KADANT INC 10-K

Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures at year-end 2022. The term "disclosure controls and procedures," as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon the evaluation of our disclosure controls and procedures at year-end 2022, our Chief Executive Officer and Chief Financial Officer concluded that at year-end 2022, our disclosure controls and procedures were effective at the reasonable assurance level. 34 Table of Contents Kadant Inc. Management's Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rules 13a-15(f) and 15d-15(f). Our management assessed the effectiveness of our internal control over financial reporting at year-end 2022. In making this assessment, our management used the criteria set forth in "Internal Control—Integrated Framework (2013)" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, management believes that at year-end 2022 our internal control over financial reporting was effective based on the criteria issued by COSO. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our independent registered public accountants, KPMG LLP, have issued an audit report on our internal control over financial reporting, which is included herein on pages F-2 and F-3 and incorporated into this Item 9A by reference. Changes in Internal Control over Financial Reporting There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the fiscal quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information Not applicable. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. PART III Item 10. Directors, Executive Officers, and Corporate Governance Information about our Directors This information will be included under the heading "Election of Directors" in our 2023 proxy statement for our 2023 Annual Meeting of Shareholders and is incorporated in this report by reference, except for the information concerning executive officers, which is included under the heading "Information about our Executive Officers" in Item 1 of Part I of this report. Section 16(a) Beneficial Ownership Reporting Compliance The information required under Item 405 of Regulation S-K will be included under the heading "Stock Ownership–Delinquent Section 16(a) Reports" in our 2023 proxy statement and is incorporated in this report by reference. Corporate Governance The information required under Items 406 and 407 of Regulation S-K will be included under the heading "Corporate Governance" in our 2023 proxy statement and is incorporated in this report by reference. Item 11. Executive Compensation This information will be included under the headings "Executive Compensation," "Corporate Governance - Compensation Committee Interlocks and Insider Participation," and "Compensation Discussion and Analysis" in our 2023 proxy statement and is incorporated in this report by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Except for the information concerning equity compensation plans, this information will be included under the heading "Stock Ownership" in our 2023 proxy statement and is incorporated in this report by reference. 35 Table of Contents Kadant Inc. The following table provides information about the securities authorized for issuance under our equity compensation plans at year-end 2022: Equity Compensation Plan Information Plan Category Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants, and Rights Weighted Average Exercise Price of Outstanding Options, Warrants, and Rights Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in the First Column) Equity compensation plans approved by security holders 85,477 (a) $ — (b) 395,636 (c) Equity compensation plans not approved by security holders — $ — — Total 85,477 (a) $ — (b) 395,636 (c) (a) Consists of shares of our common stock issuable upon the vesting of restricted stock units and performance-based restricted stock units under the Amended and Restated 2006 Equity Incentive Plan. (b) Shares of restricted stock units and performance-based restricted stock units outstanding on December 31, 2022 had a weighted average grant date fair value of $153.98. (c) Includes an aggregate of 82,532 shares of common stock issuable under our employees' stock purchase plan in connection with current and future offering periods under the plan. Item 13. Certain Relationships and Related Transactions, and Director Independence This information will be included under the heading "Corporate Governance" in our 2023 proxy statement and is incorporated in this report by reference. Item 14. Principal Accountant Fees and Services Our independent registered public accounting firm is KPMG LLP , located in Boston, Massachusetts , auditor firm ID: 185 . The information required by this item will be included under the heading "Independent Registered Public Accounting Firm" in our 2023 proxy statement and is incorporated in this report by reference. PART IV Item 15. Exhibits and Financial Statement Schedules (a) The following documents are filed as part of this report: (1) Consolidated Financial Statements (see Index on Page F-1 of this report): Report of Independent Registered Public Accounting Firm Consolidated Balance Sheet Consolidated Statement of Income Consolidated Statement of Comprehensive Income Consolidated Statement of Cash Flows Consolidated Statement of Stockholders' Equity Notes to Consolidated Financial Statements (2) All schedules are omitted because they are not applicable or not required, or because the required information is shown either in the consolidated financial statements or in the notes thereto. (3) Exhibits filed herewith or incorporated in this report by reference are set forth in the Exhibit Index beginning on page 37 . This list of exhibits identifies each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report. 36 Table of Contents Kadant Inc. (b) Exhibits Exhibit Number Description of Exhibit 3.1 Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 [File No. 001-11406] and incorporated in this document by reference). 3.2 Amended and Restated Bylaws of the Registrant effective November 20, 2014 (filed as Exhibit 3.1 to the Registrant's Form 8-K [File No. 001-11406] filed with the Commission on November 25, 2014 and incorporated in this document by reference). 4.1 Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934 (filed as Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for the year ended December 28, 2019 [File No. 001-11406] and incorporated in this document by reference). 10.1* Form of Indemnification Agreement between the Registrant and its directors and officers (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 [File No. 001-11406] and incorporated in this document by reference). 10.2* Form of Amended and Restated Executive Retention Agreement (change in control agreement) between the Registrant and its named executive officers, as amended and restated on December 9, 2008 (filed as Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the year ended January 3, 2009 [File No. 001-11406] and incorporated in this document by reference). 10.3* Form of Executive Retention Agreement (change in control agreement) between the Registrant and its executive officers for new agreements entered into from and after November 16, 2016 (filed as Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2016 [File No. 001-11406] and incorporated in this document by reference). 10.4* Employment Agreement between Kadant Johnson Europe B.V. and Fredrik Westerhout dated May 16, 2022 (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 2, 2022 [File No. 011-11406] and incorporated in this document by reference). 10.5* Amended and Restated 2006 Equity Incentive Plan of the Registrant effective as of May 17, 2017 (filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 1, 2017 [File No. 011-11406] and incorporated in this document by reference). 10.6* Cash Incentive Plan of the Registrant, Amended and Restated as of March 9, 2022 (filed as Exhibit 99.1 to the Registrant’s Current Report on Form 8-K [File No. 001-11406] filed with the Commission on March 15, 2022 and incorporated in this document by reference). 10.7* Summary of non-employee director compensation of the Registrant (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 2, 2022 [File No. 001-11406] and incorporated in this document by reference). 10.8* Form of Performance-Based Restricted Stock Unit Award Agreement between the Registrant and its executive officers used for restricted stock unit awards on or after March 5, 2014 (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 29, 2014 [File No. 001-11406] and incorporated in this document by reference). 10.9* Form of Time-Based Restricted Stock Unit Award Agreement between the Registrant and its executive officers used for restricted stock unit awards on or after March 5, 2014 (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 29, 2014 [File No. 001-11406] and incorporated in this document by reference). 37 Table of Contents Kadant Inc. Exhibit Number Description of Exhibit 10.10* Form of Performance-Based Restricted Stock Unit Award Agreement between the Registrant and its executive officers used for restricted stock unit awards on or after March 5, 2014 (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 [File No. 011-11406] and incorporated in this document by reference). 10.11* Form of Time-Based Restricted Stock Unit Award Agreement between the Registrant and its executive officers used for restricted stock unit awards on or after March 5, 2014 (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 [File No. 011-11406] and incorporated in this document by reference). 10.12* Form of Directors Restricted Stock Unit Award Agreement between the Registrant and its non-employee directors used for restricted stock unit awards on or after March 5, 2014 (filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 [File No. 011-11406] and incorporated in this document by reference). 10.13 Amended and Restated Credit Agreement dated as of March 1, 2017, among the Registrant, the Foreign Subsidiary Borrowers from time to time parties thereto, the several banks and other financial institutions or entities from time to time parties thereto, Citizens Bank, N.A., as Administrative Agent and Multicurrency Administrative Agent (filed as Exhibit 99.1 to the Registrant's Current Report on Form 8-K [File No. 001-11406] filed with the Commission on March 7, 2017 and incorporated in this document by reference). 10.14 First Amendment and Limited Consent, dated as of May 24, 2017, to the Amended and Restated Credit Agreement dated as of March 1, 2017 by and among the Registrant, the Foreign Subsidiary Borrowers from time to time parties thereto, the several banks and other financial institutions or entities from time to time parties thereto, Citizens Bank, N.A., as Administrative Agent and Multicurrency Administrative Agent (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 1, 2017 [File No. 011-11406] and incorporated in this document by reference). 10.15 Limited Consent, dated as of December 9, 2018, to the Amended and Restated Credit Agreement dated as of March 1, 2017 by and among the Registrant, the Foreign Subsidiary Borrowers from time to time parties thereto, the several banks and other financial institutions or entities from time to time parties thereto, Citizens Bank, N.A., as Administrative Agent and Multicurrency Administrative Agent (filed as Exhibit 10.24 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018 [File No. 001-11406] and incorporated in this document by reference). 10.16 Second Amendment, dated as of December 14, 2018, to the Amended and Restated Credit Agreement dated as of March 1, 2017 by and among the Registrant, the Foreign Subsidiary Borrowers from time to time parties thereto, the several banks and other financial institutions or entities from time to time parties thereto, Citizens Bank, N.A., as Administrative Agent and Multicurrency Administrative Agent (filed as Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the year ended December 29, 2018 [File No. 001-11406] and incorporated in this document by reference). 10.17 Third Amendment, dated as of March 16, 2020, to the Amended and Restated Credit Agreement dated as of March 1, 2017 by and among the Registrant, the Foreign Subsidiary Borrowers from time to time parties thereto, the several banks and other financial institutions or entities from time to time parties thereto, Citizens Bank, N.A., as Administrative Agent and Multicurrency Administrative Agent (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 28, 2020 [File No. 001-11406] and incorporated in this document by reference). 10.18 Fourth Amendment, dated as of May 4, 2021, to the Amended and Restated Credit Agreement, dated as of March 1, 2017, by and among the Registrant, the Foreign Subsidiary Borrowers from time to time parties thereto, the several banks and other financial institutions or entities from time to time parties thereto, and Citizens Bank, N.A., as Administrative Agent and Multicurrency Administrative Agent (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 2021 [File No. 001-11406] and incorporated in this document by reference). 38 Table of Contents Kadant Inc. Exhibit Number Description of Exhibit 10.19 Joinder Agreement, dated as of May 4, 2021, to the Amended and Restated Credit Agreement, dated as of March 1, 2017, by and among the Registrant, the Foreign Subsidiary Borrowers from time to time parties thereto, the several banks and other financial institutions or entities from time to time parties thereto, and Citizens Bank, N.A., as Administrative Agent and Multicurrency Administrative Agent (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 2021 [File No. 001-11406] and incorporated in this document by reference). 10.20 Fifth Amendment, dated as of December 9, 2021, to the Amended and Restated Credit Agreement, dated as of March 1, 2017, by and among the Registrant, the Foreign Subsidiary Borrowers from time to time parties thereto, the several banks and other financial institutions or entities from time to time parties thereto, and Citizens Bank, N.A., as Administrative Agent and Multicurrency Administrative Agent. (filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the year ended January 1, 2022 [File No. 001-11406] and incorporated in this document by reference). 10.21 Sixth Amendment, dated as of November 30, 2022, to the Amended and Restated Credit Agreement, dated as of March 1, 2017, by and among the Registrant, the Foreign Subsidiary Borrowers from time to time parties thereto, the several banks and other financial institutions or entities from time to time parties thereto, and Citizens Bank, N.A., as Administrative Agent and Multicurrency Administrative Agent. 10.22 Amended and Restated Guarantee Agreement dated as of March 1, 2017, among the Registrant, as Borrower, and each of the Subsidiary Guarantors, in favor of Citizens Bank, N.A., as Administrative Agent and as Multicurrency Administrative Agent for the bank and other financial institutions or entities from time to time parties to the Amended and Restated Credit Facility (filed as Exhibit 99.2 to the Registrant's Current Report on Form 8-K [File No. 001-11406] filed with the Commission on March 7, 2017 and incorporated in this document by reference). 10.23 Guarantee Agreement dated as of March 1, 2017, by Kadant Cayman Ltd. in favor of Citizens Bank, N.A., as Administrative Agent and as Multicurrency Administrative Agent for the banks and other financial institutions or entities from time to time parties to the Amended and Restated Credit Facility (filed as Exhibit 99.3 to the Registrant's Current Report on Form 8-K [File No. 001-11406] filed with the Commission on March 7, 2017 and incorporated in this document by reference). 10.24 Multi-Currency Note Purchase and Private Shelf Agreement, dated as of December 14, 2018 among the Registrant, PGIM, Inc. and the Purchasers as defined therein (filed as Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018 [File No. 001-11406] and incorporated in this document by reference). 10.25 International Swap Dealers Association, Inc. Master Agreement dated May 13, 2005 between the Registrant and Citizens Bank of Massachusetts and Swap Confirmation dated May 18, 2005 (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 2, 2005 [File No. 001-11406] filed with the Commission on August 11, 2005 and incorporated in this document by reference). 10.26 Swap Confirmation dated May 16, 2018 between the Registrant and Citizens Bank, National Association (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 [File No. 001-11406] filed with the Commission on August 8, 2018 and incorporated in this document by reference). 21 Subsidiaries of the Registrant. 23 Consent of KPMG LLP, Independent Registered Public Accounting Firm. 24 Power of Attorney (included on the signatures page to the Annual Report on Form 10-K). 39 Table of Contents Kadant Inc. Exhibit Number Description of Exhibit 31.1 Certification of the Principal Executive Officer of the Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. 31.2 Certification of the Principal Financial Officer of the Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. 32 Certification of the Chief Executive Officer and the Chief Financial Officer of the Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). * Management contract or compensatory plan or arrangement. Item 16. Form 10-K Summary Not applicable. 40 Table of Contents Kadant Inc. Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KADANT INC. Date: February 28, 2023 By: /s/ Jeffrey L. Powell Jeffrey L. Powell Chief Executive Officer and President POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jeffrey L. Powell, Michael J. McKenney and Deborah S. Selwood, jointly and severally, his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on February 28, 2023. Signature Title By: /s/ Jeffrey L. Powell Chief Executive Officer, President and Director Jeffrey L. Powell (Principal Executive Officer) By: /s/ Michael J. McKenney Executive Vice President and Chief Financial Officer Michael J. McKenney (Principal Financial Officer) By: /s/ Deborah S. Selwood Senior Vice President and Chief Accounting Officer Deborah S. Selwood (Principal Accounting Officer) By: /s/ Jonathan W. Painter Director and Chairman of the Board Jonathan W. Painter By: /s/ John M. Albertine Director John M. Albertine By: /s/ Thomas C. Leonard Director Thomas C. Leonard By: /s/ Rebecca Martinez O'Mara Director Rebecca Martinez O'Mara By: /s/ Erin L Russell Director Erin L. Russell 41 Table of Contents Kadant Inc. Annual Report on Form 10-K Index to Consolidated Financial Statements and Schedule The following Consolidated Financial Statements of the Registrant and its subsidiaries are required to be included in Item 8: Page Report of Independent Registered Public Accounting Firm F- 2 Consolidated Balance Sheet as of December 31, 2022 and January 1, 2022 F- 4 Consolidated Statement of Income for the fiscal years ended December 31, 2022, January 1, 2022 , and January 2, 2021 F- 5 Consolidated Statement of Comprehensive Income for the fiscal years ended Decemb er 31, 2022, January 1, 2022, and January 2, 2021 F- 6 Consolidated Statement of Cash Flows for the fiscal years ended Decembe r 31, 2022, January 1, 2022, and January 2, 2021 F- 7 Consolidated Statement of Stockholders' Equity for the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021 F- 8 Notes to Consolidated Financial Statements F- 9 F-1 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Kadant Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of Kadant Inc. and subsidiaries (the Company) as of December 31, 2022 and January 1, 2022, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity for each of the fiscal years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and January 1, 2022, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. F-2 Report of Independent Registered Public Accounting Firm (continued) Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Assessment of uncertain tax positions As discussed in Note 1 to the consolidated financial statements, it is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. As disclosed in Note 5 to the consolidated financial statements, the Company has recognized uncertain tax positions amounting to $10,354,000 as of December 31, 2022. The Company’s tax positions are subject to audit by local taxing authorities across multiple global jurisdictions. Tax law can be complex and tax audits can take an extended period of time to resolve, and accordingly, the ultimate outcome with respect to taxes the Company may owe may differ from the amounts recognized. We identified the assessment of specific uncertain tax positions as a critical audit matter. Complex auditor judgment, including specialized skills and knowledge, was required in evaluating the Company’s interpretation of, and compliance with, tax law globally and the estimate of the amount of tax benefits expected to be realized. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process to assess specific uncertain tax positions. This included controls related to the identification of those uncertain tax positions, interpretation of tax law and its application in the liability estimation process. We involved tax professionals with specialized skills and knowledge, who assisted in evaluating the Company's intercompany transfer pricing studies for compliance with applicable tax laws and regulations, evaluating the impact of intercompany transfer pricing policies on its uncertain tax positions, and assessing the expiration of statutes of limitations with applicable laws and regulations. /s/ KPMG LLP We have served as the Company's auditor since 2012. Boston, Massachusetts February 28, 2023 F-3 Table of Contents Kadant Inc. 2022 Financial Statements Consolidated Balance Sheet (In thousands, except share and per share amounts) December 31, 2022 January 1, 2022 Assets Current Assets: Cash and cash equivalents $ 76,371 $ 91,186 Restricted cash 3,354 2,975 Accounts receivable, net of allowances of $ 3,595 and $ 2,735 130,297 117,209 Inventories 163,672 134,356 Contract assets 14,898 8,626 Other current assets 26,818 29,530 Total Current Assets 415,410 383,882 Property, Plant, and Equipment, Net 118,855 107,989 Other Assets 54,516 44,111 Intangible Assets, Net (Notes 1 and 2) 175,645 199,343 Goodwill (Notes 1 and 2) 385,455 396,887 Total Assets $ 1,149,881 $ 1,132,212 Liabilities and Stockholders' Equity Current Liabilities: Short-term obligations and current maturities of long-term obligations (Note 6) $ 3,821 $ 5,356 Accounts payable 58,060 59,250 Accrued payroll and employee benefits 35,672 37,203 Customer deposits 64,361 59,262 Advanced billings 7,966 11,894 Other current liabilities 43,581 48,532 Total Current Liabilities 213,461 221,497 Long-Term Obligations (Note 6) 197,340 264,158 Long-Term Deferred Income Taxes (Note 5) 38,745 34,944 Other Long-Term Liabilities 44,764 45,997 Commitments and Contingencies (Note 7) Stockholders' Equity (Notes 3 and 4): Preferred stock, $ .01 par value, 5,000,000 shares authorized; none issued — — Common stock, $ .01 par value, 150,000,000 shares authorized; 14,624,159 shares issued 146 146 Capital in excess of par value 119,924 115,888 Retained earnings 660,644 551,848 Treasury stock at cost, 2,949,997 and 3,003,419 shares ( 72,287 ) ( 73,596 ) Accumulated other comprehensive items (Note 14) ( 54,578 ) ( 30,350 ) Total Kadant Stockholders' Equity 653,849 563,936 Noncontrolling interest 1,722 1,680 Total Stockholders' Equity 655,571 565,616 Total Liabilities and Stockholders' Equity $ 1,149,881 $ 1,132,212 The accompanying notes are an integral part of these consolidated financial statements. F-4 Table of Contents Kadant Inc. 2022 Financial Statements Consolidated Statement of Income (In thousands, except per share amounts) December 31, 2022 January 1, 2022 January 2, 2021 Revenue (Notes 1 and 12) $ 904,739 $ 786,579 $ 635,028 Costs and Operating Expenses: Cost of revenue 515,184 449,214 357,722 Selling, general, and administrative expenses 224,405 208,787 181,905 Research and development expenses 12,724 11,403 11,298 Gain on sale and other costs, net (Note 8) ( 18,856 ) 465 2,979 733,457 669,869 553,904 Operating Income 171,282 116,710 81,124 Interest Income 904 267 181 Interest Expense ( 6,478 ) ( 4,821 ) ( 7,423 ) Other Expense, Net ( 72 ) ( 104 ) ( 195 ) Income Before Provision for Income Taxes 165,636 112,052 73,687 Provision for Income Taxes (Note 5) 43,906 27,171 17,948 Net Income 121,730 84,881 55,739 Net Income Attributable to Noncontrolling Interest ( 802 ) ( 838 ) ( 543 ) Net Income Attributable to Kadant $ 120,928 $ 84,043 $ 55,196 Earnings per Share Attributable to Kadant (Note 13) Basic $ 10.38 $ 7.26 $ 4.81 Diluted $ 10.35 $ 7.21 $ 4.77 Weighted Average Shares (Note 13) Basic 11,654 11,579 11,482 Diluted 11,688 11,655 11,564 The accompanying notes are an integral part of these consolidated financial statements. F-5 Table of Contents Kadant Inc. 2022 Financial Statements Consolidated Statement of Comprehensive Income (In thousands) December 31, 2022 January 1, 2022 January 2, 2021 Net Income $ 121,730 $ 84,881 $ 55,739 Other Comprehensive Items: Foreign currency translation adjustment ( 25,522 ) ( 11,324 ) 18,395 Pension and other post-retirement liability adjustments, net (net of tax of $ 225 , $( 1 ), and $ 78 ) 644 ( 22 ) 180 Effect of pension plan settlement — — ( 119 ) Deferred gain (loss) on cash flow hedges (net of tax of $ 147 , $ 118 , and $( 57 )) 520 366 ( 184 ) Other Comprehensive Items ( 24,358 ) ( 10,980 ) 18,272 Comprehensive Income 97,372 73,901 74,011 Comprehensive Income Attributable to Noncontrolling Interest ( 672 ) ( 716 ) ( 687 ) Comprehensive Income Attributable to Kadant $ 96,700 $ 73,185 $ 73,324 The accompanying notes are an integral part of these consolidated financial statements. F-6 Table of Contents Kadant Inc. 2022 Financial Statements Consolidated Statement of Cash Flows (In thousands) December 31, 2022 January 1, 2022 January 2, 2021 Operating Activities Net income attributable to Kadant $ 120,928 $ 84,043 $ 55,196 Net income attributable to noncontrolling interest 802 838 543 Net income 121,730 84,881 55,739 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 34,936 34,302 31,334 Stock-based compensation expense 8,576 8,527 6,776 Provision for losses on accounts receivable 1,165 5 356 Gain on sale of assets (Note 8) ( 20,190 ) ( 515 ) — Non-cash impairment costs (Note 8) 731 804 1,861 Deferred income tax provision (benefit) 7,159 ( 1,384 ) 142 Other items, net 6,658 6,473 4,712 Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable ( 18,515 ) ( 16,737 ) 7,116 Contract assets ( 6,715 ) ( 1,222 ) 6,073 Inventories ( 36,116 ) ( 11,173 ) ( 89 ) Other assets ( 5,566 ) ( 15,033 ) ( 833 ) Accounts payable 1,362 26,346 ( 15,620 ) Customer deposits 14,358 27,693 3,903 Other liabilities ( 6,948 ) 19,453 ( 8,586 ) Net cash provided by operating activities 102,625 162,420 92,884 Investing Activities Acquisitions, net of cash acquired (Note 2) ( 3,474 ) ( 143,981 ) ( 7,095 ) Purchases of property, plant, and equipment ( 28,199 ) ( 12,771 ) ( 7,595 ) Proceeds from sale of property, plant, and equipment 2,111 1,740 145 Other investing activities 42 537 — Net cash used in investing activities ( 29,520 ) ( 154,475 ) ( 14,545 ) Financing Activities Proceeds from issuance of short-and long-term obligations 22,057 151,944 26,000 Repayment of short- and long-term obligations ( 85,510 ) ( 115,576 ) ( 99,547 ) Dividends paid ( 12,001 ) ( 11,460 ) ( 10,903 ) Proceeds from issuance of Company common stock 1,376 1,892 3,207 Tax withholding payments related to stock-based compensation ( 4,607 ) ( 3,432 ) ( 2,599 ) Dividend paid to noncontrolling interest ( 630 ) ( 560 ) ( 525 ) Other financing activities ( 1,254 ) — ( 189 ) Net cash (used in) provided by financing activities ( 80,569 ) 22,808 ( 84,556 ) Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash ( 6,972 ) ( 3,232 ) 4,584 (Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash ( 14,436 ) 27,521 ( 1,633 ) Cash, Cash Equivalents, and Restricted Cash at Beginning of Year 94,161 66,640 68,273 Cash, Cash Equivalents, and Restricted Cash at End of Year $ 79,725 $ 94,161 $ 66,640 See Note 1 , Nature of Operations and Summary of Significant Accounting Policies, under the heading Supplemental Cash Flow Information for further details. The accompanying notes are an integral part of these consolidated financial statements. F-7 Table of Contents Kadant Inc. 2022 Financial Statements Consolidated Statement of Stockholders' Equity Capital in Excess of Par Value Retained Earnings Accumulated Other Comprehensive Items Noncontrolling Interest Total Stockholders' Equity (In thousands, except share and per share amounts) Common Stock Treasury Stock Shares Amount Shares Amount Balance at December 28, 2019 14,624,159 $ 146 $ 106,698 $ 435,249 3,214,888 $ ( 78,778 ) $ ( 37,620 ) $ 1,384 $ 427,079 Net income — — — 55,196 — — — 543 55,739 Dividends declared – Common Stock, $ 0.96 per share — — — ( 11,045 ) — — — — ( 11,045 ) Dividend paid to noncontrolling interest — — — — — — — ( 525 ) ( 525 ) Activity under stock plans — — 4,126 — ( 132,969 ) 3,259 — — 7,385 Other comprehensive items — — — — — — 18,128 144 18,272 Balance at January 2, 2021 14,624,159 $ 146 $ 110,824 $ 479,400 3,081,919 $ ( 75,519 ) $ ( 19,492 ) $ 1,546 $ 496,905 Net income — — — 84,043 — — — 838 84,881 Dividends declared – Common Stock, $ 1.00 per share — — — ( 11,595 ) — — — — ( 11,595 ) Dividend paid to noncontrolling interest — — — — — — — ( 560 ) ( 560 ) Noncontrolling interest acquired (Note 2) — — — — — — — 367 367 Purchase of shares of noncontrolling interest (Note 2) — — — — — — — ( 389 ) ( 389 ) Activity under stock plans — — 5,064 — ( 78,500 ) 1,923 — — 6,987 Other comprehensive items — — — — — — ( 10,858 ) ( 122 ) ( 10,980 ) 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 — — — 120,928 — — — 802 121,730 Dividends declared – Common Stock, $ 1.04 per share — — — ( 12,132 ) — — — — ( 12,132 ) Dividend paid to noncontrolling interest — — — — — — — ( 630 ) ( 630 ) Activity under stock plans — — 4,036 — ( 53,422 ) 1,309 — — 5,345 Other comprehensive items — — — — — — ( 24,228 ) ( 130 ) ( 24,358 ) Balance at December 31, 2022 14,624,159 $ 146 $ 119,924 $ 660,644 2,949,997 $ ( 72,287 ) $ ( 54,578 ) $ 1,722 $ 655,571 The accompanying notes are an integral part of these consolidated financial statements. F-8 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Kadant Inc. was incorporated in Delaware in November 1991 and trades on the New York Stock Exchange under the ticker symbol "KAI." Kadant Inc. (together with its subsidiaries, the Company) is a global supplier of 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. Noncontrolling Interest One of the Company's foreign subsidiaries that manufactures fluid-handling products is part of a joint venture agreement with an Italian company in which each holds a 50 % ownership interest. The agreement provides the Company's subsidiary with the option to purchase the remaining 50 % interest in the joint venture. Principles of Consolidation The accompanying consolidated financial statements of the Company include the accounts of its wholly and majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated. Fiscal Year Typically, the Company's fiscal quarters and fiscal year consist of 13 and 52 weeks, respectively, ending on the Saturday closest to the end of the corresponding calendar quarter for its fiscal quarters and on the Saturday closest to December 31 for its fourth fiscal quarter and fiscal year. As a result of the difference between the fiscal and calendar periods, a 53rd week is added to the Company's fiscal year every five or six years. In a 53-week fiscal year, the Company's fourth fiscal quarter contains 14 weeks. The Company's fiscal years ended December 31, 2022 (fiscal 2022 or 2022) and January 1, 2022 (fiscal 2021 or 2021) contained 52 weeks and its fiscal year ended January 2, 2021 (fiscal 2020 or 2020) contained 53 weeks. Each quarter of fiscal 2022, 2021 and 2020 contained 13 weeks, except the fourth quarter of 2020, which contained 14 weeks. The impact of the additional week in 2020 was not material to the Company's financial results. Use of Estimates and Critical Accounting Policies The preparation of consolidated 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 consolidated 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 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 consolidated financial statements. Critical accounting policies are defined as those that entail significant judgments and estimates, and could potentially result in materially different results under different assumptions and conditions. The Company believes that the most critical accounting policies upon which its financial position depends, and which involve the most complex or subjective decisions or assessments, concern income taxes, revenue recognition, the valuation of goodwill and intangible assets, and inventories. A discussion of the application of these and other accounting policies is included within this note. Revenue Recognition The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (ASC 606). Most of the Company’s revenue is recognized at a point in time for each performance obligation under the contract when the customer obtains control of the goods or service. Most of the Company’s parts and consumables products and its capital products with minimal customization are accounted for at a point in time. The Company has made a policy election to not treat the obligation to ship as a separate performance F-9 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements obligation under the contract and, as a result, the associated shipping costs are reflected in the cost of revenue when revenue is recognized. 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. The following table presents revenue by revenue recognition method: (In thousands) December 31, 2022 January 1, 2022 January 2, 2021 Point in Time $ 807,966 $ 705,709 $ 557,702 Over Time 96,773 80,870 77,326 $ 904,739 $ 786,579 $ 635,028 The transaction price includes estimated variable consideration where applicable. Such variable consideration relates to certain performance guarantees and rights to return the product. The Company estimates variable consideration as the most likely amount to which it expects to be entitled based on the terms of the contracts with customers and historical experience, where relevant. For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation based on the relative stand-alone selling price. The Company disaggregates its revenue from contracts with customers by reportable operating segment, product type and geography as this best depicts how its revenue is affected by economic factors. The following table presents the disaggregation of revenue by product type and geography: (In thousands) December 31, 2022 January 1, 2022 January 2, 2021 Revenue by Product Type: Parts and Consumables $ 572,988 $ 511,766 $ 417,545 Capital 331,751 274,813 217,483 $ 904,739 $ 786,579 $ 635,028 Revenue by Geography (based on customer location): North America $ 508,899 $ 420,382 $ 360,061 Europe 233,790 220,578 161,527 Asia 113,932 103,810 72,268 Rest of World 48,118 41,809 41,172 $ 904,739 $ 786,579 $ 635,028 See Note 12 , Business Segment and Geographical Information, for information on the disaggregation of revenue by reportable operating segment. The following table presents contract balances from contracts with customers: (In thousands) December 31, 2022 January 1, 2022 Contract Assets $ 14,898 $ 8,626 Contract Liabilities $ 82,413 $ 77,004 Contract assets in the accompanying consolidated balance sheet 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 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. F-10 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements The Company recognized revenue of $ 61,804,000 in 2022 and $ 33,128,000 in 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 longer lead times and could take up to 24 months to complete. For contracts with an original expected duration of over one year, the aggregate amount of the transaction price allocated to the remaining unsatisfied or partially unsatisfied performance obligations as of year-end 2022 was $ 49,866,000 . The Company will recognize revenue for these performance obligations as they are satisfied, approximately 66 % of which is expected to occur within the next twelve months and the remaining 34 % after December 31, 2023. Customers in China will often settle their accounts receivable with banker's acceptance drafts, in which case cash settlement will be delayed until the drafts mature or are settled prior to maturity. For customers outside of China, final payment for the majority of the Company's products is received in the quarter following the product shipment. Certain of the Company's contracts include a longer period before final payment is due, which is typically within one year of final shipment or transfer of control to the customer. The Company includes in revenue amounts invoiced for shipping and handling with the corresponding costs reflected in cost of revenue. Provisions for discounts, warranties, returns and other adjustments are provided for in the period in which the related sale was recorded. Sales taxes, value-added taxes, and certain excise taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenue. Accounts Receivable and Allowance for Credit Losses Accounts receivable arise from sales on credit to customers, are recorded at the invoiced amount, and do not bear interest. The Company establishes an allowance for credit losses to reduce accounts receivable to the net amount expected to be collected. The Company exercises judgment in determining its allowance for credit losses, which is based on its historical collection and write-off experience, adjusted for current macroeconomic trends and conditions, credit policies, specific customer collection issues, and accounts receivable aging. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and each customer's current creditworthiness. The Company continuously monitors collections and payments from its customers. Account balances are charged off against the allowance when the Company believes it is probable the receivable will not be recovered. In some instances, the Company utilizes letters of credit to mitigate its credit exposure. The changes in the allowance for credit losses are as follows: (In thousands) December 31, 2022 January 1, 2022 January 2, 2021 Balance at Beginning of Year $ 2,735 $ 2,977 $ 2,698 Provision charged to expense 1,165 5 356 Accounts written off ( 129 ) ( 178 ) ( 266 ) Currency translation ( 176 ) ( 69 ) 189 Balance at End of Year $ 3,595 $ 2,735 $ 2,977 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 $ 5,729,000 at year-end 2022 and $ 8,049,000 at year-end 2021, are included in accounts receivable in the accompanying consolidated balance sheet until the subsidiary sells the drafts to a bank and receives a discounted amount, transfers the banker's acceptance drafts in settlement of current accounts payable prior to maturity, or obtains cash payment on the scheduled maturity date. Warranty Obligations The Company's contracts covering the sale of its products include warranty provisions that provide assurance to its customers that the products will comply with agreed-upon specifications during a defined period of time. The Company provides for the estimated cost of product warranties at the time of sale based on the historical occurrence rates and repair costs, as well as knowledge of any specific warranty problems that indicate projected warranty costs may vary from F-11 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements historical patterns. The Company negotiates the terms regarding warranty coverage and length of warranty depending on the products and applications. While the Company engages in extensive product quality programs and processes, the Company's warranty obligation is affected by product failure rates, repair costs, service delivery costs incurred in correcting a product failure, and supplier warranties on parts delivered to the Company. Should these factors or actual results differ from the Company's estimates, revisions to the estimated warranty liability would be required. The Company's liability for warranties is included in other current liabilities in the accompanying consolidated balance sheet. The changes in the carrying amount of product warranty obligations are as follows: (In thousands) December 31, 2022 January 1, 2022 Balance at Beginning of Year $ 7,298 $ 7,064 Provision charged to expense 4,955 4,366 Usage ( 4,587 ) ( 4,268 ) Acquisitions — 429 Currency translation ( 383 ) ( 293 ) Balance at End of Year $ 7,283 $ 7,298 Leases In accordance with ASC 842, Leases (ASC 842), the Company determines whether an arrangement is, or contains, a lease at inception. Operating lease liabilities are included in other current liabilities and other long-term liabilities and the corresponding right-of-use (ROU) assets are included in other assets in the accompanying consolidated balance sheet. Classification of operating lease liabilities as either current or noncurrent is based on the expected timing of payments due under the Company’s lease obligations. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities with original contract terms greater than 12 months are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Operating leases with an original term of 12 months or less are not recorded in the accompanying consolidated balance sheet. In determining the present value of future lease payments, the Company utilizes either the rate implicit in the lease if that rate is readily determinable or its incremental secured borrowing rate commensurate with the term of the underlying lease. Lease terms may include the effect of options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company recognizes operating lease expense for lease payments on a straight-line basis over the lease term. Variable lease costs are not included in fixed lease payments and, as a result, are excluded from the measurement of the ROU assets and lease liabilities. The Company expenses all variable lease costs as incurred, which were not material in 2022, 2021 and 2020. As a lessee, the Company accounts for the lease and non-lease components of its real estate and equipment leases as a single lease component. For vehicle leases, the Company does not combine lease and non-lease components. See Note 9 , Leases, for additional information about the Company's lease obligations. Income Taxes In accordance with ASC 740, Income Taxes (ASC 740), the Company recognizes deferred income taxes based on the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities, calculated using enacted tax rates in effect for the year in which these differences are expected to reverse. A tax valuation allowance is established, as needed, to reduce deferred tax assets to the amount expected to be realized. In the period in which it becomes more likely than not that some or all of the deferred tax assets will be realized, the valuation allowance will be adjusted. It is the Company's policy to provide for uncertain tax positions and the related interest and penalties based upon management's assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. At December 31, 2022, the Company believes that it has appropriately accounted for any liability for unrecognized tax benefits. To the extent the Company prevails in matters for which a liability for an unrecognized tax benefit is established, the statute of limitations expires for a tax jurisdiction year, or the Company is required to pay amounts in excess of the liability, its effective tax rate in a given financial statement period may be affected. F-12 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements Earnings per Share Basic earnings per share (EPS) is computed by dividing net income attributable to Kadant by the weighted average number of shares outstanding during the year. Diluted EPS is computed using the treasury stock method assuming the effect of all potentially dilutive securities, including stock options, restricted stock units (RSUs) and employee stock purchase plan shares. Cash, Cash Equivalents, and Restricted Cash At year-end 2022 and 2021, cash equivalents included investments in money market funds and highly liquid short-term investments, which had maturities of three months or less at the date of purchase. The carrying amounts of cash equivalents approximate their fair values due to the short-term nature of these instruments. 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 these restrictions will expire over the next twelve months. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the accompanying consolidated balance sheet that are shown in aggregate in the consolidated statement of cash flows: (In thousands) December 31, 2022 January 1, 2022 January 2, 2021 Cash and cash equivalents $ 76,371 $ 91,186 $ 65,682 Restricted cash 3,354 2,975 958 Total Cash, Cash Equivalents, and Restricted Cash $ 79,725 $ 94,161 $ 66,640 Supplemental Cash Flow Information (In thousands) December 31, 2022 January 1, 2022 January 2, 2021 Cash Paid for Interest $ 6,053 $ 4,441 $ 6,899 Cash Paid for Income Taxes, Net of Refunds $ 36,971 $ 24,174 $ 17,506 Non-Cash Investing Activities: Fair value of assets acquired $ 2,785 $ 190,977 $ 9,295 Cash paid for acquired businesses ( 3,597 ) ( 152,661 ) ( 7,565 ) Liabilities (adjusted) assumed of acquired businesses $ ( 812 ) $ 38,316 $ 1,730 Purchase of property with outstanding loan receivable $ 1,397 $ — $ — Purchases of property, plant and equipment in accounts payable $ 1,040 $ 363 $ 1,060 Non-Cash Financing Activities: Issuance of Company common stock upon vesting of RSUs $ 5,555 $ 4,108 $ 4,781 Dividends declared but unpaid $ 3,036 $ 2,905 $ 2,770 Inventories Inventories are stated at the lower of cost (on a first-in, first-out; or weighted average basis) or net realizable value and include materials, labor, and manufacturing overhead. The Company regularly reviews its quantities of inventories on hand and compares these amounts to the historical and forecasted usage of and demand for each particular product or product line. The Company records a charge to cost of revenue for excess and obsolete inventory to reduce the carrying value of inventories to net realizable value. F-13 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements The components of inventories are as follows: (In thousands) December 31, 2022 January 1, 2022 Raw Materials $ 71,040 $ 59,177 Work in Process 38,612 29,448 Finished Goods (includes $ 658 and $ 1,163 at customer locations) 54,020 45,731 $ 163,672 $ 134,356 Property, Plant, and Equipment Property, plant, and equipment are stated at cost. Assets acquired as part of a business combination are initially recorded at fair value. The costs of additions and improvements are capitalized, while maintenance and repairs are charged to expense as incurred. The Company provides for depreciation and amortization primarily using the straight-line method over the estimated useful lives of the property as follows: buildings, 10 to 40 years; machinery and equipment, 2 to 10 years; and leasehold improvements, the shorter of the term of the lease or the life of the asset. For construction in progress, no provision for depreciation is made until the assets are available and ready for use. Property, plant, and equipment consist of the following: (In thousands) December 31, 2022 January 1, 2022 Land $ 10,729 $ 11,011 Buildings 68,915 67,787 Machinery, Equipment, and Leasehold Improvements 143,642 136,656 Construction in Progress 17,011 6,567 240,297 222,021 Less: Accumulated Depreciation and Amortization 121,442 114,032 $ 118,855 $ 107,989 Depreciation and amortization expense was $ 14,429,000 in 2022, $ 13,433,000 in 2021, and $ 12,209,000 in 2020. See Note 9 , Leases, for further details relating to assets under financing leases included in property, plant and equipment in the accompanying consolidated balance sheet. Intangible Assets, Net Acquired intangible assets by major asset class are as follows: (In thousands) Gross Accumulated Amortization Currency Translation Net December 31, 2022 Definite-Lived Customer relationships $ 218,782 $ ( 94,653 ) $ ( 7,045 ) $ 117,084 Product technology 67,548 ( 39,940 ) ( 2,754 ) 24,854 Tradenames 7,427 ( 3,903 ) ( 420 ) 3,104 Other 20,314 ( 17,338 ) ( 623 ) 2,353 314,071 ( 155,834 ) ( 10,842 ) 147,395 Indefinite-Lived Tradenames 29,059 — ( 809 ) 28,250 Acquired Intangible Assets $ 343,130 $ ( 155,834 ) $ ( 11,651 ) $ 175,645 F-14 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements (In thousands) Gross Accumulated Amortization Currency Translation Net January 1, 2022 Definite-Lived Customer relationships $ 217,021 $ ( 79,839 ) $ ( 3,455 ) $ 133,727 Product technology 67,230 ( 35,833 ) ( 1,752 ) 29,645 Tradenames 7,427 ( 3,405 ) ( 373 ) 3,649 Other 20,210 ( 16,250 ) ( 561 ) 3,399 311,888 ( 135,327 ) ( 6,141 ) 170,420 Indefinite-Lived Tradenames 29,059 — ( 136 ) 28,923 Acquired Intangible Assets $ 340,947 $ ( 135,327 ) $ ( 6,277 ) $ 199,343 In connection with its impairment analysis, the Company reduced its definite-lived intangible assets by $ 499,000 in 2021. See Impairment of Long-Lived Assets under the heading Intangible Assets within this note for further details. 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 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. Intangible assets acquired related to the Company's acquisition in 2022 were $ 2,183,000 , which primarily consisted of customer relationships, and have a weighted-average amortization period of 14 years (see Note 2 , Acquisitions). Definite-lived intangible assets as of year-end 2022 have a weighted average amortization period of 13 years. Amortization of definite-lived intangible assets was $ 20,507,000 in 2022, $ 20,869,000 in 2021, and $ 19,125,000 in 2020 and was included in selling, general, and administrative (SG&A) expenses in the accompanying consolidated statement of income. The estimated future amortization expense of definite-lived intangible assets is $ 18,380,000 in 2023; $ 17,407,000 in 2024; $ 15,474,000 in 2025; $ 14,979,000 in 2026; $ 14,078,000 in 2027; and $ 67,077,000 in the aggregate thereafter. Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the identifiable net assets of the acquired business at the date of acquisition. The Company’s acquisitions have historically been made at prices above the fair value of the acquired net assets, resulting in goodwill, due to the expectation of synergies from combining the businesses. The changes in the carrying amount of goodwill by segment are as follows: (In thousands) Flow Control Industrial Processing Material Handling Total Balance as of January 2, 2021 Gross balance $ 101,437 $ 215,881 $ 119,944 $ 437,262 Accumulated impairment losses — ( 85,509 ) — ( 85,509 ) Net balance 101,437 130,372 119,944 351,753 2021 Activity Acquisitions (Note 2) 25,805 1,116 26,836 53,757 Currency translation ( 3,653 ) ( 2,015 ) ( 2,955 ) ( 8,623 ) Total 2021 activity 22,152 ( 899 ) 23,881 45,134 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 F-15 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements (In thousands) Flow Control Industrial Processing Material Handling Total 2022 Activity Acquisition (a) (Note 2) ( 33 ) — 1,231 1,198 Impairment loss — ( 29 ) — ( 29 ) Currency translation ( 5,247 ) ( 5,063 ) ( 2,291 ) ( 12,601 ) Total 2022 activity ( 5,280 ) ( 5,092 ) ( 1,060 ) ( 11,432 ) Balance at December 31, 2022 Gross balance 118,309 209,919 142,765 470,993 Accumulated impairment losses — ( 85,538 ) — ( 85,538 ) Net balance $ 118,309 $ 124,381 $ 142,765 $ 385,455 (a) Includes $ 1,733,000 for an acquisition completed in 2022 and adjustments to the purchase price allocations for acquisitions completed in 2021, principally related to inventory, machinery and equipment, and deferred taxes. Impairment of Long-Lived Assets The Company evaluates the recoverability of goodwill and indefinite-lived intangible assets as of the end of each fiscal year, or more frequently if events or changes in circumstances indicate that it is more likely than not that the carrying value of an asset might be impaired. Potential impairment indicators include a significant decline in sales, earnings, or cash flows, material adverse changes in the business climate, and a significant decline in the market capitalization due to a sustained decrease in the Company's stock price. The Company assesses its definite-lived intangible assets for impairment whenever facts and circumstances indicate that the carrying amounts may not be fully recoverable. To analyze recoverability, the Company projects undiscounted net future cash flows over the remaining lives of such assets or asset groups. If these projected cash flows were to be less than the carrying amounts, an impairment loss would be recognized, resulting in a write-down of the assets with a corresponding charge to earnings. The impairment loss would be measured based upon the difference between the carrying amounts of the assets and their fair values calculated using projected discounted cash flows. Goodwill At year-end 2022 and 2021, in connection with its annual impairment analysis, the Company performed a qualitative goodwill impairment assessment (Step 0) for each of its reporting units, which indicated that the fair value of each reporting unit exceeded its carrying value, and determined that the assets were not impaired. The impairment analysis included an assessment of certain qualitative factors including, but not limited to, the results of prior fair value calculations, the movement of the Company's share price and market capitalization, the reporting units' and the Company's overall financial performance, and macroeconomic and industry conditions. The Company considered the qualitative factors and weighed the evidence obtained and determined that it was not more likely than not that the fair value of any of the respective reporting unit's assets was less than its carrying amount. Although the Company believes the factors considered in the impairment analysis are reasonable, significant changes in any one of the assumptions used could have produced a different result. Goodwill by reporting unit is as follows: (In thousands) December 31, 2022 January 1, 2022 Fluid-Handling $ 62,426 $ 64,003 Doctoring, Cleaning, & Filtration 55,883 59,586 Stock-Preparation 20,311 20,819 Wood Processing 104,070 108,654 Material Handling 142,765 143,825 $ 385,455 $ 396,887 Intangible Assets At year-end 2022 and 2021, the Company performed a qualitative impairment analysis on its indefinite-lived intangible assets and determined that the assets were not impaired. F-16 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements No triggering events or indicators of impairment were identified in 2022 or 2021 related to the Company's definite-lived intangible assets, except for the definite-lived intangible assets associated with its existing ceramic blade product line in France in 2021. In the fourth quarter of 2021, the Company decided to exit its ceramic blade business in France, which became a redundant manufacturing operation as a result of its acquisition of The Clouth Group of Companies (Clouth) in the third quarter of 2021. As a result of this decision, the Company recorded an impairment charge of $ 499,000 in the fourth quarter of 2021 related to its product technology intangible asset, which is included in gain on sale and other costs, net in the accompanying consolidated statement of income. The Company ceased production at this business during the last quarter of 2022. Business Combinations The Company's acquisitions have been accounted for using the purchase method of accounting under ASC 805, Business Combinations (ASC 805), and the results of the acquired businesses have been included in its consolidated financial statements from their respective dates of acquisition. The Company accounts for all transactions and events in which it obtains control over a business under ASC 805 by establishing the acquisition date and recognizing the fair value of all assets acquired and liabilities assumed. The Company’s acquisitions have historically been made at prices above the fair value of identifiable net assets, resulting in goodwill, due to synergies expected to be realized by combining the businesses. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business acquisition date, the estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the purchase price allocation period, which is generally one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. For changes in the valuation of intangible assets between the preliminary and final purchase price allocation, the related amortization is adjusted in the period it occurs. Subsequent to the purchase price allocation period, any adjustment to assets acquired or liabilities assumed is included in operating results in the period in which the adjustment is determ ined. Acquisition transaction costs are recorded as incurred in SG&A expenses in the accompanying consolidated statement of income and were $ 668,000 in 2022, $ 3,655,000 in 2021, and $ 485,000 in 2020. Foreign Currency Translation and Transactions All assets and liabilities of the Company's foreign subsidiaries are translated at fiscal year-end exchange rates, and revenue and expenses are translated at average exchange rates for each quarter in accordance with ASC 830, Foreign Currency Matters . Resulting translation adjustments are reflected in the "accumulated other comprehensive items" (AOCI) component of stockholders' equity (see Note 14 , Accumulated Other Comprehensive Items). Foreign currency transaction gains and losses are included in the accompanying consolidated statement of income and are not material in the three years presented. Stock-Based Compensation The Company recognizes compensation expense for all stock-based awards granted to employees and directors based on the grant date estimate of fair value for those awards. The fair value of RSUs is based on the grant date price of the Company's common stock, reduced by the present value of estimated dividends foregone during the requisite service period. 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. Compensation expense related to any modified stock-based awards is based on the fair value for those awards as of the modification date with any remaining incremental compensation expense recognized ratably over the remaining requisite service period. Derivatives The Company uses derivative instruments primarily to reduce its exposure to changes in currency exchange rates and interest rates. When the Company enters into a derivative contract, the Company makes a determination as to whether the transaction is deemed to be a hedge for accounting purposes. If a contract is deemed a hedge, the Company formally documents the relationship between the derivative instrument and the risk being hedged. In this documentation, the Company specifically identifies the asset, liability, forecasted transaction, cash flow, or net investment that has been designated as the hedged item, and evaluates whether the derivative instrument is expected to reduce the risks associated F-17 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements with the hedged item. To the extent these criteria are not met, the Company does not use hedge accounting for the derivative. The change in the fair value of a derivative not deemed to be a hedge is recorded currently in earnings. The Company does not hold or engage in transactions involving derivative instruments for purposes other than risk management. ASC 815, Derivatives and Hedging , requires that all derivatives be recognized on the consolidated balance sheet at fair value. For derivatives designated as cash flow hedges, the related gains or losses on these contracts are deferred as a component of AOCI. These deferred gains and losses are recognized in the consolidated statement of income in the period in which the underlying anticipated transaction occurs. For derivatives designated as fair value hedges, the unrealized gains and losses resulting from the impact of currency exchange rate movements are recognized in earnings in the period in which the exchange rates change and offset the currency gains and losses on the underlying exposures being hedged. The Company performs an evaluation of the effectiveness of the hedge both at inception and on an ongoing basis. The ineffective portion of a hedge, if any, and changes in the fair value of a derivative not deemed to be a hedge, are recorded in the accompanying consolidated statement of income. Recently Adopted Accounting Pronouncements 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 . The Company adopted this ASU during the fourth quarter of 2022 and its adoption did not have a material impact on the 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 No. 2021-08 which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASU No.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 impact of the adoption of this ASU on the Company's consolidated financial statements will be dependent on the contract assets and liabilities acquired in future business combinations. 2. Acquisitions 2022 On November 14, 2022, the Company acquired a business in Canada, which is included in the Company's Material Handling segment, for approximately $ 3,612,000 , net of cash acquired. 2021 In the third quarter of 2021, the Company acquired all partnership interests and shares in Clouth, for $ 92,864,000 , 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 in 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 three manufacturing facilities in Germany and one in Poland. Goodwill from the Clouth acquisition was $ 25,773,000 , of which $ 7,367,000 is expected to be deductible for tax purposes over 15 years. In addition, intangible assets acquired were $ 34,467,000 , of which $ 6,444,000 is expected to be deductible for tax purposes over the respective useful lives. For 2021, the Company recorded revenue of $ 23,221,000 and an operating loss of $ 4,068,000 for Clouth from the date of acquisition, including amortization expense of $ 3,481,000 associated with acquired profit in inventory and backlog and $ 2,710,000 of acquisition transaction costs. 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 $ 53,547,000 , net of cash acquired. Balemaster, F-18 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements which is included in 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. Goodwill from the Balemaster acquisition was $ 26,334,000 , none of which is deductible for tax purposes. In addition, intangible assets acquired were $ 28,060,000 , none of which is deductible for tax purposes. For 2021, the Company recorded revenue of $ 9,038,000 and operating loss of $ 641,000 for Balemaster from the date of acquisition, including amortization expense of $ 2,042,000 associated with acquired profit in inventory and backlog and $ 782,000 of acquisition transaction costs. In the fourth quarter of 2021, the Company acquired the assets of a business in India, which is included in its Industrial Processing segment, for approximately $ 2,882,000 . The following table summarizes the estimated fair values of assets acquired and liabilities assumed and the purchase price for Clouth and the Company's other acquisitions in 2021. Measurement period adjustments in 2022 were not material to the Company's results of operations. (In thousands) Clouth Other Total Net Assets Acquired: Cash and Cash Equivalents $ 4,923 $ 3,757 $ 8,680 Accounts Receivable 6,808 1,641 8,449 Inventories 14,255 5,000 19,255 Property, Plant, and Equipment 24,045 5,143 29,188 Other Assets 6,056 2,922 8,978 Definite-Lived Intangible Assets Customer relationships 20,192 23,100 43,292 Product technology 8,915 2,700 11,615 Tradenames — 1,400 1,400 Other 401 1,560 1,961 Indefinite-Lived Intangible Assets Tradenames 4,959 — 4,959 Goodwill 25,773 27,449 53,222 Total assets acquired 116,327 74,672 190,999 Short-term Obligations and Current Maturities of Long-term Obligations 1,393 — 1,393 Accounts Payable 1,287 797 2,084 Long-Term Deferred Income Taxes 9,013 6,760 15,773 Long-Term Obligations 4,244 — 4,244 Other Liabilities 8,240 6,929 15,169 Total liabilities assumed 24,177 14,486 38,663 Net assets acquired $ 92,150 $ 60,186 $ 152,336 Purchase Price: Cash Paid $ 92,150 $ 60,186 $ 152,336 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 the Company's other 2021 acquisitions' definite-lived intangible assets is 16 years, including weighted-average amortization periods of 17 years for customer relationships, 13 years for product technology, and 16 years for tradenames. F-19 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements Unaudited Supplemental Pro Forma Information The following unaudited pro forma information provides the effect of the Company's 2021 acquisition of Clouth as if it had occurred at the beginning of 2020: (In thousands, except per share amounts) January 1, 2022 January 2, 2021 Revenue $ 812,016 $ 682,248 Net Income Attributable to Kadant $ 90,184 $ 55,760 Earnings per Share Attributable to Kadant Basic $ 7.79 $ 4.86 Diluted $ 7.74 $ 4.82 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 $ 3,082,000 in 2020 and reversal of $ 3,082,000 in 2021, for the sale of inventory revalued at the date of acquisition. • Pre-tax charge to SG&A expenses of $ 3,109,000 in 2020 and reversal of $ 2,710,000 in 2021 and $ 399,000 in 2021, for acquisition costs and intangible asset amortization related to acquired backlog, respectively. • Estimated tax effects related to the pro forma adjustments. Pro forma results in 2020 include a pre-tax gain of $ 4,409,000 from the forgiveness of a shareholder loan at Clouth. 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 Company's other acquisitions in 2021 as the inclusion of those results would not have been materially different from the pro forma results presented above had the acquisitions occurred at the beginning of 2020. 2020 On June 1, 2020, the Company acquired Cogent Industrial Technologies Ltd. (Cogent), which is included in its Industrial Processing segment, for approximately $ 6,866,000 , net of cash acquired. The Company funded the acquisition through borrowings under its revolving credit facility. Intangible assets acquired primarily relate to customer relationships with a fair value of $ 3,350,000 . Cogent, based in British Columbia, Canada, is an industrial automation and controls solution provider that offers expertise in process technology integration, industrial automation and controls, industrial safety, project management, and operational performance management systems. On May 28, 2020, the Company also acquired certain intellectual property from a company in Austria, which is included in its Industrial Processing segment, for $ 416,000 , of which $ 229,000 was paid in the second quarter of 2020, $ 125,000 in the first quarter of 2021, and $ 62,000 in the first quarter of 2022. Intangible assets acquired represent product technology with a fair value of $ 557,000 at acquisition date. 3. Employee Benefit Plans Stock-Based Compensation Plans The Company maintains stock-based compensation plans primarily for its key employees and directors, although the plans permit awards to others expected to make significant contributions to the future of the Company. The plans authorize the compensation committee of the Company's board of directors (the board committee) to award a variety of stock and stock-based incentives, such as restricted stock, RSUs, nonqualified and incentive stock options, stock bonus shares, or performance-based shares. The award recipients and the terms of awards granted under these plans are determined by the board committee. Upon a change of control, as defined in the plans, all options or other awards become F-20 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements fully vested and all restrictions lapse. The Company had 313,104 shares available for grant under these stock-based compensation plans at year-end 2022. The Company generally issues its common stock out of treasury stock, to the extent available, for share issuances related to its stock-based compensation plans. The Company recognizes compensation cost for all stock-based awards granted to employees and directors based on the grant date estimate of fair value for those awards. The fair value of RSUs is based on the grant date price of the Company's common stock, reduced by the present value of estimated dividends foregone during the requisite service period. The components of pre-tax stock-based compensation expense included in SG&A expenses in the accompanying consolidated statement of income are as follows: (In thousands) December 31, 2022 January 1, 2022 January 2, 2021 RSU Awards $ 8,222 $ 8,224 $ 6,453 Employee Stock Purchase Plan Awards 354 303 323 Total $ 8,576 $ 8,527 $ 6,776 The Company grants RSUs to non-employee directors and certain employees. Holders of RSUs have no voting rights and are not entitled to receive cash dividends. Non-Employee Director Restricted Stock Units The Company granted RSU awards consisting of 941 RSUs in 2022, 1,009 RSUs in 2021 and 2,085 RSUs in 2020 to each of its incumbent non-employee directors. Half of the RSUs vested on June 1 of each year and the remaining RSUs vested ratably on the last day of the third and fourth fiscal quarters of each year. In addition, the Company granted RSU awards consisting of 470 RSUs in May 2022, which vested ratably on the last day of the third and fourth fiscal quarters of 2022 and 1,042 RSUs in July 2020, which vested ratably on the last day of the third and fourth fiscal quarters of 2020 to its then new non-employee director. Each RSU issued to the directors represents the right to receive one share of the Company's common stock upon vesting. Performance-Based Restricted Stock Units The Company grants performance-based RSUs to certain officers of the Company. Each performance-based RSU represents the right to receive one share of the Company's common stock upon vesting. The RSUs are subject to adjustment based on the achievement of a performance measure selected for the fiscal year, which historically has been a specified target for adjusted earnings before interest, taxes, depreciation, and amortization (adjusted EBITDA) generated from operations. Following the adjustment, the RSUs are subject to additional time-based vesting, and vest in three equal annual installments, provided that the officer is employed by the Company on the applicable vesting dates. The Company recognizes compensation expense associated with performance-based RSUs ratably over the requisite service period for each separately vesting portion of the award based on the grant date fair value, net of actual forfeitures recorded when they occur, and remeasured each reporting period until the total number of RSUs to be issued is known. Unrecognized compensation expense related to the unvested performance-based RSUs totaled $ 2,563,000 at year-end 2022, and will be recognized over a weighted average period of 1.3 years. The performance-based RSU agreements provide for forfeiture in certain events, such as voluntary or involuntary termination of employment, and for acceleration of vesting in certain events, such as death, disability or a change in control of the Company. If death, disability, or a change in control occurs prior to the end of the performance period, the officer will receive the target RSU amount; otherwise, the officer will receive the number of deliverable RSUs based on the achievement of the performance goal, as stated in the RSU agreements. Time-Based Restricted Stock Units The Company grants time-based RSUs to its officers and other employees of the Company. Each time-based RSU represents the right to receive one share of the Company's common stock upon vesting. The Company recognizes compensation expense associated with these time-based RSUs ratably over the requisite service period for the entire award based on the grant date fair value, and net of actual forfeitures recorded when they occur. The time-based RSU agreement provides for forfeiture in certain events, such as voluntary or involuntary termination of employment, and for acceleration of vesting in certain events, such as death, disability, or a change in control of the Company. Unrecognized compensation expense related to the time-based RSUs totaled $ 3,841,000 at year-end 2022, and will be recognized over a weighted average period of 1.8 years. F-21 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements Vesting of Restricted Stock Units A summary of the activity of the Company's unvested RSUs in 2022 is as follows: (In thousands, except per share amounts) Units Weighted Average Grant- Date Fair Value Unvested RSUs at January 1, 2022 107 $ 127.70 Granted 50 $ 170.76 Vested ( 67 ) $ 123.93 Forfeited ( 5 ) $ 168.18 Unvested RSUs at December 31, 2022 85 $ 153.98 The weighted average grant date fair value of RSUs granted was $ 170.76 in 2022, $ 174.52 in 2021, and $ 88.22 in 2020. The total fair value of shares vested was $ 8,337,000 in 2022, $ 5,892,000 in 2021, and $ 7,343,000 in 2020. Stock Options The Company has not granted stock options since 2013. Prior to 2014, the Company granted nonqualified stock options to its executive officers that vested over three years and were not exercisable until vested. All options awarded in prior periods were granted at an exercise price equal to the fair market value of the Company's common stock on the date of grant. There were no stock options outstanding at year-end 2022 and 2021 as all remaining stock options were exercised prior to the end of 2021. A summary of the Company's stock option exercises are as follows: (In thousands) December 31, 2022 January 1, 2022 January 2, 2021 Total Intrinsic Value of Options Exercised $ — $ 4,986 $ 4,071 Cash Received from Options Exercised $ — $ 665 $ 1,123 Employee Stock Purchase Plan The Company's eligible U.S. employees may elect to participate in its employee stock purchase plan. Under the plan, shares of the Company's common stock may be purchased at a 15 % discount from the fair market value at the beginning or end of the purchase period, whichever is lower. Shares purchased under the plan are subject to a one-year resale restriction and are purchased through payroll deductions of up to 10 % of each participating employee's gross wages. The Company issued 9,111 shares in 2022, 10,230 shares in 2021, and 13,062 shares in 2020 of its common stock under this plan. The Company had 82,532 shares available for grant under the employee stock purchase plan at year-end 2022. 401(k) Savings and Other Defined Contribution Plans The Company's U.S. subsidiaries participate in the Kadant Inc. 401(k) Retirement Savings Plan sponsored by the Company. Contributions to the plan are made by both the employee and the Company and are immediately vested. Company contributions are based upon the level of employee contributions. Certain of the Company's subsidiaries offer other retirement plans, the majority of which are defined contribution plans. Company contributions to these plans are based on formulas determined by the Company. For these plans, the Company contributed and charged to expense $ 5,151,000 in 2022, $ 4,706,000 in 2021, and $ 4,501,000 in 2020. Pension and Other Post-Retirement Defined Benefits Plans The Company sponsors pension and other post-retirement defined benefit plans covering employees at certain U.S. and foreign subsidiaries. In accordance with ASC 715, Compensation-Retirement Benefits , the Company recognizes the funded status of its plans as an asset or liability and changes in the funded status through AOCI, net of tax, in the accompanying consolidated balance sheet. The amounts in AOCI are recognized as net periodic benefit cost pursuant to the Company's accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic benefit cost will be recognized as a component of AOCI, net of tax. F-22 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements The Company records the non-service component of net periodic pension cost in other expense, net in the accompanying consolidated statement of income . The disclosure requirements related to the Company’s defined benefit plans are not material for the fiscal years presented. 4. Stockholders' Equity Preferred Stock The Company's Certificate of Incorporation authorizes up to 5,000,000 shares of preferred stock, $ .01 par value per share, for issuance by the Company's board of directors without further shareholder approval. Common Stock At year-end 2022, the Company had reserved 481,113 unissued shares of its common stock for possible issuance under its stock-based compensation plans. 5. Income Taxes The components of income before provision for income taxes are as follows: (In thousands) December 31, 2022 January 1, 2022 January 2, 2021 Domestic $ 46,558 $ 26,599 $ 14,132 Foreign 119,078 85,453 59,555 $ 165,636 $ 112,052 $ 73,687 The components of the provision for income taxes are as follows: (In thousands) December 31, 2022 January 1, 2022 January 2, 2021 Current Provision: Federal $ 8,738 $ 2,173 $ 339 Foreign 26,032 25,512 16,800 State 1,977 870 667 36,747 28,555 17,806 Deferred Provision (Benefit): Federal 1,970 1,823 2,146 Foreign 4,233 ( 3,430 ) ( 2,361 ) State 956 223 357 7,159 ( 1,384 ) 142 $ 43,906 $ 27,171 $ 17,948 The Company receives a tax deduction upon the exercise of nonqualified stock options and the vesting of RSUs. The Company recognizes excess income tax benefits and tax deficiencies related to stock-based compensation arrangements as discrete items within the provision for income taxes in the reporting period in which they occur. The Company recognized an income tax benefit of $ 501,000 in 2022, $ 1,808,000 in 2021 and $ 758,000 in 2020 in the accompanying consolidated statement of income. F-23 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements The provision for income taxes in the accompanying consolidated statement of income differs from the provision calculated by applying the statutory federal income tax rate of 21% to income before provision for income taxes due to the following: (In thousands) December 31, 2022 January 1, 2022 January 2, 2021 Provision for Income Taxes at Statutory Rate $ 34,784 $ 23,531 $ 15,474 Increases (Decreases) Resulting From: Foreign tax rate differential 5,770 2,819 1,891 Nondeductible expenses 2,683 1,673 2,117 State income taxes, net of federal income tax 2,316 863 807 Reversal of tax benefit reserves, net ( 1,368 ) ( 444 ) ( 730 ) U.S. tax cost of foreign earnings 932 481 599 Research and development tax credits ( 425 ) ( 454 ) ( 465 ) Excess tax benefit related to stock-based compensation ( 377 ) ( 1,525 ) ( 661 ) Change in valuation allowance 318 ( 31 ) ( 469 ) Other ( 727 ) 258 ( 615 ) $ 43,906 $ 27,171 $ 17,948 The Company's net deferred tax liability consists of the following: (In thousands) December 31, 2022 January 1, 2022 Deferred Tax Asset: Net operating loss carryforwards $ 13,057 $ 14,162 Lease liabilities 6,031 6,393 Inventory basis difference 4,118 4,600 Employee compensation 3,697 4,368 Capitalized research expenses 3,398 2,349 Reserves and accruals 1,949 3,167 Allowance for credit losses 673 420 Foreign, state, and alternative minimum tax credit carryforwards 490 508 Other 122 48 Deferred tax asset, gross 33,535 36,015 Less: valuation allowance ( 8,983 ) ( 9,212 ) Deferred tax asset, net 24,552 26,803 Deferred Tax Liability: Goodwill and intangible assets ( 41,129 ) ( 43,780 ) Fixed asset basis difference ( 11,438 ) ( 6,009 ) ROU assets ( 5,145 ) ( 5,431 ) Provision for unremitted foreign earnings ( 783 ) ( 559 ) Other ( 1,976 ) ( 1,819 ) Deferred tax liability ( 60,471 ) ( 57,598 ) Net deferred tax liability $ ( 35,919 ) $ ( 30,795 ) Deferred tax assets and liabilities are presented in the accompanying consolidated balance sheet within other assets and long-term deferred income taxes on a net basis by tax jurisdiction. The Company has established valuation allowances related to certain domestic and foreign deferred tax assets on deductible temporary differences, tax losses, and tax credit carryforwards. The valuation allowance at year-end 2022 was $ 8,983,000 , consisting of $ 160,000 in the United States and $ 8,823,000 in foreign jurisdictions. The decrease in the valuation allowance in 2022 of $ 229,000 is related primarily to fluctuations in foreign currency exchange rates and utilization of net operating losses, partially offset by an increase in valuation allowance associated with restructuring losses. Compliance with ASC 740 requires the Company to periodically evaluate the necessity of establishing or adjusting a valuation allowance for deferred tax assets depending on whether it is more likely than not that a related tax benefit will be realized in future periods. When assessing the need for a valuation allowance in a tax jurisdiction, the Company evaluates the weight of all available evidence to determine whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. As part of this evaluation, F-24 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements the Company considers its cumulative three-year history of earnings before income taxes, taxable income in prior carryback years, future reversals of existing taxable temporary differences, prudent and feasible tax planning strategies, and expected future results of operations. As of year-end 2022, the Company continued to maintain a valuation allowance in the United States against a portion of its state net operating loss carryforwards due to the uncertainty of future profitability in certain state jurisdictions. As of year-end 2022, the Company maintained valuation allowances in certain foreign jurisdictions because of the uncertainty of future profitability within those foreign jurisdictions. At year-end 2022, the Company had U.S. federal and state net operating loss carryforwards of $ 1,002,000 and $ 22,587,000 , respectively, and foreign net operating loss carryforwards of $ 51,804,000 . The U.S. federal net operating loss carryforward does not expire. The state net operating loss carryforwards begin to expire in 2024 and a portion does not expire. Of the foreign net operating loss carryforwards, $ 1,451,000 will expire in the years 2025 through 2042, and the remainder do not expire. As of year-end 2022, the Company also had state disallowed business interest expense carryforwards of $ 71,000 and foreign tax credits of $ 368,000 , of which $ 120,000 came from the acquisition of Syntron Material Handling Group, LLC and certain of its affiliates (SMH) in 2019. The disallowed business interest expense carryforward does not expire, and the foreign tax credit carryforward begins to expire in 2024. The utilization of these tax attributes is limited to the Company’s future taxable income, and certain of these tax attributes are subject to an annual limitation as a result of the acquisition of SMH, which constitutes a change of ownership as defined under Internal Revenue Code Section 382. At year-end 2022, the Company had approximately $ 248,103,000 of unremitted foreign earnings. During 2022, the Company repatriated $ 39,081,000 of previously taxed foreign earnings to the United States and recognized a foreign exchange loss of $ 2,673,000 associated with these earnings. The Company intends to repatriate the distributable reserves of select foreign subsidiaries back to the United States and has recognized $ 764,000 of net tax expense on the estimated repatriation amount during 2022. Except for these select foreign subsidiaries, the Company intends to indefinitely reinvest $ 228,972,000 of earnings of its foreign subsidiaries in order to support the current and future capital needs of their operations, including the repayment of the Company’s foreign debt. The related foreign withholding taxes, which would be required if the Company were to remit these foreign earnings to the United States, would be approximately $ 4,095,000 . The Company operates within multiple tax jurisdictions and could be subject to audit in those jurisdictions. Such audits can involve complex income tax issues, which may require an extended period of time to resolve and may cover multiple years. In management's opinion, adequate provisions for income taxes have been made for all years subject to audit. As of year-end 2022, the Company had a liability of $ 10,354,000 for unrecognized tax benefits which, if recognized, would reduce the effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: (In thousands) December 31, 2022 January 1, 2022 Unrecognized Tax Benefits, Beginning of Year $ 9,731 $ 8,337 Gross Increases—Tax Positions in Prior Periods 2,116 2,409 Gross Decreases—Tax Positions in Prior Periods ( 138 ) ( 2,182 ) Gross Increases—Current-period Tax Positions 1,260 1,920 Lapses of Statutes of Limitations ( 2,251 ) ( 649 ) Currency Translation ( 364 ) ( 104 ) Unrecognized Tax Benefits, End of Year $ 10,354 $ 9,731 A portion of the unrecognized tax benefits generated in 2022 is offset by deferred tax assets in the accompanying consolidated balance sheet. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company has accrued $ 1,806,000 at year-end 2022 and $ 1,704,000 at year-end 2021 for the potential payment of interest and penalties. The interest and penalties included in the accompanying consolidated statement of income was a benefit of $ 333,000 in 2022 and $ 129,000 in 2021. The Company is currently under audit in four of its foreign tax jurisdictions. During 2021, the Company finalized its examination with the Internal Revenue Service for the tax years 2017 and 2018 with no material adjustments. It is reasonably possible that over the next fiscal year the amount of liability for unrecognized tax benefits may be reduced by up to $ 122,000 primarily from the expiration of tax statutes of limitations. The Company remains subject to U.S. federal income tax examinations for the tax years 2019 through 2022, and to non-U.S. income tax examinations for the tax years 2015 through 2022. In addition, the Company remains subject to state and local income tax examinations in the United States for the tax years 2003 through 2022. F-25 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements 6. Short- and Long-Term Obligations Short- and long-term obligations are as follows: (In thousands) December 31, 2022 January 1, 2022 Revolving Credit Facility, due 2027 $ 186,131 $ 250,267 Senior Promissory Notes, due 2023 to 2028 10,000 10,000 Finance Leases, due 2023 to 2026 1,940 1,610 Other Borrowings, due 2023 to 2028 3,090 7,637 Total 201,161 269,514 Less: Short-Term Obligations and Current Maturities of Long-Term Obligations ( 3,821 ) ( 5,356 ) Long-Term Obligations $ 197,340 $ 264,158 See Note 11 for the fair value information related to the Company's long-term obligations. Revolving Credit Facility On November 30, 2022, the Company entered into a sixth amendment to its unsecured multi-currency revolving credit facility, originally entered into on March 1, 2017 (as amended and restated to date, the Credit Agreement). Among other things, this amendment extended the maturity date to November 30, 2027, and increased the uncommitted, unsecured incremental borrowing facility from $ 150,000,000 to $ 200,000,000 . Pursuant to the Credit Agreement, the Company has a borrowing capacity of $ 400,000,000 and 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 a margin of 0 % to 1.25 %, or (ii) Eurocurrency Rate, Term SOFR (plus a 10 basis point credit spread adjustment), CDOR Rate, and RFR, as applicable and defined, plus a margin of 1.0 % to 2.25 %. The margin is determined based upon the ratio of the Company's total debt, net of unrestricted cash up to $ 50,000,000 , to earnings before interest, taxes, depreciation, and amortization as defined in the Credit Agreement. Additionally, the Credit Agreement requires the payment of a commitment fee payable in arrears on the available borrowing capacity under the Credit Agreement, which ranges from 0.125 % to 0.350 %. 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, 4.25 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. At year-end 2022, the outstanding balance under the Credit Agreement was $ 186,131,000 , which included $ 73,131,000 of euro-denominated borrowin gs primarily used to fund the Company's acquisitions in 2021. Th e Company had $ 214,061,000 of borrowing capacity available at year-end 2022, which was calculated by translating its foreign-denominated borrowings using the administrative agent's borrowing date foreign exchange rates, in addition to the $ 200,000,000 uncommitted, unsecured incremental borrowing facility. The weighted average interest rate for the outstanding balance under the Credit Agreement was 4.33 % as of year-end 2022 and 1.50 % as of year-end 2021. See Note 10 , Derivatives, under the heading Interest Rate Swap Agreement , for information relating to the Company's 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. At year-end 2022, $ 1,670,000 was included in current maturities of long-term obligations in the accompanying consolidated balance sheet related to this obligation. The obligations of the Initial Notes may be accelerated F-26 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements 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, 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 Initial Notes are guaranteed by certain of the Company’s domestic subsidiaries. Debt Compliance At year-end 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. See Note 9 , Leases, for further information relating to the Company's finance leases. Other Borrowings Prior to August 2022, other borrowings included a sale-leaseback financing arrangement for a manufacturing facility in Germany. This arrangement provided for a fixed price purchase option of the facility from the landlord at the end of the lease term in August 2022. The Company exercised this option and acquired the facility from the landlord for 2,722,000 euros, or approximately $ 2,730,000 . The Company applied its outstanding loan receivable due from the landlord of 1,393,000 euros, or approximately $ 1,397,000 , towards the purchase of the facility. At year-end 2022, other borrowings included $ 665,000 of short-term obligations and $ 1,920,000 of long-term debt obligations outstanding assumed in the acquisition of Clouth, which have maturity dates ranging from 2023 to 2028 and interest rates up to 1.70 %. Annual Repayment Requirements The following schedule presents the annual repayment requirements for the Company’s short-and long-term obligations, excluding finance leases, as of year-end 2022. (In thousands) 2023 $ 2,840 2024 2,205 2025 2,210 2026 2,104 2027 188,136 2028 1,726 $ 199,221 7. Commitments and Contingencies Letters of Credit and Bank Guarantees Outstanding letters of credit and bank guarantees issued on behalf of the Company, principally relating to performance obligations and customer deposit guarantees, totaled $ 32,533,000 at year-end 2022. Certain of the Company's contracts require the Company to provide a standby letter of credit or bank guarantee to a customer as beneficiary, limited in amount to a negotiated percentage of the total contract value, in order to guarantee warranty and performance obligations of the Company under the contract. Typically, these standby letters of credit and bank guarantees expire without being drawn by the beneficiary. Right of Recourse In the ordinary course of business, the Company's Chinese subsidiaries may receive banker's acceptance drafts from customers as payment for their trade accounts receivable. The drafts are noninterest-bearing obligations of the issuing bank and 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 F-27 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements scheduled maturity dates. The Company had $ 11,238,000 at year-end 2022 and $ 9,593,000 at year-end 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. Contingencies In the ordinary course of business, the Company is, at times, required to issue limited performance guarantees, some of which do not require the issuance of letters of credit to customers in support of these guarantees, relating to its equipment and systems. The Company generally limits its liability under these guarantees to amounts typically capped at 10% or less of the value of the contract. The Company believes that it has adequate reserves for any potential liability in connection with such guarantees. Litigation From time to time, the Company is subject to various claims and legal proceedings covering a range of matters that arise in the ordinary course of business. Such litigation may include, but is not limited to, claims and counterclaims by and against the Company for breach of contract or warranty, canceled contracts, product liability, or bankruptcy-related claims. For legal proceedings in which a loss is probable and estimable, the Company accrues a loss based on the low end of the range of estimated loss when there is no better estimate within the range. If the Company were found to be liable for any of the claims or counterclaims against it, the Company would incur a charge against earnings for amounts in excess of legal accruals. 8. Gain on Sale and Other Costs, Net A summary of the items included in gain on sale and other costs, net is as follows: (In thousands) December 31, 2022 January 1, 2022 January 2, 2021 Gain on Sale of Assets $ ( 20,190 ) $ ( 515 ) $ — Impairment Costs 731 804 1,861 Restructuring Costs 603 176 1,118 $ ( 18,856 ) $ 465 $ 2,979 Gain on Sale of Assets The Company entered into several agreements with the local government in China to sell the existing manufacturing building and land use rights at one of its subsidiaries in China for $ 25,159,000 and relocate to a new facility (China Transaction). 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 China Transaction of $ 20,190,000 , or $ 15,143,000 , net of deferred taxes of $ 5,047,000 , in the first quarter of 2022. A receivable of $ 16,082,000 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. The receivable outstanding at December 31, 2022 was $ 15,181,000 and is included in other long-term assets in the consolidated balance sheet. The subsidiary, which is part of the Industrial Processing segment, will continue to occupy its current facility until construction of its new facility is complete, which is expected in 2023. A summary of the change in the outstanding receivable on the China Transaction is as follows: (In thousands) December 31, 2022 Balance at Inception $ 17,294 Present value discount ( 1,212 ) Receivable recorded, net 16,082 Accretion of interest income 422 Currency translation ( 1,323 ) Balance at End of Year $ 15,181 F-28 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements In 2021, gain on sale of assets included $ 515,000 related to a gain on the sale of a building in Theodore, Alabama, within the Company's Industrial Processing segment for net cash proceeds of $ 1,634,000 . The building was vacated as part of the Company's 2017 restructuring plan to consolidate three of its stock-preparation operations into a single new facility, which was completed in 2018. Impairment and Restructuring Costs During 2022, the Company recorded impairment costs of $ 731,000 and restructuring costs of $ 35,000 within its Industrial Processing segment. The impairment costs included $ 549,000 primarily related to the write-down of inventory at the Company's business in Russia and $ 182,000 related to the write-down of certain fixed assets that will not be moved to the new manufacturing facility in China. During the fourth quarter of 2021, the Company initiated a restructuring plan within its Flow Control segment to eliminate a redundant ceramic blade manufacturing operation that resulted from its acquisition of Clouth. The plan consisted of severance costs related to the termination of five employees, and facility and other closure costs. Severance costs totaled $ 381,000 , of which $ 205,000 were recorded in 2022 and $ 176,000 in 2021, and facility and other closure costs totaled $ 363,000 , all of which were recorded in 2022. During 2021, the Company also recorded asset impairment charges related this restructuring plan of $ 499,000 for the write-down of an intangible asset, $ 226,000 for the write-down of certain machinery and equipment, and $ 79,000 for the write-down of a ROU asset. The Company does not expect to incur additional restructuring charges related to this restructuring plan. During 2020, the Company recorded restructuring costs totaling $ 1,118,000 , representing severance costs of $ 659,000 for 34 employees within its Flow Control segment, $ 277,000 for 26 employees in its Industrial Processing segment, and $ 182,000 for four employees in its Material Handling segment. The Company also reduced its workforce by 21 employees in its Industrial Processing segment with no associated severance costs. The Company took these cost-containment actions to reduce payroll-related overhead and operating costs in response to the slowdown in the global economy, largely driven by the COVID-19 pandemic. A summary of the changes in accrued restructuring costs included in other current liabilities in the accompanying consolidated balance sheet, which are expected to be paid in 2023, are as follows: (In thousands) Severance Costs Facility and Other Closure Costs Total 2021 Restructuring Plan Provision $ 176 $ — $ 176 Usage ( 19 ) — ( 19 ) Currency translation ( 1 ) — ( 1 ) Balance at January 1, 2022 156 — 156 Provision 205 398 603 Usage ( 159 ) ( 231 ) ( 390 ) Currency translation ( 13 ) 33 20 Balance at December 31, 2022 $ 189 $ 200 $ 389 2020 Restructuring Plan Provision $ 1,118 $ — $ 1,118 Usage ( 1,052 ) — ( 1,052 ) Currency translation ( 5 ) — ( 5 ) Balance at January 2, 2021 61 — 61 Usage ( 61 ) — ( 61 ) Balance at January 1, 2022 $ — $ — $ — During the fourth quarter of 2020, due to the continued and anticipated decline in demand for the Company's timber-harvesting business' products, the Company performed a quantitative analysis of the recoverability of the related intangible assets in which the income approach discounted cash flow methodology was used. As a result of this analysis, the Company determined that the fair values of the timber-harvesting product line's definite-lived intangible assets related to customer relationships, product technology and tradename were less than their carrying values, and therefore recorded additional impairment charges totaling $ 1,861,000 in 2020 following $ 2,336,000 of impairment charges recognized in 2019. F-29 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements 9. Leases The Company enters into operating and finance lease commitments primarily for its manufacturing and office space, vehicles, and equipment that expire on various dates over the next 12 years, some of which include one or more options to extend the lease for up to 5 years. In addition, the Company leases land associated with certain of its buildings in Canada and China under long-term leases expiring in 2032 to 2071. The lease in Canada also includes an assumed option to extend the term for up to 10 years. The components of lease expense are as follows: (In thousands) December 31, 2022 January 1, 2022 January 2, 2021 Operating Lease Cost $ 5,870 $ 5,895 $ 5,602 Short-Term Lease Cost 697 674 671 Finance Lease Cost: ROU asset amortization 1,026 1,045 1,157 Interest on lease liabilities 52 46 74 Total Finance Lease Cost 1,078 1,091 1,231 Total Lease Costs $ 7,645 $ 7,660 $ 7,504 Supplemental cash flow information related to leases is as follows: (In thousands) December 31, 2022 January 1, 2022 January 2, 2021 Cash Paid for Amounts Included in the Measurement of Lease Liabilities: Operating cash flows from operating leases $ 6,159 $ 12,474 $ 5,782 Operating cash flows from finance leases $ 51 $ 46 $ 74 Financing cash flows from finance leases $ 1,002 $ 1,044 $ 1,139 ROU Assets Obtained in Exchange for Lease Obligations: Operating leases $ 4,002 $ 7,247 $ 2,560 Finance leases $ 1,468 $ 1,147 $ 622 Supplemental balance sheet information related to leases is as follows: (In thousands) Balance Sheet Line Item December 31, 2022 January 1, 2022 Operating Leases: ROU assets Other current assets $ — $ 2,341 ROU assets Other assets 22,642 24,998 Total operating lease assets $ 22,642 $ 27,339 Short-term liabilities Other current liabilities $ 4,458 $ 4,596 Long-term liabilities Other long-term liabilities 17,817 19,959 Total operating lease liabilities $ 22,275 $ 24,555 Finance Leases: ROU assets, at cost Property, plant, and equipment, at cost $ 3,901 $ 4,076 ROU assets accumulated amortization Accumulated depreciation and amortization ( 1,994 ) ( 2,489 ) ROU assets, net Property, plant, and equipment, net $ 1,907 $ 1,587 Short-term obligations Short-term obligations and current maturities of long-term obligations $ 981 $ 862 Long-term obligations Long-term obligations 959 748 Total finance lease liabilities $ 1,940 $ 1,610 F-30 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements December 31, 2022 January 1, 2022 Weighted Average Remaining Lease Term (in years): Operating leases 8.0 8.7 Finance leases 2.2 2.1 Weighted Average Discount Rate: Operating leases 3.88 % 3.82 % Finance leases 3.79 % 2.55 % As of December 31, 2022, future lease payments for lease liabilities are as follows: Operating Finance (In thousands) Leases Leases 2023 $ 5,220 $ 1,036 2024 4,247 685 2025 3,086 301 2026 2,312 3 2027 1,989 — 2028 and Thereafter 9,338 — Total Future Lease Payments 26,192 2,025 Less: Imputed Interest ( 3,917 ) ( 85 ) Present Value of Lease Payments $ 22,275 $ 1,940 As of December 31, 2022, the Company had no significant operating and finance leases that had not yet commenced. 10. 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 6 , 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. F-31 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements Gains and losses reported within SG&A expenses in the accompanying consolidated statement of income associated with the Company's forward currency-exchange contracts that were not designated as hedges were not material in 2022, 2021, and 2020. The following table summarizes the fair value of derivative instruments in the accompanying consolidated balance sheet: December 31, 2022 January 1, 2022 (In thousands) Balance Sheet Location Asset (Liability) (a) Notional Amount (b) Asset (Liability) (a) Notional Amount Derivatives Designated as Hedging Instruments: Derivatives in an Asset Position: 2018 Swap Agreement Other Current Assets $ 131 $ 15,000 $ — $ — Derivatives in a Liability Position: 2018 Swap Agreement Other Long-Term Liabilities $ — $ — $ ( 550 ) $ 15,000 Forward currency-exchange contract Other Current Liabilities $ ( 54 ) $ 430 $ ( 44 ) $ 842 Derivatives Not Designated as Hedging Instruments: Derivatives in an Asset Position: Forward currency-exchange contracts Other Current Assets $ 15 $ 647 $ 14 $ 1,200 (a) See Note 11 , Fair Value Measurements and Fair Value of Financial Instruments, for the fair value measurements relating to these financial instruments. (b) The year-end 2022 notional amounts are indicative of the level of the Company's recurring derivative activity during the year. The following table summarizes the activity in AOCI associated with the Company's derivative instruments designated as cash flow hedges as of and for the year ended December 31, 2022: (In thousands) Interest Rate Swap Agreements Forward Currency- Exchange Contracts Total Unrealized Loss, Net of Tax, at January 1, 2022 $ ( 429 ) $ ( 33 ) $ ( 462 ) Loss reclassified to earnings (a) 158 — 158 Gain (loss) recognized in AOCI 370 ( 8 ) 362 Unrealized Gain (Loss), Net of Tax, at December 31, 2022 $ 99 $ ( 41 ) $ 58 (a) See Note 14 , Accumulated Other Comprehensive Items, for the income statement classification. At year-end 2022, the Company expects to reclassify gains of $ 58,000 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. 11. Fair Value Measurements and Fair Value of Financial Instruments Fair value measurement is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. 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. F-32 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements 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 December 31, 2022 (In thousands) Level 1 Level 2 Level 3 Total Assets: Money market funds and time deposits $ 8,351 $ — $ — $ 8,351 Banker's acceptance drafts (a) $ — $ 5,729 $ — $ 5,729 2018 Swap Agreement $ — $ 131 $ — $ 131 Forward currency-exchange contracts (b) $ — $ 15 $ — $ 15 Liabilities: Forward currency-exchange contract (c) $ — $ 54 $ — $ 54 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 (b) $ — $ 14 $ — $ 14 Liabilities: 2018 Swap Agreement $ — $ 550 $ — $ 550 Forward currency-exchange contracts (c) $ — $ 44 $ — $ 44 (a) Included in accounts receivable in the accompanying consolidated balance sheet. (b) Represents derivative instruments not designated as hedging instruments. (c) Represents derivative instruments designated as hedging instruments. The Company uses the market approach technique to value its financial assets and liabilities, and there were no changes in valuation techniques during 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 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 the Company's debt obligations, excluding lease obligations, are as follows: December 31, 2022 January 1, 2022 (In thousands) Carrying Value Fair Value Carrying Value Fair Value Debt Obligations: Revolving credit facility $ 186,131 $ 186,131 $ 250,267 $ 250,267 Senior promissory notes 10,000 9,773 10,000 10,947 Other 3,090 3,090 4,331 4,331 $ 199,221 $ 198,994 $ 264,598 $ 265,545 The carrying value of the revolving credit facility approximates the fair value as the obligation bears variable rates of interest, which adjust frequently, based on prevailing market rates. The fair values of the senior promissory notes are primarily calculated based on quoted market rates plus an applicable margin available to the Company at the respective period ends, which represent Level 2 measurements. F-33 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements 12. Business Segment and Geographical 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: (In thousands) December 31, 2022 January 1, 2022 January 2, 2021 Revenue Flow Control (a) $ 349,107 $ 288,788 $ 225,444 Industrial Processing 353,698 328,762 261,577 Material Handling (b) 201,934 169,029 148,007 $ 904,739 $ 786,579 $ 635,028 Income Before Provision for Income Taxes Flow Control (a,c) $ 89,942 $ 65,509 $ 51,530 Industrial Processing (d) 89,754 66,569 42,971 Material Handling (b,e) 27,644 17,543 14,375 Corporate (f) ( 36,058 ) ( 32,911 ) ( 27,752 ) Total operating income 171,282 116,710 81,124 Interest expense, net (g) ( 5,574 ) ( 4,554 ) ( 7,242 ) Other expense, net (g) ( 72 ) ( 104 ) ( 195 ) $ 165,636 $ 112,052 $ 73,687 Total Assets (h) Flow Control (a) $ 386,804 $ 382,379 $ 263,141 Industrial Processing 419,095 405,575 379,965 Material Handling (b) 336,492 334,785 273,909 Corporate (i) 7,490 9,473 10,556 $ 1,149,881 $ 1,132,212 $ 927,571 Depreciation and Amortization Flow Control (a) $ 9,179 $ 8,366 $ 6,333 Industrial Processing 12,575 13,467 13,163 Material Handling (b) 13,085 12,341 11,628 Corporate 97 128 210 $ 34,936 $ 34,302 $ 31,334 F-34 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements (In thousands) December 31, 2022 January 1, 2022 January 2, 2021 Capital Expenditures Flow Control (a) $ 4,425 $ 4,128 $ 2,808 Industrial Processing (j) 20,137 6,412 3,123 Material Handling (b) 3,575 2,211 1,539 Corporate 62 20 125 $ 28,199 $ 12,771 $ 7,595 Geographical Information Revenue (k): United States (b) $ 404,835 $ 328,456 $ 286,015 Canada 87,951 79,426 62,059 China 85,500 82,121 51,003 Germany (a) 45,994 37,178 23,292 Other 280,459 259,398 212,659 $ 904,739 $ 786,579 $ 635,028 Long-lived Assets (l): United States (b) $ 47,483 $ 43,418 $ 40,293 Canada 8,344 8,460 7,221 China (j) 15,834 6,613 9,844 Germany (a) 22,437 25,188 6,051 Other 24,757 24,310 21,233 $ 118,855 $ 107,989 $ 84,642 (a) Includes results from Clouth, which was acquired between July 19, 2021 and August 10, 2021 (see Note 2 , Acquisitions). (b) Includes results from Balemaster, which was acquired on August 23, 2021 (see Note 2 , Acquisitions). (c) Includes acquisition-related expenses of $ 254,000 and $ 6,191,000 in 2022 and 2021, respectively. Acquisition-related expenses include acquisition costs and amortization expense associated with acquired profit in inventory and backlog. Includes non-cash charges for the write-off of indemnification assets of $ 741,000 in 2022. Includes impairment and restructuring costs of $ 568,000 , $ 980,000 and $ 659,000 in 2022, 2021 and 2020, respectively. (d) Includes a gain on the sale of a facility of $ 20,190,000 (see Note 8 , Gain on Sale and Other Costs, Net), non-cash charges for the write-off of an indemnification asset of $ 575,000 and impairment and restructuring costs of $ 766,000 in 2022. Includ es a gain on the sale of a building of $ 515,000 and acquisition-related expenses of $ 223,000 in 2021. Includes acquisition-related expenses of $ 679,000 and impairment and restructuring costs of $ 2,138,000 in 2020. (e) Includes acquisition-related expenses of $ 899,000 , $ 2,851,000 , and $ 350,000 in 2022, 2021 and 2020, respectively. (f) Represents general and administrative expenses. (g) The Company does not allocate interest and other expense, net to its segments. (h) Excludes all intercompany receivables or payables and investment in subsidiary balances. (i) Primarily includes cash and cash equivalents, tax assets, ROU assets, and property, plant, and equipment, net. (j) Includes capital expenditures of $ 10,379,000 in 2022 associated with the construction of a manufacturing facility in China. See Note 8, Gain on Sale and Other Costs, Net. (k) Revenue is attributed to countries based on customer location. (l) Represents property, plant, and equipment, net. F-35 Table of Contents Kadant Inc. 2022 Financial Statements Notes to Consolidated Financial Statements 13. Earnings per Share Basic and diluted EPS were calculated as follows: (In thousands, except per share amounts) December 31, 2022 January 1, 2022 January 2, 2021 Net Income Attributable to Kadant $ 120,928 $ 84,043 $ 55,196 Basic Weighted Average Shares 11,654 11,579 11,482 Effect of Stock Options, Restricted Stock Units and Employee Stock Purchase Plan Shares 34 76 82 Diluted Weighted Average Shares 11,688 11,655 11,564 Basic Earnings per Share $ 10.38 $ 7.26 $ 4.81 Diluted Earnings per Share $ 10.35 $ 7.21 $ 4.77 The effect of outstanding and unvested RSUs of the Company's common stock totaling 7,500 shares in 2022, 14,200 shares in 2021, and 22,900 shares in 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. 14. Accumulated Other Comprehensive Items Comprehensive income combines net income and other comprehensive items, which represent certain amounts that are reported as components of stockholders' equity in the accompanying consolidated balance sheet. Changes in each component of AOCI, net of tax, are as follows: (In thousands) Foreign Currency Translation Adjustment Pension and Other Post-Retirement Benefit Liability Adjustments Deferred (Loss) Gain on Cash Flow Hedges Total Balance at January 1, 2022 $ ( 29,096 ) $ ( 792 ) $ ( 462 ) $ ( 30,350 ) Other comprehensive items before reclassifications ( 25,392 ) 610 362 ( 24,420 ) Reclassifications from AOCI — 34 158 192 Net current period other comprehensive items ( 25,392 ) 644 520 ( 24,228 ) Balance at December 31, 2022 $ ( 54,488 ) $ ( 148 ) $ 58 $ ( 54,578 ) Amounts reclassified out of AOCI are as follows: (In thousands) December 31, 2022 January 1, 2022 January 2, 2021 Statement of Income Line Item Retirement Benefit Plans Recognized net actuarial loss $ ( 36 ) $ ( 50 ) $ ( 66 ) Other expense, net Amortization of prior service cost ( 10 ) ( 12 ) ( 55 ) Other expense, net Total expense before income taxes ( 46 ) ( 62 ) ( 121 ) Income tax benefit 12 17 153 Provision for income taxes ( 34 ) ( 45 ) 32 Cash Flow Hedges (a) Interest rate swap agreements ( 208 ) ( 451 ) ( 333 ) Interest expense Forward currency-exchange contracts — — 28 Cost of revenue Forward currency-exchange contracts — 157 — SG&A expense Total expense before income taxes ( 208 ) ( 294 ) ( 305 ) Income tax benefit 50 70 73 Provision for income taxes ( 158 ) ( 224 ) ( 232 ) Total Reclassifications $ ( 192 ) $ ( 269 ) $ ( 200 ) (a) See Note 10 , Derivatives, for additional information. 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