KADANT INC [KAI] Filings

10-Q 1 kai-20220402.htm KAI FORM 10-Q kai-20220402

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 2, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to _________

Commission file number 001-11406

KADANT INC.

(Exact name of registrant as specified in its charter)


Delaware									52-1762325
(State or other jurisdiction of incorporation or organization)									(I.R.S. Employer Identification No.)

One Technology Park Drive

Westford, Massachusetts 01886

(Address of principal executive offices, including zip code)

(978) 776-2000

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $.01 par value

KAI

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 29, 2022, the registrant had 11,659,373 shares of common stock outstanding.

Table of Contents

Kadant Inc.

Quarterly Report on Form 10-Q

for the Period Ended April 2, 2022

Table of Contents


		Page
PART I: Financial Information

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheet as of April 2, 2022 and January 1, 2022 (unaudited)	3

	Condensed Consolidated Statement of Income for the three-month periods ended April 2, 2022 and April 3, 2021 (unaudited)	4

	Condensed Consolidated Statement of Comprehensive Income for the three-month periods ended April 2, 2022 and April 3, 2021 (unaudited)	5

	Condensed Consolidated Statement of Cash Flows for the three-month periods ended April 2, 2022 and April 3, 2021 (unaudited)	6

	Condensed Consolidated Statement of Stockholders' Equity for the three-month periods ended April 2, 2022 and April 3, 2021 (unaudited)	7

	Notes to Condensed Consolidated Financial Statements (unaudited)	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	28

PART II: Other Information

Item 1A.	Risk Factors	28

Item 6.	Exhibits	30

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PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Statements

KADANT INC.

Condensed Consolidated Balance Sheet

(Unaudited)


	April 2, 2022		January 1, 2022
(In thousands, except share and per share amounts)
Assets
Current Assets:
Cash and cash equivalents	$	86,192	$	91,186
Restricted cash (Note 1)	2,779		2,975
Accounts receivable, net of allowances of $3,067 and $2,735	125,919		117,209
Inventories	143,583		134,356
Contract assets	8,978		8,626
Other current assets	24,825		29,530
Total Current Assets	392,276		383,882
Property, Plant, and Equipment, net of accumulated depreciation of $116,911 and $114,032	105,851		107,989
Other Assets	59,299		44,111
Intangible Assets, Net	192,426		199,343
Goodwill	394,414		396,887
Total Assets	$	1,144,266	$	1,132,212

Liabilities and Stockholders' Equity
Current Liabilities:
Short-term obligations and current maturities of long-term obligations (Note 5)	$	4,893	$	5,356
Accounts payable	67,762		59,250
Accrued payroll and employee benefits	30,690		37,203
Customer deposits	62,432		59,262
Advanced billings	9,599		11,894
Other current liabilities	42,204		48,532
Total Current Liabilities	217,580		221,497
Long-Term Obligations (Note 5)	242,963		264,158
Long-Term Deferred Income Taxes	39,336		34,944
Other Long-Term Liabilities	44,649		45,997

Commitments and Contingencies (Note 11)

Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued	—		—
Common stock, $.01 par value, 150,000,000 shares authorized; 14,624,159 shares issued	146		146
Capital in excess of par value	112,651		115,888
Retained earnings	590,009		551,848
Treasury stock at cost, 2,964,786 and 3,003,419 shares	(72,649)		(73,596)
Accumulated other comprehensive items (Note 7)	(32,302)		(30,350)
Total Kadant Stockholders' Equity	597,855		563,936
Noncontrolling interest	1,883		1,680
Total Stockholders' Equity	599,738		565,616
Total Liabilities and Stockholders' Equity	$	1,144,266	$	1,132,212

The accompanying notes are an integral part of these condensed consolidated financial statements.

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KADANT INC.

Condensed Consolidated Statement of Income

(Unaudited)


	Three Months Ended
	April 2, 2022		April 3, 2021
(In thousands, except per share amounts)
Revenue (Notes 1 and 10)	$	226,480	$	172,463

Costs and Operating Expenses:
Cost of revenue	128,269		96,748
Selling, general, and administrative expenses	59,168		49,431
Research and development expenses	3,078		2,857
Gain on sale and other expense, net (Note 2)	(20,008)		—
	170,507		149,036
Operating Income	55,973		23,427
Interest Income	102		65
Interest Expense	(1,234)		(1,111)
Other Expense, Net	(22)		(24)
Income Before Provision for Income Taxes	54,819		22,357
Provision for Income Taxes (Note 4)	13,378		5,561
Net Income	41,441		16,796
Net Income Attributable to Noncontrolling Interest	(249)		(235)
Net Income Attributable to Kadant	$	41,192	$	16,561

Earnings per Share Attributable to Kadant (Note 3)
Basic	$	3.54	$	1.43
Diluted	$	3.53	$	1.43

Weighted Average Shares (Note 3)
Basic	11,630		11,553
Diluted	11,655		11,612

The accompanying notes are an integral part of these condensed consolidated financial statements.

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KADANT INC.

Condensed Consolidated Statement of Comprehensive Income

(Unaudited)


	Three Months Ended
	April 2, 2022		April 3, 2021
(In thousands)
Net Income	$	41,441	$	16,796
Other Comprehensive Items:
Foreign currency translation adjustment	(2,284)		(4,750)
Post-retirement liability adjustments, net (net of tax provision of $2 and $10)	9		28
Deferred gain on cash flow hedges (net of tax provision of $68 and $19)	277		113
Other comprehensive items	(1,998)		(4,609)
Comprehensive Income	39,443		12,187
Comprehensive Income Attributable to Noncontrolling Interest	(203)		(174)
Comprehensive Income Attributable to Kadant	$	39,240	$	12,013

The accompanying notes are an integral part of these condensed consolidated financial statements.

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KADANT INC.

Condensed Consolidated Statement of Cash Flows

(Unaudited)


	Three Months Ended
	April 2, 2022		April 3, 2021
(In thousands)
Operating Activities
Net income attributable to Kadant	$	41,192	$	16,561
Net income attributable to noncontrolling interest	249		235

Net income	41,441		16,796
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	9,445		7,686
Stock-based compensation expense	2,260		1,499
Provision for losses (benefit) on accounts receivable	208		(129)
Gain on the sale of assets (Note 2)	(20,190)		—
Noncash impairment costs (Note 2)	182		—
Other items, net	6,117		809
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable	(9,127)		(13,955)
Contract assets	(409)		1,231
Inventories	(9,359)		(6,612)
Other assets	1,113		(3,182)
Accounts payable	8,864		8,031
Customer deposits	3,329		8,464
Other liabilities	(10,106)		(1,546)


Net cash provided by operating activities	23,768		19,092

Investing Activities
Acquisitions, net of cash acquired	(62)		(125)
Purchases of property, plant, and equipment	(2,868)		(2,259)
Proceeds from sale of property, plant, and equipment	1,595		32

Other	44		—
Net cash used in investing activities	(1,291)		(2,352)

Financing Activities
Repayment of short- and long-term obligations	(35,064)		(19,563)
Proceeds from issuance of short- and long-term obligations	15,516		10,139
Tax withholding payments related to stock-based compensation	(4,550)		(3,388)
Dividends paid	(2,905)		(2,770)







Net cash used in financing activities	(27,003)		(15,582)

Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash	(664)		(1,090)

(Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash	(5,190)		68
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period	94,161		66,640
Cash, Cash Equivalents, and Restricted Cash at End of Period	$	88,971	$	66,708

See Note 1, Nature of Operations and Summary of Significant Accounting Policies,

under the heading Supplemental Cash Flow Information for further details.

The accompanying notes are an integral part of these condensed consolidated financial statements.

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KADANT INC.

Condensed Consolidated Statement of Stockholders' Equity

(Unaudited)


	Three Months Ended April 2, 2022
(In thousands, except share and per share amounts)	Common Stock			Capital in Excess of Par Value		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Items		Noncontrolling Interest		Total Stockholders' Equity
	Shares	Amount						Shares	Amount
Balance at January 1, 2022	14,624,159	$	146	$	115,888	$	551,848	3,003,419	$	(73,596)	$	(30,350)	$	1,680	$	565,616
Net income	—	—		—		41,192		—	—		—		249		41,441
Dividend declared – Common Stock, $0.26 per share	—	—		—		(3,031)		—	—		—		—		(3,031)
Activity under stock plans	—	—		(3,237)		—		(38,633)	947		—		—		(2,290)
Other comprehensive items	—	—		—		—		—	—		(1,952)		(46)		(1,998)
Balance at April 2, 2022	14,624,159	$	146	$	112,651	$	590,009	2,964,786	$	(72,649)	$	(32,302)	$	1,883	$	599,738


	Three Months Ended April 3, 2021
(In thousands, except share and per share amounts)	Common Stock			Capital in Excess of Par Value		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Items		Noncontrolling Interest		Total Stockholders' Equity
	Shares	Amount						Shares	Amount
Balance at January 2, 2021	14,624,159	$	146	$	110,824	$	479,400	3,081,919	$	(75,519)	$	(19,492)	$	1,546	$	496,905
Net income	—	—		—		16,561		—	—		—		235		16,796
Dividend declared – Common Stock, $0.25 per share	—	—		—		(2,894)		—	—		—		—		(2,894)
Activity under stock plans	—	—		(2,760)		—		(35,540)	870		—		—		(1,890)
Other comprehensive items	—	—		—		—		—	—		(4,548)		(61)		(4,609)
Balance at April 3, 2021	14,624,159	$	146	$	108,064	$	493,067	3,046,379	$	(74,649)	$	(24,040)	$	1,720	$	504,308

The accompanying notes are an integral part of these condensed consolidated financial statements.

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Kadant Inc. was incorporated in Delaware in November 1991 and trades on the New York Stock Exchange under the ticker symbol "KAI."

Kadant Inc. (together with its subsidiaries, the Company) is a global supplier of technologies and engineered systems that drive Sustainable Industrial Processing. Its products and services play an integral role in enhancing efficiency, optimizing energy utilization, and maximizing productivity in process industries while helping customers advance their sustainability initiatives with products that reduce waste or generate more yield with fewer inputs, particularly fiber, energy, and water. Producing more while consuming less is a core aspect of Sustainable Industrial Processing and a major element of the strategic focus of the Company's three reportable operating segments: Flow Control, Industrial Processing, and Material Handling.

Interim Financial Statements

The interim condensed consolidated financial statements and related notes presented have been prepared by the Company, are unaudited, and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the Company's financial position at April 2, 2022, its results of operations, comprehensive income, cash flows and stockholders' equity for the three-month periods ended April 2, 2022 and April 3, 2021. Interim results are not necessarily indicative of results for a full year or for any other interim period.

The condensed consolidated balance sheet presented as of January 1, 2022 has been derived from the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2022. The condensed consolidated financial statements and related notes are presented as permitted by the rules and regulations of the Securities and Exchange Commission (SEC) for Form 10-Q and do not contain certain information included in the annual consolidated financial statements and related notes of the Company. The condensed consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2022, filed with the SEC.

Use of Estimates and Critical Accounting Policies

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Although the Company makes every effort to ensure the accuracy of the estimates and assumptions used in the preparation of its condensed consolidated financial statements or in the application of accounting policies, if business conditions were different, or if the Company were to use different estimates and assumptions, it is possible that materially different amounts could be reported in the Company's condensed consolidated financial statements.

Note 1 to the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2022 describes the significant accounting estimates and policies used in preparation of the consolidated financial statements. There have been no material changes in the Company’s significant accounting policies during the three months ended April 2, 2022.

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Supplemental Cash Flow Information


	Three Months Ended
(In thousands)	April 2, 2022		April 3, 2021
Cash Paid for Interest	$	1,017	$	892
Cash Paid for Income Taxes, Net of Refunds	$	8,013	$	5,344

Non-Cash Investing Activities:
Fair value of assets acquired	$	(983)	$	—
Cash paid for acquired businesses	(62)		(125)
Liabilities Assumed of Acquired Businesses	$	(1,045)	$	(125)

Purchases of property, plant, and equipment in accounts payable	$	264	$	169

Non-Cash Financing Activities:
Issuance of Company common stock upon vesting of restricted stock units	$	4,578	$	3,203
Dividends declared but unpaid	$	3,031	$	2,894

Restricted Cash

The Company's restricted cash generally serves as collateral for certain banker's acceptance drafts issued to vendors and for bank guarantees associated with providing assurance to customers that the Company will fulfill certain customer obligations entered into in the normal course of business. The majority of the bank guarantees will expire over the next twelve months.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company's condensed consolidated balance sheet that are shown in aggregate in the accompanying condensed consolidated statement of cash flows:


(In thousands)	April 2, 2022		April 3, 2021		January 1, 2022		January 2, 2021
Cash and cash equivalents	$	86,192	$	65,982	$	91,186	$	65,682
Restricted cash	2,779		726		2,975		958
Total Cash, Cash Equivalents, and Restricted Cash	$	88,971	$	66,708	$	94,161	$	66,640

Inventories

The components of inventories are as follows:


	April 2, 2022		January 1, 2022
(In thousands)
Raw Materials	$	61,771	$	59,177
Work in Process	32,215		29,448
Finished Goods	49,597		45,731
	$	143,583	$	134,356

Intangible Assets, Net

Gross intangible assets were $340,947,000 at April 2, 2022 and January 1, 2022. Intangible assets are recorded at fair value at the date of acquisition. Subsequent impairment charges are reflected as a reduction in the gross balance, as applicable. Definite-lived intangible assets are stated net of accumulated amortization and currency translation in the accompanying condensed consolidated balance sheet. The Company amortizes definite-lived intangible assets over lives that have been determined based on the anticipated cash flow benefits of the intangible asset. Accumulated amortization was $141,122,000 at April 2, 2022 and $135,327,000 at January 1, 2022.

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Goodwill

The changes in the carrying amount of goodwill by segment are as follows:


(In thousands)	Flow Control		Industrial Processing		Material Handling		Total
Balance at January 1, 2022
Gross balance	$	123,589	$	214,982	$	143,825	$	482,396
Accumulated impairment losses	—		(85,509)		—		(85,509)
Net balance	123,589		129,473		143,825		396,887
2022 Activity
Acquisitions (a)	625		—		(482)		143
Currency translation	(1,632)		(6)		(978)		(2,616)
Total 2022 activity	(1,007)		(6)		(1,460)		(2,473)
Balance at April 2, 2022
Gross balance	122,582		214,976		142,365		479,923
Accumulated impairment losses	—		(85,509)		—		(85,509)
Net balance	$	122,582	$	129,467	$	142,365	$	394,414

(a)Relates to adjustments to the purchase price allocation for acquisitions completed in 2021, principally for inventory, machinery and equipment, and deferred taxes. Measurement period adjustments in 2022 were not material to the Company's results of operations. The final purchase accounting and purchase price allocations remain subject to change as the Company continues to refine its preliminary valuation of certain acquired assets and liabilities assumed and the valuation of acquired intangibles, which may result in adjustments to the assets and liabilities, including goodwill.

Warranty Obligations

The Company's contracts covering the sale of its products include warranty provisions that provide assurance to its customers that the products will comply with agreed-upon specifications during a defined period of time. The Company provides for the estimated cost of product warranties at the time of sale based on historical occurrence rates and repair costs, as well as knowledge of any specific warranty problems that indicate projected warranty costs may vary from historical patterns. The Company negotiates the terms regarding warranty coverage and length of warranty depending on the products and applications.

The Company's liability for warranties is included in other current liabilities in the accompanying condensed consolidated balance sheet.

The changes in the carrying amount of product warranty obligations are as follows:


	Three Months Ended
(In thousands)	April 2, 2022		April 3, 2021
Balance at Beginning of Year	$	7,298	$	7,064
Provision charged to expense	1,462		1,664
Usage	(1,538)		(1,361)
Currency translation	(74)		(133)
Balance at End of Period	$	7,148	$	7,234

Revenue Recognition

Most of the Company’s revenue relates to products and services that require minimal customization and is recognized at a point in time for each performance obligation under the contract when the customer obtains control of the goods or service. The remaining portion of the Company’s revenue is recognized over time based on an input method that compares the costs incurred to date to the total expected costs required to satisfy the performance obligation. Contracts are accounted for on an over time basis when they include products which have no alternative use and an enforceable right to payment over time. Most of the contracts recognized on an over time basis are for large capital projects. These projects are highly customized for the customer and, as a result, would include a significant cost to rework in the event of cancellation.

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following table presents revenue by revenue recognition method:


	Three Months Ended
	April 2,		April 3,
(In thousands)	2022		2021
Point in Time	$	203,311	$	154,417
Over Time	23,169		18,046
	$	226,480	$	172,463

The Company disaggregates its revenue from contracts with customers by reportable operating segment, product type and geography as this best depicts how its revenue is affected by economic factors.

The following table presents the disaggregation of revenue by product type and geography:


	Three Months Ended
	April 2,		April 3,
(In thousands)	2022		2021
Revenue by Product Type:
Parts and consumables	$	146,244	$	118,107
Capital	80,236		54,356
	$	226,480	$	172,463
Revenue by Geography (based on customer location):
North America	$	124,336	$	95,092
Europe	58,366		44,641
Asia	31,987		21,813
Rest of world	11,791		10,917
	$	226,480	$	172,463

See Note 10, Business Segment Information, for information on the disaggregation of revenue by reportable operating segment.

The following table presents contract balances from contracts with customers:


	April 2, 2022		January 1, 2022
(In thousands)
Contract Assets	$	8,978	$	8,626
Contract Liabilities	$	77,450	$	77,004

Contract assets represent unbilled revenue associated with revenue recognized on contracts accounted for on an over time basis, which will be billed in future periods based on the contract terms. Contract liabilities consist of short- and long-term customer deposits, advanced billings, and deferred revenue. Deferred revenue is included in other current liabilities and long-term customer deposits are included in other long-term liabilities in the accompanying condensed consolidated balance sheet. Contract liabilities will be recognized as revenue in future periods once the revenue recognition criteria are met. The majority of the contract liabilities relate to advance payments on contracts accounted for at a point in time. These advance payments will be recognized as revenue when the Company's performance obligations have been satisfied, which typically occurs when the product has shipped and control of the asset has transferred to the customer.

The Company recognized revenue of $34,477,000 in the first quarter of 2022 and $17,140,000 in the first quarter of 2021 that was included in the contract liabilities balance at the beginning of 2022 and 2021, respectively. The majority of the Company's contracts for capital equipment have an original expected duration of one year or less. Certain capital contracts require long lead times and could take up to 24 months to complete. For contracts with an original expected duration of over one year, the aggregate amount of the transaction price allocated to the remaining unsatisfied or partially unsatisfied performance obligations as of April 2, 2022 was $48,599,000. The Company will recognize revenue for these performance obligations as they are satisfied, approximately 56% of which is expected to occur within the next twelve months and the remaining 44% after the first quarter of 2023.

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Banker's Acceptance Drafts Included in Accounts Receivable

The Company's Chinese subsidiaries may receive banker's acceptance drafts from customers as payment for their trade accounts receivable. The drafts are non-interest bearing obligations of the issuing bank and generally mature within six months of the origination date. The Company's Chinese subsidiaries may sell the drafts at a discount to a third-party financial institution or transfer the drafts to vendors in settlement of current accounts payable prior to the scheduled maturity date. These drafts, which totaled $8,147,000 at April 2, 2022 and $8,049,000 at January 1, 2022, are included in accounts receivable in the accompanying condensed consolidated balance sheet until the subsidiary sells the drafts to a bank and receives a discounted amount, transfers the banker's acceptance drafts in settlement of current accounts payable prior to maturity, or obtains cash payment on the scheduled maturity date.

Recent Accounting Pronouncements Not Yet Adopted

Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of reference rates, such as the London Interbank Offered Rate (LIBOR), if certain criteria are met. Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date. The guidance in this ASU is applicable to the Company's existing contracts and hedging relationships that reference LIBOR and may be adopted prospectively through December 31, 2022. The Company is currently evaluating the effects that the adoption of this ASU will have on its consolidated financial statements.

Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. In October 2021, the FASB issued ASU 2021-08, which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this ASU will generally result in the Company recognizing contract assets and contract liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date rather than at fair value. This new guidance is effective on a prospective basis in fiscal 2023, with early adoption permitted. The Company is currently evaluating the effect that the adoption of this ASU will have on its consolidated financial statements, which will be dependent on the contract assets and liabilities acquired in future business combinations.

2. Gain on Sale and Other Expense, Net

The Company entered into several agreements with the local government in China to sell the existing manufacturing building and land use rights of one of its subsidiaries in China for approximately $25,159,000. This subsidiary, which is part of the stock preparation product line within the Company's Industrial Processing segment, will continue to occupy its current facility until construction of a new facility is complete. The agreements became effective in the first quarter of 2022 after a 31% down payment was received, including 25% in 2021 and 6% in the first quarter of 2022, and a land use right in a new location was secured. As a result, the Company recognized a gain on the sale of these assets of $20,190,000, or $15,143,000, net of deferred taxes of $5,047,000, in the first quarter of 2022. A $16,082,000 receivable was recognized for the present value of the remaining amount of the sale proceeds, which is due the earlier of when the government sells the property or within two years from the effective date of the agreements. This receivable is included in other assets in the accompanying condensed consolidated balance sheet.

In addition, the Company recognized an impairment charge of $182,000 in the first quarter of 2022 associated with the write-down of certain fixed assets that will not be moved to the new facility.

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

3. Earnings per Share

Basic and diluted earnings per share (EPS) were calculated as follows:


	Three Months Ended
	April 2, 2022		April 3, 2021
(In thousands, except per share amounts)
Net Income Attributable to Kadant	$	41,192	$	16,561

Basic Weighted Average Shares	11,630		11,553
Effect of Stock Options, Restricted Stock Units and Employee Stock Purchase Plan Shares	25		59
Diluted Weighted Average Shares	11,655		11,612

Basic Earnings per Share	$	3.54	$	1.43

Diluted Earnings per Share	$	3.53	$	1.43

The effect of outstanding and unvested restricted stock units (RSUs) of the Company's common stock totaling 17,000 shares in the first quarter of 2022 and 44,000 shares in the first quarter of 2021 were not included in the computation of diluted EPS for the respective periods as the effect would have been antidilutive or, for unvested performance-based RSUs, the performance conditions had not been met as of the end of the reporting periods.

4. Provision for Income Taxes

The provision for income taxes was $13,378,000 in the first three months of 2022 and $5,561,000 in the first three months of 2021. The effective tax rate of 24% in the first three months of 2022 was higher than the Company's statutory rate of 21% primarily due to the distribution of the Company's worldwide earnings, nondeductible expenses, state taxes, and tax expense associated with the Global Intangible Low-Taxed Income (GILTI) provisions. These increases in tax expense were offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements and the reversal of tax reserves associated with uncertain tax positions. The effective tax rate of 25% in the first three months of 2021 was higher than the Company's statutory rate of 21% primarily due to nondeductible expenses, the distribution of the Company's worldwide earnings, state taxes, and tax expense associated with the GILTI provisions. These increases in tax expense were offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements.

5. Short- and Long-Term Obligations

Short- and long-term obligations are as follows:


	April 2, 2022		January 1, 2022
(In thousands)
Revolving Credit Facility, due 2023	$	229,483	$	250,267
Senior Promissory Notes, due 2023 to 2028	10,000		10,000
Finance Leases, due 2022 to 2026	1,320		1,610
Other Borrowings, due 2022 to 2028	7,053		7,637
Total	247,856		269,514
Less: Short-term Obligations and Current Maturities of Long-Term Obligations	(4,893)		(5,356)
Long-Term Obligations	$	242,963	$	264,158

See Note 9, Fair Value Measurements and Fair Value of Financial Instruments, for the fair value information related to the Company's long-term obligations.

Revolving Credit Facility

The Company entered into an unsecured multi-currency revolving credit facility, dated as of March 1, 2017 (as amended and restated to date, the Credit Agreement), which matures on December 14, 2023. Pursuant to the Credit Agreement, the Company has a borrowing capacity of $400,000,000, with an uncommitted, unsecured incremental borrowing facility of

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

$150,000,000. Interest on borrowings outstanding accrues and is payable in arrears calculated at one of the following rates selected by the Company: (i) the Base Rate, as defined, plus an applicable margin of 0% to 1.25%, or (ii) Eurocurrency Rate, CDOR Rate and RFR (with a zero percent floor), as applicable and as defined, plus an applicable margin of 1% to 2.25%. The margin is determined based upon the ratio of the Company's total debt, net of unrestricted cash up to $30,000,000 and certain debt obligations, to earnings before interest, taxes, depreciation, and amortization as defined in the Credit Agreement.

The obligations under the Credit Agreement may be accelerated upon the occurrence of an event of default, which includes customary events of default under such financing arrangements. In addition, the Credit Agreement contains negative covenants applicable to the Company and its subsidiaries, including financial covenants requiring the Company to maintain a maximum consolidated leverage ratio of 3.75 to 1.00, or, if the Company elects, for the quarter during which a material acquisition occurs and for the three fiscal quarters thereafter, 4.00 to 1.00, and limitations on making certain restricted payments (including dividends and stock repurchases).

Loans under the Credit Agreement are guaranteed by certain domestic subsidiaries of the Company.

As of April 2, 2022, the outstanding balance under the Credit Agreement was $229,483,000, which included $78,483,000 of euro-denominated borrowings. As of April 2, 2022, the Company had $169,977,000 of borrowing capacity available under its Credit Agreement, which was calculated by translating its foreign-denominated borrowings using borrowing date foreign exchange rates.

The weighted average interest rate for the outstanding balance under the Credit Agreement was 1.73% as of April 2, 2022.

See Note 8, Derivatives, under the heading Interest Rate Swap Agreement, for information relating to the swap agreement.

Senior Promissory Notes

In 2018, the Company entered into an uncommitted, unsecured Multi-Currency Note Purchase and Private Shelf Agreement (Note Purchase Agreement). Simultaneous with the execution of the Note Purchase Agreement, the Company issued senior promissory notes (Initial Notes) in an aggregate principal amount of $10,000,000, with a per annum interest rate of 4.90% payable semiannually, and a maturity date of December 14, 2028. The Company is required to prepay a portion of the principal of the Initial Notes beginning on December 14, 2023 and each year thereafter, and may optionally prepay the principal on the Initial Notes, together with any prepayment premium, at any time in accordance with the Note Purchase Agreement. The obligations of the Initial Notes may be accelerated upon an event of default as defined in the Note Purchase Agreement, which includes customary events of default under such financing arrangements.

The Initial Notes are pari passu with the Company’s indebtedness under the Credit Agreement, and any other senior debt of the Company, subject to certain specified exceptions, and participate in a sharing agreement with respect to the obligations of the Company and its subsidiaries under the Credit Agreement. The Senior Promissory Notes are guaranteed by certain of the Company’s domestic subsidiaries.

Debt Compliance

As of April 2, 2022, the Company was in compliance with the covenants related to its debt obligations.

Finance Leases

The Company's finance leases primarily relate to contracts for vehicles.

Other Borrowings

Other borrowings include a sale-leaseback financing arrangement for a manufacturing facility in Germany. Under this arrangement, the quarterly lease payment includes principal, interest, and a payment to the landlord toward a loan receivable. The interest rate on the outstanding obligation is 1.79%. The secured loan receivable, which is included in other current assets in the accompanying condensed consolidated balance sheet, was $1,435,000 at April 2, 2022. The lease arrangement provides for a fixed price purchase option, net of the projected loan receivable, of $1,469,000 at the end of the lease term in August 2022. If the Company does not exercise the purchase option for the facility, it will receive cash from the landlord to settle the loan receivable. As of April 2, 2022, $3,152,000 was outstanding under this obligation.

Other borrowings also include $968,000 of short-term obligations and $2,925,000 of debt obligations outstanding at April 2, 2022 assumed in the acquisition of The Clouth Group of Companies (Clouth), which mature on various dates ranging from 2022 through 2028.

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

6. Stock-Based Compensation

The Company recognized stock-based compensation expense of $2,260,000 in the first quarter of 2022 and $1,499,000 in the first quarter of 2021 within selling, general, and administrative (SG&A) expenses in the accompanying condensed consolidated statement of income. The Company recognizes compensation expense for all stock-based awards granted to employees and directors based on the grant date estimate of fair value for those awards. The fair value of RSUs is based on the grant date price of the Company's common stock, reduced by the present value of estimated dividends foregone during the requisite service period. For time-based RSUs, compensation expense is recognized ratably over the requisite service period for the entire award based on the grant date fair value, and net of actual forfeitures recorded when they occur. For performance-based RSUs, compensation expense is recognized ratably over the requisite service period for each separately vesting portion of the award based on the grant date fair value, net of actual forfeitures recorded when they occur, and remeasured each reporting period until the total number of RSUs to be issued is known. Unrecognized compensation expense related to stock-based compensation totaled approximately $11,628,000 at April 2, 2022, which will be recognized over a weighted average period of 2.0 years.

7. Accumulated Other Comprehensive Items

Comprehensive income combines net income and other comprehensive items, which represent certain amounts that are reported as components of stockholders' equity in the accompanying condensed consolidated balance sheet.

Changes in each component of accumulated other comprehensive items (AOCI), net of tax, are as follows:


(In thousands)	Foreign Currency Translation Adjustment		Post-Retirement Benefit Liability Adjustments		Deferred Loss on Cash Flow Hedges		Total
Balance at January 1, 2022	$	(29,096)	$	(792)	$	(462)	$	(30,350)
Other comprehensive items before reclassifications	(2,238)		2		193		(2,043)
Reclassifications from AOCI	—		7		84		91
Net current period other comprehensive items	(2,238)		9		277		(1,952)
Balance at April 2, 2022	$	(31,334)	$	(783)	$	(185)	$	(32,302)

Amounts reclassified from AOCI are as follows:


	Three Months Ended
(In thousands)	April 2, 2022		April 3, 2021		Statement of Income Line Item
Post-retirement Benefit Plans
Recognized net actuarial loss	$	(7)	$	(11)	Other expense, net
Amortization of prior service cost	(3)		(3)		Other expense, net
Total expense before income taxes	(10)		(14)
Income tax benefit	3		4		Provision for income taxes
	(7)		(10)
Cash Flow Hedges (a)
Interest rate swap agreements	(111)		(109)		Interest expense
Total expense before income taxes	(111)		(109)
Income tax benefit	27		26		Provision for income taxes
	(84)		(83)
Total Reclassifications	$	(91)	$	(93)

(a)See Note 8, Derivatives, for additional information.

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

8. Derivatives

Interest Rate Swap Agreement

In 2018, the Company entered into an interest rate swap agreement (2018 Swap Agreement) with Citizens Bank to hedge its exposure to movements in USD LIBOR on its U.S. dollar-denominated debt. The 2018 Swap Agreement has a $15,000,000 notional value and expires on June 30, 2023. On a quarterly basis, the Company receives three-month USD LIBOR, which is subject to a zero percent floor, and pays a fixed rate of interest of 3.15% plus an applicable margin as defined in the Credit Agreement.

The Company designated its 2018 Swap Agreement as a cash flow hedge and structured it to be 100% effective. Unrealized gains and losses related to the fair value of the 2018 Swap Agreement are recorded to AOCI, net of tax. In the event of early termination, the Company will receive from or pay to the counterparty the fair value of the 2018 Swap Agreement, and the unrealized gain or loss outstanding will be recognized in earnings.

The counterparty to the 2018 Swap Agreement could demand an early termination of that agreement if the Company were to be in default under the Credit Agreement, or any agreement that amends or replaces the Credit Agreement in which the counterparty is a member, and if it were to be unable to cure the default. See Note 5, Short- and Long-Term Obligations, for further details.

Forward Currency-Exchange Contracts

The Company uses forward currency-exchange contracts that generally have maturities of twelve months or less to hedge exposures resulting from fluctuations in currency exchange rates. Such exposures result from assets and liabilities that are denominated in currencies other than the functional currencies of the Company's subsidiaries.

Forward currency-exchange contracts that hedge forecasted accounts receivable or accounts payable are designated as cash flow hedges and unrecognized gains and losses are recorded to AOCI, net of tax. Deferred gains and losses are recognized in the statement of income in the period in which the underlying transaction occurs. The fair values of forward currency-exchange contracts that are designated as fair value hedges and forward currency-exchange contracts that are not designated as hedges are recognized currently in earnings.

Gains and losses reported within SG&A expenses in the accompanying condensed consolidated statement of income associated with the Company's forward currency-exchange contracts that were not designated as hedges were not material for the three-month periods ended April 2, 2022 and April 3, 2021.

The following table summarizes the fair value of derivative instruments in the accompanying condensed consolidated balance sheet:


		April 2, 2022				January 1, 2022
	Balance Sheet Location	Asset (Liability) (a)		Notional Amount (b)		Asset (Liability) (a)		Notional Amount
(In thousands)
Derivatives Designated as Hedging Instruments:
Derivatives in a Liability Position:
Forward currency-exchange contract	Other Current Liabilities	$	(66)	$	842	$	(44)	$	842
2018 Swap Agreement	Other Long-Term Liabilities	$	(179)	$	15,000	$	(550)	$	15,000

Derivatives Not Designated as Hedging Instruments:
Derivatives in an Asset Position:
Forward currency-exchange contracts	Other Current Assets	$	—	$	—	$	14	$	1,200

(a) See Note 9, Fair Value Measurements and Fair Value of Financial Instruments, for the fair value measurements relating to these financial instruments.

(b) The 2022 notional amounts are indicative of the level of the Company's recurring derivative activity.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following table summarizes the activity in AOCI associated with the Company's derivative instruments designated as cash flow hedges as of and for the three months ended April 2, 2022:


(In thousands)	Interest Rate Swap Agreement		Forward Currency- Exchange Contract		Total
Unrealized (Loss) Gain, Net of Tax, at January 1, 2022	$	(429)	$	(33)	$	(462)
Loss reclassified to earnings (a)	84		—		84
Gain (loss) recognized in AOCI	209		(16)		193
Unrealized Loss, Net of Tax, at April 2, 2022	$	(136)	$	(49)	$	(185)

(a) See Note 7, Accumulated Other Comprehensive Items, for the income statement classification.

As of April 2, 2022, the Company expects to reclassify losses of $184,000 from AOCI to earnings over the next twelve months based on the estimated cash flows of the 2018 Swap Agreement and the maturity date of the forward currency-exchange contract.

9. Fair Value Measurements and Fair Value of Financial Instruments

Fair value measurement is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

•Level 1—Quoted prices in active markets for identical assets or liabilities.

•Level 2—Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.

•Level 3—Unobservable inputs based on the Company's own assumptions.

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis:


	Fair Value as of April 2, 2022
(In thousands)	Level 1		Level 2		Level 3		Total
Assets:
Money market funds and time deposits	$	14,175	$	—	$	—	$	14,175

Banker's acceptance drafts (a)	$	—	$	8,147	$	—	$	8,147

Liabilities:
2018 Swap Agreement	$	—	$	179	$	—	$	179
Forward currency-exchange contract	$	—	$	66	$	—	$	66


	Fair Value as of January 1, 2022
(In thousands)	Level 1		Level 2		Level 3		Total
Assets:
Money market funds and time deposits	$	13,458	$	—	$	—	$	13,458
Banker's acceptance drafts (a)	$	—	$	8,049	$	—	$	8,049
Forward currency-exchange contracts	$	—	$	14	$	—	$	14
Liabilities:
2018 Swap Agreement	$	—	$	550	$	—	$	550
Forward currency-exchange contracts	$	—	$	44	$	—	$	44

(a)Included in accounts receivable in the accompanying condensed consolidated balance sheet.

The Company uses the market approach technique to value its financial assets and liabilities, and there were no changes in valuation techniques during the first three months of 2022. Banker's acceptance drafts are carried at face value, which approximates their fair value due to the short-term nature of the negotiable instrument. The fair values of the forward

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

currency-exchange contracts are based on quoted forward foreign exchange rates at the reporting date. The fair value of the 2018 Swap Agreement is based on USD LIBOR yield curves at the reporting date. The forward currency-exchange contracts and the 2018 Swap Agreement are hedges of either recorded assets or liabilities or anticipated transactions and represent the estimated amount the Company would receive or pay upon liquidation of the contracts. Changes in values of the underlying hedged assets and liabilities or anticipated transactions are not reflected in the table above.

The carrying value and fair value of debt obligations, excluding lease obligations, are as follows:


	April 2, 2022				January 1, 2022
	Carrying Value		Fair Value		Carrying Value		Fair Value
(In thousands)
Debt Obligations:
Revolving credit facility	$	229,483	$	229,483	$	250,267	$	250,267
Senior promissory notes	10,000		10,459		10,000		10,947
Other	3,893		3,893		4,331		4,331
	$