impacted by a one-time tax charge on un-remitted foreign earnings as a result of the new US tax law. Excluding this one-time tax provision and other acquisition-related and restructuring costs, our adjusted diluted earnings per share was up 65% to $1.14.

Without a doubt, one of the highlights of the quarter was our record cash flow from operations of $33 million. Free cash was also a record at $24 million, despite spending $5 million in the quarter on a new manufacturing facility that I'll comment on later in my remarks. Our net debt at the end of the quarter was $165 million, and our leverage ratio as defined in our credit facility was 1.94.

Let me turn now to our full-year results. 2017 was definitely one for the record books, while our recent acquisition certainly contributed to our overall results excellent [Technical Difficulty] our existing businesses and a strong market conditions in most regions of the world fueled strong internal growth. Revenue was up 24% to a record $515 million. Adjusted gross margin was 46% and at the upper-end of our typical run rate. Adjusted EBITDA was a record $91 million with an adjusted EBITDA margin of nearly 18%, which was also a record.

Excluding the one-time tax provision and acquisition-related and restructuring costs, our full-year adjusted earnings per share was a record $4.49. Adjusted return on invested capital was just over 10%. As you know, acquisitions tend to weigh on ROIC results in the early years, and we completed three acquisitions in the second half of 2017. Excluding the impact of recent acquisitions, our ROIC was 15% in both 2016 and 2017. Adjusted return on equity was 14%, and cash flow from operations for the year was a record $65 million, while free cash flow was a record $48 million; overall an outstanding year.

As you can see on slide seven, acquisitions made a strong contribution to our revenue, bookings, and adjusted earnings per share. In addition, the impact from the weaker dollar had a modest favorable impact on our foreign currency translation. While a big part of our success in the fourth quarter was the contribution from our forest products acquisition, internal growth, and excellent operating performance of our existing businesses played a big role as well. Our internal revenue growth excluding FX and acquisitions was nearly 17% in the fourth quarter. Internal growth in adjusted earnings per share was 32% while internal growth in bookings declined 1% compared to a very strong fourth quarter of 2016.

For the full-year 2017, our internal revenue growth was 7% which was more than double our target growth rate and our internal growth in bookings was even better at 13%. More importantly internal growth and adjusted earnings per share was over 25% for the year.

On slide eight, you can see a positive trend in bookings over the last five quarters accommodating in record bookings of $147 million in Q4, we had broad based growth across most reasons and product lines. Leading the strong bookings performance were our recent acquisitions which contributed $30 million to Q4 bookings and internal growth in our Fluid-Handling product line which was up 32%. Q4 revenue was up 49% compared to the fourth quarter of 2016 while our strong revenue upswing was driven largely by acquisition, most of our products were up, product lines were up double-digits compared to Q4 of last year.

Of particular note was our revenue performance in China which was more than doubled from the fourth quarter of last year. Parts and consumables revenue and bookings for the fourth quarter continued their growth trajectory with revenue up 44% and bookings up 33% compared to Q4 of 2016 excluding our recent acquisitions, revenue was up 13% and bookings up 3%.

Our parts and consumables internal revenue growth was led by our Wood-Processing and Fluid-Handling product lines which were up double digits in most key regions of the world. For the full-year 2016 parts and consumables to reach a new record of $317 and represented 61% of total revenues compared to 62% in 2016.

Before I move on to the regional market review, I want to say a few words about the shift in our end markets. Our recent acquisitions which were completed in the second half of 2017 have diversified our customer base beyond our traditional pulp and paper end markets.

The chart on slide 10 shows the breakdown of our business by end market for the second half of 2017 a period that includes our recent for us product acquisition. As you can see a good portion of our revenue was outside of the traditional pulp and paper market, and the trouble grades of printing and writing and news front represented only 10% of our business.

The two largest end markets for us packaging and Wood-Processing representing over 60% of our revenue have a good growth prospects due to rapidly growing e-commerce related packaging and strong North American housing demand. Next I'd like to review our performance in the major geographic regions we operate let we start with North America.

Healthy demand for containerboard led packaging to packaging Mills running at 97% operating rates and a lot of producers to put through several price increases during the year. With packaging making up the largest portion of our revenue and we benefit from strong demand largely driven by e-commerce shipments and healthy financial position of our customers.

There are several packaging related projects on the drawing board in North America as produces respond to increased demand for linerboard. This month we secured an order of over $4 million for an OCC Stock-Prep system for a linerboard mill in the U.S. On housing front continued strengthen the sector bodes well for our Wood-Processing product line which supplies the production equipment for lumber and OSB Mills.

Industry analysts forecast North American housing starts of 8% per year for the next few years as homeownership among the Millennials continues to increase. You can see on slide 11 our revenue in North America was up 44% to a record $68 million to largely to the contributions from our acquisitions. Excluding the impact of our acquisitions and FX revenue was up 4% compared to the same period last year.

Bookings in North America were $70 million up 43% compared to Q4 of last year and the highest quarterly booking since Q1 of 2014. Increases in bookings in our Wood-Processing, fluid handling, Doctoring, cleaning, filtration product lines were partially offset by reductions in our Stock-Prep product line. Overall, we believe the North American market will continue to be a major contributor to our business. We see the new U.S. tax law and the repatriation of foreign cash is a positive for capital investment by our customers.

Before leaving North America, I want to comment on a significant project we've undertaken to consolidate several manufacturing and administrative locations into a newly constructed facility in Southern Ohio. Last month, we completed the construction of a new 160,000 square foot facility located in Lebanon, Ohio which will consolidate operations from three locations in Ohio, Alabama and Sweden and we've begun moving manufacturing equipment in machinery into the new facility. The $16 million investment in this Greenfield site of which $9 million was paid last year is expected to achieve economies of scale and greater efficiencies by integrating our U.S. and Swedish Stock-Prep manufacturing operations into a single location, as well as locating the administrative technical, commercial functions into the same facility.

The facility would also be used to enhance the manufacturing and service capabilities in North America of our Baylor business. As the expansion of this product line in the North American market is a key synergy we're pursuing relating to the Paul acquisition. Incidentally we continue to make progress in this effort with bookings of two more Baylor's in North America in the fourth quarter bringing the total to four Baylor's booked in 2017.

The projected after tax IRR for this investment is 8% due to a number of synergies from consolidating multiple sites into a single location as well tax incentives. We also expect to achieve additional benefits which are harder to quantify and thus not included in our projected IRR from co-locating our business functions into a single location prior to this building our U.S. stock manufacturing was not in the same location as our engineering purchasing and other production support personnel. This new facility allows us to bring all of these functions together. While the startup of any operation, any new operation I should say has inefficiencies to work through we are pleased with the progress we've made today and we expected to be fully operational on this by midsummer.

Slide 13, shows our revenue and bookings performance in Europe. Europe's economy continues to show improved strength in 2017 and we expect these favorable conditions to extend in the 2018. Fourth quarter revenue was up 51% from Q4 of 2016 due largely to our recently acquired forced products business. We also saw a strong performance in our European stock prep business which was up 36% over the fourth quarter of last year. Excluding acquisitions in FX, revenue was up 18% in Europe. Bookings in Europe were up 29% to a record 42 million. The bookings growth was broad based in most of our products lines for double-digit increases.

During the quarter, we booked several large orders for capital equipment from customers in Russia. One was for stock prep system and three others for de-barkers from our recently acquired force products business for a combined value of approximately 2 million. We also booked an order value of more than 2 million for our PAAL balers and related equipment from a municipal waste treatment and recycling facility and expand.

Turning to Asia, the market in Asia, which is dominated by China continues to be healthy for capital as well as parts to consumables. Our revenue in Asia was up 44% from last year due largely to shipments of large capital orders booked in the second and third quarters of 2017. The strong revenue performance was driven by a stock prep fluid handling and Dr. cleaning and filtration product lines. Acquisitions had minimal impact on revenue and bookings in Asia in Q4.

Bookings in Asia saw a decline of 13% compared to a strong Q4 of 2016. We expected this moderation of bookings and also expect to see a gradual weakening for pulp and paper related capital projects in China in the second half of 2018. That said, we see demand for oriented strand board. Our OSB in China showing signs of growth and the outlook is extremely good for this segment. OSB is a relatively new product in China and due to its cost and weight advantages its well positioned to displace a lot of medium density fiber board and particle board for use in furniture.

Other capital project activity in China resulted in number of orders including four recycled fiber processing systems with the combined value of approximately $6 million and three orders for M-Clean fabric cleaning system with a combined value of more than $2 million from customers in China and Taiwan.

Finally, a few comments about or rest of the world results, as you can see on Slide 15, or revenues and bookings in the fourth quarter of 2017 with the upper inch of our historical trend at $11 million and $13 million respectively. Our revenue and the rest of the world was up 88% compared to a very weak Q4 of '16 led by a doctoring, cleaning and filtration and stock product lines. Excluding acquisitions in FX, revenue increased 50%, likewise bookings are up sequentially and year-over-year we secured a large order from a customer in Chile for a pub cleaning system with the approximate value of 2 million and after the quarter closed we booked an order for a disc strander and feed system for an OSB plant in Chile for a similar amount.

I'd like to conclude my remarks with a few comments on our guidance for Q1 and a full-year 2018. We are encouraged by the global economic conditions as well as the solid bookings trends we've seen to the second half of 2017. We believe 2018 will be another strong year for Kadant. For 2018, we expect to achieve GAAP diluted earnings per share of 474 to 484 on revenue of $605 million to $615 million. We expect our adjusted diluted earnings per share which excludes the restructuring expense related to the consolidation of our stock prep operations and other items to be 495 to 505.

These adjusted results include expected operational inefficiencies as we ramp up manufacturing at our new facility in Ohio, which is expected to impact our adjusted results for the first half of the year, our revenue in earnings per share guidance as a result both of strong performance of our existing businesses as well as the positive impact from the inclusion of our acquisition.

In addition, we expect FX translation will benefit our 2018 revenue by approximately $20 million versus 2017. For the first quarter of 2018, we expect to achieve GAAP diluted earnings per share of $0.77 to $0.81 and revenues of $143 million to $146 million. On an adjusted basis, we expect diluted earnings per share of $0.94 to $0.98.

I will now pass the call over to Mike for additional details on our financial performance. Mike?

[Michael McKenney, CFO]

Thank you, Jon. I'll start with our gross margin performance. Consolidated product gross margins were 43.3% in the fourth quarter of 2017 down 270 basis points compared to 46% in the fourth quarter of 2016. The consolidated gross margins in the fourth quarter of 2017 were negatively affected by the amortization of acquired profit an inventory related to our recent acquisitions, which lowered consolidated gross margins by 120 basis points.

Excluding the impact of the amortization of profit and inventory consolidated gross margin in fourth quarter of 2017 were 44.5% down a 150 basis points compared to last year's fourth quarter. A contributor to the 150 basis points decrease from last year if the addition of the Timber harvesting equipment product line which has a lower gross margin profile.

Another factor was our products and consumables revenue represented 62% of total revenue in the fourth quarter of 2017 compared to 64% in the fourth quarter of 2016. For the full-year of 2017, product gross margin for 44.9% compared to 45.5% in 2016. Excluding the amortization of acquired profit and inventory in both periods, product gross margins were 45.9% in 2017 up 30 basis points from 2016. Looking ahead, we expect the full-year 2018 consolidated product gross margins will be approximately 44% to 45%.

Now let's turn to slide 20, and our quarterly SG&A expenses. SG&A expenses were $44 million in the fourth quarter of 2017, up $10.4 million from the fourth quarter of 2016, including $7 million in SG&A from our recent acquisitions, which includes approximately $0.5 million of acquired backlog amortization. In addition, during the quarter we incurred $0.4 million of acquisition cost, and that was unfavorable foreign currency translation effect of $1.3 million. SG&A expense as a percentage of revenue was 29.5% in the fourth quarter of 2017, compared to 33.6% in the fourth quarter of 2016.

Excluding the acquisition cost and the acquired backlog amortization, SG&A as a percentage of revenue was 28.9% down 470 basis points. For the full-year of 2017, SG&A expenses were $160.5 million an increase of $24.8 million compared to 2016 including $16.9 million SG&A from our acquisitions, which include approximately $1.4 million acquired backlog amortization.

In addition, we incurred acquisition cost of $5.4 million in 2017 and there was a unfavorable foreign currency translation effect of $0.7 million. Excluding SG&A from our acquisition, related acquisition cost and the translation effect SG&A expenses were up 1.7 million or 1.3% compared to 2016.

As a percentage of revenue SG&A expenses were 31.2% in 2017 compared to 32.8% in 2016 or a decrease of 160 basis points. Excluding acquisitions in the acquired backlog amortization in both periods SG&A as a percentage of revenue was 29.8% in 2017 compared to 32% in 2016 down 220 basis points.

It's worth noting here that the addition of or recent acquisition has improved our SG&A leverage for two reasons. First; because the acquisitions have lower SG&A expenses as a percentage of revenue then Kadant as a whole and second the additional revenue helps leverage a corporate SG&A expense. Looking forward, we expect the SG&A spending in 2018 as a percentage of revenue will be approximately 28.5% to 29.5%.

Let me turn to our EPS results for the quarter. In the fourth quarter of 2017 GAAP diluted earnings per share was $0.07, and our adjusted diluted EPS was a $1.14. The $1.07 difference relates to $0.90 of a discrete tax item associated with a new tax on U.S. $0.17 of acquisition related cost associated with our recent acquisitions and a restricting of charge of $0.01.

In the fourth quarter of 2016, GAAP diluted earnings per share was $0.69, and there were no adjustment for EPS. The increase of $0.45 in adjusted diluted EPS in the fourth quarter of 2017 compared to the fourth quarter of 2016 consist of the following. $0.68 due to higher revenue, $0.15 from the operating results of our recent acquisitions and $0.05 due to higher gross margin percentages. These increases were partially offset by $0.23due to higher operating expenses, $0.13 due to a higher effective tax rate and $0.07 related to higher interest expense.

Collectively, included all the categories I just mentioned, was a favorable foreign currency translation effect of $0.07 in the fourth quarter of 2017, compared to last year's fourth quarter due to the weakening of the U.S. dollar.

Let me take a moment to discuss the $0.90 of discrete tax items in the fourth quarter. These discrete tax items were the result of the recently enacted tax legislation in U.S. The $0.90 include a $1.14 of tax expense associated with the deemed repatriation of foreign earnings referred due as the transition tax and the cost to repatriate earnings in certain jurisdictions. Partially offsetting this expense was a benefit of $0.24 related to adjusting the deferred taxes in the U.S. to lower enacted federal tax rate.

Looking forward, a positive for Kadant, as a result of the new tax law is that will provide us with additional options going forward to fund transactions. I should note that the amount recorded in the quarter related to the new tax law. Our provisional amount and subject to change as the ramification of the new tax law become clear.

Let me also take a moment to compare our adjusted diluted EPS results in the fourth quarter to the guidance we issued during our November earnings call. Our adjusted diluted EPS guidance for the fourth quarter of 2017 was a $1.02 to a $1.06 and we reported adjusted diluted EPS of a $1.14. This $0.08 increase over the high-end of our guidance range was principally the result of better than expected revenue and gross margin performance. The improved revenue performance was principally due to the fluid handling product line and was broad based geographically. The improved gross margin performance was led by a stock prep product line. These were partially offset by a higher than anticipated quarterly tax rate principally due to increased provisions related to uncertain tax position.

Now turning to our EPS results for the full-year on Slide 23, we reported GAAP diluted earnings per share of $2.75 in 2017 and our adjusted diluted EPS was $4.49. The adjusted diluted EPS include $0.90 from the discrete tax expense items, $0.43 or $0.43 charge for the amortization of acquired profit inventory and backlog, acquisition cost of $0.39 and $0.01 of restructuring costs.

We reported GAAP diluted earnings per share of $2.88 in 2016. And our adjusted diluted EPS was $3.10. Adjusted diluted EPS excludes acquisition cost of $0.15, a $0.12 charge for the amortization acquire profit and inventory and backlog and a $0.02 gain on the sale of assets, and a $0.02 benefit from discrete tax items.

The increase of a $0.39 in adjusted diluted EPS from 2016 to 2017 consisted the following. Increases of $0.93 due to higher revenues, $0.59 from the operating results of our acquisitions, $0.45 due to higher gross margin percentages and $0.02 due to low effective tax rates; these increases were partially offset by decrease of $0.43 due to higher operating expenses, $0.13 due to higher interest expense and $0.04 due to higher weighted average shares outstanding. Collectively included in all the categories I just mentioned was a favorable foreign currency translation effect of $0.02 in 2017 compared to 2016.

Slide 24 presents our adjusted EBITDA performance over the last eight years. Because of the recent acquisitions, depreciation and amortization including intangible amortization included in SG&A has increased significantly. As a result, we view EBITDA as a key metric for us. Adjusted EBITDA for 2017 was a record $90.8 million up $29 million from 2016 and was 17.6% of revenue compared to 14.9% in 2016. As the chart shows the compounded annual growth rate from 2010 to 2017 was 16.5%. Now let's turn to our cash flows and working capital metrics starting on Slide 25. Cash flows from continuing operations were excellent and a record at $32.8 million in the fourth quarter of 2017 up $16.5 million from the fourth quarter of 2016.

For the full-year 2017, operating cash flows were also a record at $65.2 million an increase of $14.2 million in 2016. We had several notable non-operating uses of cash from 2017. We paid $204.7 million for acquisitions net of cash acquired, $17.3 million for capital expenditures including $9 million for the manufacturing in facility in Ohio that Jon discussed and $9 million for dividends.

In addition in 2017, we had net borrowings of $164.3 million principally related to our acquisitions. Slide 26 shows our free cash flow for the past eight years. As you can see the strong operating cash flows for 2017 led to a record $47.9 million in free cash flows.

Let's now look at our key working capital metrics on slide 27. Excluding the unusual metrics in the third quarter of 2017 that were the result of including the acquisitions of the, for us products business of NII and Unaflex in the calculation for the first time. Overall our days and inventory receivables and payables have remained fairly consistent from the fourth quarter of '16 through the fourth quarter of '17.

Looking at our overall working capital position, our cash conversion day's measure calculated by taking days and receivables plus days and inventory and subtracting days and accounts payable was 111 at the end of the fourth quarter of 2017 down six days from the fourth quarter of 2016.

Working capital as a percentage of revenue was again excellent at 11.2% in the fourth quarter of 2017 compared to 11% in the fourth quarter of 2016. Net debt, that is debt less cash at the end of the fourth quarter of 2017 decreased to $165.2 million from a $187.4 million in the third quarter of 2017 as we paid down debt associated with our recent acquisitions during the quarter.

Our interest expense increased to $1.5 million in the fourth quarter of 2017 compared to $0.4 million in the fourth quarter of 2016 and we forecast our net interest expense for 2018 will be approximately $6 million with forecasted average interest rates of approximately 3%.

As you can see on slide 30, our leverage ratio calculated as defined in our credit facility was 1.94 at the end of the fourth quarter of 2017, down from 2.45 in the third quarter of 2017, in part, because we paid down $37.4 million a debt during the fourth quarter, under the credit facility this ratio must be less than 3.5.

Before concluding my remarks, I'd like to give you a little more color on the EPS guidance that Jon gave for 2018. Looking at our quarterly EPS performance in 2018, we expect that the first quarter will be the weakest quarter of the year, and the second-half of the year will be stronger than the first-half you saw.

Our adjusted diluted EPS for the year includes $0.21 of adjustments, which consists of $0.11 restructuring costs related to the Ohio facility project, $0.08 for discreet tax expense item, and $0.02 of backlog amortization related to the products business acquisition.

In addition, included in the GAAP diluted EPS and not adjusted out is an estimated expense of $0.08 for production inefficiencies related to moving manufacturing operations into the new facility.

I should caution here that there could be some choppiness and variability in our quarterly results due to a number of factors, including the variability of order flow and shipments of capital projects, and the impact of adopting the new revenue standard, which may at times have the impact of making our revenue recognition lumpier.

We will be adopting the new revenue standard as you top at the beginning of 2018, with a cumulative factor adjustment to be opening retained earnings for any difference between the recognition criteria and the new standard, and our current revenue recognition practices. We estimate a net favorable impact from the adoption of this new revenue standard of approximately $0.01 to $0.03 in 2018; overall, given our revenue and EPS guidance, a relatively insignificant impact.

We expect our recurring tax rate, which excludes discrete tax expense, will be approximately 27.5% to 28.5% in 2018, compared to our recurring tax rate of 27.5% in 2017. Our recurring tax rate, the rate excluding the discrete tax item in the fourth quarter of 2018 will be lower than the remaining quarters as we anticipate receiving a tax benefit from investing of equity rewards.

We anticipate CapEx spending in 2018 will be approximately 18 million to 19 million. Included in this is approximately 7 million for the Ohio manufacturing facility, which will be completed in the first-half of the year. In addition, we expect depreciation and amortization will be approximately 24 million to 25 million in 2018.

That concludes my review of the financials, and I will now turn the call back over to the operator for our Q&A session. Operator?

[Operator]

Thank you. [Operator Instructions] And our first question is from Dan Jacome with Sidoti. Your line is now open.

[Dan Jacome, Sidoti & Company]

Good morning. How are you?

[Jon Painter, President and CEO]

Good, Dan. How are you doing?

[Michael McKenney, CFO]

Good morning, Dan.

[Dan Jacome, Sidoti & Company]

Not too bad. Okay, thanks for the time. Can you talk a little bit -- I think you said stock prep was up really solid in Europe; can you talk a little bit more about that? What sort of end market specifically, was it in packaging or something else?

[Jon Painter, President and CEO]

Yes, I would say, broadly speaking, Europe is up. Europe is about as strong as we've seen it, I would say. So, specifically on the stock prep, I would say, Russia is an area of strength. And also Southern Europe, places like Spain, Portugal, that kind of thing, I would say, areas of strength.

[Dan Jacome, Sidoti & Company]

Okay. I mean, where is that, like liner board?

[Jon Painter, President and CEO]

Grade-wise, it's actually liner and tissue, both, but probably more on the liner side.

[Dan Jacome, Sidoti & Company]

Tissue too, all right, okay. That helps. And then, I don't know if I got this wrong; did you say you had an OSB related order in Asia? Did I get that wrong?

[Jon Painter, President and CEO]

We did have a number of OSB orders in Asia.

[Dan Jacome, Sidoti & Company]

Okay.

[Jon Painter, President and CEO]

You might be thinking of -- and also I mentioned one in the U.S. for around 4 million.

[Dan Jacome, Sidoti & Company]

Okay. Because I know just OSB has been like the structural panel, you know, for choice here, but what's happening over there?

[Jon Painter, President and CEO]

Oh, in Asia, oh I'm sorry; on Oriented Strand Board, we don't have an order, but I think we are -- it's looking good. There is a lot of activity. So, I'm encouraged by the potential for future bookings.

[Dan Jacome, Sidoti & Company]

Yes. I never…

[Jon Painter, President and CEO]

Yes. Well, we -- in 2014, we got two orders for OSB mills, but there is really only three modern OSB mills in China. I would say what's exciting about the opportunity in China is as you can imagine China makes a lot of furniture; I had always considered that OSB would be a nice substitute for plywood, for crates and bed liners and things like that. I hadn't really thought about it as a replacement for particle board in MDF in furniture, where it has a big weight advantage, which has all kinds of advantages we are making furniture and shipping it all over the world. So very new, and I would say, quite exciting. There are multiple projects in the works, so I can't tell you the timing, but in China for OSB mills.

[Dan Jacome, Sidoti & Company]

Okay. That helps a lot. I know it's been replacing plywood here in the U.S. but on housing front, but then now you're talking about China on the furniture side. That was just kind of new news that I hadn't heard you guys talk about before.

[Jon Painter, President and CEO]

Yes.

[Dan Jacome, Sidoti & Company]

So, pretty encouraging.

[Jon Painter, President and CEO]

That is new.

[Dan Jacome, Sidoti & Company]

Okay. And then wanted to go back to -- well, at Analyst Day you kind of provided an earnings power algorithm that would factor in the acquisitions that some of the acquisitions would be very modestly kind of lower gross margin, but now kind of you're reminding us that some of these acquisitions are coming with a lower SG&A ratio, correct, I'm just going to -- just to a feel that what you highlighted at earnings excuse me at Analyst Day that you would be able to grow earnings even though you're buying slightly lower gross margin businesses because of the SG&A and other incremental benefits?

[Jon Painter, President and CEO]

What I mentioned on the Analyst Day was that I expected that most companies will have lower gross margins than us, a better SG&A leverage netting to more or less the same EBITDA margins, that was my assumption. The fact of the matter is the acquisitions we made…

[Dan Jacome, Sidoti & Company]

Actually better.

[Jon Painter, President and CEO]

Yes, the acquisitions we made this year and the forest products one in particular, they have higher EBITDA margins there. So it's little better than what we are modeling if you will.

[Michael McKenney, CFO]

If you recall, Dan in that model we had the EBIT margins at approximately 15% and you can see now we've kind of moved up to the in the 17% range.

[Dan Jacome, Sidoti & Company]

Right, and you haven't change are 20, I think it was 2021 or 2022 earnings goal?

[Jon Painter, President and CEO]

That we need to because we're going up to…

[Dan Jacome, Sidoti & Company]

Well, I saw that yesterday, when I saw your guidance and then I looked at your 2022 targets and so I mean it's a good prompt to have okay, all right. Yes. Okay.

[Jon Painter, President and CEO]

Well, either change the guidance for five years out or take it easy for the next four years and we can…

[Dan Jacome, Sidoti & Company]

Yes, well, all right. Okay, thanks a lot.

[Jon Painter, President and CEO]

All Right.

[Operator]

Our next question is from Bill Hailer [ph] with WDH Capital. Your line is now open.

[Unidentified Analyst]

Yes, hi good morning. Thanks for the call. Can you remind us what end markets are in that 15% industrial revenue number on page 10 and perhaps update us on what progress you're making in penetrating the carbon synthetic fiber and rolling metal industries?

[Jon Painter, President and CEO]

Sure, so it is amazingly diverse that industrial piece. There's not really a dominant segment particularly, so I would say its metals, carbon, plastics, textiles, machine tools, food is a big one, but there's not any one particular area. We continue to make progress and I would say in the carbon fiber front one of the bigger produces of carbon fiber is rolling our equipment out throughout their plants throughout the world. I would say we're also making some pretty nice progress in the food front. And I would say that's going as well.

[Unidentified Analyst]

Okay, let me have one follow-up if I may, what would it take to jumpstart the doctoring, cleaning and filtration business where revenues and bookings have been kind of flat for a few years. I would think, I know is a more traditional business is that but given the bigger installed base out there. I would think you would start to see some growth there and maybe are you're seeing any competition from new technology for cutting, writing maybe lasers?

[Jon Painter, President and CEO]

We are not -- let me give a quick real comment on sort of the doctoring side of our business. As you may remember, about 10% of our overall end markets is tied to the declining grades of printing variety and newsprint. That's a little heavier in the doctoring side of the business. They have a bigger exposure to those declining markets. So, that's why a lot of times you'll see them as a little softer on the growth side.

What we've been doing in that regard is focusing more and doing R&D on blades and that kind of thing, specifically for liner board, and got some promising technology kind of in the works. And we are trying to have -- be more of a problem-solver for the liner mills. But that's really the background on it. They have a little bit slower growth at times. The other side of that is the push to industrial; a big part of the push to industrial is in our doctoring and cleaning side, because you can think as rolls and belts that need cleaning all over the place, and things like food.

[Unidentified Analyst]

I see. So, the base of the declining paper market in general is going to affect that segment more than…

[Jon Painter, President and CEO]

That particular segment has a little more exposure, yes.

[Unidentified Analyst]

Right. Okay, got you. Thank you.

[Jon Painter, President and CEO]

Thank you.

[Operator]

[Operator Instructions] And I'm showing no further questions at this time. I'd now like to turn the call back to Jon Painter for any further remarks.

[Jon Painter, President and CEO]

Thank you, Operator. Before I let everyone go, I thought I'd list what I think are the key takeaways for the quarter and the year. First, we have excellent financial and operating performance in '17, with record revenue, adjusted operating income, adjusted EBITDA, and adjusted earnings per share. Second, we ended the year with record Q4 bookings, and record operating and free cash flow in 2017. And finally, we expect another strong year in 2018 with record revenue and earnings per share.

Thank you for joining us on the call today, and I look forward to updating you next quarter. Thanks.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect. Everyone have a great day.