10-Q 1 kai-20220402.htm KAI FORM 10-Q kai-20220402
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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
OR
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)
Delaware52-1762325
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $.01 par valueKAINew 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 filerSmaller 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.


Kadant Inc.
Quarterly Report on Form 10-Q
for the Period Ended April 2, 2022
Table of Contents
  Page
PART I: Financial Information
   
 
PART II: Other Information
   


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 
Inventories143,583 134,356 
Contract assets8,978 8,626 
Other current assets24,825 29,530 
Total Current Assets392,276 383,882 
Property, Plant, and Equipment, net of accumulated depreciation of $116,911 and $114,032
105,851 107,989 
Other Assets59,299 44,111 
Intangible Assets, Net192,426 199,343 
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 payable67,762 59,250 
Accrued payroll and employee benefits30,690 37,203 
Customer deposits62,432 59,262 
Advanced billings9,599 11,894 
Other current liabilities42,204 48,532 
Total Current Liabilities217,580 221,497 
Long-Term Obligations (Note 5)242,963 264,158 
Long-Term Deferred Income Taxes39,336 34,944 
Other Long-Term Liabilities44,649 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 value112,651 115,888 
Retained earnings590,009 551,848 
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' Equity597,855 563,936 
Noncontrolling interest1,883 1,680 
Total Stockholders' Equity599,738 565,616 
Total Liabilities and Stockholders' Equity$1,144,266 $1,132,212 


The accompanying notes are an integral part of these condensed consolidated financial statements.
3

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 revenue128,269 96,748 
Selling, general, and administrative expenses59,168 49,431 
Research and development expenses3,078 2,857 
Gain on sale and other expense, net (Note 2)(20,008) 
 170,507 149,036 
Operating Income55,973 23,427 
Interest Income102 65 
Interest Expense(1,234)(1,111)
Other Expense, Net(22)(24)
Income Before Provision for Income Taxes54,819 22,357 
Provision for Income Taxes (Note 4)13,378 5,561 
Net Income41,441 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)  
Basic11,630 11,553 
Diluted11,655 11,612 
























The accompanying notes are an integral part of these condensed consolidated financial statements.
4

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 Income39,443 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.
5

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 interest249 235 
Net income41,441 16,796 
Adjustments to reconcile net income to net cash provided by operating activities:
  
Depreciation and amortization9,445 7,686 
Stock-based compensation expense2,260 1,499 
Provision for losses (benefit) on accounts receivable208 (129)
Gain on the sale of assets (Note 2)(20,190) 
Noncash impairment costs (Note 2)182  
Other items, net6,117 809 
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 assets1,113 (3,182)
Accounts payable8,864 8,031 
Customer deposits3,329 8,464 
Other liabilities(10,106)(1,546)
Net cash provided by operating activities23,768 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 equipment1,595 32 
Other44  
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 obligations15,516 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 Period94,161 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.
6

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 EarningsTreasury
Stock
Accumulated
Other
Comprehensive Items
Noncontrolling InterestTotal
Stockholders' Equity
SharesAmountSharesAmount
Balance at January 1, 202214,624,159 $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, 202214,624,159 $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 EarningsTreasury
Stock
Accumulated
Other
Comprehensive Items
Noncontrolling InterestTotal
Stockholders' Equity
SharesAmountSharesAmount
Balance at January 2, 202114,624,159 $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, 202114,624,159 $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.
7

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.

8

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 cash2,779 726 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 Process32,215 29,448 
Finished Goods49,597 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.


9

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 ControlIndustrial ProcessingMaterial HandlingTotal
Balance at January 1, 2022   
Gross balance$123,589 $214,982 $143,825 $482,396 
Accumulated impairment losses (85,509) (85,509)
Net balance123,589 129,473 143,825 396,887 
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 balance122,582 214,976 142,365 479,923 
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 expense1,462 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.
10

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)20222021
Point in Time$203,311 $154,417 
Over Time23,169 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)20222021
Revenue by Product Type:
  
Parts and consumables$146,244 $118,107 
Capital80,236 54,356 
$226,480 $172,463 
Revenue by Geography (based on customer location):  
North America$124,336 $95,092 
Europe58,366 44,641 
Asia31,987 21,813 
Rest of world11,791 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.

11

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.

12

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 Shares11,630 11,553 
Effect of Stock Options, Restricted Stock Units and Employee Stock Purchase Plan Shares
25 59 
Diluted Weighted Average Shares11,655 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 202810,000 10,000 
Finance Leases, due 2022 to 20261,320 1,610 
Other Borrowings, due 2022 to 20287,053 7,637 
Total247,856 269,514 
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
13

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.

14

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 AdjustmentsDeferred Loss on Cash Flow HedgesTotal
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 benefit3 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.


15

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, 2022January 1, 2022
Balance Sheet LocationAsset (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 contractOther Current Liabilities$(66)$842 $(44)$842 
2018 Swap AgreementOther Long-Term Liabilities$(179)$15,000 $(550)$15,000 
Derivatives Not Designated as Hedging Instruments:    
Derivatives in an Asset Position:     
Forward currency-exchange contractsOther Current Assets$ $ $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.


16

KADANT INC.
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)$(462)
Loss reclassified to earnings (a)84  84 
Gain (loss) recognized in AOCI209 (16)193 
Unrealized Loss, Net of Tax, at April 2, 2022$(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 1Level 2Level 3Total
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 1Level 2Level 3Total
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
17

KADANT INC.
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, 2022January 1, 2022
 Carrying ValueFair ValueCarrying ValueFair Value
(In thousands)
Debt Obligations:
Revolving credit facility$229,483 $229,483 $250,267 $250,267 
Senior promissory notes10,000 10,459 10,000 10,947 
Other 3,893 3,893 4,331 4,331 
$