KADANT INC 10-Q

Item 1 – Financial Statements KADANT INC. Condensed Consolidated Balance Sheet (Unaudited) April 2, 2022 January 1, 2022 (In thousands, except share and per share amounts) Assets Current Assets: Cash and cash equivalents $ 86,192 $ 91,186 Restricted cash (Note 1) 2,779 2,975 Accounts receivable, net of allowances of $ 3,067 and $ 2,735 125,919 117,209 Inventories 143,583 134,356 Contract assets 8,978 8,626 Other current assets 24,825 29,530 Total Current Assets 392,276 383,882 Property, Plant, and Equipment, net of accumulated depreciation of $ 116,911 and $ 114,032 105,851 107,989 Other Assets 59,299 44,111 Intangible Assets, Net 192,426 199,343 Goodwill 394,414 396,887 Total Assets $ 1,144,266 $ 1,132,212 Liabilities and Stockholders' Equity Current Liabilities: Short-term obligations and current maturities of long-term obligations (Note 5) $ 4,893 $ 5,356 Accounts payable 67,762 59,250 Accrued payroll and employee benefits 30,690 37,203 Customer deposits 62,432 59,262 Advanced billings 9,599 11,894 Other current liabilities 42,204 48,532 Total Current Liabilities 217,580 221,497 Long-Term Obligations (Note 5) 242,963 264,158 Long-Term Deferred Income Taxes 39,336 34,944 Other Long-Term Liabilities 44,649 45,997 Commitments and Contingencies (Note 11) Stockholders' Equity: Preferred stock, $ .01 par value, 5,000,000 shares authorized; none issued — — Common stock, $ .01 par value, 150,000,000 shares authorized; 14,624,159 shares issued 146 146 Capital in excess of par value 112,651 115,888 Retained earnings 590,009 551,848 Treasury stock at cost, 2,964,786 and 3,003,419 shares ( 72,649 ) ( 73,596 ) Accumulated other comprehensive items (Note 7) ( 32,302 ) ( 30,350 ) Total Kadant Stockholders' Equity 597,855 563,936 Noncontrolling interest 1,883 1,680 Total Stockholders' Equity 599,738 565,616 Total Liabilities and Stockholders' Equity $ 1,144,266 $ 1,132,212 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents KADANT INC. Condensed Consolidated Statement of Income (Unaudited) Three Months Ended April 2, 2022 April 3, 2021 (In thousands, except per share amounts) Revenue (Notes 1 and 10) $ 226,480 $ 172,463 Costs and Operating Expenses: Cost of revenue 128,269 96,748 Selling, general, and administrative expenses 59,168 49,431 Research and development expenses 3,078 2,857 Gain on sale and other expense, net (Note 2) ( 20,008 ) — 170,507 149,036 Operating Income 55,973 23,427 Interest Income 102 65 Interest Expense ( 1,234 ) ( 1,111 ) Other Expense, Net ( 22 ) ( 24 ) Income Before Provision for Income Taxes 54,819 22,357 Provision for Income Taxes (Note 4) 13,378 5,561 Net Income 41,441 16,796 Net Income Attributable to Noncontrolling Interest ( 249 ) ( 235 ) Net Income Attributable to Kadant $ 41,192 $ 16,561 Earnings per Share Attributable to Kadant (Note 3) Basic $ 3.54 $ 1.43 Diluted $ 3.53 $ 1.43 Weighted Average Shares (Note 3) Basic 11,630 11,553 Diluted 11,655 11,612 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents KADANT INC. Condensed Consolidated Statement of Comprehensive Income (Unaudited) Three Months Ended April 2, 2022 April 3, 2021 (In thousands) Net Income $ 41,441 $ 16,796 Other Comprehensive Items: Foreign currency translation adjustment ( 2,284 ) ( 4,750 ) Post-retirement liability adjustments, net (net of tax provision of $ 2 and $ 10 ) 9 28 Deferred gain on cash flow hedges (net of tax provision of $ 68 and $ 19 ) 277 113 Other comprehensive items ( 1,998 ) ( 4,609 ) Comprehensive Income 39,443 12,187 Comprehensive Income Attributable to Noncontrolling Interest ( 203 ) ( 174 ) Comprehensive Income Attributable to Kadant $ 39,240 $ 12,013 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents KADANT INC. Condensed Consolidated Statement of Cash Flows (Unaudited) Three Months Ended April 2, 2022 April 3, 2021 (In thousands) Operating Activities Net income attributable to Kadant $ 41,192 $ 16,561 Net income attributable to noncontrolling interest 249 235 Net income 41,441 16,796 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,445 7,686 Stock-based compensation expense 2,260 1,499 Provision for losses (benefit) on accounts receivable 208 ( 129 ) Gain on the sale of assets (Note 2) ( 20,190 ) — Noncash impairment costs (Note 2) 182 — Other items, net 6,117 809 Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable ( 9,127 ) ( 13,955 ) Contract assets ( 409 ) 1,231 Inventories ( 9,359 ) ( 6,612 ) Other assets 1,113 ( 3,182 ) Accounts payable 8,864 8,031 Customer deposits 3,329 8,464 Other liabilities ( 10,106 ) ( 1,546 ) Net cash provided by operating activities 23,768 19,092 Investing Activities Acquisitions, net of cash acquired ( 62 ) ( 125 ) Purchases of property, plant, and equipment ( 2,868 ) ( 2,259 ) Proceeds from sale of property, plant, and equipment 1,595 32 Other 44 — Net cash used in investing activities ( 1,291 ) ( 2,352 ) Financing Activities Repayment of short- and long-term obligations ( 35,064 ) ( 19,563 ) Proceeds from issuance of short- and long-term obligations 15,516 10,139 Tax withholding payments related to stock-based compensation ( 4,550 ) ( 3,388 ) Dividends paid ( 2,905 ) ( 2,770 ) Net cash used in financing activities ( 27,003 ) ( 15,582 ) Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash ( 664 ) ( 1,090 ) (Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash ( 5,190 ) 68 Cash, Cash Equivalents, and Restricted Cash at Beginning of Period 94,161 66,640 Cash, Cash Equivalents, and Restricted Cash at End of Period $ 88,971 $ 66,708 See Note 1 , Nature of Operations and Summary of Significant Accounting Policies, under the heading Supplemental Cash Flow Information for further details. The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents KADANT INC. Condensed Consolidated Statement of Stockholders' Equity (Unaudited) Three Months Ended April 2, 2022 (In thousands, except share and per share amounts) Common Stock Capital in Excess of Par Value Retained Earnings Treasury Stock Accumulated Other Comprehensive Items Noncontrolling Interest Total Stockholders' Equity Shares Amount Shares Amount Balance at January 1, 2022 14,624,159 $ 146 $ 115,888 $ 551,848 3,003,419 $ ( 73,596 ) $ ( 30,350 ) $ 1,680 $ 565,616 Net income — — — 41,192 — — — 249 41,441 Dividend declared – Common Stock, $ 0.26 per share — — — ( 3,031 ) — — — — ( 3,031 ) Activity under stock plans — — ( 3,237 ) — ( 38,633 ) 947 — — ( 2,290 ) Other comprehensive items — — — — — — ( 1,952 ) ( 46 ) ( 1,998 ) Balance at April 2, 2022 14,624,159 $ 146 $ 112,651 $ 590,009 2,964,786 $ ( 72,649 ) $ ( 32,302 ) $ 1,883 $ 599,738 Three Months Ended April 3, 2021 (In thousands, except share and per share amounts) Common Stock Capital in Excess of Par Value Retained Earnings Treasury Stock Accumulated Other Comprehensive Items Noncontrolling Interest Total Stockholders' Equity Shares Amount Shares Amount Balance at January 2, 2021 14,624,159 $ 146 $ 110,824 $ 479,400 3,081,919 $ ( 75,519 ) $ ( 19,492 ) $ 1,546 $ 496,905 Net income — — — 16,561 — — — 235 16,796 Dividend declared – Common Stock, $ 0.25 per share — — — ( 2,894 ) — — — — ( 2,894 ) Activity under stock plans — — ( 2,760 ) — ( 35,540 ) 870 — — ( 1,890 ) Other comprehensive items — — — — — — ( 4,548 ) ( 61 ) ( 4,609 ) Balance at April 3, 2021 14,624,159 $ 146 $ 108,064 $ 493,067 3,046,379 $ ( 74,649 ) $ ( 24,040 ) $ 1,720 $ 504,308 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Kadant Inc. was incorporated in Delaware in November 1991 and trades on the New York Stock Exchange under the ticker symbol "KAI." Kadant Inc. (together with its subsidiaries, the Company) is a global supplier of technologies and engineered systems that drive Sustainable Industrial Processing. Its products and services play an integral role in enhancing efficiency, optimizing energy utilization, and maximizing productivity in process industries while helping customers advance their sustainability initiatives with products that reduce waste or generate more yield with fewer inputs, particularly fiber, energy, and water. Producing more while consuming less is a core aspect of Sustainable Industrial Processing and a major element of the strategic focus of the Company's three reportable operating segments: Flow Control, Industrial Processing, and Material Handling. Interim Financial Statements The interim condensed consolidated financial statements and related notes presented have been prepared by the Company, are unaudited, and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the Company's financial position at April 2, 2022, its results of operations, comprehensive income, cash flows and stockholders' equity for the three-month periods ended April 2, 2022 and April 3, 2021. Interim results are not necessarily indicative of results for a full year or for any other interim period. The condensed consolidated balance sheet presented as of January 1, 2022 has been derived from the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2022. The condensed consolidated financial statements and related notes are presented as permitted by the rules and regulations of the Securities and Exchange Commission (SEC) for Form 10-Q and do not contain certain information included in the annual consolidated financial statements and related notes of the Company. The condensed consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2022, filed with the SEC. Use of Estimates and Critical Accounting Policies The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Although the Company makes every effort to ensure the accuracy of the estimates and assumptions used in the preparation of its condensed consolidated financial statements or in the application of accounting policies, if business conditions were different, or if the Company were to use different estimates and assumptions, it is possible that materially different amounts could be reported in the Company's condensed consolidated financial statements. Note 1 to the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2022 describes the significant accounting estimates and policies used in preparation of the consolidated financial statements. There have been no material changes in the Company’s significant accounting policies during the three months ended April 2, 2022. 8 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Supplemental Cash Flow Information Three Months Ended (In thousands) April 2, 2022 April 3, 2021 Cash Paid for Interest $ 1,017 $ 892 Cash Paid for Income Taxes, Net of Refunds $ 8,013 $ 5,344 Non-Cash Investing Activities: Fair value of assets acquired $ ( 983 ) $ — Cash paid for acquired businesses ( 62 ) ( 125 ) Liabilities Assumed of Acquired Businesses $ ( 1,045 ) $ ( 125 ) Purchases of property, plant, and equipment in accounts payable $ 264 $ 169 Non-Cash Financing Activities: Issuance of Company common stock upon vesting of restricted stock units $ 4,578 $ 3,203 Dividends declared but unpaid $ 3,031 $ 2,894 Restricted Cash The Company's restricted cash generally serves as collateral for certain banker's acceptance drafts issued to vendors and for bank guarantees associated with providing assurance to customers that the Company will fulfill certain customer obligations entered into in the normal course of business. The majority of the bank guarantees will expire over the next twelve months . The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company's condensed consolidated balance sheet that are shown in aggregate in the accompanying condensed consolidated statement of cash flows: (In thousands) April 2, 2022 April 3, 2021 January 1, 2022 January 2, 2021 Cash and cash equivalents $ 86,192 $ 65,982 $ 91,186 $ 65,682 Restricted cash 2,779 726 2,975 958 Total Cash, Cash Equivalents, and Restricted Cash $ 88,971 $ 66,708 $ 94,161 $ 66,640 Inventories The components of inventories are as follows: April 2, 2022 January 1, 2022 (In thousands) Raw Materials $ 61,771 $ 59,177 Work in Process 32,215 29,448 Finished Goods 49,597 45,731 $ 143,583 $ 134,356 Intangible Assets, Net Gross intangible assets were $ 340,947,000 at April 2, 2022 and January 1, 2022. Intangible assets are recorded at fair value at the date of acquisition. Subsequent impairment charges are reflected as a reduction in the gross balance, as applicable. Definite-lived intangible assets are stated net of accumulated amortization and currency translation in the accompanying condensed consolidated balance sheet. The Company amortizes definite-lived intangible assets over lives that have been determined based on the anticipated cash flow benefits of the intangible asset. Accumulated amortization was $ 141,122,000 at April 2, 2022 and $ 135,327,000 at January 1, 2022. 9 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Goodwill The changes in the carrying amount of goodwill by segment are as follows: (In thousands) Flow Control Industrial Processing Material Handling Total Balance at January 1, 2022 Gross balance $ 123,589 $ 214,982 $ 143,825 $ 482,396 Accumulated impairment losses — ( 85,509 ) — ( 85,509 ) Net balance 123,589 129,473 143,825 396,887 2022 Activity Acquisitions (a) 625 — ( 482 ) 143 Currency translation ( 1,632 ) ( 6 ) ( 978 ) ( 2,616 ) Total 2022 activity ( 1,007 ) ( 6 ) ( 1,460 ) ( 2,473 ) Balance at April 2, 2022 Gross balance 122,582 214,976 142,365 479,923 Accumulated impairment losses — ( 85,509 ) — ( 85,509 ) Net balance $ 122,582 $ 129,467 $ 142,365 $ 394,414 (a) Relates to adjustments to the purchase price allocation for acquisitions completed in 2021, principally for inventory, machinery and equipment, and deferred taxes. Measurement period adjustments in 2022 were not material to the Company's results of operations. The final purchase accounting and purchase price allocations remain subject to change as the Company continues to refine its preliminary valuation of certain acquired assets and liabilities assumed and the valuation of acquired intangibles, which may result in adjustments to the assets and liabilities, including goodwill. Warranty Obligations The Company's contracts covering the sale of its products include warranty provisions that provide assurance to its customers that the products will comply with agreed-upon specifications during a defined period of time. The Company provides for the estimated cost of product warranties at the time of sale based on historical occurrence rates and repair costs, as well as knowledge of any specific warranty problems that indicate projected warranty costs may vary from historical patterns. The Company negotiates the terms regarding warranty coverage and length of warranty depending on the products and applications. The Company's liability for warranties is included in other current liabilities in the accompanying condensed consolidated balance sheet. The changes in the carrying amount of product warranty obligations are as follows: Three Months Ended (In thousands) April 2, 2022 April 3, 2021 Balance at Beginning of Year $ 7,298 $ 7,064 Provision charged to expense 1,462 1,664 Usage ( 1,538 ) ( 1,361 ) Currency translation ( 74 ) ( 133 ) Balance at End of Period $ 7,148 $ 7,234 Revenue Recognition Most of the Company’s revenue relates to products and services that require minimal customization and is recognized at a point in time for each performance obligation under the contract when the customer obtains control of the goods or service. The remaining portion of the Company’s revenue is recognized over time based on an input method that compares the costs incurred to date to the total expected costs required to satisfy the performance obligation. Contracts are accounted for on an over time basis when they include products which have no alternative use and an enforceable right to payment over time. Most of the contracts recognized on an over time basis are for large capital projects. These projects are highly customized for the customer and, as a result, would include a significant cost to rework in the event of cancellation. 10 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The following table presents revenue by revenue recognition method: Three Months Ended April 2, April 3, (In thousands) 2022 2021 Point in Time $ 203,311 $ 154,417 Over Time 23,169 18,046 $ 226,480 $ 172,463 The Company disaggregates its revenue from contracts with customers by reportable operating segment, product type and geography as this best depicts how its revenue is affected by economic factors. The following table presents the disaggregation of revenue by product type and geography: Three Months Ended April 2, April 3, (In thousands) 2022 2021 Revenue by Product Type: Parts and consumables $ 146,244 $ 118,107 Capital 80,236 54,356 $ 226,480 $ 172,463 Revenue by Geography (based on customer location): North America $ 124,336 $ 95,092 Europe 58,366 44,641 Asia 31,987 21,813 Rest of world 11,791 10,917 $ 226,480 $ 172,463 See Note 10 , Business Segment Information, for information on the disaggregation of revenue by reportable operating segment. The following table presents contract balances from contracts with customers: April 2, 2022 January 1, 2022 (In thousands) Contract Assets $ 8,978 $ 8,626 Contract Liabilities $ 77,450 $ 77,004 Contract assets represent unbilled revenue associated with revenue recognized on contracts accounted for on an over time basis, which will be billed in future periods based on the contract terms. Contract liabilities consist of short- and long-term customer deposits, advanced billings, and deferred revenue. Deferred revenue is included in other current liabilities and long-term customer deposits are included in other long-term liabilities in the accompanying condensed consolidated balance sheet. Contract liabilities will be recognized as revenue in future periods once the revenue recognition criteria are met. The majority of the contract liabilities relate to advance payments on contracts accounted for at a point in time. These advance payments will be recognized as revenue when the Company's performance obligations have been satisfied, which typically occurs when the product has shipped and control of the asset has transferred to the customer. The Company recognized revenue of $ 34,477,000 in the first quarter of 2022 and $ 17,140,000 in the first quarter of 2021 that was included in the contract liabilities balance at the beginning of 2022 and 2021, respectively. The majority of the Company's contracts for capital equipment have an original expected duration of one year or less. Certain capital contracts require long lead times and could take up to 24 months to complete. For contracts with an original expected duration of over one year, the aggregate amount of the transaction price allocated to the remaining unsatisfied or partially unsatisfied performance obligations as of April 2, 2022 was $ 48,599,000 . The Company will recognize revenue for these performance obligations as they are satisfied, approximately 56 % of which is expected to occur within the next twelve months and the remaining 44 % after the first quarter of 2023. 11 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Banker's Acceptance Drafts Included in Accounts Receivable The Company's Chinese subsidiaries may receive banker's acceptance drafts from customers as payment for their trade accounts receivable. The drafts are non-interest bearing obligations of the issuing bank and generally mature within six months of the origination date. The Company's Chinese subsidiaries may sell the drafts at a discount to a third-party financial institution or transfer the drafts to vendors in settlement of current accounts payable prior to the scheduled maturity date. These drafts, which totaled $ 8,147,000 at April 2, 2022 and $ 8,049,000 at January 1, 2022, are included in accounts receivable in the accompanying condensed consolidated balance sheet until the subsidiary sells the drafts to a bank and receives a discounted amount, transfers the banker's acceptance drafts in settlement of current accounts payable prior to maturity, or obtains cash payment on the scheduled maturity date. Recent Accounting Pronouncements Not Yet Adopted Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of reference rates, such as the London Interbank Offered Rate (LIBOR), if certain criteria are met. Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date. The guidance in this ASU is applicable to the Company's existing contracts and hedging relationships that reference LIBOR and may be adopted prospectively through December 31, 2022. The Company is currently evaluating the effects that the adoption of this ASU will have on its consolidated financial statements. Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. In October 2021, the FASB issued ASU 2021-08, which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606) . The guidance in this ASU will generally result in the Company recognizing contract assets and contract liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date rather than at fair value. This new guidance is effective on a prospective basis in fiscal 2023, with early adoption permitted. The Company is currently evaluating the effect that the adoption of this ASU will have on its consolidated financial statements, which will be dependent on the contract assets and liabilities acquired in future business combinations. 2. Gain on Sale and Other Expense, Net The Company entered into several agreements with the local government in China to sell the existing manufacturing building and land use rights of one of its subsidiaries in China for approximately $ 25,159,000 . This subsidiary, which is part of the stock preparation product line within the Company's Industrial Processing segment, will continue to occupy its current facility until construction of a new facility is complete. The agreements became effective in the first quarter of 2022 after a 31 % down payment was received, including 25 % in 2021 and 6 % in the first quarter of 2022, and a land use right in a new location was secured. As a result, the Company recognized a gain on the sale of these assets of $ 20,190,000 , or $ 15,143,000 , net of deferred taxes of $ 5,047,000 , in the first quarter of 2022. A $ 16,082,000 receivable was recognized for the present value of the remaining amount of the sale proceeds, which is due the earlier of when the government sells the property or within two years from the effective date of the agreements. This receivable is included in other assets in the accompanying condensed consolidated balance sheet. In addition, the Company recognized an impairment charge of $ 182,000 in the first quarter of 2022 associated with the write-down of certain fixed assets that will not be moved to the new facility. 12 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 3. Earnings per Share Basic and diluted earnings per share (EPS) were calculated as follows: Three Months Ended April 2, 2022 April 3, 2021 (In thousands, except per share amounts) Net Income Attributable to Kadant $ 41,192 $ 16,561 Basic Weighted Average Shares 11,630 11,553 Effect of Stock Options, Restricted Stock Units and Employee Stock Purchase Plan Shares 25 59 Diluted Weighted Average Shares 11,655 11,612 Basic Earnings per Share $ 3.54 $ 1.43 Diluted Earnings per Share $ 3.53 $ 1.43 The effect of outstanding and unvested restricted stock units (RSUs) of the Company's common stock totaling 17,000 shares in the first quarter of 2022 and 44,000 shares in the first quarter of 2021 were not included in the computation of diluted EPS for the respective periods as the effect would have been antidilutive or, for unvested performance-based RSUs, the performance conditions had not been met as of the end of the reporting periods. 4. Provision for Income Taxes The provision for income taxes was $ 13,378,000 in the first three months of 2022 and $ 5,561,000 in the first three months of 2021. The effective tax rate of 24 % in the first three months of 2022 was higher than the Company's statutory rate of 21% primarily due to the distribution of the Company's worldwide earnings, nondeductible expenses, state taxes, and tax expense associated with the Global Intangible Low-Taxed Income (GILTI) provisions. These increases in tax expense were offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements and the reversal of tax reserves associated with uncertain tax positions. The effective tax rate of 25 % in the first three months of 2021 was higher than the Company's statutory rate of 21% primarily due to nondeductible expenses, the distribution of the Company's worldwide earnings, state taxes, and tax expense associated with the GILTI provisions. These increases in tax expense were offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements. 5. Short- and Long-Term Obligations Short- and long-term obligations are as follows: April 2, 2022 January 1, 2022 (In thousands) Revolving Credit Facility, due 2023 $ 229,483 $ 250,267 Senior Promissory Notes, due 2023 to 2028 10,000 10,000 Finance Leases, due 2022 to 2026 1,320 1,610 Other Borrowings, due 2022 to 2028 7,053 7,637 Total 247,856 269,514 Less: Short-term Obligations and Current Maturities of Long-Term Obligations ( 4,893 ) ( 5,356 ) Long-Term Obligations $ 242,963 $ 264,158 See Note 9 , Fair Value Measurements and Fair Value of Financial Instruments, for the fair value information related to the Company's long-term obligations. Revolving Credit Facility The Company entered into an unsecured multi-currency revolving credit facility, dated as of March 1, 2017 (as amended and restated to date, the Credit Agreement), which matures on December 14, 2023. Pursuant to the Credit Agreement, the Company has a borrowing capacity of $ 400,000,000 , with an uncommitted, unsecured incremental borrowing facility of 13 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) $ 150,000,000 . Interest on borrowings outstanding accrues and is payable in arrears calculated at one of the following rates selected by the Company: (i) the Base Rate, as defined, plus an applicable margin of 0 % to 1.25 %, or (ii) Eurocurrency Rate, CDOR Rate and RFR (with a zero percent floor), as applicable and as defined, plus an applicable margin of 1 % to 2.25 %. The margin is determined based upon the ratio of the Company's total debt, net of unrestricted cash up to $ 30,000,000 and certain debt obligations, to earnings before interest, taxes, depreciation, and amortization as defined in the Credit Agreement. The obligations under the Credit Agreement may be accelerated upon the occurrence of an event of default, which includes customary events of default under such financing arrangements. In addition, the Credit Agreement contains negative covenants applicable to the Company and its subsidiaries, including financial covenants requiring the Company to maintain a maximum consolidated leverage ratio of 3.75 to 1.00, or, if the Company elects, for the quarter during which a material acquisition occurs and for the three fiscal quarters thereafter, 4.00 to 1.00, and limitations on making certain restricted payments (including dividends and stock repurchases). Loans under the Credit Agreement are guaranteed by certain domestic subsidiaries of the Company. As of April 2, 2022, the outstanding balance under the Credit Agreement was $ 229,483,000 , which included $ 78,483,000 of euro-denominated borrowings. As of April 2, 2022, the Company had $ 169,977,000 of borrowing capacity available under its Credit Agreement, which was calculated by translating its foreign-denominated borrowings using borrowing date foreign exchange rates. The weighted average interest rate for the outstanding balance under the Credit Agreement was 1.73 % as of April 2, 2022. See Note 8 , Derivatives, under the heading Interest Rate Swap Agreement, for information relating to the swap agreement. Senior Promissory Notes In 2018, the Company entered into an uncommitted, unsecured Multi-Currency Note Purchase and Private Shelf Agreement (Note Purchase Agreement). Simultaneous with the execution of the Note Purchase Agreement, the Company issued senior promissory notes (Initial Notes) in an aggregate principal amount of $ 10,000,000 , with a per annum interest rate of 4.90 % payable semiannually, and a maturity date of December 14, 2028. The Company is required to prepay a portion of the principal of the Initial Notes beginning on December 14, 2023 and each year thereafter, and may optionally prepay the principal on the Initial Notes, together with any prepayment premium, at any time in accordance with the Note Purchase Agreement. The obligations of the Initial Notes may be accelerated upon an event of default as defined in the Note Purchase Agreement, which includes customary events of default under such financing arrangements. The Initial Notes are pari passu with the Company’s indebtedness under the Credit Agreement, and any other senior debt of the Company, subject to certain specified exceptions, and participate in a sharing agreement with respect to the obligations of the Company and its subsidiaries under the Credit Agreement. The Senior Promissory Notes are guaranteed by certain of the Company’s domestic subsidiaries. Debt Compliance As of April 2, 2022, the Company was in compliance with the covenants related to its debt obligations. Finance Leases The Company's finance leases primarily relate to contracts for vehicles. Other Borrowings Other borrowings include a sale-leaseback financing arrangement for a manufacturing facility in Germany. Under this arrangement, the quarterly lease payment includes principal, interest, and a payment to the landlord toward a loan receivable. The interest rate on the outstanding obligation is 1.79 %. The secured loan receivable, which is included in other current assets in the accompanying condensed consolidated balance sheet, was $ 1,435,000 at April 2, 2022. The lease arrangement provides for a fixed price purchase option, net of the projected loan receivable, of $ 1,469,000 at the end of the lease term in August 2022. If the Company does not exercise the purchase option for the facility, it will receive cash from the landlord to settle the loan receivable. As of April 2, 2022, $ 3,152,000 was outstanding under this obligation. Other borrowings also include $ 968,000 of short-term obligations and $ 2,925,000 of debt obligations outstanding at April 2, 2022 assumed in the acquisition of The Clouth Group of Companies (Clouth), which mature on various dates ranging from 2022 through 2028. 14 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 6. Stock-Based Compensation The Company recognized stock-based compensation expense of $ 2,260,000 in the first quarter of 2022 and $ 1,499,000 in the first quarter of 2021 within selling, general, and administrative (SG&A) expenses in the accompanying condensed consolidated statement of income. The Company recognizes compensation expense for all stock-based awards granted to employees and directors based on the grant date estimate of fair value for those awards. The fair value of RSUs is based on the grant date price of the Company's common stock, reduced by the present value of estimated dividends foregone during the requisite service period. For time-based RSUs, compensation expense is recognized ratably over the requisite service period for the entire award based on the grant date fair value, and net of actual forfeitures recorded when they occur. For performance-based RSUs, compensation expense is recognized ratably over the requisite service period for each separately vesting portion of the award based on the grant date fair value, net of actual forfeitures recorded when they occur, and remeasured each reporting period until the total number of RSUs to be issued is known. Unrecognized compensation expense related to stock-based compensation totaled approximately $ 11,628,000 at April 2, 2022, which will be recognized over a weighted average period of 2.0 years. 7. Accumulated Other Comprehensive Items Comprehensive income combines net income and other comprehensive items, which represent certain amounts that are reported as components of stockholders' equity in the accompanying condensed consolidated balance sheet. Changes in each component of accumulated other comprehensive items (AOCI), net of tax, are as follows: (In thousands) Foreign Currency Translation Adjustment Post-Retirement Benefit Liability Adjustments Deferred Loss on Cash Flow Hedges Total Balance at January 1, 2022 $ ( 29,096 ) $ ( 792 ) $ ( 462 ) $ ( 30,350 ) Other comprehensive items before reclassifications ( 2,238 ) 2 193 ( 2,043 ) Reclassifications from AOCI — 7 84 91 Net current period other comprehensive items ( 2,238 ) 9 277 ( 1,952 ) Balance at April 2, 2022 $ ( 31,334 ) $ ( 783 ) $ ( 185 ) $ ( 32,302 ) Amounts reclassified from AOCI are as follows: Three Months Ended (In thousands) April 2, 2022 April 3, 2021 Statement of Income Line Item Post-retirement Benefit Plans Recognized net actuarial loss $ ( 7 ) $ ( 11 ) Other expense, net Amortization of prior service cost ( 3 ) ( 3 ) Other expense, net Total expense before income taxes ( 10 ) ( 14 ) Income tax benefit 3 4 Provision for income taxes ( 7 ) ( 10 ) Cash Flow Hedges (a) Interest rate swap agreements ( 111 ) ( 109 ) Interest expense Total expense before income taxes ( 111 ) ( 109 ) Income tax benefit 27 26 Provision for income taxes ( 84 ) ( 83 ) Total Reclassifications $ ( 91 ) $ ( 93 ) (a) See Note 8 , Derivatives, for additional information. 15 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 8. Derivatives Interest Rate Swap Agreement In 2018, the Company entered into an interest rate swap agreement (2018 Swap Agreement) with Citizens Bank to hedge its exposure to movements in USD LIBOR on its U.S. dollar-denominated debt. The 2018 Swap Agreement has a $ 15,000,000 notional value and expires on June 30, 2023. On a quarterly basis, the Company receives three-month USD LIBOR, which is subject to a zero percent floor, and pays a fixed rate of interest of 3.15 % plus an applicable margin as defined in the Credit Agreement. The Company designated its 2018 Swap Agreement as a cash flow hedge and structured it to be 100 % effective. Unrealized gains and losses related to the fair value of the 2018 Swap Agreement are recorded to AOCI, net of tax. In the event of early termination, the Company will receive from or pay to the counterparty the fair value of the 2018 Swap Agreement, and the unrealized gain or loss outstanding will be recognized in earnings. The counterparty to the 2018 Swap Agreement could demand an early termination of that agreement if the Company were to be in default under the Credit Agreement, or any agreement that amends or replaces the Credit Agreement in which the counterparty is a member, and if it were to be unable to cure the default. See Note 5 , Short- and Long-Term Obligations, for further details. Forward Currency-Exchange Contracts The Company uses forward currency-exchange contracts that generally have maturities of twelve months or less to hedge exposures resulting from fluctuations in currency exchange rates. Such exposures result from assets and liabilities that are denominated in currencies other than the functional currencies of the Company's subsidiaries. Forward currency-exchange contracts that hedge forecasted accounts receivable or accounts payable are designated as cash flow hedges and unrecognized gains and losses are recorded to AOCI, net of tax. Deferred gains and losses are recognized in the statement of income in the period in which the underlying transaction occurs. The fair values of forward currency-exchange contracts that are designated as fair value hedges and forward currency-exchange contracts that are not designated as hedges are recognized currently in earnings. Gains and losses reported within SG&A expenses in the accompanying condensed consolidated statement of income associated with the Company's forward currency-exchange contracts that were not designated as hedges were not material for the three-month periods ended April 2, 2022 and April 3, 2021. The following table summarizes the fair value of derivative instruments in the accompanying condensed consolidated balance sheet: April 2, 2022 January 1, 2022 Balance Sheet Location Asset (Liability) (a) Notional Amount (b) Asset (Liability) (a) Notional Amount (In thousands) Derivatives Designated as Hedging Instruments: Derivatives in a Liability Position: Forward currency-exchange contract Other Current Liabilities $ ( 66 ) $ 842 $ ( 44 ) $ 842 2018 Swap Agreement Other Long-Term Liabilities $ ( 179 ) $ 15,000 $ ( 550 ) $ 15,000 Derivatives Not Designated as Hedging Instruments: Derivatives in an Asset Position: Forward currency-exchange contracts Other Current Assets $ — $ — $ 14 $ 1,200 (a) See Note 9 , Fair Value Measurements and Fair Value of Financial Instruments, for the fair value measurements relating to these financial instruments. (b) The 2022 notional amounts are indicative of the level of the Company's recurring derivative activity. 16 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The following table summarizes the activity in AOCI associated with the Company's derivative instruments designated as cash flow hedges as of and for the three months ended April 2, 2022: (In thousands) Interest Rate Swap Agreement Forward Currency- Exchange Contract Total Unrealized (Loss) Gain, Net of Tax, at January 1, 2022 $ ( 429 ) $ ( 33 ) $ ( 462 ) Loss reclassified to earnings (a) 84 — 84 Gain (loss) recognized in AOCI 209 ( 16 ) 193 Unrealized Loss, Net of Tax, at April 2, 2022 $ ( 136 ) $ ( 49 ) $ ( 185 ) (a) See Note 7 , Accumulated Other Comprehensive Items, for the income statement classification. As of April 2, 2022, the Company expects to reclassify losses of $ 184,000 from AOCI to earnings over the next twelve months based on the estimated cash flows of the 2018 Swap Agreement and the maturity date of the forward currency-exchange contract. 9. Fair Value Measurements and Fair Value of Financial Instruments Fair value measurement is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is established, which prioritizes the inputs used in measuring fair value into three broad levels as follows: • Level 1—Quoted prices in active markets for identical assets or liabilities. • Level 2—Inputs, other than quoted prices in active markets, that are observable either directly or indirectly. • Level 3—Unobservable inputs based on the Company's own assumptions. The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis: Fair Value as of April 2, 2022 (In thousands) Level 1 Level 2 Level 3 Total Assets: Money market funds and time deposits $ 14,175 $ — $ — $ 14,175 Banker's acceptance drafts (a) $ — $ 8,147 $ — $ 8,147 Liabilities: 2018 Swap Agreement $ — $ 179 $ — $ 179 Forward currency-exchange contract $ — $ 66 $ — $ 66 Fair Value as of January 1, 2022 (In thousands) Level 1 Level 2 Level 3 Total Assets: Money market funds and time deposits $ 13,458 $ — $ — $ 13,458 Banker's acceptance drafts (a) $ — $ 8,049 $ — $ 8,049 Forward currency-exchange contracts $ — $ 14 $ — $ 14 Liabilities: 2018 Swap Agreement $ — $ 550 $ — $ 550 Forward currency-exchange contracts $ — $ 44 $ — $ 44 (a) Included in accounts receivable in the accompanying condensed consolidated balance sheet. The Company uses the market approach technique to value its financial assets and liabilities, and there were no changes in valuation techniques during the first three months of 2022. Banker's acceptance drafts are carried at face value, which approximates their fair value due to the short-term nature of the negotiable instrument. The fair values of the forward 17 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) currency-exchange contracts are based on quoted forward foreign exchange rates at the reporting date. The fair value of the 2018 Swap Agreement is based on USD LIBOR yield curves at the reporting date. The forward currency-exchange contracts and the 2018 Swap Agreement are hedges of either recorded assets or liabilities or anticipated transactions and represent the estimated amount the Company would receive or pay upon liquidation of the contracts. Changes in values of the underlying hedged assets and liabilities or anticipated transactions are not reflected in the table above. The carrying value and fair value of debt obligations, excluding lease obligations, are as follows: April 2, 2022 January 1, 2022 Carrying Value Fair Value Carrying Value Fair Value (In thousands) Debt Obligations: Revolving credit facility $ 229,483 $ 229,483 $ 250,267 $ 250,267 Senior promissory notes 10,000 10,459 10,000 10,947 Other 3,893 3,893 4,331 4,331 $ 243,376 $ 243,835 $ 264,598 $ 265,545 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 end, which represent Level 2 measurements. 10. Business Segment Information The Company has combined its operating entities into three 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; and the Material Handling segment consists of the conveying and vibratory, baling, and fiber-based product lines. 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 primary 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: Three Months Ended April 2, April 3, (In thousands) 2022 2021 Revenue Flow Control (a) $ 85,826 $ 63,754 Industrial Processing 93,085 69,154 Material Handling (b) 47,569 39,555 $ 226,480 $ 172,463 18 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Three Months Ended April 2, April 3, (In thousands) 2022 2021 Income Before Provision for Income Taxes Flow Control (a,c) $ 21,725 $ 15,446 Industrial Processing (d) 38,159 11,106 Material Handling (b,e) 5,844 4,169 Corporate (f) ( 9,755 ) ( 7,294 ) Total operating income 55,973 23,427 Interest expense, net (g) ( 1,132 ) ( 1,046 ) Other expense, net (g) ( 22 ) ( 24 ) $ 54,819 $ 22,357 Capital Expenditures Flow Control $ 525 $ 334 Industrial Processing 1,952 1,804 Material Handling 384 121 Corporate 7 — $ 2,868 $ 2,259 (a) Includes Clouth's results in 2022, which was acquired between July 19, 2021 and August 10, 2021. (b) Includes the East Chicago Machine Tool Corporation (Balemaster) results in 2022, which was acquired on August 23, 2021. (c) Includes acquisition costs of $ 997,000 in the three months ended April 3, 2021. (d) Includes a gain on the sale of a facility of $ 20,190,000 and non-cash charges for the write-off of an indemnification asset of $ 575,000 and the write-down of machinery and equipment of $ 182,000 in the three months ended April 2, 2022. (e) Includes acquisition-related expenses of $ 717,000 in the three months ended April 2, 2022 and $ 274,000 in the three months ended April 3, 2021. Acquisition-related expenses include acquisition costs and amortization expense associated with acquired backlog. (f) Represents general and administrative expenses. (g) The Company does not allocate interest and other expense, net to its segments. 11. Commitments and Contingencies 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 non-interest bearing obligations of the issuing bank and generally 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 $ 8,419,000 at April 2, 2022 and $ 9,593,000 at January 1, 2022 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. 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. 19 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited)