KADANT INC 10-K

Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures at year-end 2020. The term "disclosure controls and procedures," as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial 37 Table of Contents Kadant Inc. officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon the evaluation of our disclosure controls and procedures at year-end 2020, our Chief Executive Officer and Chief Financial Officer concluded that at year-end 2020, our disclosure controls and procedures were effective at the reasonable assurance level. Management's Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rules 13a-15(f) and 15d-15(f). Our management assessed the effectiveness of our internal control over financial reporting at year-end 2020. In making this assessment, our management used the criteria set forth in "Internal Control—Integrated Framework (2013)" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, management believes that at year-end 2020 our internal control over financial reporting was effective based on the criteria issued by COSO. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our independent registered public accountants, KPMG LLP, have issued an audit report on our internal control over financial reporting, which is included herein on page F-2 and incorporated into this Item 9A by reference. Changes in Internal Control over Financial Reporting There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the fiscal quarter ended January 2, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information Not applicable. PART III Item 10. Directors, Executive Officers, and Corporate Governance Information about our Directors This information will be included under the heading "Election of Directors" in our 2021 proxy statement for our 2021 Annual Meeting of Shareholders and is incorporated in this report by reference, except for the information concerning executive officers, which is included under the heading "Information about our Executive Officers" in Item 1 of Part I of this report. Section 16(a) Beneficial Ownership Reporting Compliance The information required under Item 405 of Regulation S-K will be included under the heading "Stock Ownership–Delinquent Section 16(a) Reports" in our 2021 proxy statement and is incorporated in this report by reference. Corporate Governance The information required under Items 406 and 407 of Regulation S-K will be included under the heading "Corporate Governance" in our 2021 proxy statement and is incorporated in this report by reference. Item 11. Executive Compensation This information will be included under the headings "Executive Compensation," "Corporate Governance - Compensation Committee Interlocks and Insider Participation," and "Compensation Discussion and Analysis" in our 2021 proxy statement and is incorporated in this report by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Except for the information concerning equity compensation plans, this information will be included under the heading "Stock Ownership" in our 2021 proxy statement and is incorporated in this Report by reference. 38 Table of Contents Kadant Inc. The following table provides information about the securities authorized for issuance under our equity compensation plans at year-end 2020: Equity Compensation Plan Information Plan Category Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants, and Rights Weighted Average Exercise Price of Outstanding Options, Warrants, and Rights Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in the First Column) Equity compensation plans approved by security holders 147,578 (a) $ 24.44 (b) 465,457 (c) Equity compensation plans not approved by security holders — $ — — Total 147,578 (a) $ 24.44 (b) 465,457 (c) __________________________________ (a) Consists of 27,225 shares of our common stock to be issued upon exercise of outstanding options under our Amended and Restated 2006 Equity Compensation Plan, as amended (the 2006 Plan), and 120,353 shares of our common stock issuable upon the vesting of restricted stock units and performance-based restricted stock units under the 2006 Plan. (b) Consists of the weighted average exercise price of the 27,225 stock options outstanding on January 2, 2021. The 120,353 shares of restricted stock units and performance-based restricted stock units outstanding on January 2, 2021 had a weighted average grant date fair value of $92.42. (c) Includes an aggregate of 101,873 shares of common stock issuable under our employees' stock purchase plan in connection with current and future offering periods under the plan. Item 13. Certain Relationships and Related Transactions, and Director Independence This information will be included under the heading "Corporate Governance" in our 2021 proxy statement and is incorporated in this report by reference. Item 14. Principal Accountant Fees and Services This information will be included under the heading "Independent Registered Public Accounting Firm" in our 2021 proxy statement and is incorporated in this report by reference. PART IV Item 15. Exhibits and Financial Statement Schedules (a) The following documents are filed as part of this report: (1) Consolidated Financial Statements (see Index on Page F-1 of this report): Report of Independent Registered Public Accounting Firm Consolidated Balance Sheet Consolidated Statement of Income Consolidated Statement of Comprehensive Income Consolidated Statement of Cash Flows Consolidated Statement of Stockholders' Equity Notes to Consolidated Financial Statements (2) All schedules are omitted because they are not applicable or not required, or because the required information is shown either in the consolidated financial statements or in the notes thereto. (3) Exhibits filed herewith or incorporated in this report by reference are set forth in the Exhibit Index beginning on page 40. This list of exhibits identifies each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report. 39 Table of Contents Kadant Inc. (b) Exhibits Exhibit Index Exhibit Number Description of Exhibit 2.1 Equity Purchase Agreement by and among the Registrant, LLCP PCS Alternative Syntron, LLC, Syntron Material Handling Group, LLC, PCS Alternative Corp Seller 1, LLC, PCS Alternative Corp Seller 2, LLC, and SMH Equity, LLC and Levine Leichtman Capital Partners Private Capital Solutions, L.P., dated as of December 9, 2018 (filed as Exhibit 2.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018 [File No. 001-11406] and incorporated in this document by reference). (1) 3.1 Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 [File No. 001-11406] and incorporated in this document by reference). 3.2 Amended and Restated Bylaws of the Registrant effective November 20, 2014 (filed as Exhibit 3.1 to the Registrant's Form 8-K [File No. 001-11406] filed with the Commission on November 25, 2014 and incorporated in this document by reference). 4.1 Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934 (filed as Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for the year ended December 28, 2019 [File No. 001-11406] and incorporated in this document by reference). 10.1* Form of Indemnification Agreement between the Registrant and its directors and officers (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 [File No. 001-11406] and incorporated in this document by reference). 10.2* Form of Amended and Restated Executive Retention Agreement (change in control agreement) between the Registrant and its named executive officers, as amended and restated on December 9, 2008 (filed as Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the year ended January 3, 2009 [File No. 001-11406] and incorporated in this document by reference). 10.3* Form of Executive Retention Agreement (change in control agreement) between the Registrant and its executive officers for new agreements entered into from and after November 16, 2016 (filed as Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2016 [File No. 001-11406] and incorporated in this document by reference). 10.4* Amended and Restated Equity Incentive Plan of the Registrant (filed as Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the year ended January 3, 2009 [File No. 001-11406] and incorporated in this document by reference). 10.5* Amended and Restated 2006 Equity Incentive Plan of the Registrant effective as of May 17, 2017 (filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 1, 2017 [File No. 011-11406] and incorporated in this document by reference). 10.6* Cash Incentive Plan of the Registrant (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 1, 2017 [File No. 001-11406] and incorporated in this document by reference). 10.7* Summary of non-employee director compensation of the Registrant (filed as Exhibit 10. 1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 28 , 20 20 [ File No. 001-11406 ] and incorporated in this document by reference). 10.8* Transition and Executive Chairman Agreement between the Registrant and Jonathan W. Painter dated February 13, 2019 (filed as Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018 [File No. 001-11406] and incorporated in this document by reference). 40 Table of Contents Kadant Inc. Exhibit Index Exhibit Number Description of Exhibit 10.9* Form of Performance-Based Restricted Stock Unit Award Agreement between the Registrant and its executive officers used for restricted stock unit awards on or after March 5, 2014 (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 29, 2014 [File No. 001-11406] and incorporated in this document by reference). 10.10* Form of Time-Based Restricted Stock Unit Award Agreement between the Registrant and its executive officers used for restricted stock unit awards on or after March 5, 2014 (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 29, 2014 [File No. 001-11406] and incorporated in this document by reference). 10.11* Form of Stock Option Agreement between the Registrant and its executive officers used for stock option awards (filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the year ended January 2, 2010 [File No. 001-11406] and incorporated in this document by reference). 10.12* Notice of Amendment to Stock Option Agreements between the Registrant and its executive officers used for stock option awards (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 28, 2013 [File No. 001-11406] and incorporated in this document by reference). 10.13* Form of Performance-Based Restricted Stock Unit Award Agreement between the Registrant and its executive officers used for restricted stock unit awards on or after March 5, 2014 (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 [File No. 011-11406] and incorporated in this document by reference). 10.14* Form of Time-Based Restricted Stock Unit Award Agreement between the Registrant and its executive officers used for restricted stock unit awards on or after March 5, 2014 (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 [File No. 011-11406] and incorporated in this document by reference). 10.15* Form of Directors Restricted Stock Unit Award Agreement between the Registrant and its non-employee directors used for restricted stock unit awards on or after March 5, 2014 (filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 [File No. 011-11406] and incorporated in this document by reference). 10.16 Amended and Restated Credit Agreement dated as of March 1, 2017, among the Registrant, the Foreign Subsidiary Borrowers from time to time parties thereto, the several banks and other financial institutions or entities from time to time parties thereto, Citizens Bank, N.A., as Administrative Agent and Multicurrency Administrative Agent (filed as Exhibit 99.1 to the Registrant's Current Report on Form 8-K [File No. 001-11406] filed with the Commission on March 7, 2017 and incorporated in this document by reference). 10.17 First Amendment and Limited Consent, dated as of May 24, 2017, to the Amended and Restated Credit Agreement dated as of March 1, 2017 by and among the Registrant, the Foreign Subsidiary Borrowers from time to time parties thereto, the several banks and other financial institutions or entities from time to time parties thereto, Citizens Bank, N.A., as Administrative Agent and Multicurrency Administrative Agent (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 1, 2017 [File No. 011-11406] and incorporated in this document by reference). 10.18 Limited Consent, dated as of December 9, 2018, to the Amended and Restated Credit Agreement dated as of March 1, 2017 by and among the Registrant, the Foreign Subsidiary Borrowers from time to time parties thereto, the several banks and other financial institutions or entities from time to time parties thereto, Citizens Bank, N.A., as Administrative Agent and Multicurrency Administrative Agent (filed as Exhibit 10.24 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018 [File No. 001-11406] and incorporated in this document by reference). 41 Table of Contents Kadant Inc. Exhibit Index Exhibit Number Description of Exhibit 10.19 Second Amendment, dated as of December 14, 2018, to the Amended and Restated Credit Agreement dated as of March 1, 2017 by and among the Registrant, the Foreign Subsidiary Borrowers from time to time parties thereto, the several banks and other financial institutions or entities from time to time parties thereto, Citizens Bank, N.A., as Administrative Agent and Multicurrency Administrative Agent (filed as Exhibit 10. 25 to the Registrant's Annual Report on Form 10-K for the year ended December 2 9 , 201 8 [File No. 001-11406] and incorporated in this document by reference). 10.20 Third Amendment, dated as of March 16, 2020, to the Amended and Restated Credit Agreement dated as of March 1, 2017 by and among the Registrant, the Foreign Subsidiary Borrowers from time to time parties thereto, the several banks and other financial institutions or entities from time to time parties thereto, Citizens Bank, N.A., as Administrative Agent and Multicurrency Administrative Agent (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 28, 2020 [File No. 001-11406] and incorporated in this document by reference). 10.21 Amended and Restated Guarantee Agreement dated as of March 1, 2017, among the Registrant, as Borrower, and each of the Subsidiary Guarantors, in favor of Citizens Bank, N.A., as Administrative Agent and as Multicurrency Administrative Agent for the bank and other financial institutions or entities from time to time parties to the Amended and Restated Credit Facility (filed as Exhibit 99.2 to the Registrant's Current Report on Form 8-K [File No. 001-11406] filed with the Commission on March 7, 2017 and incorporated in this document by reference). 10.22 Guarantee Agreement dated as of March 1, 2017, by Kadant Cayman Ltd. in favor of Citizens Bank, N.A., as Administrative Agent and as Multicurrency Administrative Agent for the banks and other financial institutions or entities from time to time parties to the Amended and Restated Credit Facility (filed as Exhibit 99.3 to the Registrant's Current Report on Form 8-K [File No. 001-11406] filed with the Commission on March 7, 2017 and incorporated in this document by reference). 10.23 Multi-Currency Note Purchase and Private Shelf Agreement, dated as of December 14, 2018 among the Registrant, PGIM, Inc. and the Purchasers as defined therein (filed as Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018 [File No. 001-11406] and incorporated in this document by reference). (1) 10.24 International Swap Dealers Association, Inc. Master Agreement dated May 13, 2005 between the Registrant and Citizens Bank of Massachusetts and Swap Confirmation dated May 18, 2005 (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 2, 2005 [File No. 001-11406] filed with the Commission on August 11, 2005 and incorporated in this document by reference). 10.25 Swap Confirmation dated May 16, 2018 between the Registrant and Citizens Bank, National Association (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 [File No. 001-11406] filed with the Commission on August 8, 2018 and incorporated in this document by reference). 21 Subsidiaries of the Registrant. 23 Consent of KPMG LLP, Independent Registered Public Accounting Firm. 24 Power of Attorney (included on the signatures page to the Annual Report on Form 10-K). 31.1 Certification of the Principal Executive Officer of the Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. 31.2 Certification of the Principal Financial Officer of the Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. 42 Table of Contents Kadant Inc. Exhibit Index Exhibit Number Description of Exhibit 32 Certification of the Chief Executive Officer and the Chief Financial Officer of the Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). * Management contract or compensatory plan or arrangement. (1) The schedules to this document have been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish copies of any of the schedules to the U.S. Securities and Exchange Commission upon request. Item 16. Form 10-K Summary Not applicable. 43 Table of Contents Kadant Inc. Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KADANT INC. Date: March 2, 2021 By: /s/ Jeffrey L. Powell Jeffrey L. Powell Chief Executive Officer and President POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jeffrey L. Powell, Michael J. McKenney and Deborah S. Selwood, jointly and severally, his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on March 2, 2021. Signature Title By: /s/ Jeffrey L. Powell Chief Executive Officer, President and Director Jeffrey L. Powell (Principal Executive Officer) By: /s/ Michael J. McKenney Executive Vice President and Chief Financial Officer Michael J. McKenney (Principal Financial Officer) By: /s/ Deborah S. Selwood Senior Vice President and Chief Accounting Officer Deborah S. Selwood (Principal Accounting Officer) By: /s/ Jonathan W. Painter Director and Chairman of the Board Jonathan W. Painter By: /s/ John M. Albertine Director John M. Albertine By: /s/ Thomas C. Leonard Director Thomas C. Leonard By: /s/ Erin L Russell Director Erin L. Russell By: /s/ William P. Tully Director William P. Tully 44 Table of Contents Kadant Inc. Annual Report on Form 10-K Index to Consolidated Financial Statements and Schedule The following Consolidated Financial Statements of the Registrant and its subsidiaries are required to be included in Item 8: Page Report of Independent Registered Public Accounting Firm F- 2 Consolidated Balance Sheet as of January 2, 2021 and December 28, 2019 F- 4 Consolidated Statement of Income for the fiscal years ended January 2, 2021, December 28, 2019, and December 29, 2018 F- 5 Consolidated Statement of Comprehensive Income for the fiscal years ended January 2, 2021, December 28, 2019, and December 29, 2018 F- 6 Consolidated Statement of Cash Flows for the fiscal years ended January 2, 2021, December 28, 2019, and December 29, 2018 F- 7 Consolidated Statement of Stockholders' Equity for the fiscal years ended January 2, 2021, December 28, 2019, and December 29, 2018 F- 8 Notes to Consolidated Financial Statements F- 9 F-1 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Kadant Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of Kadant Inc. and subsidiaries (the Company) as of January 2, 2021 and December 28, 2019, the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for each of the fiscal years in the three-year period ended January 2, 2021, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of January 2, 2021 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 2, 2021 and December 28, 2019, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended January 2, 2021, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 2, 2021 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. F-2 Report of Independent Registered Public Accounting Firm (continued) Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Assessment of uncertain tax positions As discussed in Note 1 to the consolidated financial statements, it is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. As disclosed in Note 5 to the consolidated financial statements, the Company has recognized uncertain tax positions amounting to $8,337,000 as of January 2, 2021. The Company’s tax positions are subject to audit by local taxing authorities across multiple global jurisdictions. Tax law can be complex and tax audits can take an extended period of time to resolve, and accordingly, the ultimate outcome with respect to taxes the Company may owe may differ from the amounts recognized. We identified the assessment of uncertain tax positions as a critical audit matter. Complex auditor judgment, including specialized skills and knowledge, was required in evaluating the Company’s interpretation of, and compliance with, tax law globally and the estimate of the amount of tax benefits expected to be realized. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process to assess uncertain tax positions. This included controls related to the identification of uncertain tax positions, interpretation of tax law and its application in the liability estimation process. We involved domestic and international tax professionals with specialized skills and knowledge, who assisted in: • assessing tax positions for compliance with applicable laws and regulations • evaluating the Company’s uncertain tax positions by developing independent expectations of the uncertain tax positions using independent assumptions and comparing them to the Company’s estimates • assessing the expiration of statutes of limitations with applicable laws and regulations. /s/ KPMG LLP We have served as the Company's auditor since 2012. Boston, Massachusetts March 2, 2021 F-3 Table of Contents Kadant Inc. 2020 Financial Statements Consolidated Balance Sheet (In thousands, except share and per share amounts) January 2, 2021 December 28, 2019 Assets Current Assets: Cash and cash equivalents $ 65,682 $ 66,786 Restricted cash 958 1,487 Accounts receivable, net of allowances of $ 2,977 and $ 2,698 91,540 95,740 Inventories 106,814 102,715 Unbilled revenue 7,576 13,162 Other current assets 17,250 17,686 Total Current Assets 289,820 297,576 Property, Plant, and Equipment, Net 84,642 86,032 Other Assets 40,391 45,851 Intangible Assets, Net (Notes 1 and 2) 160,965 173,896 Goodwill (Notes 1 and 2) 351,753 336,032 Total Assets $ 927,571 $ 939,387 Liabilities and Stockholders' Equity Current Liabilities: Current maturities of long-term obligations (Note 6) $ 1,474 $ 2,851 Accounts payable 32,264 45,852 Accrued payroll and employee benefits 31,168 31,968 Customer deposits 29,433 24,012 Advanced billings 8,513 11,280 Other current liabilities 31,836 30,206 Total Current Liabilities 134,688 146,169 Long-Term Obligations (Note 6) 232,000 298,174 Long-Term Deferred Income Taxes (Note 5) 21,669 19,736 Other Long-Term Liabilities 42,309 48,229 Commitments and Contingencies (Note 7) Stockholders' Equity (Notes 3 and 4): 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 110,824 106,698 Retained earnings 479,400 435,249 Treasury stock at cost, 3,081,919 and 3,214,888 shares ( 75,519 ) ( 78,778 ) Accumulated other comprehensive items (Note 14) ( 19,492 ) ( 37,620 ) Total Kadant Stockholders' Equity 495,359 425,695 Noncontrolling interest 1,546 1,384 Total Stockholders' Equity 496,905 427,079 Total Liabilities and Stockholders' Equity $ 927,571 $ 939,387 The accompanying notes are an integral part of these consolidated financial statements. F-4 Table of Contents Kadant Inc. 2020 Financial Statements Consolidated Statement of Income (In thousands, except per share amounts) January 2, 2021 December 28, 2019 December 29, 2018 Revenue (Notes 1 and 12) $ 635,028 $ 704,644 $ 633,786 Costs and Operating Expenses: Cost of revenue 357,722 410,884 355,505 Selling, general, and administrative expenses 181,905 192,525 177,414 Research and development expenses 11,298 10,884 10,552 Impairment and restructuring costs (Notes 1 and 8) 2,979 2,528 1,717 553,904 616,821 545,188 Operating Income 81,124 87,823 88,598 Interest Income 181 213 379 Interest Expense ( 7,423 ) ( 12,755 ) ( 7,032 ) Other Expense, Net (Note 3) ( 195 ) ( 6,359 ) ( 2,417 ) Income Before Provision for Income Taxes 73,687 68,922 79,528 Provision for Income Taxes (Note 5) 17,948 16,358 18,482 Net Income 55,739 52,564 61,046 Net Income Attributable to Noncontrolling Interest ( 543 ) ( 496 ) ( 633 ) Net Income Attributable to Kadant $ 55,196 $ 52,068 $ 60,413 Earnings per Share Attributable to Kadant (Note 13) Basic $ 4.81 $ 4.63 $ 5.45 Diluted $ 4.77 $ 4.54 $ 5.30 Weighted Average Shares (Note 13) Basic 11,482 11,235 11,086 Diluted 11,564 11,457 11,400 The accompanying notes are an integral part of these consolidated financial statements. F-5 Table of Contents Kadant Inc. 2020 Financial Statements Consolidated Statement of Comprehensive Income (In thousands) January 2, 2021 December 28, 2019 December 29, 2018 Net Income $ 55,739 $ 52,564 $ 61,046 Other Comprehensive Items: Foreign currency translation adjustment 18,395 ( 1,392 ) ( 17,381 ) Pension and other post-retirement liability adjustments, net (net of tax of $ 78 , $( 137 ), and $ 412 ) 180 ( 282 ) 1,248 Effect of pension and other post-retirement plan amendments (net of tax of $ 351 ) — — ( 1,087 ) Effect of pension and other post-retirement plan curtailments (net of tax of $ 1,183 ) — — 3,679 Effect of pension and other post-retirement settlement and curtailment losses (net of tax of $ 0 , $( 653 ), and $ 347 ) ( 119 ) 3,826 1,078 Deferred loss on cash flow hedges (net of tax of $( 57 ), $( 143 ), and $( 93 )) ( 184 ) ( 447 ) ( 276 ) Other Comprehensive Items 18,272 1,705 ( 12,739 ) Comprehensive Income 74,011 54,269 48,307 Comprehensive Income Attributable to Noncontrolling Interest ( 687 ) ( 445 ) ( 555 ) Comprehensive Income Attributable to Kadant $ 73,324 $ 53,824 $ 47,752 The accompanying notes are an integral part of these consolidated financial statements. F-6 Table of Contents Kadant Inc. 2020 Financial Statements Consolidated Statement of Cash Flows (In thousands) January 2, 2021 December 28, 2019 December 29, 2018 Operating Activities Net income attributable to Kadant $ 55,196 $ 52,068 $ 60,413 Net income attributable to noncontrolling interest 543 496 633 Net income 55,739 52,564 61,046 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 31,334 32,390 23,568 Stock-based compensation expense 6,776 6,815 7,027 Provision for losses on accounts receivable 356 114 355 (Gain) loss on sale of property, plant, and equipment ( 8 ) ( 79 ) 110 U.S. benefit plans settlement and curtailment losses — 5,887 1,425 Impairment charges (Note 1) 1,861 2,336 — Deferred income tax provision (benefit) 142 ( 2,491 ) ( 4,240 ) Other items, net ( 677 ) ( 2,097 ) 1,310 Changes in current assets and liabilities, net of effects of acquisitions: Accounts receivable 7,116 6,553 ( 7,016 ) Unbilled revenue 6,073 2,559 ( 11,350 ) Inventories ( 89 ) ( 3,076 ) ( 6,577 ) Other current assets 1,221 ( 5,618 ) 3,820 Accounts payable ( 15,620 ) 7,358 5,419 Other current liabilities ( 1,340 ) ( 5,802 ) ( 11,912 ) Net cash provided by operating activities 92,884 97,413 62,985 Investing Activities Acquisitions, net of cash acquired (Note 2) ( 7,095 ) ( 177,798 ) — Purchases of property, plant, and equipment ( 7,595 ) ( 9,957 ) ( 16,559 ) Proceeds from sale of property, plant, and equipment 145 398 195 Net cash used in investing activities ( 14,545 ) ( 187,357 ) ( 16,364 ) Financing Activities Proceeds from issuance of long-term obligations 26,000 247,196 50,055 Repayment of short- and long-term obligations ( 99,547 ) ( 126,315 ) ( 110,094 ) Dividends paid ( 10,903 ) ( 10,196 ) ( 9,644 ) Proceeds from issuance of Company common stock 3,207 5,176 813 Tax withholding payments related to stock-based compensation ( 2,599 ) ( 2,691 ) ( 3,886 ) Dividend paid to noncontrolling interest ( 525 ) ( 664 ) ( 465 ) Other financing activities ( 189 ) ( 56 ) ( 934 ) Net cash (used in) provided by financing activities ( 84,556 ) 112,450 ( 74,155 ) Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash 4,584 ( 350 ) ( 3,195 ) (Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash ( 1,633 ) 22,156 ( 30,729 ) Cash, Cash Equivalents, and Restricted Cash at Beginning of Year 68,273 46,117 76,846 Cash, Cash Equivalents, and Restricted Cash at End of Year $ 66,640 $ 68,273 $ 46,117 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 consolidated financial statements. F-7 Table of Contents Kadant Inc. 2020 Financial Statements Consolidated Statement of Stockholders' Equity Capital in Excess of Par Value Retained Earnings Accumulated Other Comprehensive Items Noncontrolling Interest Total Stockholders' Equity (In thousands, except share and per share amounts) Common Stock Treasury Stock Shares Amount Shares Amount Balance at December 30, 2017 14,624,159 $ 146 $ 103,221 $ 342,893 3,613,838 $ ( 88,554 ) $ ( 26,715 ) $ 1,513 $ 332,504 Net income — — — 60,413 — — — 633 61,046 Adoption of ASU No. 2014-09 — — — 119 — — — — 119 Adoption of ASU No. 2016-16 — — — ( 75 ) — — — — ( 75 ) Dividends declared – Common Stock, $ 0.88 per share — — — ( 9,772 ) — — — — ( 9,772 ) Dividend paid to noncontrolling interest — — — — — — — ( 465 ) ( 465 ) Activity under stock plans — — 1,510 — ( 99,675 ) 2,443 — — 3,953 Other comprehensive items — — — — — — ( 12,661 ) ( 78 ) ( 12,739 ) Balance at December 29, 2018 14,624,159 $ 146 $ 104,731 $ 393,578 3,514,163 $ ( 86,111 ) $ ( 39,376 ) $ 1,603 $ 374,571 Net income — — — 52,068 — — — 496 52,564 Adoption of ASU No. 2016-02 (Note 1) — — — ( 17 ) — — — — ( 17 ) Dividends declared – Common Stock, $ 0.92 per share — — — ( 10,380 ) — — — — ( 10,380 ) Dividend paid to noncontrolling interest — — — — — — — ( 664 ) ( 664 ) Activity under stock plans — — 1,967 — ( 299,275 ) 7,333 — — 9,300 Other comprehensive items — — — — — — 1,756 ( 51 ) 1,705 Balance at December 28, 2019 14,624,159 $ 146 $ 106,698 $ 435,249 3,214,888 $ ( 78,778 ) $ ( 37,620 ) $ 1,384 $ 427,079 Net income — — — 55,196 — — — 543 55,739 Dividends declared – Common Stock, $ 0.96 per share — — — ( 11,045 ) — — — — ( 11,045 ) Activity under stock plans — — 4,126 — ( 132,969 ) 3,259 — — 7,385 Dividend paid to noncontrolling interest — — — — — — — ( 525 ) ( 525 ) Other comprehensive items — — — — — — 18,128 144 18,272 Balance at January 2, 2021 14,624,159 $ 146 $ 110,824 $ 479,400 3,081,919 $ ( 75,519 ) $ ( 19,492 ) $ 1,546 $ 496,905 The accompanying notes are an integral part of these consolidated financial statements. F-8 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements 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 high-value, critical components and engineered systems used in process industries worldwide. Its products, technologies, and services play an integral role in enhancing process efficiency, optimizing energy utilization, and maximizing productivity in resource-intensive industries. COVID-19 The ongoing COVID-19 pandemic has negatively affected the global economy, disrupted global supply chains, and resulted in significant travel and transport restrictions, which adversely affected the Company’s bookings and financial results for a substantial part of 2020. The impact of the COVID-19 pandemic, including the resulting economic impact, continues to evolve and the Company is closely monitoring its impact on all aspects of its business and will continue to take actions that are in the best interests of its employees, customers, and stakeholders. Noncontrolling Interest One of the Company's foreign subsidiaries that manufactures fluid-handling products is part of a joint venture agreement with an Italian company in which each holds a 50 % ownership interest. The agreement provides the Company's subsidiary with the option to purchase the remaining 50 % interest in the joint venture. Principles of Consolidation The accompanying consolidated financial statements of the Company include the accounts of its wholly and majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated. Fiscal Year Typically, the Company's fiscal quarters and fiscal year consist of 13 and 52 weeks, respectively, ending on the Saturday closest to the end of the corresponding calendar quarter for its fiscal quarters and on the Saturday closest to December 31 for its fourth fiscal quarter and fiscal year. As a result of the difference between the fiscal and calendar periods, a 53rd week is added to the Company's fiscal year every five or six years. In a 53-week fiscal year, the Company's fourth fiscal quarter contains 14 weeks. The Company's fiscal year ended January 2, 2021 (fiscal 2020) contained 53 weeks and its fiscal years ended December 28, 2019 (fiscal 2019) and December 29, 2018 (fiscal 2018) both contained 52 weeks. Each quarter of fiscal 2020, 2019 and 2018 contained 13 weeks, except the fourth quarter of 2020, which contained 14 weeks. Financial Statement Presentation Effective at the beginning of 2019, the Company adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (Topic 842), using the cumulative-effect adjustment method. Consolidated statement of income amounts and disclosures in 2020 and 2019 are presented under Topic 842, while 2018 is not adjusted and is reported under the Company's prior method of accounting for leases in accordance with Accounting Standards Codification (ASC) 840, Leases (Topic 840) (Topic 840), which is allowed under the transition guidance in Topic 842. Effective at the beginning of 2020, the Company realigned its business segments into three new reportable operating segments: Flow Control, Industrial Processing, and Material Handling. The Company previously reported its financial results by combining its operating entities into three reportable operating segments: Papermaking Systems, Wood Processing Systems, and Material Handling Systems, and a separate product line, Fiber-based Products. Financial information for 2019 and 2018 has been recast to conform to the new segment presentation. See Note 12 , Business Segment and Geographical Information, for further detail regarding the Company's segments. 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 F-9 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements 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. Critical accounting policies are defined as those that entail significant judgments and estimates, and could potentially result in materially different results under different assumptions and conditions. The Company believes that the most critical accounting policies upon which its financial position depends, and which involve the most complex or subjective decisions or assessments, concern income taxes, revenue recognition, the valuation of goodwill and intangible assets, and inventories. A discussion of the application of these and other accounting policies is included within this note. Revenue Recognition The Company recognizes revenue in accordance with ASC, Revenue from Contracts with Customers (Topic 606) . Most of the Company’s revenue is recognized at a point in time for each performance obligation under the contract when the customer obtains control of the goods or service. Most of the Company’s parts and consumables products and its capital products with minimal customization are accounted for at a point in time. The Company has made a policy election to not treat the obligation to ship as a separate performance obligation under the contract and, as a result, the associated shipping costs are reflected in cost of revenue when revenue is recognized. The remaining portion of the Company’s revenue is recognized on an over time basis 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. The following table presents revenue by revenue recognition method: (In thousands) January 2, 2021 December 28, 2019 Point in Time $ 557,702 $ 611,528 Over Time 77,326 93,116 $ 635,028 $ 704,644 The transaction price includes estimated variable consideration where applicable. Such variable consideration relates to certain performance guarantees and rights to return the product. The Company estimates variable consideration as the most likely amount to which it expects to be entitled based on the terms of the contracts with customers and historical experience, where relevant. For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation based on the relative stand-alone selling price. 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: (In thousands) January 2, 2021 December 28, 2019 December 29, 2018 Revenue by Product Type: Parts and Consumables $ 417,545 $ 440,699 $ 374,433 Capital 217,483 263,945 259,353 $ 635,028 $ 704,644 $ 633,786 Revenue by Geography (based on customer location): North America $ 360,061 $ 386,952 $ 305,618 Europe 161,527 180,888 174,681 Asia 72,268 84,705 109,688 Rest of World 41,172 52,099 43,799 $ 635,028 $ 704,644 $ 633,786 See Note 12 , Business Segment and Geographical Information, for information on the disaggregation of revenue by reportable operating segment. F-10 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements The following table presents contract balances from contracts with customers: (In thousands) January 2, 2021 December 28, 2019 Accounts Receivable $ 91,540 $ 95,740 Contract Assets $ 7,576 $ 13,162 Contract Liabilities $ 39,269 $ 37,216 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 customer deposits, advanced billings, and deferred revenue. Deferred revenue is included in other current liabilities in the accompanying 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 $ 30,426,000 in 2020 and $ 29,220,000 in 2019 that was included in the contract liabilities balance at the beginning of 2020 and 2019. 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 year-end 2020 was $ 14,916,000 . The Company will recognize revenue for these performance obligations as they are satisfied, approximately 50 % of which is expected to occur within the next twelve months and the remaining 50 % within twenty-four months . Customers in China will often settle their accounts receivable with banker's acceptance drafts, in which case cash settlement will be delayed until the drafts mature or are settled prior to maturity. For customers outside of China, final payment for the majority of the Company's products is received in the quarter following the product shipment. Certain of the Company's contracts include a longer period before final payment is due, which is typically within one year of final shipment or transfer of control to the customer. The Company includes in revenue amounts invoiced for shipping and handling with the corresponding costs reflected in cost of revenue. Provisions for discounts, warranties, returns and other adjustments are provided for in the period in which the related sale was recorded. Sales taxes, value-added taxes, and certain excise taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenue. Accounts Receivable and Allowance for Credit Losses Accounts receivable arise from sales on credit to customers, are recorded at the invoiced amount, and do not bear interest. The Company establishes an allowance for credit losses to reduce accounts receivable to the net amount expected to be collected. The Company exercises judgment in determining its allowance for credit losses, which is based on its historical collection and write-off experience, adjusted for current macroeconomic trends and conditions, credit policies, specific customer collection issues, and accounts receivable aging. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and each customer's current creditworthiness. The Company continuously monitors collections and payments from its customers. Account balances are charged off against the allowance when the Company believes it is probable the receivable will not be recovered. In some instances, the Company utilizes letters of credit to mitigate its credit exposure. The changes in the allowance for credit losses are as follows: (In thousands) January 2, 2021 December 28, 2019 December 29, 2018 Balance at Beginning of Year $ 2,698 $ 2,897 $ 2,879 Provision charged to expense 356 114 355 Accounts written off ( 266 ) ( 263 ) ( 165 ) Currency translation 189 ( 50 ) ( 172 ) Balance at End of Year $ 2,977 $ 2,698 $ 2,897 F-11 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements 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 noninterest-bearing obligations of the issuing bank and 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 $ 9,445,000 at year-end 2020 and $ 5,230,000 at year-end 2019, are included in accounts receivable in the accompanying 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. 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 the 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. While the Company engages in extensive product quality programs and processes, the Company's warranty obligation is affected by product failure rates, repair costs, service delivery costs incurred in correcting a product failure, and supplier warranties on parts delivered to the Company. Should these factors or actual results differ from the Company's estimates, revisions to the estimated warranty liability would be required. The Company's liability for warranties is included in other current liabilities in the accompanying consolidated balance sheet. The changes in the carrying amount of product warranty obligations are as follows: (In thousands) January 2, 2021 December 28, 2019 Balance at Beginning of Year $ 6,467 $ 5,726 Provision charged to expense 5,555 4,727 Usage ( 5,439 ) ( 4,255 ) Acquisition — 303 Currency translation 481 ( 34 ) Balance at End of Year $ 7,064 $ 6,467 Leases In accordance with Topic 842, the Company determines whether an arrangement is, or contains, a lease at inception. Operating leases that have commenced are included in other assets, other current liabilities and other long-term liabilities in the accompanying consolidated balance sheet. Classification of operating lease liabilities as either current or noncurrent is based on the expected timing of payments due under the Company’s lease obligations. Right-of-use (ROU) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities with original contract terms greater than 12 months are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Operating leases with an original term of 12 months or less are not recorded in the accompanying consolidated balance sheet. In determining the present value of future lease payments, the Company utilizes either the rate implicit in the lease if that rate is readily determinable or its incremental secured borrowing rate commensurate with the term of the underlying lease. Lease terms may include the effect of options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company recognizes operating lease expense for lease payments on a straight-line basis over the lease term. Variable lease costs are not included in fixed lease payments and, as a result, are excluded from the measurement of the ROU assets and lease liabilities. The Company expenses all variable lease costs as incurred, which were not material in 2020 and 2019. As a lessee, the Company accounts for the lease and non-lease components of its real estate and equipment leases as a single lease component. For vehicle leases, the Company does not combine lease and non-lease components. See Note 9 , Leases, for additional information about the Company's lease obligations. F-12 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements Income Taxes In accordance with ASC 740, Income Taxes (ASC 740), the Company recognizes deferred income taxes based on the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities, calculated using enacted tax rates in effect for the year in which these differences are expected to reverse. A tax valuation allowance is established, as needed, to reduce deferred tax assets to the amount expected to be realized. In the period in which it becomes more likely than not that some or all of the deferred tax assets will be realized, the valuation allowance will be adjusted. It is the Company's policy to provide for uncertain tax positions and the related interest and penalties based upon management's assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. At January 2, 2021, the Company believes that it has appropriately accounted for any liability for unrecognized tax benefits. To the extent the Company prevails in matters for which a liability for an unrecognized tax benefit is established, the statute of limitations expires for a tax jurisdiction year, or the Company is required to pay amounts in excess of the liability, its effective tax rate in a given financial statement period may be affected. Earnings per Share Basic earnings per share (EPS) is computed by dividing net income attributable to Kadant by the weighted average number of shares outstanding during the year. Diluted EPS is computed using the treasury stock method assuming the effect of all potentially dilutive securities, including stock options, restricted stock units (RSUs) and employee stock purchase plan shares. Cash, Cash Equivalents, and Restricted Cash At year-end 2020 and year-end 2019, cash equivalents included investments in money market funds and marketable securities, which had maturities of three months or less at the date of purchase. The carrying amounts of cash equivalents approximate their fair values due to the short-term nature of these instruments. Restricted cash 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 accompanying consolidated balance sheet that are shown in aggregate in the consolidated statement of cash flows: (In thousands) January 2, 2021 December 28, 2019 December 29, 2018 Cash and cash equivalents $ 65,682 $ 66,786 $ 45,830 Restricted cash 958 1,487 287 Total Cash, Cash Equivalents, and Restricted Cash $ 66,640 $ 68,273 $ 46,117 Supplemental Cash Flow Information (In thousands) January 2, 2021 December 28, 2019 December 29, 2018 Cash Paid for Interest $ 6,899 $ 12,344 $ 7,550 Cash Paid for Income Taxes, Net of Refunds $ 17,506 $ 24,533 $ 25,654 Non-Cash Investing Activities: Fair value of assets acquired $ 9,295 $ 207,223 $ — Cash paid for acquired businesses ( 7,565 ) ( 179,693 ) — Liabilities Assumed of Acquired Businesses $ 1,730 $ 27,530 $ — F-13 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements (In thousands) January 2, 2021 December 28, 2019 December 29, 2018 Non-cash additions to property, plant, and equipment $ 1,060 $ 626 $ 917 Non-Cash Financing Activities: Issuance of Company common stock upon vesting of RSUs $ 4,781 $ 4,100 $ 4,231 Dividends declared but unpaid $ 2,770 $ 2,628 $ 2,444 Inventories Inventories are stated at the lower of cost (on a first-in, first-out; or weighted average basis) or net realizable value and include materials, labor, and manufacturing overhead. The Company regularly reviews its quantities of inventories on hand and compares these amounts to the historical and forecasted usage of and demand for each particular product or product line. The Company records a charge to cost of revenue for excess and obsolete inventory to reduce the carrying value of inventories to net realizable value. The components of inventories are as follows: (In thousands) January 2, 2021 December 28, 2019 Raw Materials $ 46,413 $ 49,332 Work in Process 17,692 15,344 Finished Goods (includes $ 427 and $ 559 at customer locations) 42,709 38,039 $ 106,814 $ 102,715 Property, Plant, and Equipment Property, plant, and equipment are stated at cost. The costs of additions and improvements are capitalized, while maintenance and repairs are charged to expense as incurred. The Company provides for depreciation and amortization primarily using the straight-line method over the estimated useful lives of the property as follows: buildings, 10 to 40 years; machinery and equipment, 2 to 10 years; and leasehold improvements, the shorter of the term of the lease or the life of the asset. For construction in progress, no provision for depreciation is made until the assets are available and ready for use. Property, plant, and equipment consist of the following: (In thousands) January 2, 2021 December 28, 2019 Land $ 7,676 $ 7,347 Buildings 60,702 58,509 Machinery, Equipment, and Leasehold Improvements 120,804 112,655 Construction in Progress 3,292 2,830 192,474 181,341 Less: Accumulated Depreciation and Amortization 107,832 95,309 $ 84,642 $ 86,032 Depreciation and amortization expense was $ 12,209,000 in 2020, $ 12,236,000 in 2019, and $ 9,386,000 in 2018. See Note 9 , Leases, for further details relating to assets under financing leases included in property, plant and equipment in the accompanying consolidated balance sheet. F-14 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements Intangible Assets, Net Acquired intangible assets by major asset class are as follows: (In thousands) Gross Accumulated Amortization Currency Translation Net January 2, 2021 Definite-Lived Customer relationships $ 173,728 $ ( 65,488 ) $ ( 1,316 ) $ 106,924 Product technology 56,111 ( 31,655 ) ( 1,005 ) 23,451 Tradenames 6,027 ( 2,946 ) ( 282 ) 2,799 Other 18,248 ( 14,369 ) ( 515 ) 3,364 254,114 ( 114,458 ) ( 3,118 ) 136,538 Indefinite-Lived Tradenames 24,100 — 327 24,427 Acquired Intangible Assets $ 278,214 $ ( 114,458 ) $ ( 2,791 ) $ 160,965 December 28, 2019 Definite-Lived Customer relationships $ 171,583 $ ( 51,798 ) $ ( 4,141 ) $ 115,644 Product technology 56,011 ( 27,819 ) ( 1,709 ) 26,483 Tradenames 6,527 ( 2,421 ) ( 427 ) 3,679 Other 17,964 ( 13,295 ) ( 593 ) 4,076 252,085 ( 95,333 ) ( 6,870 ) 149,882 Indefinite-Lived Tradenames 24,100 — ( 86 ) 24,014 Acquired Intangible Assets $ 276,185 $ ( 95,333 ) $ ( 6,956 ) $ 173,896 Gross intangible assets include $ 3,907,000 for acquired intangible assets from acquisitions that occurred in 2020. See Note 2 , Acquisitions, for further details. In connection with its impairment analysis, the Company reduced its definite-lived intangible assets by $ 1,861,000 in 2020 and definite and indefinite-lived intangible assets by $ 2,336,000 in 2019. Additionally, the Company reclassified $ 1,300,000 of an indefinite-lived tradename to definite-lived in 2019. See Impairment of Long-Lived Assets under the heading Intangible Assets within this note for further details. Intangible assets are initially 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 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. Definite-lived intangible assets have a weighted average amortization period of 12 years. Amortization of definite-lived intangible assets was $ 19,125,000 in 2020, $ 20,154,000 in 2019, and $ 14,182,000 in 2018. The estimated future amortization expense of definite-lived intangible assets is $ 18,365,000 in 2021; $ 17,398,000 in 2022; $ 15,849,000 in 2023; $ 14,839,000 in 2024; $ 12,729,000 in 2025; and $ 57,358,000 in the aggregate thereafter. Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the identifiable net assets of the acquired business at the date of acquisition. The Company’s acquisitions have historically been made at prices above the fair value of the acquired net assets, resulting in goodwill, due to the expectation of synergies from combining the businesses. F-15 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements The changes in the carrying amount of goodwill by segment are as follows: (In thousands) Flow Control Industrial Processing Material Handling Total Balance as of December 29, 2018 (a) Gross balance $ 98,261 $ 206,664 $ 38,758 $ 343,683 Accumulated impairment losses — ( 85,509 ) — ( 85,509 ) Net balance 98,261 121,155 38,758 258,174 2019 Adjustments Acquisitions (Note 2) — — 78,592 78,592 Currency translation ( 581 ) 872 ( 1,025 ) ( 734 ) Total 2019 adjustments ( 581 ) 872 77,567 77,858 Balance at December 28, 2019 (a) Gross balance 97,680 207,536 116,325 421,541 Accumulated impairment losses — ( 85,509 ) — ( 85,509 ) Net balance 97,680 122,027 116,325 336,032 2020 Adjustments Acquisition (Note 2) — 3,953 — 3,953 Currency translation 3,757 4,392 3,619 11,768 Total 2020 adjustments 3,757 8,345 3,619 15,721 Balance at January 2, 2021 Gross balance 101,437 215,881 119,944 437,262 Accumulated impairment losses — ( 85,509 ) — ( 85,509 ) Net balance $ 101,437 $ 130,372 $ 119,944 $ 351,753 (a) Goodwill amounts for 2019 and 2018 have been recast to conform to the current period presentation. See Note 12 , Business Segment and Geographical Information, for further details regarding the Company's change in reportable operating segments. Impairment of Long-Lived Assets The Company evaluates the recoverability of goodwill and indefinite-lived intangible assets as of the end of each fiscal year, or more frequently if events or changes in circumstances indicate that it is more likely than not that the carrying value of an asset might be impaired. Potential impairment indicators include a significant decline in sales, earnings, or cash flows, material adverse changes in the business climate, and a significant decline in the market capitalization due to a sustained decrease in the Company's stock price. The Company assesses its long-lived assets other than goodwill and indefinite-lived intangible assets (definite-lived intangible assets) for impairment whenever facts and circumstances indicate that the carrying amounts may not be fully recoverable. To analyze recoverability, the Company projects undiscounted net future cash flows over the remaining lives of such assets or asset groups. If these projected cash flows were to be less than the carrying amounts, an impairment loss would be recognized, resulting in a write-down of the assets with a corresponding charge to earnings. The impairment loss would be measured based upon the difference between the carrying amounts of the assets and their fair values calculated using projected discounted cash flows. Goodwill In March 2020, the Company experienced a significant decrease in market capitalization due to a decline in the Company’s stock price. During that time, the overall U.S. stock market also declined significantly amid market volatility driven by the uncertainty surrounding the COVID-19 pandemic. Based on these occurrences, the Company concluded that a triggering event had occurred related to the indefinite-lived assets within its material handling reporting unit. As a result, for each reporting period in 2020, the Company prepared a quantitative impairment analysis (Step 1) for its material handling reporting unit, which indicated that its fair value exceeded its carrying value and the indefinite-lived assets were not impaired. F-16 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements At year-end 2020, in connection with its annual impairment analysis, the Company performed a qualitative goodwill impairment assessment (Step 0) for all its reporting units, except the material handling reporting unit, which indicated that the fair value of each reporting unit exceeded its carrying value, and determined that the assets were no t impaired. The impairment analysis included an assessment of certain qualitative factors including, but not limited to, the results of prior fair value calculations, the movement of the Company's share price and market capitalization, the reporting unit and overall financial performance, and macroeconomic and industry conditions. The Company considered the qualitative factors and weighed the evidence obtained and determined that it was not more likely than not that the fair value of any of the assets was less than its carrying amount. Although the Company believes the factors considered in the impairment analysis are reasonable, significant changes in any one of the assumptions used could have produced a different result. For its material handling reporting unit, the Company performed a quantitative goodwill impairment assessment (Step 1), which indicated that its fair value exceeded its carrying value for this reporting unit and determined that the asset was not impaired. At year-end 2019, in connection with its annual impairment analysis, the Company performed a qualitative goodwill impairment assessment (Step 0) for all its reporting units and determined that the assets were no t impaired. Goodwill by reporting unit is as follows: (In thousands) January 2, 2021 December 28, 2019 Stock-Preparation (a) $ 19,685 $ 19,399 Fluid-Handling 65,755 63,382 Doctoring, Cleaning, & Filtration 35,682 34,297 Wood Processing 110,687 102,629 Material Handling (a) 119,944 116,325 $ 351,753 $ 336,032 (a) Goodwill balances as of December 28, 2019 have been recast to conform to the current period presentation. See Note 12 , Business Segment and Geographical Information, for further details regarding the Company's change in reportable operating segments. Intangible Assets At year-end 2020 and 2019, the Company performed a qualitative impairment analysis on its indefinite-lived intangible assets and determined that the assets were not impaired, except in 2019 related to the indefinite-lived tradename associated with its timber-harvesting product line discussed below. No triggering events or indicators of impairment were identified in 2020 or 2019 related to the Company's definite-lived intangible assets, except for the definite-lived intangible assets associated with its timber-harvesting product line discussed below. During 2019, the Company experienced a significant decrease in revenue and operating results in its timber-harvesting product line included in its Industrial Processing segment, which it acquired in 2017 as part of the acquisition of the forest products business of NII FPG Company (NII FPG). The decrease was primarily driven by the deterioration of several market conditions in the Pacific Northwest, including a widespread timber shortage in this region and high stumpage fees. These factors, along with a shift in demand for timber to the Southeastern part of the United States, resulted in sawmill closures in western Canada where the Company's steep terrain equipment is generally used. Given the decline in demand for this business' products, which was expected to continue into 2020, the Company performed a quantitative analysis of the recoverability of the related intangible assets. As a result of this analysis in which the income approach discounted cash flow methodology was used, the Company determined that the fair values of certain of the timber-harvesting product line's intangible assets were less than their carrying values, and therefore, recorded impairment charges in the fourth quarter of 2019 totaling $ 2,336,000 . These impairment charges, which are included in impairment and restructuring costs in the accompanying consolidated statement of income, consist of $ 1,636,000 related to the definite-lived product technology of the timber-harvesting product line and $ 700,000 related to its indefinite-lived tradename. The Company then reclassified the remaining carrying value of $ 1,300,000 related to the indefinite-lived tradename associated with the timber-harvesting product line to definite-lived tradenames, as the indefinite use of the tradename became uncertain. In the fourth quarter of 2020, due to the continued decline in demand for the timber-harvesting business' products, which is expected to continue into 2021, the Company performed a quantitative analysis of the recoverability of its intangible assets. As a result of this analysis, the Company determined that the fair values of the timber-harvesting product line's definite-lived intangible assets related to customer relationships, product technology and tradename were less than their carrying values, and therefore recorded additional impairment charges in the fourth quarter of 2020 totaling $ 1,861,000 . These impairment F-17 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements charges are included in impairment and restructuring costs in the accompanying consolidated statement of income. The remaining intangible asset for the timber-harvesting product line is $ 481,000 . Business Combinations The Company's acquisitions have been accounted for using the purchase method of accounting under ASC 805, Business Combinations (ASC 805), and the results of the acquired businesses have been included in its consolidated financial statements from their respective dates of acquisition. The Company accounts for all transactions and events in which it obtains control over a business under ASC 805 by establishing the acquisition date and recognizing the fair value of all assets acquired and liabilities assumed. The Company’s acquisitions have historically been made at prices above the fair value of identifiable net assets, resulting in goodwill, due to synergies expected to be realized by combining the businesses. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business acquisition date, the estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the purchase price allocation period, which is generally one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. For changes in the valuation of intangible assets between the preliminary and final purchase price allocation, the related amortization is adjusted in the period it occurs. Subsequent to the purchase price allocation period, any adjustment to assets acquired or liabilities assumed is included in operating results in the period in which the adjustment is determ ined. Acquisition transaction costs are recorded as incurred in selling, general, and administrative expenses (SG&A) in the accompanying consolidated statement of income and were $ 485,000 in 2020, $ 843,000 in 2019, and $ 1,321,000 in 2018. Foreign Currency Translation and Transactions All assets and liabilities of the Company's foreign subsidiaries are translated at fiscal year-end exchange rates, and revenue and expenses are translated at average exchange rates for each quarter in accordance with ASC 830, Foreign Currency Matters . Resulting translation adjustments are reflected in the "accumulated other comprehensive items" (AOCI) component of stockholders' equity (see Note 14 , Accumulated Other Comprehensive Items). Foreign currency transaction gains and losses are included in the accompanying consolidated statement of income and are not material in the three years presented. Stock-Based Compensation 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. Compensation expense for time-based RSUs is recognized ratably over the requisite service period for the entire award, 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. Compensation expense related to any modified stock-based awards is based on the fair value for those awards as of the modification date with any remaining incremental compensation expense recognized ratably over the remaining requisite service period. Derivatives The Company uses derivative instruments primarily to reduce its exposure to changes in currency exchange rates and interest rates. When the Company enters into a derivative contract, the Company makes a determination as to whether the transaction is deemed to be a hedge for accounting purposes. If a contract is deemed a hedge, the Company formally documents the relationship between the derivative instrument and the risk being hedged. In this documentation, the Company specifically identifies the asset, liability, forecasted transaction, cash flow, or net investment that has been designated as the hedged item, and evaluates whether the derivative instrument is expected to reduce the risks associated with the hedged item. To the extent these criteria are not met, the Company does not use hedge accounting for the derivative. The change in the fair value of a derivative not deemed to be a hedge is recorded currently in earnings. The Company does not hold or engage in transactions involving derivative instruments for purposes other than risk management. ASC 815, Derivatives and Hedging , requires that all derivatives be recognized on the balance sheet at fair value. For derivatives designated as cash flow hedges, the related gains or losses on these contracts are deferred as a component of AOCI. These deferred gains and losses are recognized in the statement of income in the period in which the underlying anticipated transaction occurs. For derivatives designated as fair value hedges, the unrealized gains and losses resulting from the impact of currency exchange rate movements are recognized in earnings in the period in which the exchange rates change and offset the F-18 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements currency gains and losses on the underlying exposures being hedged. The Company performs an evaluation of the effectiveness of the hedge both at inception and on an ongoing basis. The ineffective portion of a hedge, if any, and changes in the fair value of a derivative not deemed to be a hedge, are recorded in the accompanying consolidated statement of income. Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. In June 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-13, which changes the way entities recognize impairment of financial assets, such as accounts receivable, by requiring immediate recognition of estimated credit losses expected to occur over their remaining lives. During 2018 and 2019, the FASB issued additional guidance and clarification. The Company adopted this ASU using a modified retrospective method at the beginning of fiscal 2020 and its adoption did not have a material impact on the consolidated financial statements. See Accounts Receivable and Allowance for Credit Losses in this note for information on the Company's allowance for credit losses. 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 FASB issued 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. Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. In December 2019, the FASB issued ASU No. 2019-12, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and by clarifying and amending existing guidance, including the recognition of franchise tax, the treatment of a step up in the tax basis of goodwill, and the timing for recognition of enacted changes in tax laws or rates in the interim period annual effective tax rate computation. This new guidance is effective in fiscal 2021, and the transition requirements are primarily prospective. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements. 2. Acquisitions 2020 On June 1, 2020, the Company’s Industrial Processing segment acquired Cogent Industrial Technologies Ltd. (Cogent) for approximately $ 6,866,000 , net of cash acquired. The Company funded the acquisition through borrowings under its revolving credit facility. Intangible assets acquired primarily relate to customer relationships with a fair value of $ 3,350,000 . Cogent, based in British Columbia, Canada, is an industrial automation and controls solution provider that offers expertise in process technology integration, industrial automation and controls, industrial safety, project management, and operational performance management systems. On May 28, 2020, the Company’s Industrial Processing segment also acquired certain intellectual property from a company in Austria for $ 416,000 , of which $ 229,000 was paid in the second quarter of 2020. The Company expects to pay the remaining amount no later than the first quarter of 2022. Intangible assets acquired represent product technology with a fair value of $ 557,000 . 2019 On September 3, 2019, the Company acquired certain assets of a business in Brazil for its Flow Control segment for approximately $ 407,000 in cash. On January 2, 2019, the Company acquired, directly and indirectly, all the outstanding equity interests of Syntron Material Handling Group, LLC and certain of its affiliates (SMH) pursuant to an equity purchase agreement, dated December 9, 2018, for $ 176,855,000 , net of cash acquired. The Company funded the acquisition through borrowings under its revolving credit facility. F-19 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements SMH, which is included in the Company's Material Handling segment, has manufacturing operations in Mississippi, United States, and China. SMH is a leading provider of material handling equipment and systems to various process industries, including mining, aggregates, food processing, packaging, and pulp and paper. This acquisition continues to expand the Company into new markets by leveraging SMH's presence in the material handling industry. Goodwill from the SMH acquisition was $ 78,592,000 , of which $ 59,195,000 is expected to be deductible for tax purposes over 15 years. In addition, intangible assets acquired were $ 83,020,000 , of which $ 69,969,000 is expected to be deductible for tax purposes over 15 years. For 2019, the Company recorded revenue of $ 83,364,000 and operating income of $ 3,132,000 for SMH from the date of acquisition, including amortization expense of $ 4,872,000 associated with acquired profit in inventory and backlog and $ 843,000 of acquisition transaction costs. The following table summarizes the estimated fair values of assets acquired and liabilities assumed and the purchase price for SMH. SMH (In thousands) January 2, 2019 Net Assets Acquired: Cash, Cash Equivalents, and Restricted Cash $ 2,431 Accounts Receivable 10,275 Inventories 13,061 Property, Plant, and Equipment 7,383 Other Assets 12,054 Definite-Lived Intangible Assets Customer relationships 58,300 Product technology 11,000 Other 4,220 Indefinite-Lived Intangible Assets Tradenames 9,500 Goodwill 78,592 Total assets acquired 206,816 Accounts Payable 3,380 Other Current Liabilities 7,954 Long-Term Lease Liabilities 15,244 Long-Term Deferred Income Taxes 952 Total liabilities assumed 27,530 Net assets acquired $ 179,286 Purchase Price: Cash Paid to Seller Borrowed Under Revolving Credit Facility $ 179,286 The weighted average amortization period for the definite-lived intangible assets above is 14 years, including weighted average amortization periods of 15 years for customer relationships, 14 years for product technology, and 8 years for other intangible assets. Unaudited Supplemental Pro Forma Information Had the acquisition of SMH been completed as of the beginning of 2018, the Company’s pro forma results of operations for 2019 and 2018 would have been as follows: (In thousands, except per share amounts) December 28, 2019 December 29, 2018 Revenue $ 704,644 $ 719,142 Net Income Attributable to Kadant $ 56,409 $ 56,511 Earnings per Share Attributable to Kadant Basic $ 5.02 $ 5.10 Diluted $ 4.92 $ 4.96 F-20 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements The historical consolidated financial information of the Company and SMH has been adjusted in the pro forma information to give effect to pro forma events that are directly attributable to the acquisition and related financing arrangements, are expected to have a continuing impact on the Company, and are factually supportable. Pro forma results include the following non-recurring pro forma adjustments that were directly attributable to the acquisition: • Pre-tax charge to SG&A expenses of $ 843,000 in 2018 and reversal of $ 843,000 in 2019 for acquisition transaction costs. • Pre-tax charge to cost of revenue of $ 3,549,000 in 2018 and reversal of $ 3,549,000 in 2019 for the sale of inventory revalued at the date of acquisition. • Pre-tax charge to SG&A expenses of $ 1,323,000 in 2018 and reversal of $ 1,323,000 in 2019 for intangible asset amortization related to acquired backlog. • Tax effects related to pro forma adjustments. These pro forma results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that would have resulted had the acquisition of SMH occurred as of the beginning of 2018, or that may result in the future. 3. Employee Benefit Plans Stock-Based Compensation Plans The Company maintains stock-based compensation plans primarily for its key employees and directors, although the plans permit awards to others expected to make significant contributions to the future of the Company. The plans authorize the compensation committee of the Company's board of directors (the board committee) to award a variety of stock and stock-based incentives, such as restricted stock, RSUs, nonqualified and incentive stock options, stock bonus shares, or performance-based shares. The award recipients and the terms of awards granted under these plans are determined by the board committee. Upon a change of control, as defined in the plans, all options or other awards become fully vested and all restrictions lapse. The Company had 363,584 shares available for grant under these stock-based compensation plans at year-end 2020. The Company generally issues its common stock out of treasury stock, to the extent available, for share issuances related to its stock-based compensation plans. The Company recognizes compensation cost 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. The components of pre-tax stock-based compensation expense included in SG&A expenses in the accompanying consolidated statement of income are as follows: (In thousands) January 2, 2021 December 28, 2019 December 29, 2018 RSU Awards $ 6,453 $ 6,616 $ 6,838 Employee Stock Purchase Plan Awards 323 199 189 Total $ 6,776 $ 6,815 $ 7,027 The Company grants RSUs to non-employee directors and certain employees. Holders of RSUs have no voting rights and are not entitled to receive cash dividends. Non-Employee Director Restricted Stock Units The Company granted RSU awards consisting of 2,085 RSUs in 2020, 1,858 RSUs in 2019 and 2,700 RSUs in 2018 to each of its incumbent non-employee directors. Half of the RSUs vested on June 1 of each year and the remaining RSUs vested ratably on the last day of the third and fourth fiscal quarters of each year. In addition, the Company granted RSU awards consisting of 1,042 RSUs in July 2020 to its new non-employee director (former executive director), which vested ratably on the last day of the third and fourth fiscal quarters of 2020. Each RSU issued to the directors represents the right to receive one share of the Company's common stock upon vesting. F-21 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements Performance-Based Restricted Stock Units The Company grants performance-based RSUs to certain officers of the Company. Each performance-based RSU represents the right to receive one share of the Company's common stock upon vesting. The RSUs are subject to adjustment based on the achievement of a performance measure selected for the fiscal year, which historically has been a specified target for adjusted earnings before interest, taxes, depreciation, and amortization (adjusted EBITDA) generated from operations. Following the adjustment, the RSUs are subject to additional time-based vesting, and vest in three equal annual installments, provided that the officer is employed by the Company on the applicable vesting dates. The Company recognizes compensation expense associated with performance-based RSUs 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 the unvested performance-based RSUs totaled $ 1,988,000 at year-end 2020, and will be recognized over a weighted average period of 1.4 years. The performance-based RSU agreements provide for forfeiture in certain events, such as voluntary or involuntary termination of employment, and for acceleration of vesting in certain events, such as death, disability or a change in control of the Company. If death, disability, or a change in control occurs prior to the end of the performance period, the officer will receive the target RSU amount; otherwise, the officer will receive the number of deliverable RSUs based on the achievement of the performance goal, as stated in the RSU agreements. Time-Based Restricted Stock Units The Company grants time-based RSUs to its officers and other employees of the Company. Each time-based RSU represents the right to receive one share of the Company's common stock upon vesting. The Company recognizes compensation expense associated with these time-based RSUs 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. The time-based RSU agreement provides for forfeiture in certain events, such as voluntary or involuntary termination of employment, and for acceleration of vesting in certain events, such as death, disability, or a change in control of the Company. Unrecognized compensation expense related to the time-based RSUs totaled $ 3,292,000 at year-end 2020, and will be recognized over a weighted average period of 1.8 years. Vesting of Restricted Stock Units A summary of the activity of the Company's unvested RSUs in 2020 is as follows: Units (In thousands) Weighted Average Grant- Date Fair Value Unvested RSUs at December 28, 2019 135 $ 86.11 Granted 78 $ 88.22 Vested ( 92 ) $ 79.66 Forfeited ( 1 ) $ 87.75 Unvested RSUs at January 2, 2021 120 $ 92.42 The weighted average grant date fair value of RSUs granted was $ 88.22 in 2020, $ 86.50 in 2019, and $ 98.12 in 2018. The total fair value of shares vested was $ 7,343,000 in 2020, $ 5,452,000 in 2019, and $ 11,932,000 in 2018. Stock Options The Company has not granted stock options since 2013. Prior to 2014, the Company granted nonqualified stock options to its executive officers that vested over three years and were not exercisable until vested. All options awarded in prior periods were granted at an exercise price equal to the fair market value of the Company's common stock on the date of grant. All outstanding stock options are fully vested and expire on the tenth anniversary of the grant date. There was no unrecognized compensation expense related to these stock options at year-end 2020. F-22 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements A summary of the Company's stock option activity in 2020 is as follows: (In thousands, except per share amounts) Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life Aggregate Intrinsic Value (a) Options Outstanding at December 28, 2019 74 $ 24.28 Exercised ( 47 ) $ 24.19 Options Outstanding at January 2, 2021 27 $ 24.44 1.8 years $ 3,173 Vested and Exercisable at January 2, 2021 27 $ 24.44 1.8 years $ 3,173 (a) The closing price per share on the last trading day prior to year-end 2020 was $ 140.98 . A summary of the Company's stock option exercises in 2020, 2019 and 2018 are as follows: (In thousands) January 2, 2021 December 28, 2019 December 29, 2018 Total Intrinsic Value of Options Exercised $ 4,071 $ 16,796 $ 515 Cash Received from Options Exercised $ 1,123 $ 4,454 $ 127 Employee Stock Purchase Plan The Company's eligible U.S. employees may elect to participate in its employee stock purchase plan. Under the plan, shares of the Company's common stock may be purchased at a 15 % discount from the fair market value at the beginning or end of the purchase period, whichever is lower. Shares purchased under the plan are subject to a one -year resale restriction and are purchased through payroll deductions of up to 10 % of each participating employee's gross wages. The Company issued 13,062 shares for 2020 (issued in 2020), 13,195 shares for 2019 (issued in 2020), and 10,439 shares for 2018 (issued in 2019) of its common stock under this plan. The Company had 101,873 shares available for grant under the employee stock purchase plan at year-end 2020. 401(k) Savings and Other Defined Contribution Plans The Company's U.S. subsidiaries participate in the Kadant Inc. 401(k) Retirement Savings Plan sponsored by the Company. Contributions to the plan are made by both the employee and the Company and are immediately vested. Company contributions are based upon the level of employee contributions. Certain of the Company's subsidiaries offer other retirement plans, the majority of which are defined contribution plans. Company contributions to these plans are based on formulas determined by the Company. For these plans, the Company contributed and charged to expense $ 4,501,000 in 2020, $ 4,412,000 in 2019, and $ 3,705,000 in 2018. The increase in the Company's contributions in 2019 was primarily due to the acquisition of SMH. Pension and Other Post-Retirement Benefits Plans Prior to its termination in 2018, the Company sponsored a noncontributory defined benefit pension plan for eligible employees at one of its U.S. divisions and its corporate office (Retirement Plan). Funds for the Retirement Plan were contributed to a trustee to provide for current service and for any unfunded projected benefit obligation over a reasonable period. Certain of the Company’s non-U.S. subsidiaries also sponsor defined benefit pension plans covering certain employees at those subsidiaries. One of the non-U.S. pension plans also contributes funds to a trustee. The remaining non-U.S. pension plans are unfunded as permitted under their plans and applicable laws. Benefits under the Company’s pension plans are based on years of service and employee compensation. The Company also provides other post-retirement benefits under plans in the United States and at one of its non-U.S. subsidiaries. Prior to its termination in 2018, the Company provided for a restoration plan (Restoration Plan) for certain executive officers which fully supplemented benefits lost under the Retirement Plan. In accordance with ASC 715, Compensation-Retirement Benefits (ASC 715), the Company recognizes the funded status of its defined benefit pension and other post-retirement benefit plans as an asset or liability and changes in the funded status through AOCI, net of tax. The amounts in AOCI are recognized as net periodic pension cost pursuant to the Company's accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic benefit cost will be recognized as a component of AOCI, net of tax. F-23 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements Effective December 28, 2018, the Company's board of directors and its compensation committee approved amendments to freeze and terminate the Retirement Plan and Restoration Plan and, as a result, recognized a curtailment loss of $ 1,425,000 in 2018, which was reclassified from AOCI and included in other expense, net in the accompanying consolidated statement of income. In 2019, the Company settled its Retirement Plan obligation, which required adjustment based on the number of plan participants who elected to receive either a lump sum payment or an annuity, and the increased costs to purchase the annuity contracts due to changes in certain market conditions, including a decrease in long-term interest rates in 2019. As a result, the Company recognized a settlement loss of $ 5,887,000 in 2019, which was included in other expense, net in the accompanying consolidated statement of income, and was calculated as the sum of the unrecognized actuarial loss and $ 3,839,000 of additional cash to be paid, less the accrued pension liability. In January 2020, the Company settled its Restoration Plan obligation of $ 2,427,000 by paying a lump sum to its plan participants resulting in a settlement loss of $ 57,000 in 2019, which was included in other expense, net in the accompanying consolidated statement of income. The Company does not plan to make any material cash contributions to its pension and post-retirement plans in 2021. The following table summarizes the change in benefit obligation; the change in plan assets; the unfunded status; and the amounts recognized in the accompanying consolidated balance sheet for the Company's U.S. and non-U.S. pension benefit plans and other post-retirement benefit plans. In accordance with ASU No. 2015-04, Compensation - Retirement Benefits (Topic 715) , the Company elects to measure its plan assets and benefit obligations as of December 31. U.S. Pension Non-U.S. Pension Other Post-Retirement (In thousands) December 28, 2019 January 2, 2021 December 28, 2019 January 2, 2021 December 28, 2019 Change in Projected Benefit Obligation: Projected benefit obligation at beginning of year $ 29,715 $ 4,168 $ 3,671 $ 3,742 $ 3,672 Service cost — 209 205 6 4 Interest cost 1,134 98 121 39 149 Actuarial loss (gain) (a) 4,039 ( 94 ) 393 47 144 Benefits paid ( 966 ) ( 286 ) ( 184 ) ( 131 ) ( 232 ) Settlement payment ( 33,922 ) — — ( 2,427 ) — Currency translation — 239 ( 38 ) ( 7 ) 5 Projected benefit obligation at end of year $ — $ 4,334 $ 4,168 $ 1,269 $ 3,742 Change in Plan Assets: Fair value of plan assets at beginning of year $ 28,729 $ 973 $ 726 $ 64 $ 44 Actual return on plan assets 2,320 37 58 2 4 Employer contributions 3,839 457 340 2,577 246 Benefits paid ( 966 ) ( 286 ) ( 184 ) ( 131 ) ( 232 ) Settlement payment ( 33,922 ) — — ( 2,427 ) — Currency translation — ( 35 ) 33 ( 3 ) 2 Fair value of plan assets at end of year $ — $ 1,146 $ 973 $ 82 $ 64 Unfunded Status $ — $ ( 3,188 ) $ ( 3,195 ) $ ( 1,187 ) $ ( 3,678 ) Accumulated Benefit Obligation at End of Year $ — $ 3,572 $ 3,046 $ — $ — Amounts Included in the Balance Sheet: Current liability $ — $ ( 144 ) $ ( 189 ) $ ( 131 ) $ ( 2,569 ) Non-current liability $ — $ ( 3,044 ) $ ( 3,006 ) $ ( 1,056 ) $ ( 1,109 ) Amounts Included in Accumulated Other Comprehensive Items Before Tax: Unrecognized net actuarial loss $ — $ ( 900 ) $ ( 1,034 ) $ ( 175 ) $ ( 144 ) Unrecognized prior service cost — 97 ( 38 ) — — $ — $ ( 803 ) $ ( 1,072 ) $ ( 175 ) $ ( 144 ) (a) The actuarial loss of $ 4,039,000 in 2019 resulted from the settlement of the Retirement Plan obligation in which participants' lump sum elections were lower than assumed and the cost of annuity contracts increased primarily due to a decline in long-term interest rates. F-24 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements U.S. Pension Non-U.S. Pension Other Post-Retirement (In thousands) December 28, 2019 January 2, 2021 December 28, 2019 January 2, 2021 December 28, 2019 Changes in Amounts Included in Accumulated Other Comprehensive Items Before Tax: Net actuarial (loss) gain $ ( 2,714 ) $ 230 $ ( 402 ) $ ( 50 ) $ ( 88 ) Amortization of net actuarial loss 32 50 25 16 13 Amortization of prior service cost — 55 6 — — Settlement loss 5,887 — — — — Currency translation — ( 66 ) 18 3 — $ 3,205 $ 269 $ ( 353 ) $ ( 31 ) $ ( 75 ) The weighted average assumptions used to determine the benefit obligation are as follows: Non-U.S. Pension Other Post-Retirement January 2, 2021 December 28, 2019 January 2, 2021 December 28, 2019 Discount Rate 2.02 % 2.59 % 2.33 % 3.82 % Rate of Compensation Increase 2.10 % 3.40 % 5.57 % 5.57 % The discount rates are based on market yields on high-quality corporate or government bonds currently available and expected to be available for the duration of the obligation. For plans that have been closed to new participants, the discount rate is determined based on discounting expected future payments using the FTSE Pension Discount Curve. The projected benefit obligations and fair values of plan assets for the Company's pension plans with projected benefit obligations in excess of plan assets are as follows: Non-U.S. Pension (In thousands) January 2, 2021 December 28, 2019 Projected Benefit Obligation $ 4,334 $ 4,168 Fair Value of Plan Assets $ 1,146 $ 973 The accumulated benefit obligations and fair values of plan assets for the Company's pension plans with accumulated benefit obligations in excess of plan assets are as follows: Non-U.S. Pension (In thousands) January 2, 2021 December 28, 2019 Accumulated Benefit Obligation $ 2,601 $ 2,408 Fair Value of Plan Assets $ — $ — The components of net periodic benefit cost are as follows: U.S. Pension Non-U.S. Pension Other Post-Retirement (In thousands) December 28, 2019 December 29, 2018 January 2, 2021 December 28, 2019 December 29, 2018 January 2, 2021 December 28, 2019 December 29, 2018 Service cost $ — $ 699 $ 209 $ 205 $ 173 $ 6 $ 4 $ 213 Interest cost 1,134 1,193 98 121 126 39 149 172 Expected return on plan assets ( 995 ) ( 1,286 ) ( 60 ) ( 66 ) ( 42 ) ( 3 ) ( 4 ) ( 3 ) Amortization of net actuarial loss 32 541 50 25 63 16 13 136 Amortization of prior service cost — — 55 6 6 — — 86 Settlement loss 5,887 — — — — — 57 — Curtailment loss — 1,116 — — — — — 309 Net Periodic Benefit Cost $ 6,058 $ 2,263 $ 352 $ 291 $ 326 $ 58 $ 219 $ 913 F-25 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements The weighted average assumptions used to determine net periodic benefit cost are as follows: U.S. Pension Non-U.S. Pension Other Post-Retirement December 28, 2019 December 29, 2018 January 2, 2021 December 28, 2019 December 29, 2018 January 2, 2021 December 28, 2019 December 29, 2018 Discount Rate 4.10 % 3.51 % 1.73 % 2.58 % 3.49 % 3.82 % 4.33 % 3.58 % Expected Long-Term Return on Plan Assets 4.10 % 4.50 % 5.89 % 9.22 % 7.43 % 5.89 % 9.22 % 7.43 % Rate of Compensation Increase — % 3.00 % 2.89 % 2.81 % 3.97 % 5.57 % 5.57 % 3.05 % The expected long-term return on plan assets for the Retirement Plan in fiscal 2019 equals the discount rate, which was valued using the FTSE Pension Discount Curve. The expected long-term rate of return on plan assets for the U.S. pension plan in fiscal 2018 and the non-U.S. pension and other post-retirement plan for all years presented were determined based on the composition of plan investments, historical returns earned and future expectations. Plan Assets The fair value of the Company’s non-U.S. pension and other post-retirement plan assets were $ 1,228,000 at year-end 2020 and $ 1,037,000 at year end 2019. The assets are invested in a diversified portfolio of government and corporate bonds, which are Level 1 investments and are valued at quoted prices for identical assets in active markets. See N ote 11 , Fair Value Measurement and Fair Value of Financial Instruments, for the fair value hierarchy. Estimated Future Benefit Payments Expected benefit payments are based on the same assumptions used to measure the Company's benefit obligation at year-end 2020. Estimated future benefit payments during the next five years and in aggregate for the five years thereafter are as follows: Other Post-retirement (In thousands) Non-U.S. Pension 2021 $ 145 $ 131 2022 157 119 2023 277 110 2024 306 117 2025 405 92 2026-2029 2,264 426 4. Stockholders' Equity Preferred Stock The Company's Certificate of Incorporation authorizes up to 5,000,000 shares of preferred stock, $ .01 par value per share, for issuance by the Company's board of directors without further shareholder approval. Common Stock At year-end 2020, the Company had reserved 613,035 unissued shares of its common stock for possible issuance under its stock-based compensation plans. F-26 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements 5. Income Taxes The components of income before provision for income taxes are as follows: (In thousands) January 2, 2021 December 28, 2019 December 29, 2018 Domestic $ 14,132 $ 93 $ ( 397 ) Foreign 59,555 68,829 79,925 $ 73,687 $ 68,922 $ 79,528 The components of the provision for income taxes are as follows: (In thousands) January 2, 2021 December 28, 2019 December 29, 2018 Current Provision (Benefit): Federal $ 339 $ ( 264 ) $ 724 Foreign 16,800 18,778 21,829 State 667 335 169 17,806 18,849 22,722 Deferred Provision (Benefit): Federal 2,146 ( 453 ) ( 2,551 ) Foreign ( 2,361 ) ( 1,253 ) ( 1,761 ) State 357 ( 785 ) 72 142 ( 2,491 ) ( 4,240 ) $ 17,948 $ 16,358 $ 18,482 The Company receives a tax deduction upon the exercise of nonqualified stock options and the vesting of RSUs. The Company recognizes excess income tax benefits and tax deficiencies related to stock-based compensation arrangements as discrete items within the provision for income taxes in the reporting period in which they occur. The Company recognized an income tax benefit of $ 870,000 in 2020, $ 3,807,000 in 2019 and $ 1,097,000 in 2018 in the accompanying consolidated statement of income. The provision for income taxes in the accompanying statement of income differs from the provision calculated by applying the statutory federal income tax rate to income before provision for income taxes due to the following: (In thousands) January 2, 2021 December 28, 2019 December 29, 2018 Provision for Income Taxes at Statutory Rate $ 15,474 $ 14,474 $ 16,701 Increases (Decreases) Resulting From: State income taxes, net of federal tax 807 ( 355 ) 164 U.S. tax cost of foreign earnings 599 146 1,215 Foreign tax rate differential 1,891 2,584 3,158 Reversal of tax benefit reserves, net ( 730 ) ( 286 ) ( 1,785 ) Change in valuation allowance ( 469 ) 81 141 Nondeductible expenses 2,214 2,454 781 Research and development tax credits ( 465 ) ( 381 ) ( 445 ) Excess tax benefit related to stock-based compensation ( 758 ) ( 3,352 ) ( 967 ) Impact of the U.S. Tax Cuts and Jobs Act — — ( 106 ) Other ( 615 ) 993 ( 375 ) $ 17,948 $ 16,358 $ 18,482 F-27 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements Net deferred tax liability in the accompanying consolidated balance sheet consists of the following: (In thousands) January 2, 2021 December 28, 2019 Deferred Tax Asset: Foreign, state, and alternative minimum tax credit carryforwards $ 472 $ 776 Reserves and accruals 3,565 3,007 Net operating loss carryforwards 13,719 12,478 Inventory basis difference 4,576 4,107 Capitalized research expenses 2,668 2,813 Employee compensation 3,189 3,630 Allowance for credit losses 397 351 Lease liabilities 6,855 7,543 Other 213 543 Deferred tax asset, gross 35,654 35,248 Less: valuation allowance ( 9,609 ) ( 8,531 ) Deferred tax asset, net 26,045 26,717 Deferred Tax Liability: Goodwill and intangible assets ( 30,166 ) ( 30,003 ) Fixed asset basis difference ( 4,964 ) ( 4,557 ) Provision for unremitted foreign earnings ( 1,233 ) ( 809 ) ROU assets ( 5,812 ) ( 6,433 ) Other ( 1,574 ) ( 943 ) Deferred tax liability ( 43,749 ) ( 42,745 ) Net deferred tax liability $ ( 17,704 ) $ ( 16,028 ) The deferred tax assets and liabilities are presented in the accompanying consolidated balance sheet within other assets and long-term deferred income taxes on a net basis by tax jurisdiction. The Company has established valuation allowances related to certain domestic and foreign deferred tax assets on deductible temporary differences, tax losses, and tax credit carryforwards. The valuation allowance at year-end 2020 was $ 9,609,000 , consisting of $ 255,000 in the United States and $ 9,354,000 in foreign jurisdictions. The increase in the valuation allowance in 2020 of $ 1,078,000 related primarily to tax rate changes and fluctuations in foreign currency exchange rates, partially offset by the expected utilization of net operating losses in one of the Company's foreign jurisdictions. Compliance with ASC 740 requires the Company to periodically evaluate the necessity of establishing or adjusting a valuation allowance for deferred tax assets depending on whether it is more likely than not that a related tax benefit will be realized in future periods. When assessing the need for a valuation allowance in a tax jurisdiction, the Company evaluates the weight of all available evidence to determine whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. As part of this evaluation, the Company considers its cumulative three-year history of earnings before income taxes, taxable income in prior carryback years, future reversals of existing taxable temporary differences, prudent and feasible tax planning strategies, and expected future results of operations. As of year-end 2020, the Company continued to maintain a valuation allowance in the United States against a portion of its state net operating loss carryforwards due to the uncertainty of future profitability in state jurisdictions. As of year-end 2020, the Company maintained valuation allowances in certain foreign jurisdictions because of the uncertainty of future profitability within those foreign jurisdictions. At year-end 2020, the Company had U.S. federal and state net operating loss carryforwards of $ 2,811,000 and $ 32,974,000 , respectively, and foreign net operating loss carryforwards of $ 47,568,000 . Of the U.S. federal net operating loss carryforwards, $ 72,000 expires in 2036 and the remainder do not expire. The state net operating loss carryforwards begin to expire in 2021 and a portion does not expire. Of the foreign net operating loss carryforwards, $ 777,000 will expire in the years 2022 through 2028, and the remainder do not expire. As of year-end 2020, the Company also had U.S. federal and state disallowed business interest expense carryforwards of $ 796,000 and $ 319,000 , respectively, of which $ 796,000 and $ 238,000 , respectively, came from its acquisition of SMH in 2019 and foreign tax credits of $ 320,000 , of which $ 120,000 came from the acquisition of SMH. The disallowed business interest expense carryforward does not expire, and the foreign tax credit carryforward begins to expire in 2024. The utilization of these tax attributes is limited to the Company’s future taxable income, and certain of these tax attributes are subject to an annual limitation as a result of the acquisition of SMH, which constitutes a change of ownership as defined under Internal Revenue Code Section 382. At year-end 2020, the Company had approximately $ 293,676,000 of unremitted foreign earnings. During 2020, the Company repatriated $ 1,682,000 of previously taxed foreign earnings to the United States and recognized a foreign exchange F-28 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements loss of $ 377,000 associated with these earnings. The Company intends to repatriate the distributable reserves of select foreign subsidiaries back to the United States and has recognized $ 657,000 of net tax expense on the estimated repatriation amount during 2020. Except for these select foreign subsidiaries, the Company intends to indefinitely reinvest $ 271,572,000 of these earnings of its international subsidiaries in order to support the current and future capital needs of their operations in the foreign jurisdictions, including the repayment of the Company’s foreign debt. The related foreign withholding taxes, which would be required if the Company were to remit these foreign earnings to the United States, would be approximately $ 6,006,000 . The Company operates within multiple tax jurisdictions and could be subject to audit in those jurisdictions. Such audits can involve complex income tax issues, which may require an extended period of time to resolve and may cover multiple years. In management's opinion, adequate provisions for income taxes have been made for all years subject to audit. As of year-end 2020, the Company had a liability of $ 8,337,000 for unrecognized tax benefits which, if recognized, would reduce the effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits at year-end 2020 and year-end 2019 is as follows: (In thousands) January 2, 2021 December 28, 2019 Unrecognized Tax Benefits, Beginning of Year $ 8,331 $ 12,364 Gross Increases—Tax Positions in Prior Periods 4 615 Gross Decreases—Tax Positions in Prior Periods ( 21 ) ( 4,373 ) Gross Increases—Current-period Tax Positions 1,468 804 Lapses of Statutes of Limitations ( 1,488 ) ( 1,094 ) Currency Translation 43 15 Unrecognized Tax Benefits, End of Year $ 8,337 $ 8,331 A portion of the unrecognized tax benefits generated in 2020 is offset by deferred tax assets in the accompanying consolidated balance sheet. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company has accrued $ 1,600,000 at year-end 2020 and $ 1,717,000 at year-end 2019 for the potential payment of interest and penalties. The interest and penalties included in the accompanying consolidated statement of income was a benefit of $ 145,000 in 2020 and an expense of $ 420,000 in 2019. The Company is currently under audit in certain tax jurisdictions, including an income tax examination by the Internal Revenue Service for the tax years 2017 and 2018. It is reasonably possible that the potential outcome of current audits could result in a change to the Company's liability for unrecognized tax benefits over the next fiscal year; however, the Company cannot reasonably estimate possible adjustments at this time. It is also reasonably possible that over the next fiscal year the amount of liability for unrecognized tax benefits may be reduced by up to $ 290,000 primarily from the expiration of tax statutes of limitations. The Company remains subject to U.S. Federal income tax examinations for the tax years 2019 and 2020, and to non-U.S. income tax examinations for the tax years 2008 through 2020. In addition, the Company remains subject to state and local income tax examinations in the United States for the tax years 2003 through 2020. 6. Long-Term Obligations Long-term obligations are as follows: (In thousands) January 2, 2021 December 28, 2019 Revolving Credit Facility, due 2023 $ 217,963 $ 265,419 Commercial Real Estate Loan — 19,425 Senior Promissory Notes, due 2023 to 2028 10,000 10,000 Finance Leases, due 2021 to 2025 1,631 2,308 Other Borrowings, due 2021 to 2023 3,880 4,000 Unamortized Debt Issuance Costs — ( 127 ) Total 233,474 301,025 Less: Current Maturities of Long-Term Obligations ( 1,474 ) ( 2,851 ) Long-Term Obligations $ 232,000 $ 298,174 See Note 10 , Derivatives, for the fair value information related to the Company's long-term obligations. F-29 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements Revolving Credit Facility The Company entered into a five-year , unsecured multi-currency revolving credit facility, dated as of March 1, 2017 (as amended and restated to date, the Credit Agreement). Pursuant to the Credit Agreement, the Company has a borrowing capacity of $ 400,000,000 , with an uncommitted, unsecured incremental borrowing facility of $ 150,000,000 and a maturity date of December 14, 2023. 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, plus an applicable margin of 0 % to 1.25 %, or (ii) LIBOR (with a zero percent floor), as defined, plus an applicable margin of 1 % to 2.25 %. The Base Rate is calculated as the highest of (a) the federal funds rate plus 0.50 %, (b) the prime rate as published by Citizens Bank, N.A. (Citizens) and (c) thirty-day U.S. dollar LIBOR (USD LIBOR), as defined, plus 0.50 %. The applicable 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. 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 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. In addition, one of the Company’s foreign subsidiaries entered into a separate guarantee agreement limited to certain obligations of two foreign subsidiary borrowers. At year-end 2020, the outstanding balance under the Credit Agreement was $ 217,963,000 , and included $ 45,566,000 of euro-denominated borrowings and $ 4,398,000 of Canadian dollar-denominated borrowings. At year-end 2020, the Company had $ 181,937,000 of borrowing capacity available under the Credit Agreement, which was calculated by translating its foreign-denominated borrowings using borrowing date foreign exchange rates. See Note 10 , Derivatives, under the heading Interest Rate Swap Agreements , for information relating to the swap agreements used to hedge the Company’s exposure to movements in the three-month USD LIBOR on its U.S. dollar-denominated debt borrowed under the Credit Agreement. Unamortized debt issuance costs related to the Credit Agreement, of $ 1,209,000 at year-end 2020 and $ 1,407,000 at year-end 2019, are included in other assets in the accompanying consolidated balance sheet, and are being amortized to interest expense using the straight-line method. The weighted average interest rate for the outstanding balance under the Credit Agreement was 1.58 % as of year-end 2020. Commercial Real Estate Loan In 2018, the Company and certain domestic subsidiaries borrowed $ 21,000,000 under a ten-year promissory note (Real Estate Loan), which was repayable in quarterly principal installments of $ 262,500 with the remaining principal balance of $ 10,500,000 due July 6, 2028. Interest accrued and was payable quarterly in arrears at a fixed rate of 4.45 % per annum. In 2020, the Company prepaid the outstanding principal balance on the Real Estate Loan of $ 18,900,000 , together with accrued interest and a prepayment fee of 1.00 % of the outstanding principal balance, resulting in a loss on the extinguishment of debt of $ 189,000 , which is included in selling, general, and administrative expenses in the accompanying consolidated statement of income. To prepay the Real Estate Loan, the Company used $ 19,000,000 of borrowings available under the Credit 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 a minimum amount of $ 1,000,000 , or the foreign currency equivalent thereof, if applicable) 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. In accordance with the Note Purchase Agreement, the Company may also issue additional senior promissory notes (together with the Initial Notes, the Senior Promissory Notes) up to an additional $ 115,000,000 until the earlier of December F-30 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements 14, 2021 or the thirtieth day after written notice to terminate the issuance and sale of additional notes pursuant to the Note Purchase Agreement. The Senior Promissory Notes are pari passu with the Company’s indebtedness under the Credit Agreement, and any other senior debt, 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. Annual Repayment Requirements The following schedule presents the annual repayment requirements for the Company’s Credit Agreement and Initial Notes as of year-end 2020. (In thousands) 2023 $ 219,630 2024 1,667 2025 1,666 2026 and Thereafter 5,000 $ 227,963 Debt Compliance At year-end 2020, 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 its vehicles. See Note 9 , Leases, for further information relating to the Company's finance leases. 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 assets in the accompanying consolidated balance sheet, was $ 1,247,000 at year-end 2020. The lease arrangement provides for a fixed price purchase option, net of the projected loan receivable, of $ 1,625,000 at the end of the lease term in 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 year-end 2020, $ 3,817,000 was outstanding under this obligation. The following schedule presents future minimum lease payments for the Company's sales-leaseback financing arrangement as of year-end 2020. (In thousands) 2021 $ 578 2022 1,680 Total Minimum Lease Payments 2,258 Less: Imputed Interest ( 66 ) Present Value of Minimum Lease Payments $ 2,192 7. Commitments and Contingencies Letters of Credit and Bank Guarantees Outstanding letters of credit and bank guarantees issued on behalf of the Company, principally relating to performance obligations and customer deposit guarantees, totaled $ 18,596,000 at year-end 2020. Certain of the Company's contracts require the Company to provide a standby letter of credit or bank guarantee to a customer as beneficiary, limited in amount to a negotiated percentage of the total contract value, in order to guarantee warranty and performance obligations of the Company under the contract. Typically, these standby letters of credit and bank guarantees expire without being drawn by the beneficiary. F-31 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements Right of Recourse In the ordinary course of business, the Company's Chinese subsidiaries may receive banker's acceptance drafts from customers as payment for their trade accounts receivable. The drafts are noninterest-bearing obligations of the issuing bank and mature within six months of the origination date. The Company's Chinese subsidiaries may use these banker's acceptance drafts prior to the scheduled maturity date to settle outstanding accounts payable with vendors. Banker's acceptance drafts transferred to vendors are subject to customary right of recourse provisions prior to their scheduled maturity dates. The Company had $ 7,568,000 at year-end 2020 and $ 7,003,000 at year-end 2019 of banker's acceptance drafts subject to recourse, which were transferred to vendors and had not reached their scheduled maturity dates. Historically, the banker's acceptance drafts have settled upon maturity without any claim of recourse against the Company. Contingencies In the ordinary course of business, the Company is, at times, required to issue limited performance guarantees, some of which do not require the issuance of letters of credit to customers in support of these guarantees, relating to its equipment and systems. The Company generally limits its liability under these guarantees to amounts typically capped at 10% or less of the value of the contract. The Company believes that it has adequate reserves for any potential liability in connection with such guarantees. Litigation From time to time, the Company is subject to various claims and legal proceedings covering a range of matters that arise in the ordinary course of business. Such litigation may include, but is not limited to, claims and counterclaims by and against the Company for breach of contract or warranty, canceled contracts, product liability, or bankruptcy-related claims. For legal proceedings in which a loss is probable and estimable, the Company accrues a loss based on the low end of the range of estimated loss when there is no better estimate within the range. If the Company were found to be liable for any of the claims or counterclaims against it, the Company would incur a charge against earnings for amounts in excess of legal accruals. 8. Restructuring Costs During 2020, the Company recorded restructuring costs of $ 1,118,000 , representing severance costs of $ 659,000 for 34 employees in its Flow Control segment, $ 277,000 for 26 employees in its Industrial Processing segment, and $ 182,000 for four employees in its Material Handling segment. The Company also reduced its workforce by 21 employees in its Industrial Processing segment with no associated severance costs. The Company took these cost-containment actions to reduce future payroll-related overhead and operating costs in response to the slowdown in the global economy, largely driven by the COVID-19 pandemic. During 2019, the Company experienced a significant decrease in revenue and operating results in its timber-harvesting product line included in its Industrial Processing segment, which was acquired in 2017 as part of its acquisition of the forest products business of NII FPG. Given the decline in this business, the Company undertook a restructuring plan in the fourth quarter of 2019 and incurred $ 192,000 of severance costs associated with the reduction of six employees in Canada. In 2017, the Company constructed a 160,000 square foot manufacturing facility in the United States that integrated its Industrial Processing segment's U.S. and Swedish papermaking stock-preparation product lines into a single manufacturing facility to achieve economies of scale and greater efficiencies. As a result of the consolidation and integration of these facilities, the Company developed a restructuring plan totaling $ 1,920,000 , primarily related to costs for the relocation of machinery and equipment and administrative offices, severance, and abandonment of leased facilities. As a result of this plan, the Company recorded restructuring charges of $ 203,000 in 2017 associated with severance costs for the reduction of four employees in the United States and six employees in Sweden. In 2018, the Company recorded additional restructuring costs of $ 1,717,000 related to this plan, including $ 1,318,000 primarily for the relocation of machinery and equipment and administrative offices, $ 454,000 associated with employee retention costs and abandonment of excess facility and other closure costs, and a reversal of $ 55,000 of severance costs no longer required. The Company does not expect to incur additional charges related to the above restructuring plans. Restructuring costs are included in impairment and restructuring costs in the accompanying consolidated statement of income. F-32 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements A summary of the changes in accrued restructuring costs included in other accrued expenses in the accompanying consolidated balance sheet, which are expected to be paid in 2021, are as follows: (In thousands) Severance Relocation Other (a) Total 2020 Restructuring Plan Provision $ 1,118 $ — $ — $ 1,118 Usage ( 1,052 ) — — ( 1,052 ) Currency translation ( 5 ) — — ( 5 ) Balance at January 2, 2021 $ 61 $ — $ — $ 61 2019 Restructuring Plan Provision $ 192 $ — $ — $ 192 Usage ( 109 ) — — ( 109 ) Currency translation 1 — — 1 Balance at December 28, 2019 84 — — 84 Usage ( 90 ) — — ( 90 ) Currency translation 6 — — 6 Balance at January 2, 2021 $ — $ — $ — $ — 2017 Restructuring Plan Balance at December 30, 2017 $ 203 $ — $ — $ 203 (Reversal) Provision ( 55 ) 1,318 454 1,717 Usage ( 77 ) ( 1,315 ) ( 448 ) ( 1,840 ) Currency translation ( 8 ) ( 3 ) ( 6 ) ( 17 ) Balance at December 29, 2018 63 — — 63 Usage — — — — Balance at December 28, 2019 63 — — 63 Usage ( 3 ) — — ( 3 ) Balance at January 2, 2021 $ 60 $ — $ — $ 60 (a) Includes employee retention costs that are accrued ratably over the period through which employees must work to qualify for a payment, as well as facility closure and clean-up costs. 9. Leases The Company enters into operating and finance lease commitments primarily for its manufacturing and office space, vehicles, and equipment leases that expire on various dates over the next 14 years, some of which include one or more options to extend the lease for up to 5 years. In addition, the Company leases land associated with certain of its buildings in Canada and China, under long-term leases expiring on various dates ranging from 2032 to 2062, one of which includes an assumed option to extend the lease for up to 10 years. The components of lease expense are as follows: (In thousands) January 2, 2021 December 28, 2019 Operating Lease Cost $ 5,602 $ 5,534 Short-Term Lease Cost 671 715 F-33 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements (In thousands) January 2, 2021 December 28, 2019 Finance Lease Cost: ROU asset amortization 1,157 1,213 Interest on lease liabilities 74 94 Total Finance Lease Cost 1,231 1,307 Total Lease Costs $ 7,504 $ 7,556 The accompanying consolidated statement of income included expenses from operating leases of $ 5,575,000 in 2018 recognized under Topic 840, the Company's previous lease accounting standard. Supplemental cash flow information related to leases is as follows: (In thousands) January 2, 2021 December 28, 2019 Cash Paid for Amounts Included in the Measurement of Lease Liabilities: Operating cash flows from operating leases $ 5,782 $ 5,636 Operating cash flows from finance leases $ 74 $ 93 Financing cash flows from finance leases $ 1,139 $ 1,144 ROU Assets Obtained in Exchange for Lease Obligations (a): Operating leases $ 2,560 $ 28,484 Finance leases $ 622 $ 3,847 (a) Included in 2019 were additions related to the transition adjustment for the adoption of ASC 842. The post-adoption additions of operating leases were $ 13,167,000 , of which $ 10,994,000 related to ROU assets obtained as part of the acquisition of SMH in 2019. The post-adoption additions of finance leases were $ 2,496,000 , of which $ 528,000 related to ROU assets obtained as part of the acquisition of SMH. Supplemental balance sheet information related to leases is as follows: (In thousands) Balance Sheet Line Item January 2, 2021 December 28, 2019 Operating Leases: ROU assets Other assets $ 25,460 $ 27,139 Short-term liabilities Other current liabilities $ 4,396 $ 4,184 Long-term liabilities Other long-term liabilities 22,198 24,411 Total operating lease liabilities $ 26,594 $ 28,595 Finance Leases: ROU assets, at cost Property, plant, and equipment, at cost $ 3,707 $ 3,775 ROU assets accumulated amortization Accumulated depreciation and amortization ( 2,108 ) ( 1,475 ) ROU assets, net Property, plant, and equipment, net $ 1,599 $ 2,300 Short-term obligations Current maturities of long-term obligations $ 915 $ 1,116 Long-term obligations Long-term obligations 716 1,192 Total finance lease liabilities $ 1,631 $ 2,308 F-34 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements January 2, 2021 December 28, 2019 Weighted Average Remaining Lease Term (in years): Operating leases 9.4 10.2 Finance leases 2.0 2.3 Weighted Average Discount Rate: Operating leases 3.88 % 3.96 % Finance leases 3.52 % 4.10 % As of January 2, 2021, future lease payments for lease liabilities are as follows: Operating Finance (In thousands) Leases Leases 2021 $ 5,332 $ 951 2022 4,359 528 2023 3,495 189 2024 2,870 8 2025 2,616 6 2026 and Thereafter 13,480 — Total Future Lease Payments 32,152 1,682 Less: Imputed Interest ( 5,558 ) ( 51 ) Present Value of Lease Payments $ 26,594 $ 1,631 As of January 2, 2021, the Company had no significant operating and finance leases that had not yet commenced. 10. Derivatives Interest Rate Swap Agreements The Company has entered into interest rate swap agreements to hedge its exposure to movements in USD LIBOR on its U.S. dollar-denominated debt. In 2018, the Company entered into an interest rate swap agreement (2018 Swap Agreement) with Citizens which 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. In 2015, the Company entered into an interest rate swap agreement (2015 Swap Agreement) with Citizens which had a $ 10,000,000 notional value and expired on March 27, 2020. Under the 2015 Swap Agreement, the Company received three-month USD LIBOR and paid a fixed rate of interest of 1.5 % 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 of the 2018 Swap Agreement, the Company will receive from or pay to the counterparty the fair value of the interest rate 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 6 , 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. 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. F-35 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements The Company recognized losses of $ 16,000 in 2020, $ 46,000 in 2019 and $ 27,000 in 2018 within SG&A expenses in the accompanying consolidated statement of income associated with forward currency-exchange contracts that were not designated as hedges. The following table summarizes the fair value of derivative instruments in the accompanying consolidated balance sheet: January 2, 2021 December 28, 2019 (In thousands) Balance Sheet Location Asset (Liability) (a) Notional Amount (b) Asset (Liability) (a) Notional Amount Derivatives Designated as Hedging Instruments: Derivatives in an Asset Position: 2015 Swap Agreement Other Current Assets $ — $ — $ 11 $ 10,000 Forward currency-exchange contract Other Current Assets $ 25 $ 842 $ — $ — Derivatives in a Liability Position: Forward currency-exchange contracts Other Current Liabilities $ — $ — $ ( 75 ) $ 4,825 2018 Swap Agreement Other Long-Term Liabilities $ ( 1,099 ) $ 15,000 $ ( 770 ) $ 15,000 Derivatives Not Designated as Hedging Instruments: Derivatives in an Asset Position: Forward currency-exchange contracts Other Current Assets $ 12 $ 582 $ 3 $ 387 Derivatives in a Liability Position: Forward currency-exchange contracts Other Current Liabilities $ ( 7 ) $ 825 $ ( 43 ) $ 2,545 (a) See Note 11 , Fair Value Measurements and Fair Value of Financial Instruments, for the fair value measurements relating to these financial instruments. (b) The year-end 2020 notional amounts are indicative of the level of the Company's recurring derivative activity during the year. 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 year ended January 2, 2021: (In thousands) Interest Rate Swap Agreements Forward Currency- Exchange Contracts Total Unrealized Loss, Net of Tax, at December 28, 2019 $ ( 589 ) $ ( 55 ) $ ( 644 ) Loss (gain) reclassified to earnings (a) 253 ( 21 ) 232 (Loss) gain recognized in AOCI ( 510 ) 94 ( 416 ) Unrealized (Loss) Gain, Net of Tax, at January 2, 2021 $ ( 846 ) $ 18 $ ( 828 ) (a) See Note 14 , Accumulated Other Comprehensive Items, for the income statement classification. At year-end 2020, the Company expects to reclassify losses of $ 324,000 from AOCI to earnings over the next twelve months based on the estimated cash flows of the interest rate swap agreement and the maturity date of the forward currency- exchange contract. 11. 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. F-36 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements 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 January 2, 2021 (In thousands) Level 1 Level 2 Level 3 Total Assets: Money market funds and time deposits $ 8,054 $ — $ — $ 8,054 Banker's acceptance drafts (a) $ — $ 9,445 $ — $ 9,445 Forward currency-exchange contracts $ — $ 37 $ — $ 37 Liabilities: 2018 Swap Agreement $ — $ 1,099 $ — $ 1,099 Forward currency-exchange contracts $ — $ 7 $ — $ 7 Fair Value as of December 28, 2019 (In thousands) Level 1 Level 2 Level 3 Total Assets: Money market funds and time deposits $ 9,920 $ — $ — $ 9,920 Banker's acceptance drafts (a) $ — $ 5,230 $ — $ 5,230 2015 Swap Agreement $ — $ 11 $ — $ 11 Forward currency-exchange contracts $ — $ 3 $ — $ 3 Liabilities: 2018 Swap Agreement $ — $ 770 $ — $ 770 Forward currency-exchange contracts $ — $ 118 $ — $ 118 (a) Included in accounts receivable in the accompanying 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 2020. 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 currency-exchange contracts are based on quoted forward foreign exchange rates at the reporting date. The fair values of the interest rate swap agreements are based on LIBOR yield curves at the reporting date. The forward currency-exchange contracts and interest rate swap agreements 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 the Company's debt obligations, excluding lease obligations and other borrowings, are as follows: January 2, 2021 December 28, 2019 (In thousands) Carrying Value Fair Value Carrying Value Fair Value Debt Obligations: Revolving credit facility $ 217,963 $ 217,963 $ 265,419 $ 265,419 Commercial real estate loan — — 19,425 20,541 Senior promissory notes 10,000 11,157 10,000 10,803 $ 227,963 $ 229,120 $ 294,844 $ 296,763 The carrying value of the revolving credit facility approximates the fair value as the obligation bears variable rates of interest, which adjust frequently, based on prevailing market rates. The fair values of the commercial real estate loan, which was repaid in July 2020, and senior promissory notes are primarily calculated based on quoted market rates plus an applicable margin available to the Company at the respective period ends, which represent Level 2 measurements. F-37 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements 12. Business Segment and Geographical Information The Company previously reported its financial results by combining its operating entities into three reportable operating segments: Papermaking Systems, Wood Processing Systems, and Material Handling Systems, and a separate product line, Fiber-based Products, as described below. In classifying operational entities into a particular segment, the Company has aggregated businesses with similar economic characteristics, products and services, production processes, customers, and methods of distribution. During the first quarter of 2020, the Company changed its reportable operating segments to better align with its strategic initiatives to grow both organically and through acquisitions. Such growth and diversification resulted in a change in the internal organization of the Company and how its chief operating decision maker makes operating decisions, assesses the performance of the business, and allocates resources. The Company's financial results are reported in three new reportable operating segments: Flow Control, Industrial Processing, and Material Handling. The Flow Control segment consists of the fluid-handling and doctoring, cleaning, & filtration product lines; the Industrial Processing segment consists of the wood processing and stock-preparation product lines (excluding baling products); and the Material Handling segment consists of the conveying and screening, baling, and fiber-based product lines. Financial information for 2019 and 2018 has been recast to conform to the new segment presentation. A description of each segment follows. • Flow Control – Custom-engineered products, systems, and technologies that control the flow of fluids used in industrial and commercial applications to keep critical processes running efficiently in the packaging, tissue, food, metals, and other industrial sectors. The Company's products include rotary sealing devices, steam systems, expansion joints, doctor systems, roll and fabric cleaning devices, and filtration and fiber recovery systems. • Industrial Processing – Equipment, machinery, and technologies used to recycle paper and paperboard and process timber for use in the packaging, tissue, wood products and alternative fuel industries, among others. The Company's primary products include stock-preparation systems and recycling equipment, chemical pulping equipment, debarkers, stranders, chippers, and logging machinery. In addition, the Company provides industrial automation and digitization solutions to process industries. • Material Handling – Products and engineered systems used to handle bulk and discrete materials for secondary processing or transport in the aggregates, mining, food, and waste management industries, among others. The Company's primary products include conveying and vibratory equipment and balers. In addition, the Company manufactures and sells biodegradable, absorbent granules used as carriers in agricultural applications and for oil and grease absorption. The following table presents financial information for the Company's reportable operating segments: (In thousands) January 2, 2021 December 28, 2019 December 29, 2018 Revenue Flow Control $ 225,444 $ 250,339 $ 247,966 Industrial Processing 261,577 301,948 314,229 Material Handling (a) 148,007 152,357 71,591 $ 635,028 $ 704,644 $ 633,786 Income Before Provision for Income Taxes Flow Control (b) $ 51,530 $ 55,343 $ 52,928 Industrial Processing (c) 42,971 49,599 57,355 Material Handling (a, d) 14,375 11,600 8,077 Corporate (e) ( 27,752 ) ( 28,719 ) ( 29,762 ) Total operating income 81,124 87,823 88,598 Interest expense, net (f) ( 7,242 ) ( 12,542 ) ( 6,653 ) Other expense, net (f, g) ( 195 ) ( 6,359 ) ( 2,417 ) $ 73,687 $ 68,922 $ 79,528 F-38 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements (In thousands) January 2, 2021 December 28, 2019 December 29, 2018 Total Assets Flow Control $ 263,141 $ 262,320 $ 256,140 Industrial Processing 379,965 375,194 374,512 Material Handling (a) 273,909 281,057 86,003 Corporate (h) 10,556 20,816 9,094 $ 927,571 $ 939,387 $ 725,749 Depreciation and Amortization Flow Control $ 6,333 $ 6,603 $ 5,971 Industrial Processing 13,163 13,012 13,660 Material Handling (a) 11,628 12,528 3,756 Corporate 210 247 181 $ 31,334 $ 32,390 $ 23,568 Capital Expenditures Flow Control $ 2,808 $ 2,639 $ 2,791 Industrial Processing 3,123 5,113 12,288 Material Handling (a) 1,539 2,144 1,312 Corporate 125 61 168 $ 7,595 $ 9,957 $ 16,559 Geographical Information Revenue (i): United States $ 286,015 $ 309,957 $ 234,487 China 51,003 66,480 89,645 Canada 62,059 64,010 61,096 Germany 23,292 29,076 26,577 Finland 11,805 11,113 10,934 Other 200,854 224,008 211,047 $ 635,028 $ 704,644 $ 633,786 Long-lived Assets (j): United States $ 40,293 $ 42,094 $ 35,446 China 9,844 10,319 11,069 Finland 8,013 6,960 6,998 Canada 7,221 7,948 8,193 Germany 6,051 5,925 6,223 Other 13,220 12,786 12,228 $ 84,642 $ 86,032 $ 80,157 (a) Includes the SMH business in 2020 and 2019, which was acquired on January 2, 2019 (see Note 2 , Acquisitions). (b) Includes restructuring costs of $ 659,000 in 2020. (c) Includes $ 1,861,000 of impairment charges and $ 277,000 of restructuring costs in 2020. Includes $ 2,336,000 of impairment charges and $ 192,000 of restructuring costs in 2019. Includes restructuring costs of $ 1,717,000 in 2018. Includes acquisition-related expenses of $ 679,000 in 2020 and $ 252,000 in 2018. Acquisition-related expenses include amortization expense associated with backlog and acquisition costs. (d) Includes restructuring costs of $ 182,000 in 2020. Includes acquisition-related expenses of $ 350,000 in 2020 and $ 5,715,000 in 2019. Acquisition-related expenses include amortization expense associated with acquired profit in inventory and backlog, and acquisition costs. (e) Represents general and administrative expenses, including $ 1,321,000 of acquisition transaction costs in 2018. (f) The Company does not allocate interest and other expense, net to its segments. (g) Includes a settlement loss of $ 5,887,000 in 2019 and a curtailment loss of $ 1,425,000 in 2018. (h) Primarily includes cash and cash equivalents, tax assets, ROU assets, and property, plant, and equipment, net. (i) Revenue is attributed to countries based on customer location. (j) Represents property, plant, and equipment, net. F-39 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements 13. Earnings per Share Basic and diluted EPS were calculated as follows: (In thousands, except per share amounts) January 2, 2021 December 28, 2019 December 29, 2018 Net Income Attributable to Kadant $ 55,196 $ 52,068 $ 60,413 Basic Weighted Average Shares 11,482 11,235 11,086 Effect of Stock Options, Restricted Stock Units and Employee Stock Purchase Plan Shares 82 222 314 Diluted Weighted Average Shares 11,564 11,457 11,400 Basic Earnings per Share $ 4.81 $ 4.63 $ 5.45 Diluted Earnings per Share $ 4.77 $ 4.54 $ 5.30 The effect of outstanding and unvested RSUs of the Company's common stock totaling 22,900 shares in 2020, 24,000 shares in 2019, and 18,700 shares in 2018 was 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. 14. 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 consolidated balance sheet. Changes in each component of AOCI, net of tax, are as follows: (In thousands) Foreign Currency Translation Adjustment Pension and Other Post-Retirement Benefit Liability Adjustments Deferred Loss on Cash Flow Hedges Total Balance at December 28, 2019 $ ( 36,145 ) $ ( 831 ) $ ( 644 ) $ ( 37,620 ) Other comprehensive items before reclassifications 18,251 93 ( 416 ) 17,928 Reclassifications from AOCI — ( 32 ) 232 200 Net current period other comprehensive items 18,251 61 ( 184 ) 18,128 Balance at January 2, 2021 $ ( 17,894 ) $ ( 770 ) $ ( 828 ) $ ( 19,492 ) F-40 Table of Contents Kadant Inc. 2020 Financial Statements Notes to Consolidated Financial Statements Amounts reclassified out of AOCI are as follows: (In thousands) January 2, 2021 December 28, 2019 December 29, 2018 Statement of Income Line Item Retirement Benefit Plans (a) Recognized net actuarial loss $ ( 66 ) $ ( 70 ) $ ( 740 ) Other expense, net Amortization of prior service cost ( 55 ) ( 6 ) ( 92 ) Other expense, net Settlement and curtailment losses — ( 5,887 ) ( 1,425 ) Other expense, net Total expense before income taxes ( 121 ) ( 5,963 ) ( 2,257 ) Income tax benefit (provision) 153 ( 641 ) 549 Provision for income taxes 32 ( 6,604 ) ( 1,708 ) Cash Flow Hedges (b) Interest rate swap agreements ( 333 ) ( 8 ) ( 11 ) Interest expense Forward currency-exchange contracts 28 ( 169 ) 22 Cost of revenue Total (expense) income before income taxes ( 305 ) ( 177 ) 11 Income tax benefit (provision) 73 54 ( 3 ) Provision for income taxes ( 232 ) ( 123 ) 8 Total Reclassifications $ ( 200 ) $ ( 6,727 ) $ ( 1,700 ) (a) Included in the computation of net periodic benefit cost. See Note 3 , Employee Benefit Plans, for additional information. (b) See Note 10 , Derivatives, for additional information. 15. Unaudited Quarterly Information 2020 (In thousands, except per share amounts) First Second Third Fourth Revenue $ 159,127 $ 152,860 $ 154,610 $ 168,431 Gross Profit $ 68,323 $ 66,448 $ 68,316 $ 74,219 Net Income Attributable to Kadant $ 12,531 $ 11,607 $ 14,851 $ 16,207 Earnings per Share Attributable to Kadant Basic $ 1.10 $ 1.01 $ 1.29 $ 1.41 Diluted $ 1.09 $ 1.00 $ 1.28 $ 1.40 Cash Dividends Declared per Common Share $ 0.24 $ 0.24 $ 0.24 $ 0.24 2019 (In thousands, except per share amounts) First Second Third Fourth Revenue $ 171,316 $ 177,165 $ 173,504 $ 182,659 Gross Profit $ 70,515 $ 74,371 $ 74,247 $ 74,627 Net Income Attributable to Kadant $ 10,900 $ 16,304 $ 16,115 $ 8,749 Earnings per Share Attributable to Kadant Basic $ 0.98 $ 1.46 $ 1.43 $ 0.77 Diluted $ 0.96 $ 1.42 $ 1.41 $ 0.76 Cash Dividends Declared per Common Share $ 0.23 $ 0.23 $ 0.23 $ 0.23 F-41