KADANT INC 10-Q

Item 1 – Financial Statements KADANT INC. Condensed Consolidated Balance Sheet (Unaudited) September 28, 2024 December 30, 2023 (In thousands, except share and per share amounts) Assets Current Assets: Cash and cash equivalents $ 88,407 $ 103,832 Restricted cash 1,327 2,621 Accounts receivable, net of allowances of $ 4,888 and $ 4,090 154,965 133,929 Inventories 169,252 152,677 Contract assets 14,534 8,366 Other current assets 41,065 38,757 Total Current Assets 469,550 440,182 Property, Plant, and Equipment, net of accumulated depreciation of $ 145,901 and $ 132,846 174,559 140,504 Other Assets 59,915 43,609 Intangible Assets, Net (Notes 1 and 2) 292,211 159,286 Goodwill (Notes 1 and 2) 493,105 392,084 Total Assets $ 1,489,340 $ 1,175,665 Liabilities and Stockholders' Equity Current Liabilities: Current maturities of long-term obligations (Note 6) $ 3,263 $ 3,209 Accounts payable 50,536 42,104 Accrued payroll and employee benefits 43,250 41,855 Customer deposits 46,208 62,641 Advanced billings 9,548 12,194 Other current liabilities 52,422 52,406 Total Current Liabilities 205,227 214,409 Long-Term Obligations (Note 6) 323,169 107,666 Long-Term Deferred Income Taxes 41,397 36,398 Other Long-Term Liabilities 56,761 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 127,486 124,940 Retained earnings 839,422 763,131 Treasury stock at cost, 2,878,835 and 2,915,978 shares ( 70,543 ) ( 71,453 ) Accumulated other comprehensive items (Note 8) ( 44,778 ) ( 43,062 ) Total Kadant Stockholders' Equity 851,733 773,702 Noncontrolling interests (Note 2) 11,053 2,538 Total Stockholders' Equity 862,786 776,240 Total Liabilities and Stockholders' Equity $ 1,489,340 $ 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 Nine Months Ended September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023 (In thousands, except per share amounts) Revenue (Notes 1 and 11) $ 271,614 $ 244,182 $ 795,354 $ 718,993 Costs and Operating Expenses: Cost of revenue 150,175 138,456 441,066 404,671 Selling, general, and administrative expenses 69,043 57,889 209,352 176,441 Research and development expenses 3,409 3,324 10,621 10,102 Other costs (Note 3) — 969 — 1,043 222,627 200,638 661,039 592,257 Operating Income 48,987 43,544 134,315 126,736 Interest Income 407 438 1,386 1,053 Interest Expense ( 5,516 ) ( 2,107 ) ( 15,386 ) ( 6,722 ) Other Expense, Net ( 16 ) ( 20 ) ( 48 ) ( 62 ) Income Before Provision for Income Taxes 43,862 41,855 120,267 121,005 Provision for Income Taxes (Note 5) 11,964 10,816 31,810 31,761 Net Income 31,898 31,039 88,457 89,244 Net Income Attributable to Noncontrolling Interests ( 312 ) ( 175 ) ( 891 ) ( 571 ) Net Income Attributable to Kadant $ 31,586 $ 30,864 $ 87,566 $ 88,673 Earnings per Share Attributable to Kadant (Note 4) Basic $ 2.69 $ 2.64 $ 7.46 $ 7.58 Diluted $ 2.68 $ 2.63 $ 7.44 $ 7.57 Weighted Average Shares (Note 4) Basic 11,745 11,706 11,737 11,697 Diluted 11,780 11,740 11,763 11,719 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 Nine Months Ended September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023 (In thousands) Net Income $ 31,898 $ 31,039 $ 88,457 $ 89,244 Other Comprehensive Items: Foreign currency translation adjustment 13,643 ( 9,104 ) ( 1,781 ) ( 3,931 ) Post-retirement liability adjustments, net (net of tax of $ 2 , $ 1 , $ 3 and $( 2 )) 4 5 7 ( 3 ) Deferred (loss) gain on cash flow hedges (net of tax of $ — , $( 3 ), $ 13 and $( 35 )) — ( 9 ) 38 ( 107 ) Other comprehensive items 13,647 ( 9,108 ) ( 1,736 ) ( 4,041 ) Comprehensive Income 45,545 21,931 86,721 85,203 Comprehensive Income Attributable to Noncontrolling Interests ( 378 ) ( 111 ) ( 871 ) ( 543 ) Comprehensive Income Attributable to Kadant $ 45,167 $ 21,820 $ 85,850 $ 84,660 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) Nine Months Ended September 28, 2024 September 30, 2023 (In thousands) Operating Activities Net income attributable to Kadant $ 87,566 $ 88,673 Net income attributable to noncontrolling interests 891 571 Net income 88,457 89,244 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 36,505 24,917 Stock-based compensation expense 7,926 7,243 Provision for losses on accounts receivable 893 543 Other items, net 2,834 1,803 Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable ( 10,409 ) ( 10,676 ) Contract assets ( 4,180 ) 2,465 Inventories 10,196 ( 1,461 ) Other assets ( 512 ) 667 Accounts payable 8,695 ( 12,913 ) Customer deposits ( 21,556 ) ( 1,463 ) Other liabilities ( 15,474 ) 5,942 Net cash provided by operating activities 103,375 106,311 Investing Activities Acquisitions, net of cash acquired (Note 2) ( 302,024 ) 277 Purchases of property, plant, and equipment ( 15,430 ) ( 22,094 ) Proceeds from sale of property, plant, and equipment 1,320 535 Other investing activities 263 1,222 Net cash used in investing activities ( 315,871 ) ( 20,060 ) Financing Activities Proceeds from issuance of long-term obligations (Note 6) 305,211 — Repayment of short- and long-term obligations ( 91,378 ) ( 71,868 ) Tax withholding payments related to stock-based compensation ( 5,881 ) ( 3,915 ) Dividends paid ( 10,914 ) ( 9,825 ) 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 196,774 ( 85,671 ) Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash ( 997 ) ( 1,252 ) Decrease in Cash, Cash Equivalents, and Restricted Cash ( 16,719 ) ( 672 ) Cash, Cash Equivalents, and Restricted Cash at Beginning of Period 106,453 79,725 Cash, Cash Equivalents, and Restricted Cash at End of Period $ 89,734 $ 79,053 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 September 28, 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 June 29, 2024 14,624,159 $ 146 $ 124,892 $ 811,595 2,879,638 $ ( 70,563 ) $ ( 58,359 ) $ 10,675 $ 818,386 Net income — — — 31,586 — — — 312 31,898 Dividend declared – Common Stock, $ 0.32 per share — — — ( 3,759 ) — — — — ( 3,759 ) Activity under stock plans — — 2,594 — ( 803 ) 20 — — 2,614 Other comprehensive items — — — — — — 13,581 66 13,647 Balance at September 28, 2024 14,624,159 $ 146 $ 127,486 $ 839,422 2,878,835 $ ( 70,543 ) $ ( 44,778 ) $ 11,053 $ 862,786 Nine Months Ended September 28, 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 — — — 87,566 — — — 891 88,457 Dividends declared – Common Stock, $ 0.96 per share — — — ( 11,275 ) — — — — ( 11,275 ) Activity under stock plans — — 2,740 — ( 37,143 ) 910 — — 3,650 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 — — — — — — ( 1,716 ) ( 20 ) ( 1,736 ) Balance at September 28, 2024 14,624,159 $ 146 $ 127,486 $ 839,422 2,878,835 $ ( 70,543 ) $ ( 44,778 ) $ 11,053 $ 862,786 Three Months Ended September 30, 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 July 1, 2023 14,624,159 $ 146 $ 120,117 $ 711,664 2,918,261 $ ( 71,509 ) $ ( 49,547 ) $ 2,154 $ 713,025 Net income — — — 30,864 — — — 175 31,039 Dividend declared – Common Stock, $ 0.29 per share — — — ( 3,395 ) — — — — ( 3,395 ) Activity under stock plans — — 2,327 — ( 1,198 ) 29 — — 2,356 Other comprehensive items — — — — — — ( 9,044 ) ( 64 ) ( 9,108 ) Balance at September 30, 2023 14,624,159 $ 146 $ 122,444 $ 739,133 2,917,063 $ ( 71,480 ) $ ( 58,591 ) $ 2,265 $ 733,917 Nine Months Ended September 30, 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 — — — 88,673 — — — 571 89,244 Dividends declared – Common Stock, $ 0.87 per share — — — ( 10,184 ) — — — — ( 10,184 ) Activity under stock plans — — 2,520 — ( 32,934 ) 807 — — 3,327 Other comprehensive items — — — — — — ( 4,013 ) ( 28 ) ( 4,041 ) Balance at September 30, 2023 14,624,159 $ 146 $ 122,444 $ 739,133 2,917,063 $ ( 71,480 ) $ ( 58,591 ) $ 2,265 $ 733,917 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 September 28, 2024, its results of operations, comprehensive income, and stockholders' equity for the three- and nine-month periods ended September 28, 2024 and September 30, 2023, and its cash flows for the nine-month periods ended September 28, 2024 and September 30, 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 nine months ended September 28, 2024. Supplemental Cash Flow Information Nine Months Ended (In thousands) September 28, 2024 September 30, 2023 Cash Paid for Interest $ 15,034 $ 6,341 Cash Paid for Income Taxes, Net of Refunds $ 33,288 $ 34,037 Non-Cash Investing Activities (Note 2) : Fair value of assets acquired (adjusted) $ 360,021 $ ( 270 ) Fair value of liabilities assumed $ 35,575 $ 7 Fair value of noncontrolling interest acquired $ 9,319 $ — Fair value of contingent consideration $ 1,785 $ — Purchases of property, plant, and equipment in accounts payable $ 590 $ 749 8 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Nine Months Ended (In thousands) September 28, 2024 September 30, 2023 Non-Cash Financing Activities: Issuance of Company common stock upon vesting of restricted stock units $ 5,364 $ 4,951 Dividends declared but unpaid $ 3,759 $ 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) September 28, 2024 September 30, 2023 December 30, 2023 December 31, 2022 Cash and cash equivalents $ 88,407 $ 76,793 $ 103,832 $ 76,371 Restricted cash 1,327 2,260 2,621 3,354 Total Cash, Cash Equivalents, and Restricted Cash $ 89,734 $ 79,053 $ 106,453 $ 79,725 Inventories The components of inventories are as follows: September 28, 2024 December 30, 2023 (In thousands) Raw Materials $ 69,672 $ 66,738 Work in Process 37,767 32,147 Finished Goods (includes $ 804 and $ 5,182 at customer locations) 61,813 53,792 $ 169,252 $ 152,677 Intangible Assets, Net Acquired intangible assets by major asset class are as follows: (In thousands) Gross Accumulated Amortization Currency Translation Net September 28, 2024 Definite-Lived Customer relationships $ 333,966 $ ( 122,730 ) $ ( 5,558 ) $ 205,678 Product technology 92,535 ( 47,816 ) ( 2,157 ) 42,562 Tradenames 16,579 ( 4,860 ) ( 380 ) 11,339 Other 24,721 ( 20,129 ) ( 571 ) 4,021 467,801 ( 195,535 ) ( 8,666 ) 263,600 Indefinite-Lived Tradenames 29,059 — ( 448 ) 28,611 Acquired Intangible Assets $ 496,860 $ ( 195,535 ) $ ( 9,114 ) $ 292,211 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 recorded in connection with the Company's 2024 acquisitions totaled $ 153,895,000 . 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) 16,018 36,405 47,808 100,231 Measurement period adjustment for 2023 acquisition — ( 22 ) — ( 22 ) Currency translation 767 ( 680 ) 725 812 Total 2024 activity 16,785 35,703 48,533 101,021 Balance at September 28, 2024 Gross balance 137,567 248,435 192,641 578,643 Accumulated impairment losses — ( 85,538 ) — ( 85,538 ) Net balance $ 137,567 $ 162,897 $ 192,641 $ 493,105 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: Nine Months Ended (In thousands) September 28, 2024 September 30, 2023 Balance at Beginning of Year $ 8,154 $ 7,283 Provision charged to expense 4,463 4,879 Usage ( 2,972 ) ( 3,391 ) Acquisitions 473 — Currency translation 37 ( 90 ) Balance at End of Period $ 10,155 $ 8,681 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 Nine Months Ended September 28, September 30, September 28, September 30, (In thousands) 2024 2023 2024 2023 Point in Time $ 238,971 $ 216,956 $ 701,199 $ 643,430 Over Time 32,643 27,226 94,155 75,563 $ 271,614 $ 244,182 $ 795,354 $ 718,993 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 Nine Months Ended September 28, September 30, September 28, September 30, (In thousands) 2024 2023 2024 2023 Revenue by Product Type: Parts and consumables $ 176,961 $ 149,564 $ 520,836 $ 454,209 Capital 94,653 94,618 274,518 264,784 $ 271,614 $ 244,182 $ 795,354 $ 718,993 Revenue by Geography (based on customer location): North America $ 172,186 $ 133,780 501,220 401,618 Europe 57,309 66,491 176,289 181,273 Asia 26,724 27,393 74,248 88,030 Rest of world 15,395 16,518 43,597 48,072 $ 271,614 $ 244,182 $ 795,354 $ 718,993 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: September 28, 2024 December 30, 2023 (In thousands) Contract Assets $ 14,534 $ 8,366 Contract Liabilities $ 58,324 $ 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 $ 8,897,000 in the third quarter of 2024 and $ 9,613,000 in the third quarter of 2023, and $ 66,036,000 in the first nine months of 2024 and $ 56,841,000 in the first nine 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 $ 25,268,000 as of September 28, 2024. The Company will recognize revenue for these performance obligations as they are satisfied, approximately 56 % of which is expected to occur within the next twelve months and the remaining 44 % 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 $ 6,707,000 at September 28, 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 September 28, 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 Two Rules serve as a framework for implementing the minimum tax, countries may enact domestic laws that vary slightly from 12 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) the Pillar Two Rules and may also adjust domestic tax incentives to align with the Pillar Two Rules on different timelines. The Company continues to monitor developments of the Pillar Two Rules and evaluate the potential impact they may have on the jurisdictions in which it operates, including eligibility to qualify for transitional safe harbor relief. The Company does not expect the Pillar Two Rules to have a material impact on its effective tax rate or consolidated financial statements for the fiscal year ending December 28, 2024. Recent Accounting Pronouncements Not Yet Adopted 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. This ASU will result in the Company including the additional disclosures in its consolidated financial statements when adopted. 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 $ 469,000 in the third quarter of 2024 and $ 2,533,000 in the nine months ended September 28, 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. 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 $ 36,203,000 , of which $ 29,479,000 is expected to be deductible for tax purposes over 15 years. In addition, separately identifiable intangible assets acquired were $ 91,620,000 , of which $ 77,400,000 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 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 bank 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 13 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Handling segment. Goodwill from the KWS acquisition was $ 38,207,000 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 $ 15,580,000 , of which $ 15,251,000 is expected to be deductible for tax purposes over 15 years. In addition, separately identifiable intangible assets acquired were $ 24,290,000 , all of which are expected to be fully 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 $ 3,352,000 , 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. On August 21, 2024, the Company acquired a technology company as part of its Material Handling segment. The total purchase price was approximately $ 11,829,000 , which included cash paid at closing of $ 8,623,000 net of cash acquired, an estimated post-closing adjustment of $ 1,421,000 to be paid within 18 months of closing, and contingent consideration with a fair value of $ 1,785,000 . The contingent consideration is payable upon the achievement of certain revenue performance targets earned between June 30, 2025 and June 30, 2027. The maximum future value of the contingent consideration subject to payment is approximately $ 12,068,000 , calculated using the foreign currency spot rate at September 28, 2024. The valuation of the contingent consideration is dependent on the following assumptions: the probability of successful achievement of certain revenue targets, forecasted revenue, revenue volatility, and discount rate. These assumptions were estimated based on a review of historical and projected results. See Note 10 , Fair Value Measurements and Fair Value of Financial Instruments, for additional information related to the fair value of the contingent consideration assumed in the acquisition. In August 2024, the Company acquired certain other assets for a total of $ 1,755,000 in cash. 14 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Purchase Price Allocation The following table summarizes the aggregate purchase price and estimated fair values of the net assets and noncontrolling interests acquired related to the 2024 acquisitions: (In thousands) Total Cash and Cash Equivalents $ 11,509 Accounts Receivable 12,143 Inventories 27,461 Other Current Assets 3,472 Property, Plant, and Equipment 37,061 Other Assets 14,249 Definite-Lived Intangible Assets Customer relationships 114,995 Product technology 24,959 Tradenames 9,540 Other 4,401 Goodwill 100,231 Total assets acquired 360,021 Accounts Payable 3,316 Customer Deposits 3,275 Other Current Liabilities 9,895 Long-Term Deferred Income Taxes 5,455 Other Long-Term Liabilities 13,634 Total liabilities assumed 35,575 Noncontrolling interests acquired 9,319 Net assets and noncontrolling interests acquired $ 315,127 Purchase Price: Cash Paid $ 313,533 Fair Value of Contingent Consideration ( Note 10) 1,785 Estimated Remaining Post-closing Adjustments, Net ( 191 ) $ 315,127 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, which may result in adjustments to the assets and liabilities, including goodwill. The Company expects purchase price allocation adjustments will relate to the valuation of acquired intangibles, inventory, and deferred income taxes primarily associated with its acquisitions made in the second and third quarters of 2024. Measurement period adjustments were not material to the Company's financial position or results of operations in the third quarter and first nine months 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 nine-month periods ended September 28, 2024 associated with the 2024 acquisitions from their respective acquisition dates, are as follows: (In thousands) Three Months Ended September 28, 2024 Nine Months Ended September 28, 2024 Revenue $ 30,477 $ 82,075 Operating Income (a) $ 1,651 $ 4,258 (a) Includes amortization expense associated with acquired profit in inventory and backlog of $ 1,892,000 in the three months ended September 28, 2024 and $ 6,246,000 in the nine months ended September 28, 2024. 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 nine-month periods ended September 28, 2024 and September 30, 2023 would have been as follows: Three Months Ended Nine Months Ended (In thousands, except per share amounts) September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023 Revenue $ 271,614 $ 278,202 $ 806,946 $ 821,052 Net Income Attributable to Kadant $ 33,497 $ 28,973 $ 92,264 $ 80,131 Earnings per Share Attributable to Kadant Basic $ 2.85 $ 2.48 $ 7.86 $ 6.85 Diluted $ 2.84 $ 2.47 $ 7.84 $ 6.84 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 acquisitions 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 $ 1,181,000 in the three months ended September 30, 2023 and $ 4,745,000 in the nine months ended September 30, 2023 and reversal of $ 1,181,000 in the three months ended September 28, 2024 and $ 4,041,000 in the nine months ended September 28, 2024 for the sale of inventory revalued at the date of acquisition. • Pre-tax charge to SG&A expenses of $ 412,000 in the three months ended September 30, 2023 and $ 2,535,000 in the nine months ended September 30, 2023 and reversal of $ 680,000 in the three months ended September 28, 2024 and $ 1,855,000 in the nine months ended September 28, 2024 for intangible asset amortization related to acquired backlog. • Pre-tax charge to SG&A expenses of $ 2,533,000 in the nine months ended September 30, 2023 and reversal of $ 469,000 in the three months ended September 28, 2024 and $ 2,533,000 in the nine months ended September 28, 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. Other Costs Relocation Costs The Company incurred costs of $ 535,000 in the third quarter of 2023 and $ 609,000 in the nine months ended September 30, 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. Restructuring and Impairment 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 $ 434,000 in the third quarter and nine months ended September 30, 2023, including severance costs of $ 369,000 for the termination of 10 employees, asset write-downs of $ 36,000 , and facility and other closure costs of $ 29,000 . 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 Plan Balance at December 30, 2023 $ 201 $ 313 $ 514 Usage ( 195 ) ( 303 ) ( 498 ) Currency translation ( 6 ) ( 10 ) ( 16 ) Balance at September 28, 2024 $ — $ — $ — 4. Earnings per Share Basic and diluted earnings per share (EPS) were calculated as follows: Three Months Ended Nine Months Ended (In thousands, except per share amounts) September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023 Net Income Attributable to Kadant $ 31,586 $ 30,864 $ 87,566 $ 88,673 Basic Weighted Average Shares 11,745 11,706 11,737 11,697 Effect of Restricted Stock Units and Employee Stock Purchase Plan Shares 35 34 26 22 Diluted Weighted Average Shares 11,780 11,740 11,763 11,719 Basic Earnings per Share $ 2.69 $ 2.64 $ 7.46 $ 7.58 Diluted Earnings per Share $ 2.68 $ 2.63 $ 7.44 $ 7.57 The effect of outstanding and unvested restricted stock units (RSUs) of the Company’s common stock totaling 5,000 shares in the third quarter of 2024, 5,000 shares in the third quarter of 2023, 21,000 in the first nine months of 2024 and 23,000 in the first nine 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 respective reporting periods. 5. Provision for Income Taxes The provision for income taxes was $ 31,810,000 in the first nine months of 2024 and $ 31,761,000 in the first nine months of 2023. The effective tax rate of 26 % in the first nine 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. The effective tax rate of 26 % in the first nine 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: September 28, 2024 December 30, 2023 (In thousands) Revolving Credit Facility, due 2027 $ 314,467 $ 98,761 Senior Promissory Notes, due 2024 to 2028 8,330 8,330 Finance Leases, due 2024 to 2029 1,931 1,789 Other Borrowings, due 2024 to 2028 1,704 1,995 Total 326,432 110,875 Less: Current Maturities of Long-Term Obligations ( 3,263 ) ( 3,209 ) Long-Term Obligations $ 323,169 $ 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 nine months of 2024, the Company borrowed an aggregate of $ 305,211,000 under the Credit Agreement, which was primarily used to fund the Company's 2024 acquisitions. See Note 2 , Acquisitions, for further details. As of September 28, 2024, the outstanding balance under the Credit Agreement was $ 314,467,000 , which included $ 76,467,000 of euro-denominated borrowings. The Company had $ 85,321,000 of borrowing capacity available as of September 28, 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 5.82 % as of September 28, 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 September 28, 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 $ 2,627,000 in the third quarter of 2024, $ 2,357,000 in the third quarter of 2023, $ 7,926,000 in the first nine months of 2024 and $ 7,243,000 in the first nine 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 $ 11,319,000 at September 28, 2024, which will be recognized over a weighted average period of 1.7 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 % vested on September 28, 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 vesting date. 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 ( 1,761 ) 1 — ( 1,760 ) Reclassifications from AOCI — 6 38 44 Net current period other comprehensive items ( 1,761 ) 7 38 ( 1,716 ) Balance at September 28, 2024 $ ( 44,774 ) $ ( 4 ) $ — $ ( 44,778 ) 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 nine-month periods ended September 28, 2024 and September 30, 2023. The following table summarizes the fair value of derivative instruments in the accompanying condensed consolidated balance sheet: September 28, 2024 December 30, 2023 (In thousands) Balance Sheet Location Asset (Liability) (a) Notional Amount (b) Asset (Liability) (a) Notional Amount 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 $ 28 $ 839 $ 8 $ 701 (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 nine months ended September 28, 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 September 28, 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 September 28, 2024 (In thousands) Level 1 Level 2 Level 3 Total Assets: Money market funds and time deposits $ 15,071 $ — $ — $ 15,071 Banker's acceptance drafts (a) $ — $ 6,707 $ — $ 6,707 Forward currency-exchange contracts $ — $ 28 $ — $ 28 Liabilities: Contingent consideration ( Note 2 ) (b) $ — $ — $ 1,862 $ 1,862 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. (b) Included in other long-term liabilities 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 nine 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. The Company estimates the fair value of contingent consideration through valuation models that incorporate probability adjusted assumptions and simulations related to the achievement of milestones and the likelihood of making the related payment. The unobservable inputs used in the fair value measurements include the probability of successful achievement of certain revenue targets, forecasted revenue, revenue volatility, and discount rates. Projected contingent 21 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) consideration related to revenue-based payments are discounted back to the current period using a discounted cash flow model. Changes to the fair value of contingent consideration can result from changes to one or multiple inputs, including the discount rate, projected revenue, revenue volatility, and the assumed probabilities of successful achievement of certain revenue targets. The following table provides a rollforward of the change in the fair value of the contingent consideration as determined by level 3 inputs: (In thousands) Total Balance Measured at Inception ( Note 2 ) $ 1,785 Currency translation 77 Balance at September 28, 2024 $ 1,862 The carrying value and fair value of debt obligations, excluding lease obligations, are as follows: September 28, 2024 December 30, 2023 (In thousands) Carrying Value Fair Value Carrying Value Fair Value Debt Obligations: Revolving credit facility $ 314,467 $ 314,467 $ 98,761 $ 98,761 Senior promissory notes 8,330 8,370 8,330 8,182 Other 1,704 1,704 1,995 1,995 $ 324,501 $ 324,541 $ 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 include the results from the 2024 acquisitions from the date of acquisition. See Note 2 , Acquisitions, for further details. Three Months Ended Nine Months Ended September 28, September 30, September 28, September 30, (In thousands) 2024 2023 2024 2023 Revenue Flow Control $ 97,521 $ 90,798 $ 276,493 $ 276,048 Industrial Processing 110,696 94,220 331,310 267,729 Material Handling 63,397 59,164 187,551 175,216 $ 271,614 $ 244,182 $ 795,354 $ 718,993 Income Before Provision for Income Taxes Flow Control (a) $ 24,281 $ 24,246 $ 69,521 $ 74,256 Industrial Processing (b) 25,969 19,023 70,060 51,968 Material Handling (c) 8,793 10,345 25,522 30,006 Corporate (d) ( 10,056 ) ( 10,070 ) ( 30,788 ) ( 29,494 ) Total operating income 48,987 43,544 134,315 126,736 Interest expense, net (e) ( 5,109 ) ( 1,669 ) ( 14,000 ) ( 5,669 ) Other expense, net ( 16 ) ( 20 ) ( 48 ) ( 62 ) $ 43,862 $ 41,855 $ 120,267 $ 121,005 Capital Expenditures Flow Control $ 1,894 $ 1,195 $ 5,729 $ 3,889 Industrial Processing 1,209 7,299 5,943 16,007 Material Handling 1,074 350 3,737 2,170 Corporate 8 4 21 28 $ 4,185 $ 8,848 $ 15,430 $ 22,094 September 28, December 30, (In thousands) 2024 2023 Total Assets Flow Control $ 456,173 $ 391,719 Industrial Processing 591,740 443,189 Material Handling 429,204 326,226 Corporate 12,223 14,531 $ 1,489,340 $ 1,175,665 (a) Includes acquisition-related costs of $ 1,428,000 in the third quarter of 2024 and $ 2,482,000 in the nine months ended September 28, 2024. Acquisition-related expenses include acquisition costs and amortization expense associated with acquired profit in inventory and backlog. Includes restructuring and impairment costs of $ 434,000 in both the third quarter and the nine months ended September 30, 2023. (b) Includes acquisition-related costs of $ 631,000 in the third quarter of 2024 and $ 2,904,000 in the nine months ended September 28, 2024. Includes relocation costs of $ 535,000 in the third quarter of 2023 and $ 609,000 in the nine months ended September 30, 2023. (c) Includes acquisition-related costs of $ 302,000 in the third quarter of 2024 and $ 3,393,000 in the nine months ended September 28, 2024. (d) Represents general and administrative expenses. (e) The Company does not allocate interest 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 $ 10,476,000 at September 28, 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.