KADANT INC 10-Q

Item 1 – Financial Statements KADANT INC. Condensed Consolidated Balance Sheet (Unaudited) June 29, 2024 December 30, 2023 (In thousands, except share and per share amounts) Assets Current Assets: Cash and cash equivalents $ 73,805 $ 103,832 Restricted cash 1,373 2,621 Accounts receivable, net of allowances of $ 4,253 and $ 4,090 149,689 133,929 Inventories 173,513 152,677 Contract assets 15,144 8,366 Other current assets 41,808 38,757 Total Current Assets 455,332 440,182 Property, Plant, and Equipment, net of accumulated depreciation of $ 139,055 and $ 132,846 174,182 140,504 Other Assets 58,788 43,609 Intangible Assets, Net (Notes 1 and 2) 289,695 159,286 Goodwill (Notes 1 and 2) 478,035 392,084 Total Assets $ 1,456,032 $ 1,175,665 Liabilities and Stockholders' Equity Current Liabilities: Current maturities of long-term obligations (Note 6) $ 3,233 $ 3,209 Accounts payable 54,415 42,104 Accrued payroll and employee benefits 38,251 41,855 Customer deposits 48,391 62,641 Advanced billings 11,007 12,194 Other current liabilities 46,681 52,406 Total Current Liabilities 201,978 214,409 Long-Term Obligations (Note 6) 342,035 107,666 Long-Term Deferred Income Taxes 41,250 36,398 Other Long-Term Liabilities 52,383 40,952 Commitments and Contingencies (Note 12) Stockholders' Equity: Preferred stock, $ .01 par value, 5,000,000 shares authorized; none issued — — Common stock, $ .01 par value, 150,000,000 shares authorized; 14,624,159 shares issued 146 146 Capital in excess of par value 124,892 124,940 Retained earnings 811,595 763,131 Treasury stock at cost, 2,879,638 and 2,915,978 shares ( 70,563 ) ( 71,453 ) Accumulated other comprehensive items (Note 8) ( 58,359 ) ( 43,062 ) Total Kadant Stockholders' Equity 807,711 773,702 Noncontrolling interests (Note 2) 10,675 2,538 Total Stockholders' Equity 818,386 776,240 Total Liabilities and Stockholders' Equity $ 1,456,032 $ 1,175,665 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents KADANT INC. Condensed Consolidated Statement of Income (Unaudited) Three Months Ended Six Months Ended June 29, 2024 July 1, 2023 June 29, 2024 July 1, 2023 (In thousands, except per share amounts) Revenue (Notes 1 and 11) $ 274,765 $ 245,053 $ 523,740 $ 474,811 Costs and Operating Expenses: Cost of revenue 152,878 138,503 290,891 266,215 Selling, general, and administrative expenses 70,004 59,990 140,309 118,552 Research and development expenses 3,482 3,408 7,212 6,778 Other costs (Note 3) — 74 — 74 226,364 201,975 438,412 391,619 Operating Income 48,401 43,078 85,328 83,192 Interest Income 368 316 979 615 Interest Expense ( 5,201 ) ( 2,245 ) ( 9,870 ) ( 4,615 ) Other Expense, Net ( 2 ) ( 21 ) ( 32 ) ( 42 ) Income Before Provision for Income Taxes 43,566 41,128 76,405 79,150 Provision for Income Taxes (Note 5) 11,992 11,182 19,846 20,945 Net Income 31,574 29,946 56,559 58,205 Net Income Attributable to Noncontrolling Interests ( 283 ) ( 212 ) ( 579 ) ( 396 ) Net Income Attributable to Kadant $ 31,291 $ 29,734 $ 55,980 $ 57,809 Earnings per Share Attributable to Kadant (Note 4) Basic $ 2.66 $ 2.54 $ 4.77 $ 4.94 Diluted $ 2.66 $ 2.54 $ 4.76 $ 4.94 Weighted Average Shares (Note 4) Basic 11,743 11,704 11,734 11,693 Diluted 11,766 11,723 11,755 11,709 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents KADANT INC. Condensed Consolidated Statement of Comprehensive Income (Unaudited) Three Months Ended Six Months Ended June 29, 2024 July 1, 2023 June 29, 2024 July 1, 2023 (In thousands) Net Income $ 31,574 $ 29,946 $ 56,559 $ 58,205 Other Comprehensive Items: Foreign currency translation adjustment ( 5,202 ) ( 400 ) ( 15,424 ) 5,173 Post-retirement liability adjustments, net (net of tax of $ 1 , $( 1 ), $ 1 and $( 3 )) 2 ( 2 ) 3 ( 8 ) Deferred gain (loss) on cash flow hedges (net of tax of $ — , $( 18 ), $ 13 and $( 32 )) — ( 59 ) 38 ( 98 ) Other comprehensive items ( 5,200 ) ( 461 ) ( 15,383 ) 5,067 Comprehensive Income 26,374 29,485 41,176 63,272 Comprehensive Income Attributable to Noncontrolling Interests ( 269 ) ( 213 ) ( 493 ) ( 432 ) Comprehensive Income Attributable to Kadant $ 26,105 $ 29,272 $ 40,683 $ 62,840 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents KADANT INC. Condensed Consolidated Statement of Cash Flows (Unaudited) Six Months Ended June 29, 2024 July 1, 2023 (In thousands) Operating Activities Net income attributable to Kadant $ 55,980 $ 57,809 Net income attributable to noncontrolling interests 579 396 Net income 56,559 58,205 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 23,730 16,683 Stock-based compensation expense 5,299 4,886 Provision for losses on accounts receivable 311 123 Other items, net 1,899 1,461 Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable ( 7,282 ) ( 4,002 ) Contract assets ( 5,062 ) 2,790 Inventories 225 ( 10,808 ) Other assets ( 2,339 ) 211 Accounts payable 13,985 ( 9,364 ) Customer deposits ( 17,744 ) 464 Other liabilities ( 18,684 ) ( 1,305 ) Net cash provided by operating activities 50,897 59,344 Investing Activities Acquisitions, net of cash acquired (Note 2) ( 291,575 ) 277 Purchases of property, plant, and equipment ( 11,245 ) ( 13,246 ) Proceeds from sale of property, plant, and equipment 1,302 97 Other investing activities — ( 30 ) Net cash used in investing activities ( 301,518 ) ( 12,902 ) Financing Activities Proceeds from issuance of long-term obligations (Note 6) 295,211 — Repayment of short- and long-term obligations ( 59,089 ) ( 46,143 ) Tax withholding payments related to stock-based compensation ( 5,868 ) ( 3,915 ) Dividends paid ( 7,153 ) ( 6,430 ) Proceeds from issuance of Company common stock 1,605 — Dividend paid to noncontrolling interest ( 1,346 ) — Acquisition of subsidiary shares from noncontrolling interest (Note 2) ( 523 ) — Other financing activities — ( 63 ) Net cash provided by (used in) financing activities 222,837 ( 56,551 ) Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash ( 3,491 ) 579 Decrease in Cash, Cash Equivalents, and Restricted Cash ( 31,275 ) ( 9,530 ) Cash, Cash Equivalents, and Restricted Cash at Beginning of Period 106,453 79,725 Cash, Cash Equivalents, and Restricted Cash at End of Period $ 75,178 $ 70,195 See Note 1 , Nature of Operations and Summary of Significant Accounting Policies, under the heading Supplemental Cash Flow Information for further details. The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents KADANT INC. Condensed Consolidated Statement of Stockholders' Equity (Unaudited) Three Months Ended June 29, 2024 (In thousands, except share and per share amounts) Common Stock Capital in Excess of Par Value Retained Earnings Treasury Stock Accumulated Other Comprehensive Items Noncontrolling Interests Total Stockholders' Equity Shares Amount Shares Amount Balance at March 30, 2024 14,624,159 $ 146 $ 122,253 $ 784,062 2,881,213 $ ( 70,601 ) $ ( 53,173 ) $ 12,081 $ 794,768 Net income — — — 31,291 — — — 283 31,574 Dividend declared – Common Stock, $ 0.32 per share — — — ( 3,758 ) — — — — ( 3,758 ) Activity under stock plans — — 2,833 — ( 1,575 ) 38 — — 2,871 Acquisition of subsidiary shares (Note 2) — — ( 194 ) — — — — ( 329 ) ( 523 ) Dividend paid to noncontrolling interest — — — — — — — ( 1,346 ) ( 1,346 ) Other comprehensive items — — — — — — ( 5,186 ) ( 14 ) ( 5,200 ) Balance at June 29, 2024 14,624,159 $ 146 $ 124,892 $ 811,595 2,879,638 $ ( 70,563 ) $ ( 58,359 ) $ 10,675 $ 818,386 Six Months Ended June 29, 2024 (In thousands, except share and per share amounts) Common Stock Capital in Excess of Par Value Retained Earnings Treasury Stock Accumulated Other Comprehensive Items Noncontrolling Interests Total Stockholders' Equity Shares Amount Shares Amount Balance at December 30, 2023 14,624,159 $ 146 $ 124,940 $ 763,131 2,915,978 $ ( 71,453 ) $ ( 43,062 ) $ 2,538 $ 776,240 Net income — — — 55,980 — — — 579 56,559 Dividends declared – Common Stock, $ 0.64 per share — — — ( 7,516 ) — — — — ( 7,516 ) Activity under stock plans — — 146 — ( 36,340 ) 890 — — 1,036 Noncontrolling interests acquired (Note 2) — — — — — — — 9,319 9,319 Acquisition of subsidiary shares (Note 2) — — ( 194 ) — — — — ( 329 ) ( 523 ) Dividend paid to noncontrolling interest — — — — — — — ( 1,346 ) ( 1,346 ) Other comprehensive items — — — — — — ( 15,297 ) ( 86 ) ( 15,383 ) Balance at June 29, 2024 14,624,159 $ 146 $ 124,892 $ 811,595 2,879,638 $ ( 70,563 ) $ ( 58,359 ) $ 10,675 $ 818,386 Three Months Ended July 1, 2023 (In thousands, except share and per share amounts) Common Stock Capital in Excess of Par Value Retained Earnings Treasury Stock Accumulated Other Comprehensive Items Noncontrolling Interest Total Stockholders' Equity Shares Amount Shares Amount Balance at April 1, 2023 14,624,159 $ 146 $ 117,547 $ 685,325 2,920,678 $ ( 71,569 ) $ ( 49,085 ) $ 1,941 $ 684,305 Net income — — — 29,734 — — — 212 29,946 Dividend declared – Common Stock, $ 0.29 per share — — — ( 3,395 ) — — — — ( 3,395 ) Activity under stock plans — — 2,570 — ( 2,417 ) 60 — — 2,630 Other comprehensive items — — — — — — ( 462 ) 1 ( 461 ) Balance at July 1, 2023 14,624,159 $ 146 $ 120,117 $ 711,664 2,918,261 $ ( 71,509 ) $ ( 49,547 ) $ 2,154 $ 713,025 Six Months Ended July 1, 2023 (In thousands, except share and per share amounts) Common Stock Capital in Excess of Par Value Retained Earnings Treasury Stock Accumulated Other Comprehensive Items Noncontrolling Interest Total Stockholders' Equity Shares Amount Shares Amount Balance at December 31, 2022 14,624,159 $ 146 $ 119,924 $ 660,644 2,949,997 $ ( 72,287 ) $ ( 54,578 ) $ 1,722 $ 655,571 Net income — — — 57,809 — — — 396 58,205 Dividends declared – Common Stock, $ 0.58 per share — — — ( 6,789 ) — — — — ( 6,789 ) Activity under stock plans — — 193 — ( 31,736 ) 778 — — 971 Other comprehensive items — — — — — — 5,031 36 5,067 Balance at July 1, 2023 14,624,159 $ 146 $ 120,117 $ 711,664 2,918,261 $ ( 71,509 ) $ ( 49,547 ) $ 2,154 $ 713,025 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Kadant Inc. was incorporated in Delaware in November 1991 and trades on the New York Stock Exchange under the ticker symbol "KAI." Kadant Inc. (together with its subsidiaries, the Company) is a global supplier of technologies and engineered systems that drive Sustainable Industrial Processing. Its products and services play an integral role in enhancing efficiency, optimizing energy utilization, and maximizing productivity in process industries while helping customers advance their sustainability initiatives with products that reduce waste or generate more yield with fewer inputs, particularly fiber, energy, and water. Producing more while consuming less is a core aspect of Sustainable Industrial Processing and a major element of the strategic focus of the Company's three reportable operating segments: Flow Control, Industrial Processing, and Material Handling. Interim Financial Statements The interim condensed consolidated financial statements and related notes presented have been prepared by the Company, are unaudited, and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the Company's financial position at June 29, 2024, its results of operations, comprehensive income, and stockholders' equity for the three- and six-month periods ended June 29, 2024 and July 1, 2023, and its cash flows for the six-month periods ended June 29, 2024 and July 1, 2023. Interim results are not necessarily indicative of results for a full year or for any other interim period. The condensed consolidated balance sheet presented as of December 30, 2023 has been derived from the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2023 (Annual Report). The condensed consolidated financial statements and related notes are presented as permitted by the rules and regulations of the Securities and Exchange Commission (SEC) for Form 10-Q and do not contain certain information included in the annual consolidated financial statements and related notes of the Company. The condensed consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and related notes included in the Annual Report. Use of Estimates and Critical Accounting Policies The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Although the Company makes every effort to ensure the accuracy of the estimates and assumptions used in the preparation of its condensed consolidated financial statements or in the application of accounting policies, if business conditions were different, or if the Company were to use different estimates and assumptions, it is possible that materially different amounts could be reported in the Company's condensed consolidated financial statements. Note 1 to the consolidated financial statements in the Annual Report describes the significant accounting estimates and policies used in preparation of the consolidated financial statements. There have been no material changes in the Company’s significant accounting policies during the six months ended June 29, 2024. Supplemental Cash Flow Information Six Months Ended (In thousands) June 29, 2024 July 1, 2023 Cash Paid for Interest $ 9,703 $ 4,443 Cash Paid for Income Taxes, Net of Refunds $ 23,286 $ 23,792 Non-Cash Investing Activities: Fair value of assets acquired (adjusted) $ 341,105 $ ( 270 ) Cash (paid) received for businesses acquired (a) ( 299,892 ) 277 Liabilities assumed (reduced) and noncontrolling interests acquired $ 41,213 $ ( 7 ) (a) Includes estimated post-closing adjustments, net. 8 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Six Months Ended (In thousands) June 29, 2024 July 1, 2023 Purchases of property, plant, and equipment in accounts payable $ 618 $ 1,134 Non-Cash Financing Activities: Issuance of Company common stock upon vesting of restricted stock units $ 5,140 $ 4,717 Dividends declared but unpaid $ 3,758 $ 3,395 Restricted Cash The Company's restricted cash generally serves as collateral 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 and for certain banker's acceptance drafts issued to vendors. 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 condensed consolidated balance sheet that are shown in aggregate in the accompanying condensed consolidated statement of cash flows: (In thousands) June 29, 2024 July 1, 2023 December 30, 2023 December 31, 2022 Cash and cash equivalents $ 73,805 $ 66,725 $ 103,832 $ 76,371 Restricted cash 1,373 3,470 2,621 3,354 Total Cash, Cash Equivalents, and Restricted Cash $ 75,178 $ 70,195 $ 106,453 $ 79,725 Inventories The components of inventories are as follows: June 29, 2024 December 30, 2023 (In thousands) Raw Materials $ 71,453 $ 66,738 Work in Process 38,916 32,147 Finished Goods (includes $ 3,350 and $ 5,182 at customer locations) 63,144 53,792 $ 173,513 $ 152,677 Intangible Assets, Net Acquired intangible assets by major asset class are as follows: (In thousands) Gross Accumulated Amortization Currency Translation Net June 29, 2024 Definite-Lived Customer relationships $ 332,804 $ ( 117,776 ) $ ( 7,127 ) $ 207,901 Product technology 87,576 ( 46,365 ) ( 2,721 ) 38,490 Tradenames 16,253 ( 4,640 ) ( 429 ) 11,184 Other 23,860 ( 19,356 ) ( 620 ) 3,884 460,493 ( 188,137 ) ( 10,897 ) 261,459 Indefinite-Lived Tradenames 29,059 — ( 823 ) 28,236 Acquired Intangible Assets $ 489,552 $ ( 188,137 ) $ ( 11,720 ) $ 289,695 9 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands) Gross Accumulated Amortization Currency Translation Net December 30, 2023 Definite-Lived Customer relationships $ 218,959 $ ( 108,519 ) $ ( 5,562 ) $ 104,878 Product technology 67,576 ( 43,786 ) ( 2,367 ) 21,423 Tradenames 7,039 ( 4,262 ) ( 388 ) 2,389 Other 20,320 ( 17,715 ) ( 604 ) 2,001 313,894 ( 174,282 ) ( 8,921 ) 130,691 Indefinite-Lived Tradenames 29,059 — ( 464 ) 28,595 Acquired Intangible Assets $ 342,953 $ ( 174,282 ) $ ( 9,385 ) $ 159,286 Intangible assets are recorded at fair value at the date of acquisition. Subsequent impairment charges are reflected as a reduction in the gross balance, as applicable. Definite-lived intangible assets are stated net of accumulated amortization and currency translation in the accompanying condensed consolidated balance sheet. The Company amortizes definite-lived intangible assets over lives that have been determined based on the anticipated cash flow benefits of the intangible asset. Intangible assets associated with the Company's 2024 acquisitions totaled $ 146,588,000 . See Note 2 , Acquisitions, for further details. Goodwill The changes in the carrying amount of goodwill by segment are as follows: (In thousands) Flow Control Industrial Processing Material Handling Total Balance at December 30, 2023 Gross balance $ 120,782 $ 212,732 $ 144,108 $ 477,622 Accumulated impairment losses — ( 85,538 ) — ( 85,538 ) Net balance 120,782 127,194 144,108 392,084 2024 Activity Acquisitions (Note 2) 14,498 37,037 40,560 92,095 Fair value adjustment — ( 22 ) — ( 22 ) Currency translation ( 2,201 ) ( 2,655 ) ( 1,266 ) ( 6,122 ) Total 2024 activity 12,297 34,360 39,294 85,951 Balance at June 29, 2024 Gross balance 133,079 247,092 183,402 563,573 Accumulated impairment losses — ( 85,538 ) — ( 85,538 ) Net balance $ 133,079 $ 161,554 $ 183,402 $ 478,035 Warranty Obligations The Company's contracts covering the sale of its products include warranty provisions that provide assurance to its customers that the products will comply with agreed-upon specifications during a defined period of time. The Company provides for the estimated cost of product warranties at the time of sale based on historical occurrence rates and repair costs, as well as knowledge of any specific warranty problems that indicate projected warranty costs may vary from historical patterns. The Company negotiates the terms regarding warranty coverage and length of warranty depending on the products and applications. 10 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The Company's liability for warranties is included in other current liabilities in the accompanying condensed consolidated balance sheet. The changes in the carrying amount of product warranty obligations are as follows: Six Months Ended (In thousands) June 29, 2024 July 1, 2023 Balance at Beginning of Year $ 8,154 $ 7,283 Provision charged to expense 2,048 3,154 Usage ( 1,326 ) ( 2,335 ) Acquisitions 472 — Currency translation ( 219 ) 97 Balance at End of Period $ 9,129 $ 8,199 Revenue Recognition Most of the Company’s revenue relates to products and services that require minimal customization and is recognized at a point in time for each performance obligation under the contract when the customer obtains control of the goods or service. The remaining portion of the Company’s revenue is recognized over time based on an input method that compares the costs incurred to date to the total expected costs required to satisfy the performance obligation. Contracts are accounted for on an over time basis when they include products which have no alternative use and an enforceable right to payment over time. Most of the contracts recognized on an over time basis are for large capital equipment 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: Three Months Ended Six Months Ended June 29, July 1, June 29, July 1, (In thousands) 2024 2023 2024 2023 Point in Time $ 245,735 $ 222,235 $ 462,228 $ 426,474 Over Time 29,030 22,818 61,512 48,337 $ 274,765 $ 245,053 $ 523,740 $ 474,811 The Company disaggregates its revenue from contracts with customers by reportable operating segment, product type and geography as this best depicts how its revenue is affected by economic factors. The following table presents the disaggregation of revenue by product type and geography: Three Months Ended Six Months Ended June 29, July 1, June 29, July 1, (In thousands) 2024 2023 2024 2023 Revenue by Product Type: Parts and consumables $ 172,745 $ 153,082 $ 343,875 $ 304,645 Capital 102,020 91,971 179,865 170,166 $ 274,765 $ 245,053 $ 523,740 $ 474,811 Revenue by Geography (based on customer location): North America $ 172,543 $ 135,385 329,034 267,838 Europe 63,193 60,625 118,980 114,782 Asia 24,970 32,867 47,524 60,637 Rest of world 14,059 16,176 28,202 31,554 $ 274,765 $ 245,053 $ 523,740 $ 474,811 See Note 11 , Business Segment Information, for information on the disaggregation of revenue by reportable operating segment. 11 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The following table presents contract balances from contracts with customers: June 29, 2024 December 30, 2023 (In thousands) Contract Assets $ 15,144 $ 8,366 Contract Liabilities $ 61,829 $ 79,397 Contract assets represent unbilled revenue associated with revenue recognized on contracts accounted for on an over time basis, which will be billed in future periods based on the contract terms. Contract liabilities consist of short- and long-term customer deposits, advanced billings, and deferred revenue. Deferred revenue is included in other current liabilities, and long-term customer deposits are included in other long-term liabilities in the accompanying condensed consolidated balance sheet. Contract liabilities will be recognized as revenue in future periods once the revenue recognition criteria are met. The majority of the contract liabilities relate to advance payments on contracts accounted for at a point in time. These advance payments will be recognized as revenue when the Company's performance obligations have been satisfied, which typically occurs when the product has shipped and control of the asset has transferred to the customer. The Company recognized revenue of $ 23,473,000 in the second quarter of 2024 and $ 20,212,000 in the second quarter of 2023, and $ 57,139,000 in the first six months of 2024 and $ 47,228,000 in the first six months of 2023 that was included in the contract liabilities balance at the beginning of 2024 and 2023, respectively. The majority of the Company's contracts for capital equipment have an original expected duration of one year or less. Certain capital equipment 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 was $ 27,262,000 as of June 29, 2024. The Company will recognize revenue for these performance obligations as they are satisfied, approximately 78 % of which is expected to occur within the next twelve months and the remaining 22 % thereafter. 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 $ 7,574,000 at June 29, 2024 and $ 10,826,000 at December 30, 2023, are included in accounts receivable in the accompanying condensed consolidated balance sheet until the subsidiary sells the drafts to a bank and receives a discounted amount, transfers the banker's acceptance drafts in settlement of current accounts payable prior to maturity, or obtains cash payment on the scheduled maturity date. Income Taxes In accordance with Accounting Standards Codification (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 June 29, 2024, 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. In December 2021, the Organisation for Economic Co-operation and Development (OECD) released model rules introducing a new 15% global minimum tax for large multinational enterprises with an annual global revenue exceeding 750,000,000 euros (Pillar Two Rules). Since the release of the Pillar Two Rules, the OECD has issued four tranches of administrative guidance, as well as guidance on transitional safe harbor relief. Various countries, including the member states of the European Union, have adopted the Pillar Two Rules into their domestic laws, with certain rules coming into effect for fiscal years beginning in 2024. Some countries are in the process of drafting legislation for adoption in future years. While the Pillar 12 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Two Rules serve as a framework for implementing the minimum tax, countries may enact domestic laws that vary slightly from the Pillar Two Rules and may also adjust domestic tax incentives to align with the Pillar Two Rules on different timelines. The Company is monitoring developments of the Pillar Two Rules and is evaluating the potential impact they may have on the jurisdictions in which it operates. Recent Accounting Pronouncements Not Yet Adopted Business Combinations - Joint Venture Formations (Topic 805), Recognition and Initiation Measurement. In August 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2023-05, to address the diversity in practice on the accounting treatment of joint venture formations. Under this ASU, a joint venture is required to apply a new basis of accounting at its formation date by valuing the net assets contributed at fair value for both business and asset transactions. The value of the net assets in total is then allocated to individual assets and liabilities by applying Topic 805 with certain exceptions. This new guidance is effective for joint ventures with a formation date on or after January 1, 2025 and is required to be applied prospectively. Additionally, joint ventures with a formation date prior to January 1, 2025, have an option to elect to apply the guidance retrospectively, provided adequate information is available. The impact of the adoption of this ASU on the Company's consolidated financial statements will be dependent upon joint ventures formed in future periods. Segment Reporting - Improving Reportable Segment Disclosures (Topic 280). In November 2023, the FASB issued ASU No. 2023-07, to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant expenses. Under this ASU, a company is required to enhance its segment disclosures to include significant segment expenses that are regularly provided to the chief operating decision maker (CODM), a description of other segment items by reportable segment, and any additional measures of a segment's profit or loss used by the CODM when deciding how to allocate resources. This ASU also requires all annual disclosures currently required by Topic 280 to be included in interim periods. This ASU is effective for the Company's fiscal year ending December 28, 2024, and interim periods beginning in fiscal 2025, with early adoption permitted, and requires retrospective application to all prior periods presented in the financial statements. The Company is currently evaluating the effects that the adoption of this ASU will have on its consolidated financial statements. Income Taxes - Improvements to Income Tax Disclosures (Topic 740) . In December 2023, the FASB issued ASU No. 2023-09, to improve income tax disclosure requirements, primarily through enhanced disclosures related to the income tax rate reconciliation and income taxes paid. This ASU is effective for fiscal 2025, with early adoption permitted, and may be applied retrospectively. The Company is currently evaluating the effects that the adoption of this ASU will have on its consolidated financial statements. 2. Acquisitions The Company’s acquisitions have been accounted for using the acquisition method of accounting and the results of the acquired businesses are included in its condensed consolidated financial statements from the date of acquisition. Historically, acquisitions have been made at prices above the fair value of identifiable net assets, resulting in goodwill. Acquisition costs were $ 940,000 in the second quarter of 2024 and $ 2,064,000 in the first six months of 2024 and are included in selling, general, and administrative (SG&A) expenses in the accompanying condensed consolidated statement of income. The Company expects several synergies in connection with the acquisitions described below, including expansion of product sales into new markets by leveraging its global sales network and relationships, broadening its product portfolio, and strengthening its position in each segment's markets. The Company funded the acquisitions primarily through borrowings under its revolving credit facility. Key Knife, Inc. On January 1, 2024, the Company acquired Key Knife Inc. and certain of its affiliates (collectively, Key Knife) pursuant to a securities purchase agreement dated December 22, 2023, for $ 153,386,000 , net of cash acquired. The Company paid $ 156,925,000 at closing and $ 2,372,000 as a post-closing adjustment in the second quarter of 2024. Key Knife is a global supplier of engineered knife systems for custom chipping, planing, and flaking solutions for wood products industries, with revenue of approximately $ 65,000,000 for the twelve months ended September 30, 2023, and is part of the Company's Industrial Processing segment. Goodwill from the Key Knife acquisition was $ 37,037,000 , of which $ 30,002,000 is expected to be deductible for tax purposes over 15 years. In addition, separately identifiable intangible assets acquired were $ 91,620,000 , of which $ 77,300,000 is expected to be deductible for tax purposes over 15 years. As part of the acquisition, the Company acquired a 45 % interest in two of Key Knife's subsidiaries, increasing its noncontrolling interest liability by $ 9,319,000 based on the income valuation approach. Under a put and purchase option as outlined in the securities purchase agreement, the seller can demand the Company purchase, or the Company can demand that the seller sell to the Company, the remaining interest in these subsidiaries at any time after December 31, 2027. The purchase 13 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) price would be based on a total enterprise value as defined in the original purchase agreement. See Other Acquisitions below for additional information. KWS Manufacturing Company, Ltd. On January 24, 2024, the Company acquired all of the outstanding equity securities of KWS Manufacturing Company, Ltd. (KWS) for $ 81,247,000 , subject to a post-closing adjustment. The Company paid $ 81,009,000 at closing and assumed a $ 238,000 overdraft. KWS is a leading manufacturer of conveying equipment for the bulk material handling industry, with revenue of approximately $ 45,000,000 for the twelve months ended September 30, 2023, and is part of the Company's Material Handling segment. Goodwill from the KWS acquisition was $ 38,717,000 and separately identifiable intangibles assets were $ 28,500,000 , both of which are expected to be fully deductible for tax purposes over 15 years. Dynamic Sealing Technologies LLC On May 31, 2024, the Company acquired all of the outstanding equity securities of Dynamic Sealing Technologies LLC and affiliates (collectively, DSTI) for $ 53,661,000 , net of cash acquired and subject to a post-closing adjustment. DSTI is a leading manufacturer of engineered fluid sealing and transfer solutions for rotating applications, with revenue of approximately $ 25,000,000 for the twelve months ended March 31, 2024, and is part of the Company's Flow Control segment. Goodwill from the DSTI acquisition was $ 14,498,000 , of which $ 14,169,000 is expected to be deductible for tax purposes over 15 years. In addition, separately identifiable intangible assets acquired were $ 23,490,000 , all of which are expected to be deductible for tax purposes over 15 years. Other Acquisitions On May 2, 2024, the Company acquired a service business in Germany, which is included in the Company's Material Handling segment, for $ 3,281,000 , net of cash acquired and subject to a post-closing adjustment. On May 6, 2024, the Company acquired the remaining outstanding shares of a Key Knife subsidiary in which the Company previously held a noncontrolling interest for $ 523,000 in cash. 14 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Purchase Price Allocation The following table summarizes the aggregate estimated fair values of the net assets and noncontrolling interests acquired and purchase price for the 2024 acquisitions: (In thousands) Total Cash and Cash Equivalents $ 10,016 Accounts Receivable 11,995 Inventories 25,033 Other Current Assets 3,203 Property, Plant, and Equipment 38,758 Other Assets 13,417 Definite-Lived Intangible Assets Customer relationships 113,833 Product technology 20,000 Tradenames 9,215 Other 3,540 Goodwill 92,095 Total assets acquired 341,105 Accounts Payable 3,060 Customer Deposits 2,890 Other Current Liabilities 7,807 Long-Term Deferred Income Taxes 5,331 Other Long-Term Liabilities 12,806 Total liabilities assumed 31,894 Noncontrolling interests acquired 9,319 Net assets and noncontrolling interests acquired $ 299,892 Purchase Price: Cash Paid $ 301,591 Estimated Remaining Post-closing Adjustments, Net ( 1,699 ) $ 299,892 The final purchase accounting and purchase price allocations remain subject to change as the Company continues to refine its preliminary valuation of certain acquired assets and liabilities assumed and the valuation of acquired intangibles, which may result in adjustments to the assets and liabilities, including goodwill. Measurement period adjustments were not material to the Company's financial position or results of operations in the second quarter of 2024. The weighted-average amortization period for the definite-lived intangible assets related to the 2024 acquisitions is 17 years, including weighted-average amortization periods of 18 years for customer relationships, 12 years for product technology, and 20 years for tradenames. Revenue and operating income for the three- and six-month periods ended June 29, 2024 associated with the 2024 acquisitions from their respective acquisition dates, are as follows: Three Months Ended Six Months Ended June 29, 2024 June 29, 2024 (In thousands) Revenue $ 27,302 $ 51,598 Operating Income, including acquisition-related costs (a) $ 1,439 $ 1,124 (a) Acquisition-related costs include acquired profit in inventory and backlog amortization expense and acquisition costs. 15 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Unaudited Supplemental Pro Forma Information Had the Key Knife, KWS, and DSTI acquisitions been completed as of the beginning of 2023, the Company’s pro forma results of operations for the three- and six-month periods ended June 29, 2024 and July 1, 2023 would have been as follows: Three Months Ended Six Months Ended June 29, 2024 July 1, 2023 June 29, 2024 July 1, 2023 (In thousands, except per share amounts) Revenue $ 277,971 $ 279,073 $ 535,332 $ 542,850 Net Income Attributable to Kadant $ 31,760 $ 27,895 $ 58,733 $ 51,499 Earnings per Share Attributable to Kadant Basic $ 2.70 $ 2.38 $ 5.01 $ 4.40 Diluted $ 2.70 $ 2.38 $ 5.00 $ 4.40 The historical consolidated pro forma financial information of the Company, Key Knife, KWS, and DSTI above has been adjusted 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 $ 998,000 in the three months ended July 1, 2023 and $ 3,564,000 in the six months ended July 1, 2023 and reversal of $ 529,000 in the three months ended June 29, 2024 and $ 2,860,000 in the six months ended June 29, 2024 for the sale of inventory revalued at the date of acquisition. • Pre-tax charge to SG&A expenses of $ 973,000 in the three months ended July 1, 2023 and $ 2,025,000 in the six months ended July 1, 2023 and reversal of $ 569,000 in the three months ended June 29, 2024 and $ 1,211,000 in the six months ended June 29, 2024 for intangible asset amortization related to acquired backlog. • Pre-tax charge to SG&A expenses of $ 2,064,000 in the six months ended July 1, 2023 and reversal of $ 940,000 in the three months ended June 29, 2024 and $ 2,064,000 in the six months ended June 29, 2024 for acquisition costs. • Estimated tax effects related to the pro forma adjustments. These pro forma results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that would have resulted had the acquisitions occurred as of the beginning of 2023, or that may result in the future. The Company's pro forma results of operations exclude its other acquisitions in 2024 as the inclusion of its results would not have been materially different from the pro forma results presented above. 3. Restructuring and Other Costs Restructuring Costs The Company initiated a restructuring plan within its Flow Control segment in the third quarter of 2023 to consolidate a small manufacturing operation into a larger facility in Germany. As part of this restructuring plan, the Company incurred restructuring and impairment costs totaling $ 400,000 , including severance costs of $ 335,000 for the termination of 10 employees, facility and other closure costs of $ 29,000 , and asset write-downs of $ 36,000 . The Company also incurred restructuring costs within its Flow Control segment of $ 366,000 in the fourth quarter of 2023 related to the termination of a contract at one of its operations in Germany. 16 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) A summary of the changes in accrued restructuring costs included in other current liabilities in the accompanying condensed consolidated balance sheet is as follows: (In thousands) Severance Costs Contract Termination Costs Total 2023 Restructuring Plans Balance at December 30, 2023 $ 201 $ 313 $ 514 Usage ( 195 ) ( 303 ) ( 498 ) Currency translation ( 6 ) ( 10 ) ( 16 ) Balance at June 29, 2024 $ — $ — $ — Other Costs The Company incurred costs of $ 74,000 in the three- and six-month periods ended July 1, 2023 within its Industrial Processing segment related to the write-down of certain fixed assets that were not moved to a new manufacturing facility in China and facility moving costs. 4. Earnings per Share Basic and diluted earnings per share (EPS) were calculated as follows: Three Months Ended Six Months Ended June 29, 2024 July 1, 2023 June 29, 2024 July 1, 2023 (In thousands, except per share amounts) Net Income Attributable to Kadant $ 31,291 $ 29,734 $ 55,980 $ 57,809 Basic Weighted Average Shares 11,743 11,704 11,734 11,693 Effect of Restricted Stock Units and Employee Stock Purchase Plan Shares 23 19 21 16 Diluted Weighted Average Shares 11,766 11,723 11,755 11,709 Basic Earnings per Share $ 2.66 $ 2.54 $ 4.77 $ 4.94 Diluted Earnings per Share $ 2.66 $ 2.54 $ 4.76 $ 4.94 The effect of outstanding and unvested restricted stock units (RSUs) of the Company’s common stock totaling 25,000 shares in the second quarter of 2024, 26,000 shares in the second quarter of 2023, 29,000 in the first six months of 2024 and 32,000 in the first six months of 2023 were not included in the computation of diluted EPS for the respective periods as the effect would have been antidilutive or, for unvested performance-based RSUs, the performance conditions had not been met as of the end of the reporting periods. 5. Provision for Income Taxes The provision for income taxes was $ 19,846,000 in the first six months of 2024 and $ 20,945,000 in the first six months of 2023. The effective tax rate of 26 % in the first six months of 2024 was higher than the Company’s statutory rate of 21% primarily due to the distribution of the Company’s worldwide earnings, nondeductible expenses, state taxes, and the cost of repatriating the earnings of certain foreign subsidiaries. These items were offset in part by foreign tax credits and net excess income tax benefits from stock-based compensation arrangements. The effective tax rate of 26 % in the first six months of 2023 was higher than the Company's statutory rate of 21% primarily due to the distribution of the Company's worldwide earnings, state taxes, and nondeductible expenses. 17 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 6. Long-Term Obligations Long-term obligations are as follows: June 29, 2024 December 30, 2023 (In thousands) Revolving Credit Facility, due 2027 $ 333,322 $ 98,761 Senior Promissory Notes, due 2024 to 2028 8,330 8,330 Finance Leases, due 2024 to 2029 1,954 1,789 Other Borrowings, due 2024 to 2028 1,662 1,995 Total 345,268 110,875 Less: Current Maturities of Long-Term Obligations ( 3,233 ) ( 3,209 ) Long-Term Obligations $ 342,035 $ 107,666 See Note 10 , Fair Value Measurements and Fair Value of Financial Instruments, for the fair value information related to the Company's long-term obligations. Revolving Credit Facility The Company's unsecured multi-currency revolving credit facility, originally entered into on March 1, 2017 (as amended and restated to date, the Credit Agreement) matures on November 30, 2027 and has a borrowing capacity of $ 400,000,000 , in addition to an uncommitted, unsecured incremental borrowing facility of $ 200,000,000 . Interest on borrowings outstanding accrues and is payable in arrears calculated at one of the following rates selected by the Company: (i) the Base Rate, as defined, plus an applicable margin of 0 % to 1.25 %, or (ii) Eurocurrency Rate, Term SOFR (plus a 10 basis point credit spread adjustment), Term CORRA, and RFR, as applicable and defined, plus an applicable 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, which includes customary events of default under such financing arrangements, may be accelerated upon the occurrence of an event of default. 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. During the first six months of 2024, the Company borrowed an aggregate of $ 295,200,000 under the Credit Agreement, which was primarily used to fund the Company's 2024 acquisitions. See Note 2 , Acquisitions, for further details. As of June 29, 2024, the outstanding balance under the Credit Agreement was $ 333,322,000 , which included $ 73,322,000 of euro-denominated borrowings. The Company had $ 66,883,000 of borrowing capacity available as of June 29, 2024, 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 6.30 % as of June 29, 2024 and 5.24 % as of year-end 2023. Senior Promissory Notes In 2018, the Company entered into an uncommitted, unsecured Multi-Currency Note Purchase and Private Shelf Agreement (Note Purchase Agreement). Simultaneous with the execution of the Note Purchase Agreement, the Company issued senior promissory notes (Initial Notes) in an aggregate principal amount of $ 10,000,000 , with a per annum interest rate of 4.90 % payable semiannually, and a maturity date of December 14, 2028. The Company is required to prepay a portion of the principal of the Initial Notes beginning on December 14, 2023 and each year thereafter, and may optionally prepay the principal on the Initial Notes, together with any prepayment premium, at any time in accordance with the Note Purchase Agreement. The obligations of the Initial Notes may be accelerated upon an event of default as defined in the Note Purchase Agreement, which includes customary events of default under such financing arrangements. 18 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The Initial Notes are pari passu with the Company’s indebtedness under the Credit Agreement, and any other senior debt of the Company, subject to certain specified exceptions, and participate in a sharing agreement with respect to the obligations of the Company and its subsidiaries under the Credit Agreement. The Initial Notes are guaranteed by certain of the Company’s domestic subsidiaries. Debt Compliance As of June 29, 2024, the Company was in compliance with the covenants related to its debt obligations. 7. Stock-Based Compensation The Company recognized stock-based compensation expense of $ 2,884,000 in the second quarter of 2024, $ 2,648,000 in the second quarter of 2023, $ 5,299,000 in the first six months of 2024 and $ 4,886,000 in the first six months of 2023 within SG&A expenses in the accompanying condensed consolidated statement of income. The Company recognizes compensation expense for all stock-based awards granted to employees and directors based on the grant date estimate of fair value for those awards. The fair value of RSUs is based on the grant date price of the Company's common stock, reduced by the present value of estimated dividends foregone during the requisite service period. For time-based RSUs, compensation expense is recognized ratably over the requisite service period for the entire award based on the grant date fair value, and net of actual forfeitures recorded when they occur. For performance-based RSUs, compensation expense is recognized ratably over the requisite service period for each separately vesting portion of the award based on the grant date fair value, net of actual forfeitures recorded when they occur, and remeasured each reporting period until the total number of RSUs to be issued is known. Unrecognized compensation expense related to stock-based compensation totaled approximately $ 13,840,000 at June 29, 2024, which will be recognized over a weighted average period of 1.9 years. Non-Employee Director RSUs On May 15, 2024, the Company granted an aggregate of 3,030 RSUs to its non-employee directors with an aggregate grant date fair value of $ 849,000 , of which 50 % vested on June 1, 2024, 25 % will vest on the last day of the third fiscal quarter of 2024 and the remaining 25 % will vest on the last day of the fourth fiscal quarter of 2024 subject to continued service as a director on the applicable vesting dates. Performance-based RSUs On March 6, 2024, the Company granted performance-based RSUs to certain of its officers, which represented, in aggregate, the right to receive 18,643 shares (target RSU amount), with an aggregate grant date fair value of $ 5,917,000 . The RSUs are subject to adjustment based on the achievement of the performance measure selected for the fiscal year, which is a specified target for adjusted earnings before interest, taxes, depreciation, and amortization (target adjusted EBITDA) generated from operations for the fiscal year. The RSUs are adjusted by comparing the actual adjusted EBITDA for the performance period to the target adjusted EBITDA. Actual adjusted EBITDA between 50 % and 100 % of the target adjusted EBITDA results in an adjustment of 50 % to 100 % of the target RSU amount. Actual adjusted EBITDA between 100 % and 115 % of the target adjusted EBITDA results in an adjustment using a straight-line linear scale between 100 % and 150 % of the target RSU amount. Actual adjusted EBITDA in excess of 115 % results in an adjustment capped at 150 % of the target RSU amount. If actual adjusted EBITDA is below 50 % of the target adjusted EBITDA for the 2024 fiscal year, these performance-based RSUs will be forfeited. The Company recognizes compensation expense based on the probable number of performance-based RSUs expected to vest. Following the adjustment, the performance-based RSUs will be subject to additional time-based vesting, and will vest in three equal annual installments on March 10 of 2025, 2026, and 2027, provided that the officer is employed by the Company on the applicable vesting dates. Time-based RSUs On March 6, 2024, the Company granted time-based RSUs representing 14,109 shares to certain of its officers and employees with an aggregate grant date fair value of $ 4,461,000 . These time-based RSUs vest in three equal annual installments on March 10 of 2025, 2026, and 2027, provided that a recipient is employed by the Company on the applicable vesting dates. 19 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 8. Accumulated Other Comprehensive Items Comprehensive income combines net income and other comprehensive items, which represent certain amounts that are reported as components of stockholders' equity in the accompanying condensed consolidated balance sheet. Changes in each component of accumulated other comprehensive items (AOCI), net of tax, are as follows: (In thousands) Foreign Currency Translation Adjustment Pension and Other Post-Retirement Benefit Liability Adjustments Deferred Loss on Cash Flow Hedges Total Balance at December 30, 2023 $ ( 43,013 ) $ ( 11 ) $ ( 38 ) $ ( 43,062 ) Other comprehensive items before reclassifications ( 15,338 ) 7 — ( 15,331 ) Reclassifications from AOCI — ( 4 ) 38 34 Net current period other comprehensive items ( 15,338 ) 3 38 ( 15,297 ) Balance at June 29, 2024 $ ( 58,351 ) $ ( 8 ) $ — $ ( 58,359 ) 9. Derivatives The Company uses forward currency-exchange contracts that generally have maturities of twelve months or less to hedge exposures resulting from fluctuations in currency exchange rates. Such exposures result from assets and liabilities that are denominated in currencies other than the functional currencies of the Company's subsidiaries. Forward currency-exchange contracts that hedge forecasted accounts receivable or accounts payable are designated as cash flow hedges and unrecognized gains and losses are recorded to AOCI, net of tax. Deferred gains and losses are recognized in the statement of income in the period in which the underlying transaction occurs. The fair values of forward currency-exchange contracts that are designated as fair value hedges and forward currency-exchange contracts that are not designated as hedges are recognized currently in earnings. Gains and losses reported within SG&A expenses in the accompanying condensed consolidated statement of income associated with the Company's forward currency-exchange contracts that were not designated as hedges were not material for the three- and six-month periods ended June 29, 2024 and July 1, 2023. The following table summarizes the fair value of derivative instruments in the accompanying condensed consolidated balance sheet: June 29, 2024 December 30, 2023 Balance Sheet Location Asset (Liability) (a) Notional Amount (b) Asset (Liability) (a) Notional Amount (In thousands) Derivatives Designated as Hedging Instruments: Derivatives in a Liability Position: Forward currency-exchange contract Other Current Liabilities $ — $ — $ ( 51 ) $ 430 Derivatives Not Designated as Hedging Instruments: Derivatives in an Asset Position: Forward currency-exchange contracts Other Current Assets $ — $ — $ 8 $ 701 Derivatives in a Liability Position: Forward currency-exchange contracts Other Current Liabilities $ ( 25 ) $ 1,693 $ — $ — (a) See Note 10 , Fair Value Measurements and Fair Value of Financial Instruments, for the fair value measurements relating to these financial instruments. (b) The 2024 notional amounts are indicative of the level of the Company's recurring derivative activity. 20 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The following table summarizes the activity in AOCI associated with the Company's foreign currency exchange contract designated as a cash flow hedge as of and for the six months ended June 29, 2024: (In thousands) Total Unrealized Loss, Net of Tax, at December 30, 2023 $ ( 38 ) Loss recognized in AOCI 38 Unrealized Loss, Net of Tax, at June 29, 2024 $ — 10. Fair Value Measurements and Fair Value of Financial Instruments Fair value measurement is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is established, which prioritizes the inputs used in measuring fair value into three broad levels as follows: • Level 1—Quoted prices in active markets for identical assets or liabilities. • Level 2—Inputs, other than quoted prices in active markets, that are observable either directly or indirectly. • Level 3—Unobservable inputs based on the Company's own assumptions. The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis: Fair Value as of June 29, 2024 (In thousands) Level 1 Level 2 Level 3 Total Assets: Money market funds and time deposits $ 11,567 $ — $ — $ 11,567 Banker's acceptance drafts (a) $ — $ 7,574 $ — $ 7,574 Liabilities: Forward currency-exchange contracts $ — $ 25 $ — $ 25 Fair Value as of December 30, 2023 (In thousands) Level 1 Level 2 Level 3 Total Assets: Money market funds and time deposits $ 14,795 $ — $ — $ 14,795 Banker's acceptance drafts (a) $ — $ 10,826 $ — $ 10,826 Forward currency-exchange contracts $ — $ 8 $ — $ 8 Liabilities: Forward currency-exchange contract $ — $ 51 $ — $ 51 (a) Included in accounts receivable in the accompanying condensed consolidated balance sheet. The Company uses the market approach technique to value its financial assets and liabilities, and there were no changes in valuation techniques during the first six months of 2024. 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 forward currency-exchange contracts 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. 21 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The carrying value and fair value of debt obligations, excluding lease obligations, are as follows: June 29, 2024 December 30, 2023 Carrying Value Fair Value Carrying Value Fair Value (In thousands) Debt Obligations: Revolving credit facility $ 333,322 $ 333,322 $ 98,761 $ 98,761 Senior promissory notes 8,330 8,136 8,330 8,182 Other 1,662 1,662 1,995 1,995 $ 343,314 $ 343,120 $ 109,086 $ 108,938 The carrying value of the Company's revolving credit facility approximates the fair value as the obligation bears variable rates of interest, which adjust frequently, based on prevailing market rates. The fair value of the senior promissory notes is primarily calculated based on quoted market rates plus an applicable margin available to the Company at the respective period end, which represent Level 2 measurements. 11. Business Segment Information The Company has 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, energy, 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 process recycled paper and timber for 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 custom engineered knife systems. 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. 22 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The following tables present financial information for the Company's reportable operating segments and includes the results from the 2024 acquisitions from the date of acquisition. See Note 2 , Acquisitions, for further details. Three Months Ended Six Months Ended June 29, July 1, June 29, July 1, (In thousands) 2024 2023 2024 2023 Revenue Flow Control $ 92,290 $ 95,729 $ 178,972 $ 185,250 Industrial Processing 114,753 89,967 220,614 173,509 Material Handling 67,722 59,357 124,154 116,052 $ 274,765 $ 245,053 $ 523,740 $ 474,811 Income Before Provision for Income Taxes Flow Control (a) $ 23,530 $ 25,821 $ 45,240 $ 50,010 Industrial Processing (b) 24,092 16,978 44,091 32,945 Material Handling (c) 11,188 10,374 16,729 19,661 Corporate (d) ( 10,409 ) ( 10,095 ) ( 20,732 ) ( 19,424 ) Total operating income 48,401 43,078 85,328 83,192 Interest expense, net (e) ( 4,833 ) ( 1,929 ) ( 8,891 ) ( 4,000 ) Other expense, net (e) ( 2 ) ( 21 ) ( 32 ) ( 42 ) $ 43,566 $ 41,128 $ 76,405 $ 79,150 Capital Expenditures Flow Control $ 1,961 $ 1,290 $ 3,835 $ 2,694 Industrial Processing 1,851 6,129 4,734 8,708 Material Handling 1,157 1,358 2,663 1,820 Corporate 5 — 13 24 $ 4,974 $ 8,777 $ 11,245 $ 13,246 June 29, December 30, (In thousands) 2024 2023 Total Assets Flow Control $ 438,402 $ 391,719 Industrial Processing 590,771 443,189 Material Handling 413,860 326,226 Corporate 12,999 14,531 $ 1,456,032 $ 1,175,665 (a) Includes acquisition-related costs of $ 1,054,000 in the three and six months ended June 29, 2024. Acquisition-related expenses include acquisition costs and amortization expense associated with acquired profit in inventory and backlog. (b) Includes acquisition-related costs of $ 383,000 in the three months ended June 29, 2024 and $ 2,273,000 in the six months ended June 29, 2024. (c) Includes acquisition-related costs of $ 727,000 in the three months ended June 29, 2024 and $ 3,091,000 in the six months ended June 29, 2024. (d) Represents general and administrative expenses. (e) The Company does not allocate interest expense, net and other expense, net to its segments. 23 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 12. Commitments and Contingencies Right of Recourse In the ordinary course of business, the Company's Chinese subsidiaries may receive banker's acceptance drafts from customers as payment for their trade accounts receivable. The drafts are non-interest bearing obligations of the issuing bank and generally mature within six months of the origination date. The Company's Chinese subsidiaries may use these banker's acceptance drafts prior to the scheduled maturity date to settle outstanding accounts payable with vendors. Banker's acceptance drafts transferred to vendors are subject to customary right of recourse provisions prior to their scheduled maturity dates. The Company had $ 5,162,000 at June 29, 2024 and $ 9,090,000 at December 30, 2023 of banker's acceptance drafts subject to recourse, which were transferred to vendors and had not reached their scheduled maturity dates. Historically, the banker's acceptance drafts have settled upon maturity without any claim of recourse against the Company. Litigation From time to time, the Company is subject to various claims and legal proceedings covering a range of matters that arise in the ordinary course of business. Such litigation may include, but is not limited to, claims and counterclaims by and against the Company for breach of contract or warranty, canceled contracts, product liability, or bankruptcy-related claims. For legal proceedings in which a loss is probable and estimable, the Company accrues a loss based on the low end of the range of estimated loss when there is no better estimate within the range. If the Company were found to be liable for any of the claims or counterclaims against it, the Company would incur a charge against earnings for amounts in excess of legal accruals. 24 Table of Contents KADANT INC.