What changed in this filing

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Item 1. Financial Statements

2021-11-10 compared with 2021-08-11 · 204 added, 127 removed, 533 unchanged (38% of the section changed)

5 unchanged sentences

Cash and cash equivalents $ 82,600 $ 65,682

Restricted cash (Notes 1 and 11) 84,708 958

Restricted cash (Note 1) 1,064 958

Accounts receivable, net of allowances of $ 2,874 and $ 2,977

7 unchanged sentences

Other Assets 42,777 40,391

Intangible Assets, Net 151,582 160,965

Goodwill 350,271 351,753

Intangible Assets, Net (Note 2) 205,328 160,965

Goodwill (Note 2) 398,907 351,753

Total Assets $ 1,133,128 $ 927,571

1 unchanged sentence

Current Liabilities:

Current maturities of long-term obligations (Note 4) $ 1,355 $ 1,474

Short-term obligations and current maturities of long-term obligations (Note 5) $ 5,574 $ 1,474

Accounts payable 53,476 32,264

5 unchanged sentences

Long-Term Obligations (Note 5) 308,922 232,000

Long-Term Deferred Income Taxes 36,842 21,669

Other Long-Term Liabilities 45,319 42,309

15 unchanged sentences

Condensed Consolidated Statement of Income

Three Months Ended Six Months Ended

2021 June 27,

Three Months Ended Nine Months Ended

2021 September 26,

2020 October 2,

2021 September 26,

(In thousands, except per share amounts)

23 unchanged sentences

Condensed Consolidated Statement of Comprehensive Income

Three Months Ended Six Months Ended

2021 June 27,

Three Months Ended Nine Months Ended

2021 September 26,

2020 October 2,

2021 September 26,

(In thousands)

2 unchanged sentences

Foreign currency translation adjustment ( 7,326 ) 8,656 ( 7,987 ) 824

Post-retirement liability adjustments, net (net of tax provision of $ 2 , $ 0 , $ 12 and $ 20 )

Post-retirement liability adjustments, net (net of tax provision (benefit) of $ 9 , $( 6 ), $ 21 and $ 14 )

24 ( 14 ) 57 34

9 unchanged sentences

Condensed Consolidated Statement of Cash Flows

Six Months Ended

2021 June 27,

Nine Months Ended

2021 September 26,

(In thousands)

6 unchanged sentences

Stock-based compensation expense 6,230 5,126

(Benefit) provision for losses on accounts receivable ( 241 ) 303

Loss on sale of property, plant, and equipment 91 —

Provision for losses on accounts receivable 116 505

Loss (gain) on sale of property, plant, and equipment 99 ( 4 )

Other items, net ( 1,852 ) ( 250 )

8 unchanged sentences

Investing Activities

Acquisitions, net of cash acquired ( 159 ) ( 7,066 )

Acquisitions, net of cash acquired (Note 2) ( 141,538 ) ( 7,095 )

Purchases of property, plant, and equipment ( 7,688 ) ( 5,419 )

2 unchanged sentences

Financing Activities

Repayment of long-term obligations ( 47,138 ) ( 24,160 )

Repayment of short- and long-term obligations ( 72,723 ) ( 69,034 )

Proceeds from issuance of long-term obligations (Note 5) 151,944 26,000

1 unchanged sentence

Dividends paid ( 8,559 ) ( 8,141 )

Dividend paid to noncontrolling interest ( 560 ) ( 525 )

Proceeds from issuance of Company common stock — 1,614

Other — ( 189 )

Net cash provided by (used in) financing activities 66,714 ( 52,871 )

7 unchanged sentences

Condensed Consolidated Statement of Stockholders' Equity

Three Months Ended July 3, 2021

Three Months Ended October 2, 2021

(In thousands, except share and per share amounts) Common

5 unchanged sentences

Shares Amount Shares Amount

Balance at April 3, 2021 14,624,159 $ 146 $ 108,064 $ 493,067 3,046,379 $ ( 74,649 ) $ ( 24,040 ) $ 1,720 $ 504,308

Balance at July 3, 2021 14,624,159 $ 146 $ 110,529 $ 513,036 3,043,854 $ ( 74,587 ) $ ( 19,889 ) $ 1,891 $ 531,126

Net income — — — 20,461 — — — 237 20,698

2 unchanged sentences

Activity under stock plans — — 2,164 — ( 5,225 ) 128 — — 2,292

Dividend paid to noncontrolling interest — — — — — — — ( 560 ) ( 560 )

Noncontrolling interest acquired (Note 2) — — — — — — — 653 653

Purchase of shares of noncontrolling interest (Note 2) — — — — — — — ( 686 ) ( 686 )

Other comprehensive items — — — — — — ( 7,200 ) ( 36 ) ( 7,236 )

Balance at July 3, 2021 14,624,159 $ 146 $ 110,529 $ 513,036 3,043,854 $ ( 74,587 ) $ ( 19,889 ) $ 1,891 $ 531,126

Six Months Ended July 3, 2021

Balance at October 2, 2021 14,624,159 $ 146 $ 112,693 $ 530,596 3,038,629 $ ( 74,459 ) $ ( 27,089 ) $ 1,499 $ 543,386

Nine Months Ended October 2, 2021

(In thousands, except share and per share amounts) Common

10 unchanged sentences

Activity under stock plans — — 1,869 — ( 43,290 ) 1,060 — — 2,929

Dividend paid to noncontrolling interest — — — — — — — ( 560 ) ( 560 )

Noncontrolling interest acquired (Note 2) — — — — — — — 653 653

Purchase of shares of noncontrolling interest (Note 2) — — — — — — — ( 686 ) ( 686 )

Other comprehensive items — — — — — — ( 7,597 ) ( 89 ) ( 7,686 )

Balance at July 3, 2021 14,624,159 $ 146 $ 110,529 $ 513,036 3,043,854 $ ( 74,587 ) $ ( 19,889 ) $ 1,891 $ 531,126

Three Months Ended June 27, 2020

Balance at October 2, 2021 14,624,159 $ 146 $ 112,693 $ 530,596 3,038,629 $ ( 74,459 ) $ ( 27,089 ) $ 1,499 $ 543,386

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

Condensed Consolidated Statement of Stockholders' Equity (continued)

Three Months Ended September 26, 2020

(In thousands, except share and per share amounts) Common

5 unchanged sentences

Shares Amount Shares Amount

Balance at March 28, 2020 14,624,159 $ 146 $ 105,457 $ 445,027 3,154,644 $ ( 77,302 ) $ ( 50,554 ) $ 1,498 $ 424,272

Balance at June 27, 2020 14,624,159 $ 146 $ 107,202 $ 453,874 3,127,565 $ ( 76,638 ) $ ( 45,863 ) $ 1,638 $ 440,359

Net income — — — 14,851 — — — 129 14,980

1 unchanged sentence

— — — ( 2,762 ) — — — — ( 2,762 )

Dividend paid to noncontrolling interest — — — — — — — ( 525 ) ( 525 )

Activity under stock plans — — 1,182 — ( 12,966 ) 318 — — 1,500

Other comprehensive items — — — — — — 8,631 62 8,693

Balance at June 27, 2020 14,624,159 $ 146 $ 107,202 $ 453,874 3,127,565 $ ( 76,638 ) $ ( 45,863 ) $ 1,638 $ 440,359

Six Months Ended June 27, 2020

Balance at September 26, 2020 14,624,159 $ 146 $ 108,384 $ 465,963 3,114,599 $ ( 76,320 ) $ ( 37,232 ) $ 1,304 $ 462,245

Nine Months Ended September 26, 2020

(In thousands, except share and per share amounts) Common

9 unchanged sentences

— — — ( 8,275 ) — — — — ( 8,275 )

Dividend paid to noncontrolling interest — — — — — — — ( 525 ) ( 525 )

Activity under stock plans — — 1,686 — ( 100,289 ) 2,458 — — 4,144

Other comprehensive items — — — — — — 388 76 464

Balance at June 27, 2020 14,624,159 $ 146 $ 107,202 $ 453,874 3,127,565 $ ( 76,638 ) $ ( 45,863 ) $ 1,638 $ 440,359

Balance at September 26, 2020 14,624,159 $ 146 $ 108,384 $ 465,963 3,114,599 $ ( 76,320 ) $ ( 37,232 ) $ 1,304 $ 462,245

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

6 unchanged sentences

Interim Financial Statements

The interim condensed consolidated financial statements and related notes presented have been prepared by the Company, are unaudited, and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the Company's financial position at July 3, 2021, its results of operations, comprehensive income, and stockholders' equity for the three- and six-month periods ended July 3, 2021 and June 27, 2020 and its cash flows for the six-month periods ended July 3, 2021 and June 27, 2020.

The interim condensed consolidated financial statements and related notes presented have been prepared by the Company, are unaudited, and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the Company's financial position at October 2, 2021, its results of operations, comprehensive income, and stockholders' equity for the three- and nine-month periods ended October 2, 2021 and September 26, 2020 and its cash flows for the nine-month periods ended October 2, 2021 and September 26, 2020.

Interim results are not necessarily indicative of results for a full year or for any other interim period.

7 unchanged sentences

Note 1 to the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2021 describes the significant accounting estimates and policies used in preparation of the consolidated financial statements.

There have been no material changes in the Company’s significant accounting policies during the six months ended July 3, 2021.

There have been no material changes in the Company’s significant accounting policies during the nine months ended October 2, 2021.

Supplemental Cash Flow Information

Six Months Ended

(In thousands) July 3,

2021 June 27,

Nine Months Ended

(In thousands) October 2,

2021 September 26,

Cash Paid for Interest $ 3,091 $ 5,518

12 unchanged sentences

The majority of the bank guarantees will expire over the next twelve months .

Restricted cash at July 3, 2021 also included $ 84,249,000 related to funds held in escrow for an acquisition that occurred in the third quarter of 2021.

See Not e 11 , Subsequent Event, for further details.

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

(In thousands) July 3,

2021 June 27,

(In thousands) October 2,

2021 September 26,

2020 January 2,

15 unchanged sentences

Translation Net

October 2, 2021

Definite-Lived

29 unchanged sentences

2021 Adjustments

Acquisitions (Note 2) 25,349 — 27,699 53,048

Currency translation ( 2,417 ) ( 1,351 ) ( 2,126 ) ( 5,894 )

Acquisition 197 — — 197

Total 2021 adjustments 22,932 ( 1,351 ) 25,573 47,154

Balance at July 3, 2021

Balance at October 2, 2021

Gross balance 124,369 214,530 145,517 484,416

7 unchanged sentences

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

Six Months Ended

(In thousands) July 3,

2021 June 27,

Nine Months Ended

(In thousands) October 2,

2021 September 26,

Balance at Beginning of Year $ 7,064 $ 6,467

1 unchanged sentence

Usage ( 3,106 ) ( 3,809 )

Acquisitions 429 —

Currency translation ( 210 ) 114

2 unchanged sentences

Most of the Company’s revenue relates to products and services that require minimal customization and is recognized at a point in time for each performance obligation under the contract when the customer obtains control of the goods or service.

The remaining portion of the Company’s revenue is recognized 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.

The remaining portion of the Company’s revenue is recognized over time based on an input method that compares the costs incurred to date to the total expected costs required to satisfy the performance obligation.

Contracts are accounted for on an over time basis when they include products which have no alternative use and an enforceable right to payment over time.

3 unchanged sentences

The following table presents revenue by revenue recognition method:

Three Months Ended Six Months Ended

July 3, June 27, July 3, June 27,

Three Months Ended Nine Months Ended

October 2, September 26, October 2, September 26,

(In thousands) 2021 2020 2021 2020

4 unchanged sentences

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

Three Months Ended Six Months Ended

July 3, June 27, July 3, June 27,

Three Months Ended Nine Months Ended

October 2, September 26, October 2, September 26,

(In thousands) 2021 2020 2021 2020

22 unchanged sentences

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 $ 10,070,000 in the second quarter of 2021, $ 7,158,000 in the second quarter of 2020, $ 27,210,000 in the first six months of 2021 and $ 26,866,000 in the first six months of 2020 that was included in the contract liabilities balance at the beginning of 2021 and 2020.

The Company recognized revenue of $ 3,973,000 in the third quarter of 2021, $ 1,656,000 in the third quarter of 2020, $ 31,183,000 in the first nine months of 2021 and $ 28,522,000 in the first nine months of 2020 that was included in the contract liabilities balance at the beginning of 2021 and 2020.

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 July 3, 2021 was $ 12,994,000 .

The Company will recognize revenue for these performance obligations as they are satisfied, approximately 70 % of which is expected to occur within the next twelve months and the remaining 30 % within the following twelve months .

4 unchanged sentences

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 $ 10,793,000 at July 3, 2021 and $ 9,445,000 at January 2, 2021, are included in accounts receivable in the accompanying condensed consolidated balance sheet until the subsidiary sells the drafts to a bank and receives a discounted amount, transfers the banker's acceptance drafts in settlement of current accounts payable prior to maturity, or obtains cash payment on the scheduled maturity date.

These drafts, which totaled $ 7,428,000 at October 2, 2021 and $ 9,445,000 at January 2, 2021, are included in accounts receivable in the accompanying condensed consolidated balance sheet until the subsidiary sells the drafts to a bank and receives a discounted amount, transfers the banker's acceptance drafts in settlement of current accounts payable prior to maturity, or obtains cash payment on the scheduled maturity date.

Recent Accounting Pronouncements

12 unchanged sentences

The Company is currently evaluating the effects that the adoption of this ASU will have on its consolidated financial statements.

The Company’s acquisitions have been accounted for using the purchase method of accounting and the results of the acquired businesses are included in its condensed consolidated financial statements from the date of acquisition.

Historically, acquisitions have been made at prices above the fair value of identifiable net assets, resulting in goodwill.

Acquisition costs are included in selling, general, and administrative (SG&A) expenses in the accompanying condensed consolidated statement of income as incurred.

The Company recorded acquisition costs of $ 2,619,000 in the first nine months of 2021 and $ 485,000 in the first nine months of 2020.

In the third quarter of 2021, the Company acquired all partnership interests and shares in The Clouth Group of Companies (Clouth), for $ 93,127,000 , net of cash acquired plus debt assumed.

The majority of the Clouth companies were acquired on July 19, 2021 and the acquisition of the last legal entity occurred on August 10, 2021, which the Company accounted for as a noncontrolling interest during the period from July 19, 2021 to August 10, 2021.

The Company funded the purchase price with euro-denominated borrowings under its revolving credit facility and existing cash.

Clouth, which is included within the Company's Flow Control segment, is a leading manufacturer of doctor blades and related equipment used in the production of paper, packaging, and tissue.

The Company expects several synergies in connection with this acquisition, including deepening its presence in the growing ceramic blade market and expansion of sales at its existing businesses by leveraging Clouth's complementary global geographic footprint.

Clouth has two manufacturing facilities in Germany and one in Poland and generated revenue of approximately 40,495,000 euros for the trailing twelve months ended June 30, 2021.

Goodwill from the Clouth acquisition was $ 25,349,000 , of which $ 6,240,000 is expected to be deductible for tax purposes over 15 years.

In addition, intangible assets acquired were $ 34,113,000 , of which $ 4,827,000 is expected to be deductible for tax purposes over 15 years.

For the quarter ended October 2, 2021, the Company recorded revenue of $ 9,913,000 and an operating loss of $ 1,025,000 for Clouth from the date of acquisition, including amortization expense of $ 2,199,000 associated with acquired profit in inventory and backlog.

The final purchase accounting and purchase price allocations remain subject to change as the

Notes to Condensed Consolidated Financial Statements

Company continues to refine its preliminary valuation of certain acquired assets and liabilities assumed and the valuation of acquired intangibles.

On August 23, 2021, the Company acquired all the outstanding equity securities in East Chicago Machine Tool Corporation (Balemaster) and certain assets of affiliated companies for $ 53,747,000 , net of cash acquired.

Balemaster, which is included within the Company's Material Handling segment, is a leading U.S.

manufacturer of horizontal balers and related equipment used primarily for recycling packaging waste at corrugated box plants and large retail and distribution centers.

The Company funded the purchase price with borrowings under its revolving credit facility.

The Company expects several synergies in connection with the acquisition, including expansion of its presence in the secondary material processing market and creation of new opportunities for leveraging its high-performance balers produced in Europe.

Balemaster's revenue for the trailing twelve months ended June 30, 2021 was approximately $ 22,166,000 .

Goodwill from the Balemaster acquisition was $ 27,699,000 , no ne of which is deductible for tax purposes.

In addition, intangible assets acquired were $ 27,260,000 , no ne of which is deductible for tax purposes.

For the quarter ended October 2, 2021, the Company recorded revenue of $ 2,845,000 and operating income of $ 221,000 for Balemaster from the date of acquisition, including amortization expense of $ 621,000 associated with acquired profit in inventory and backlog.

The final purchase accounting and purchase price allocations remain subject to change as the Company continues to refine its preliminary valuation of certain acquired assets and liabilities assumed and the valuation of acquired intangibles.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed and the purchase

price for Clouth and Balemaster.

(In thousands) Clouth Balemaster Total

Net Assets Acquired:

Cash and Cash Equivalents $ 4,666 $ 3,757 $ 8,423

Accounts Receivable 6,863 1,593 8,456

Inventories 15,770 3,993 19,763

Other Current Assets 1,467 36 1,503

Property, Plant, and Equipment 24,508 4,232 28,740

Other Assets 3,923 195 4,118

Definite-Lived Intangible Assets

Customer relationships 19,838 21,800 41,638

Product technology 8,914 2,600 11,514

Tradenames — 1,400 1,400

Other 402 1,460 1,862

Indefinite-Lived Intangible Assets

Tradenames 4,959 — 4,959

Goodwill 25,349 27,699 53,048

Total assets acquired 116,659 68,765 185,424

Short-term Obligations and Current Maturities of Long-term Obligations 1,320 — 1,320

Accounts Payable 1,452 743 2,195

Other Current Liabilities 4,557 3,900 8,457

Long-Term Deferred Income Taxes 10,060 6,423 16,483

Long-Term Obligations 4,141 — 4,141

Other Long-term Liabilities 2,797 195 2,992

Total liabilities assumed 24,327 11,261 35,588

Net assets acquired $ 92,332 $ 57,504 $ 149,836

Purchase Price:

Cash Paid $ 92,332 $ 57,504 $ 149,836

The weighted-average amortization period for Clouth's definite-lived intangible assets is 19 years, including weighted-average amortization periods of 24 years for customer relationships and 10 years for product technology.

The weighted-average amortization period for Balemaster's definite-lived intangible assets is 17 years, including weighted-average amortization periods of 18 years for customer relationships, 13 years for product technology, and 17 years for tradenames.

Notes to Condensed Consolidated Financial Statements

Unaudited Supplemental Pro Forma Information

Had the acquisition of Clouth been completed as of the beginning of 2020, the Company’s pro forma results of operations for the three- and nine-month periods ended October 2, 2021 and September 26, 2020 would have been as follows:

Three Months Ended Nine Months Ended

2021 September 26,

2020 October 2,

2021 September 26,

(In thousands, except per share amounts)

Revenue $ 201,372 $ 166,687 $ 593,500 $ 501,484

Net Income Attributable to Kadant $ 22,125 $ 17,013 $ 64,102 $ 37,106

Earnings per Share Attributable to Kadant

Basic $ 1.91 $ 1.48 $ 5.54 $ 3.23

Diluted $ 1.90 $ 1.47 $ 5.51 $ 3.21

The historical consolidated financial information of the Company and Clouth has been adjusted in the pro forma information above to give effect to pro forma events that are (i) directly attributable to the acquisition and related financing arrangements, (ii) expected to have a continuing impact on the Company, and (iii) factually supportable.

Pro forma results include the following non-recurring pro forma adjustments:

• Pre-tax charge to cost of revenue of $ 3,098,000 in the nine months ended September 26, 2020 and reversal of $ 1,846,000 in the three and nine months ended October 2, 2021, for the sale of inventory revalued at the date of acquisition.

• Pre-tax charge to SG&A expenses of $ 2,143,000 in the nine months ended September 26, 2020 and reversal of $ 860,000 in the three months ended October 2, 2021 and $ 2,096,000 in the nine months ended October 2, 2021, for acquisition costs and intangible asset amortization related to acquired backlog.

• Estimated tax effects related to the 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 Clouth occurred as of the beginning of 2020, or that may result in the future.

The Company's pro forma results exclude the Balemaster acquisition as the inclusion of its results would not have been materially different from the pro forma results presented above had the acquisition occurred at the beginning of 2020 .

Earnings per Share

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

Three Months Ended Six Months Ended

2021 June 27,

Three Months Ended Nine Months Ended

2021 September 26,

2020 October 2,

2021 September 26,

(In thousands, except per share amounts)

5 unchanged sentences

Diluted Earnings per Share $ 1.75 $ 1.28 $ 5.14 $ 3.38

The effect of outstanding and unvested restricted stock units (RSUs) of the Company's common stock totaling 9,000 shares in the second quarter of 2021, 36,000 shares in the second quarter of 2020, 27,000 in the first six months of 2021, and 39,000 in the first six months of 2020 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.

The effect of outstanding and unvested restricted stock units (RSUs) of the Company's common stock totaling 3,000 shares in the third quarter of 2021, 11,000 shares in the third quarter of 2020, 19,000 shares in the first nine months of 2021, and 30,000 shares in the first nine months of 2020 were not included in the computation of diluted EPS for the respective periods as the effect would have been antidilutive or, for unvested performance-based RSUs, the performance conditions had not been met as of the end of the reporting periods.

Notes to Condensed Consolidated Financial Statements

Provision for Income Taxes

The provision for income taxes was $ 14,510,000 in the first six months of 2021 and $ 9,033,000 in the first six months of 2020.

The effective tax rate of 27 % in the first six months of 2021 was higher than the Company's statutory rate of 21% primarily due to the distribution of the Company's worldwide earnings, nondeductible expenses, state taxes, and tax expense associated with the Global Intangible Low-Taxed Income (GILTI) provisions.

The provision for income taxes was $ 21,252,000 in the first nine months of 2021 and $ 13,738,000 in the first nine months of 2020.

The effective tax rate of 26 % in the first nine months of 2021 was higher than the Company's statutory rate of 21% primarily due to the distribution of the Company's worldwide earnings, nondeductible expenses, state taxes, and tax expense associated with the Global Intangible Low-Taxed Income (GILTI) provisions.

These increases in tax expense were offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements.

The effective tax rate of 27 % in the first six months of 2020 was higher than the Company's statutory rate of 21% primarily due to nondeductible expenses, the distribution of the Company's worldwide earnings, state taxes, and tax expense associated with GILTI provisions.

The effective tax rate of 26 % in the first nine months of 2020 was higher than the Company's statutory rate of 21% primarily due to nondeductible expenses, the distribution of the Company's worldwide earnings and state taxes.

These increases in tax expense were offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements.

Long-Term Obligations

Long-term obligations are as follows:

Short- and Long-Term Obligations

Short- and long-term obligations are as follows:

2021 January 2,

5 unchanged sentences

Total 314,496 233,474

Current Maturities of Long-Term Obligations ( 1,355 ) ( 1,474 )

Short-term Obligations and Current Maturities of Long-Term Obligations ( 5,574 ) ( 1,474 )

Long-Term Obligations $ 308,922 $ 232,000

12 unchanged sentences

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

In the first six months of 2021, the Company borrowed an aggregate of $ 88,888,000 under the Credit Agreement, including $ 85,888,000 of euro-denominated borrowings, which was primarily used to fund an acquisition that closed in the third quarter of 2021.

See Note 11 , Subsequent Event, for further details.

As of July 3, 2021, the outstanding balance under the Credit Agreement was $ 258,722,000 , which included $ 113,722,000 of euro-denominated borrowings.

As of July 3, 2021, the Company had $ 140,546,000 of borrowing capacity available under its Credit Agreement, which was calculated by translating its foreign-denominated borrowings using borrowing date foreign exchange rates.

The weighted average interest rate for the outstanding balance under the Credit Agreement was 1.48 % as of July 3, 2021.

In the first nine months of 2021, the Company borrowed an aggregate of $ 151,944,000 under the Credit Agreement, including $ 89,944,000 of euro-denominated borrowings, which were primarily used to fund the Company's acquisitions in the third quarter of 2021.

See Note 2 , Acquisitions, for further details.

As of October 2, 2021, the outstanding balance under the Credit Agreement was $ 294,610,000 , which included $ 106,610,000 of euro-denominated borrowings.

As of October 2, 2021, the Company had $ 104,912,000 of borrowing capacity available under its Credit Agreement, which was calculated by translating its foreign-denominated borrowings using borrowing date foreign exchange rates.

The weighted average interest rate for the outstanding balance under the Credit Agreement was 1.46 % as of October 2, 2021.

Notes to Condensed Consolidated Financial Statements

10 unchanged sentences

Debt Compliance

As of July 3, 2021, the Company was in compliance with the covenants related to its debt obligations.

As of October 2, 2021, the Company was in compliance with the covenants related to its debt obligations.

Finance Leases

4 unchanged sentences

The interest rate on the outstanding obligation is 1.79 %.

The secured loan receivable, which is included in other assets in the accompanying condensed consolidated balance sheet, was $ 1,339,000 at July 3, 2021.

The secured loan receivable, which is included in other current assets in the accompanying condensed consolidated balance sheet, was $ 1,374,000 at October 2, 2021.

The lease arrangement provides for a fixed price purchase option, net of the projected loan receivable, of $ 1,540,000 at the end of the lease term in August 2022.

If the Company does not exercise the purchase option for the facility, the Company will receive cash from the landlord to settle the loan receivable.

As of July 3, 2021, $ 3,573,000 was outstanding under this obligation.

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 October 2, 2021, $ 3,432,000 was outstanding under this obligation.

Other borrowings also include $ 1,150,000 of short-term obligations and $ 3,629,000 of debt obligations outstanding at October 2, 2021 assumed in the acquisition of Clouth, which mature on various dates ranging from 2021 through 2028.

Stock-Based Compensation

The Company recognized stock-based compensation expense of $ 2,527,000 in the second quarter of 2021, $ 1,877,000 in the second quarter of 2020, $ 4,026,000 in the first six months of 2021, and $ 3,516,000 in the first six months of 2020 within selling, general, and administrative (SG&A) expenses in the accompanying condensed consolidated statement of income.

The Company recognized stock-based compensation expense of $ 2,204,000 in the third quarter of 2021, $ 1,610,000 in the third quarter of 2020, $ 6,230,000 in the first nine months of 2021, and $ 5,126,000 in the first nine months of 2020 within selling, general, and administrative (SG&A) expenses in the accompanying condensed consolidated statement of income.

The Company recognizes compensation expense for all stock-based awards granted to employees and directors based on the grant date estimate of fair value for those awards.

2 unchanged sentences

For performance-based RSUs, compensation expense is recognized ratably over the requisite service period for each separately vesting portion of the award based on the grant date fair value, net of actual forfeitures recorded when they occur, and remeasured each reporting period until the total number of RSUs to be issued is known.

Unrecognized compensation expense related to stock-based compensation totaled approximately $ 11,872,000 at July 3, 2021 and will be recognized over a weighted average period of 1.9 years.

On May 19, 2021, the Company granted an aggregate of 5,045 RSUs to its non-employee directors with a grant date fair value of $ 850,000 .

Half of these RSUs vested on June 1, 2021 and the remaining RSUs will vest ratably on the last day of the third and fourth fiscal quarters of 2021.

Unrecognized compensation expense related to stock-based compensation totaled approximately $ 9,699,000 at October 2, 2021, which will be recognized over a weighted average period of 1.7 years.

Notes to Condensed Consolidated Financial Statements

9 unchanged sentences

( 7,898 ) 57 244 ( 7,597 )

Balance at July 3, 2021 $ ( 18,502 ) $ ( 737 ) $ ( 650 ) $ ( 19,889 )

Balance at October 2, 2021 $ ( 25,792 ) $ ( 713 ) $ ( 584 ) $ ( 27,089 )

Amounts reclassified from AOCI are as follows:

Three Months Ended Six Months Ended

(In thousands) July 3,

2021 June 27,

Three Months Ended Nine Months Ended

(In thousands) October 2,

2021 September 26,

2020 October 2,

2021 September 26,

2020 Statement of Income Line Item

28 unchanged sentences

In the event of early termination, the Company will receive from or pay to the counterparty the fair value of the 2018 Swap Agreement, and the unrealized gain or loss outstanding will be recognized in earnings.

The counterparty to the 2018 Swap Agreement could demand an early termination of that agreement if the Company were to be in default under the Credit Agreement, or any agreement that amends or replaces the Credit Agreement in which the counterparty is a member, and if it were to be unable to cure the default.

See Note 4 , Long-Term Obligations, for further details.

Notes to Condensed Consolidated Financial Statements

See Note 5 , Short- and Long-Term Obligations, for further details.

Forward Currency-Exchange Contracts

4 unchanged sentences

The fair values of forward currency-exchange contracts that are designated as fair value hedges and forward currency-exchange contracts that are not designated as hedges are recognized currently in earnings.

Gains and losses reported within SG&A expenses in the accompanying condensed consolidated statement of income associated with the Company's forward currency-exchange contracts that were not designated as hedges were not material for the three-and six-month periods ended July 3, 2021 and June 27, 2020.

Gains and losses reported within SG&A expenses in the accompanying condensed consolidated statement of income associated with the Company's forward currency-exchange contracts that were not designated as hedges were not material for the three- and nine-month periods ended October 2, 2021 and September 26, 2020.

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

July 3, 2021 January 2, 2021

October 2, 2021 January 2, 2021

Balance Sheet Location Asset (Liability) (a) Notional Amount (b) Asset (Liability) (a) Notional Amount

13 unchanged sentences

(b) The 2021 notional amounts are indicative of the level of the Company's recurring derivative activity.

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 six months ended July 3, 2021:

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 nine months ended October 2, 2021:

(In thousands) Interest Rate Swap

4 unchanged sentences

Gain (loss) recognized in AOCI 25 ( 37 ) ( 12 )

Unrealized Loss, Net of Tax, at July 3, 2021 $ ( 645 ) $ ( 5 ) $ ( 650 )

Unrealized Loss, Net of Tax, at October 2, 2021 $ ( 565 ) $ ( 19 ) $ ( 584 )

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

As of July 3, 2021, the Company expects to reclassify losses of $ 348,000 from AOCI to earnings over the next twelve months based on the estimated cash flows of the 2018 Swap Agreement and the maturity date of the forward currency-exchange contract.

Notes to Condensed Consolidated Financial Statements

As of October 2, 2021, the Company expects to reclassify losses of $ 363,000 from AOCI to earnings over the next twelve months based on the estimated cash flows of the 2018 Swap Agreement and the maturity date of the forward currency-exchange contract.

Fair Value Measurements and Fair Value of Financial Instruments

5 unchanged sentences

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 July 3, 2021

Fair Value as of October 2, 2021

(In thousands) Level 1 Level 2 Level 3 Total

11 unchanged sentences

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

The Company uses the market approach technique to value its financial assets and liabilities, and there were no changes in valuation techniques during the first six months of 2021.

The Company uses the market approach technique to value its financial assets and liabilities, and there were no changes in valuation techniques during the first nine months of 2021.

Banker's acceptance drafts are carried at face value, which approximates their fair value due to the short-term nature of the negotiable instrument.

3 unchanged sentences

Changes in values of the underlying hedged assets and liabilities or anticipated transactions are not reflected in the table above.

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

July 3, 2021 January 2, 2021

Notes to Condensed Consolidated Financial Statements

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

October 2, 2021 January 2, 2021

Carrying Value Fair Value Carrying Value Fair Value

3 unchanged sentences

Senior promissory notes 10,000 11,179 10,000 11,157

Other 4,779 4,779 — —

$ 309,389 $ 310,568 $ 227,963 $ 229,120

The carrying value of the Company's 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 value of the senior promissory notes is 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.

Notes to Condensed Consolidated Financial Statements

Business Segment Information

14 unchanged sentences

The following table presents financial information for the Company's reportable operating segments:

Three Months Ended Six Months Ended

July 3, June 27, July 3, June 27,

Three Months Ended Nine Months Ended

October 2, September 26, October 2, September 26,

(In thousands) 2021 2020 2021 2020

3 unchanged sentences

$ 199,789 $ 154,610 $ 568,063 $ 466,597

Notes to Condensed Consolidated Financial Statements

Three Months Ended Nine Months Ended

October 2, September 26, October 2, September 26,

(In thousands) 2021 2020 2021 2020

Income Before Provision for Income Taxes

Flow Control (a) $ 17,129 $ 13,770 $ 51,899 $ 37,360

Industrial Processing (b) 17,301 10,639 28,434 20,075

Material Handling 5,592 3,593 10,035 7,727

Industrial Processing 16,095 12,072 44,449 32,147

Material Handling (b) 3,491 2,614 12,941 10,341

Corporate (c) ( 7,987 ) ( 7,121 ) ( 24,124 ) ( 20,737 )

9 unchanged sentences

$ 3,370 $ 1,822 $ 7,688 $ 5,419

(a) Includes acquisition costs of $ 239,000 in the three months ended July 3, 2021 and $ 1,236,000 in the six months ended July 3, 2021 and restructuring costs of $ 456,000 in the three- and six-month periods ended June 27, 2020.

(b) Includes $ 435,000 of acquisition-related expense in the three- and six-month periods ended June 27, 2020.

Acquisition-related expenses include amortization expense associated with backlog and acquisition costs.

Notes to Condensed Consolidated Financial Statements

October 2, January 2,

(In thousands) 2021 2021

Flow Control $ 388,662 $ 263,141

Industrial Processing 399,651 379,965

Material Handling 333,535 273,909

Corporate 11,280 10,556

$ 1,133,128 $ 927,571

(a) Includes acquisition-related expenses of $ 2,706,000 in the three months ended October 2, 2021 and $ 3,942,000 in the nine months ended October 2, 2021 and restructuring costs of $ 265,000 in the three months ended September 26, 2020 and $ 721,000 in the nine months ended September 26, 2020.

Acquisition-related expenses include acquisition costs and amortization expense associated with acquired profit in inventory and backlog.

(b) Includes acquisition-related expenses of $ 799,000 in the three months ended October 2, 2021 and $ 1,411,000 in the nine months ended October 2, 2021 and $ 248,000 in the three months ended September 26, 2020 and $ 256,000 in the nine months ended September 26, 2020.

6 unchanged sentences

Banker's acceptance drafts transferred to vendors are subject to customary right of recourse provisions prior to their scheduled maturity dates.

The Company had $ 9,723,000 at July 3, 2021 and $ 7,568,000 at January 2, 2021 of banker's acceptance drafts subject to recourse, which were transferred to vendors and had not reached their scheduled maturity dates.

The Company had $ 11,432,000 at October 2, 2021 and $ 7,568,000 at January 2, 2021 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.

Notes to Condensed Consolidated Financial Statements

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.

2 unchanged sentences

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.

Subsequent Event

In the third quarter of 2021, Kadant Germany Holding GmbH, a subsidiary of the Company, acquired all partnership interests and shares in The Clouth Group of Companies (Clouth), for approximately 78,000,000 euros, or $ 92,000,000 , net of cash acquired and debt assumed.

The majority of the Clouth companies were acquired on July 19, 2021 and the acquisition of the last legal entity occurred on August 10, 2021.

The Company funded the purchase price with existing cash and borrowings of approximately $ 82,877,000 of euro-denominated funds under the Credit Agreement, of which $ 78,749,000 was borrowed in the second quarter of 2021.

At July 3, 2021, $ 84,249,000 of the purchase price was held in escrow and was classified as restricted cash in the accompanying condensed consolidated balance sheet.

Clouth is a leading manufacturer of doctor blades and related equipment used in the production of paper, packaging, and tissue and will be included within the Company's Flow Control segment.

The Company expects several synergies in connection with this acquisition, including deepening the Company's presence in the growing ceramic blade market and expansion of sales at its existing businesses by leveraging Clouth's complementary global geographic footprint.

Clouth has two manufacturing facilities in Germany and one in Poland and generated revenue of approximately 41,000,000 euros in 2020.

The excess of the purchase price for the acquisition of Clouth over the net assets acquired will be recorded as goodwill.

The purchase price allocation for this acquisition is not presented as the preliminary valuation of Clouth has not been completed.

Unaudited Supplemental Pro Forma Information

Had the acquisition of Clouth been completed as of the beginning of 2020, the Company’s pro forma results of operations for the three- and six-month periods ended July 3, 2021 and June 27, 2020 would have been as follows:

Three Months Ended Six Months Ended

2021 June 27,

(In thousands, except per share amounts)

Revenue $ 207,740 $ 164,248 $ 392,128 $ 334,796

Net Income Attributable to Kadant $ 23,663 $ 10,276 $ 41,522 $ 20,147

Earnings per Share Attributable to Kadant

Basic $ 2.04 $ 0.89 $ 3.59 $ 1.76

Diluted $ 2.03 $ 0.89 $ 3.57 $ 1.75

Notes to Condensed Consolidated Financial Statements

The historical consolidated financial information of the Company and Clouth has been adjusted in the pro forma information above 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:

• Estimated pre-tax charge to cost of revenue of $ 1,753,000 in the three months ended June 27, 2020 and $ 3,505,000 in the six months ended June 27, 2020, for the sale of inventory revalued at the date of acquisition.

• Estimated pre-tax charge to SG&A expenses of $ 239,000 in the three months ended June 27, 2020 and $ 1,673,000 in the six months ended June 27, 2020 and reversal of $ 239,000 in the three months ended July 3, 2021 and $ 1,236,000 in the six months ended July 3, 2021, for acquisition costs and intangible asset amortization related to acquired backlog.

• Estimated tax effects related to the pro forma adjustments.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements