UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2017~~March 31, 2018



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ________ to _________

Commission file number ~~1-11406~~001-11406

KADANT INC.

(Exact name of registrant as specified in its charter)



Delaware		52-1762325
(State or ~~Other Jurisdiction~~other jurisdiction of ~~Incorporation~~incorporation or ~~Organization)~~organization)		(I.R.S. Employer Identification No.)

One Technology Park Drive
Westford, Massachusetts		01886
(Address of ~~Principal Executive Offices)~~principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: (978) 776-2000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated ~~filer,"~~filer", "accelerated ~~filer,"~~filer", "smaller reporting ~~company,"~~company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer ox		Accelerated filer xo
Non-accelerated filer o(Do not check if a smaller reporting company)		Smaller reporting company o
		Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.



Class		Outstanding at ~~October~~April 27, ~~2017~~2018
Common Stock, $.01 par value		~~11,007,321~~11,090,209

Table of Contents

Kadant Inc.

Quarterly Report on Form 10-Q

for the Period Ended ~~September 30, 2017~~March 31, 2018

Table of Contents



		Page
PART I: Financial Information

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheet as of ~~September~~March 31, 2018 and December 30, 2017 ~~and December 31, 2016~~ (unaudited)	3

	Condensed Consolidated Statement of Income for the ~~three- and nine-month~~three-month periods ended ~~September 30,~~March 31, 2018 and April 1, 2017 ~~and October 1, 2016~~ (unaudited)	4

	Condensed Consolidated Statement of Comprehensive Income for the ~~three- and nine-month~~three-month periods ended ~~September 30,~~March 31, 2018 and April 1, 2017 ~~and October 1, 2016~~ (unaudited)	5

	Condensed Consolidated Statement of Cash Flows for the ~~nine-month~~three-month periods ended ~~September 30,~~March 31, 2018 and April 1, 2017 ~~and October 1, 2016~~ (unaudited)	6

	Condensed Consolidated Statement of Stockholders' Equity for the ~~nine-month~~three-month periods ended ~~September 30,~~March 31, 2018 and April 1, 2017 ~~and October 1, 2016~~ (unaudited)	7

	Notes to Condensed Consolidated Financial Statements (unaudited)	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3937

Item 4.	Controls and Procedures	4037

PART II: Other Information

Item 1A.	Risk Factors	4037

Item 6.	Exhibits	4138

Table of Contents

PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Statements

KADANT INC.

Condensed Consolidated Balance Sheet

(Unaudited)


	September 30, 2017			December 31, 2016			March 31, 2018			December 30, 2017
(In thousands, except share amounts)
(In thousands, except share and per share amounts)							March 31, 2018			December 30, 2017
Assets
Current Assets:
Cash and cash equivalents	$	90,622		$	71,487		$	72,210		$	75,425
Restricted cash (Note 1)	766			2,082			1,532			1,421
Accounts receivable, less allowances of $2,640 and $2,395 (Note 1)	94,664			65,963
Accounts receivable, less allowances of $3,216 and $2,879 (Note 1)							91,529			89,624
Inventories (Note 1)	90,450			54,951			95,840			84,933
Unbilled contract costs and fees	6,256			3,068
Unbilled revenue							2,375			2,374
Other current assets	20,911			9,799			14,429			12,246
Total Current Assets	303,669			207,350			277,915			266,023

Property, Plant, and Equipment, at Cost	153,878			124,424			169,523			165,231
Less: accumulated depreciation and amortization	83,505			76,720			88,851			85,508
	70,373			47,704
Property, Plant, and Equipment, at Cost, Net							80,672			79,723

Other Assets	13,546			11,452			14,541			14,311
Intangible Assets, Net (Notes 1 and 2)	135,231			52,730
Goodwill (Notes 1 and 2)	264,840			151,455
Intangible Assets, Net (Note 1)							129,635			133,036
Goodwill (Note 1)							269,514			268,001
Total Assets	$	787,659		$	470,691		$	772,277		$	761,094

Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term obligations (Note 6)	$	707		$	643
Current maturities of long-term obligations (Note 5)							$	710		$	696
Accounts payable	35,136			23,929			37,026			35,461
Customer deposits	27,940			21,168			40,034			30,103
Accrued payroll and employee benefits	25,448			20,508			23,400			29,616
Billings in excess of costs and fees	10,781			1,271
Advanced billings							5,745			7,316
Other current liabilities	29,068			21,394			25,274			29,038
Total Current Liabilities	129,080			88,913			132,189			132,230

Long-Term Obligations (Note 5)							240,226			241,384
Long-Term Deferred Income Taxes	31,070			14,631			29,125			29,085
Other Long-Term Liabilities	18,531			17,100			25,510			25,891
Long-Term Obligations (Note 6)	278,091			65,768

Commitments and Contingencies (Note 13)
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			146			146
Capital in excess of par value	101,774			101,405			99,828			103,221
Retained earnings	344,449			321,050			351,355			342,893
Treasury stock at cost, 3,616,838 and 3,686,532 shares	(88,627		)	(90,335		)
Accumulated other comprehensive items (Note 9)	(28,197		)	(49,637		)
Treasury stock at cost, 3,533,950 and 3,613,838 shares							(86,596		)	(88,554		)
Accumulated other comprehensive items (Note 8)							(21,212		)	(26,715		)
Total Kadant Stockholders' Equity	329,545			282,629			343,521			330,991
Noncontrolling interest	1,342			1,650			1,706			1,513
Total Stockholders' Equity	330,887			284,279			345,227			332,504
Total Liabilities and Stockholders' Equity	$	787,659		$	470,691		$	772,277		$	761,094

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

Table of Contents

KADANT INC.

Condensed Consolidated Statement of Income

(Unaudited)


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30, 2017			October 1, 2016			September 30, 2017			October 1, 2016			March 31, 2018			April 1, 2017
(In thousands, except per share amounts)

Revenues (Note 12)	$	152,794			$	105,519		$	365,893		$	313,885
Revenues (Note 11)													$	149,193		$	102,857

Costs and Operating Expenses:
Cost of revenues	88,166			57,440			199,449			171,569			83,114			53,840
Selling, general, and administrative expenses	42,535			33,527			116,493			102,095			45,776			34,620
Research and development expenses	2,635			1,991			7,004			5,640			2,869			2,147
Other income (Note 3)	—			—			—			(317		)
Restructuring costs (Note 2)													770			—
	133,336			92,958			322,946			278,987			132,529			90,607

Operating Income	19,458			12,561			42,947			34,898			16,664			12,250

Interest Income	94			54			300			175			183			104
Interest Expense	(1,282		)	(305		)	(2,022		)	(914		)	(1,732		)	(348		)
Other Expense, Net (Note 7)													(246		)	(204		)

Income Before Provision for Income Taxes	18,270			12,310			41,225			34,159			14,869			11,802
Provision for Income Taxes (Note 5)	4,860			3,081			10,550			9,500

Income from Continuing Operations	13,410			9,229			30,675			24,659

Income from Discontinued Operation (net of income tax provision of $1 in the 2016 periods)	—			3			—			3
Provision for Income Taxes (Note 4)													3,861			2,735

Net Income	13,410			9,232			30,675			24,662			11,008			9,067

Net Income Attributable to Noncontrolling Interest	(125		)	(75		)	(343		)	(318		)	(150		)	(116		)

Net Income Attributable to Kadant	$	13,285		$	9,157		$	30,332		$	24,344		$	10,858		$	8,951

Earnings per Share Attributable to Kadant (Note 4):
Earnings per Share Attributable to Kadant (Note 3):
Basic	$	1.21		$	0.84		$	2.76		$	2.24		$	0.98		$	0.82
Diluted	$	1.17		$	0.82		$	2.69		$	2.19		$	0.96		$	0.80

Weighted Average Shares (Note 4):
Weighted Average Shares (Note 3):
Basic	11,004			10,901			10,986			10,854			11,042			10,952
Diluted	11,344			11,189			11,282			11,120			11,342			11,205

Cash Dividends Declared per Common Share	$	0.21		$	0.19		$	0.63		$	0.57
Cash Dividend Declared per Common Share													$	0.22		$	0.21

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

Table of Contents

KADANT INC.

Condensed Consolidated Statement of Comprehensive Income

(Unaudited)


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30, 2017			October 1, 2016			September 30, 2017			October 1, 2016			March 31, 2018			April 1, 2017
(In thousands)							September 30, 2017			October 1, 2016			March 31, 2018			April 1, 2017
	September 30, 2017
Net Income	$	13,410		October 1, 2016	$	9,232		$	30,675		$	24,662		$	11,008		$	9,067

Other Comprehensive Items:
Foreign currency translation adjustment	7,740			(979		)	21,427			(243		)	5,336			5,032
Pension and other post-retirement liability adjustments (net of tax provision (benefit) of $26 and $86 in the three and nine months ended September 30, 2017, respectively, and $68 and $(91) in the three and nine months ended October 1, 2016, respectively)	(11		)	127			152			(144		)
Deferred gain on hedging instruments (net of tax provision (benefit) of $28 and $44 in the three and nine months ended September 30, 2017, respectively, and $75 and $(148) in the three and nine months ended October 1, 2016, respectively)	58			139			92			99
Pension and other post-retirement liability adjustments, net (net of tax provision of $34 and $49)													117			82
Deferred gain on cash flow hedges (net of tax provision of $8 and $15)													93			27
Other Comprehensive Items	7,787			(713		)	21,671			(288		)	5,546			5,141
Comprehensive Income	21,197			8,519			52,346			24,374			16,554			14,208
Comprehensive Income Attributable to Noncontrolling Interest	(193		)	(92		)	(574		)	(358		)	(193		)	(162		)
Comprehensive Income Attributable to Kadant	$	21,004		$	8,427		$	51,772		$	24,016		$	16,361		$	14,046

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

Table of Contents

KADANT INC.

Condensed Consolidated Statement of Cash Flows

(Unaudited)


	Nine Months Ended						Three Months Ended
	September 30, 2017			October 1, 2016			March 31, 2018			April 1, 2017
(In thousands)

Operating Activities:
Operating Activities
Net income attributable to Kadant	$	30,332		$	24,344		$	10,858		$	8,951
Net income attributable to noncontrolling interest	343			318			150			116
Income from discontinued operation	—			(3		)
Net income	30,675			24,659			11,008			9,067
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	13,056			10,934			6,099			3,256
Stock-based compensation expense	4,283			3,865			1,464			1,295
Provision for losses on accounts receivable	238			420			316			129
Loss (gain) on the sale of property, plant, and equipment	37			(384		)
Loss on the sale of property, plant, and equipment							24			41
Other items, net	(738		)	256			(386		)	180
Contributions to U.S. pension plan	(810		)	(810		)	—			(90		)
Changes in current assets and liabilities, net of effects of acquisitions:
Accounts receivable	(16,225		)	3,731			(799		)	(5,043		)
Unbilled contract costs and fees	(2,582		)	1,713
Unbilled revenue							2,064			(1,134		)
Inventories	(3,504		)	2,051			(9,674		)	(3,964		)
Other current assets	(2,517		)	620			(435		)	(1,886		)
Accounts payable	2,049			(5,599		)	3,854			805
Other current liabilities	8,366			(6,717		)	(6,319		)	(973		)
Net cash provided by continuing operations	32,328			34,739
Net cash used in discontinued operation	—			(2		)
Net cash provided by operating activities	32,328			34,737			7,216			1,683

Investing Activities:
Acquisitions, net of cash acquired (Note 2)	(204,228		)	(56,617		)
Investing Activities
Purchases of property, plant, and equipment	(8,718		)	(3,579		)	(5,151		)	(1,722		)
Acquisition							—			(165		)
Proceeds from sale of property, plant, and equipment	111			409			28			—
Other investing activities							—			(2		)
Net cash used in investing activities	(212,835		)	(59,787		)	(5,123		)	(1,889		)

Financing Activities:
Proceeds from issuance of debt (Note 6)	222,019			48,046
Financing Activities
Repayment of debt	(20,272		)	(15,429		)	(13,382		)	(4,610		)
Proceeds from issuance of debt							12,000			8,000
Tax withholding payments related to stock-based compensation							(3,641		)	(2,182		)
Dividends paid	(6,699		)	(5,964		)	(2,316		)	(2,078		)
Tax withholding payments related to stock-based compensation	(2,206		)	(2,572		)
Payment of debt issuance costs (Note 6)	(1,257		)	(27		)
Payment of contingent consideration	—			(1,091		)
Proceeds from issuance of Company common stock	—			1,780			742			—
Change in restricted cash	1,523			(793		)
Dividend paid to noncontrolling interest	(882		)	—
Payment of debt issuance costs							—			(654		)
Other financing activities	(288		)	—			(111		)	(118		)
Net cash provided by financing activities	191,938			23,950
Net cash used in financing activities							(6,708		)	(1,642		)

Exchange Rate Effect on Cash and Cash Equivalents	7,704			(1,195		)
Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash							1,511			1,362

Increase (Decrease) in Cash and Cash Equivalents	19,135			(2,295		)
Cash and Cash Equivalents at Beginning of Period	71,487			65,530
Cash and Cash Equivalents at End of Period	$	90,622		$	63,235
Decrease in Cash, Cash Equivalents, and Restricted Cash							(3,104		)	(486		)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period							76,846			73,569
Cash, Cash Equivalents, and Restricted Cash at End of Period							$	73,742		$	73,083

See Note 1 – Supplemental Cash Flow Information and Recently Adopted Accounting Pronouncements, Statement of Cash Flows (Topic 230), Restricted Cash for ~~supplemental cash flow information.~~further details.

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

Table of Contents

KADANT INC.

Condensed Consolidated Statement of Stockholders' Equity

(Unaudited)


(In thousands, except share amounts)	Common Stock			Capital in Excess of Par Value				Retained Earnings			Treasury Stock						Accumulated Other Comprehensive Items				Noncontrolling Interest				Total Stockholders' Equity				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									Shares								Amount				Shares							Amount

Balance at January 2, 2016	14,624,159	$	146	$	100,536				$	297,258		3,850,779		$	(94,359	)		$	(36,972	)			$	1,336			$	267,945
Balance at December 31, 2016																													14,624,159	$	146		$	101,405		$	321,050			3,686,532		$	(90,335	)	$	(49,637	)	$	1,650	$	284,279

Net income	—	—		—				24,344			—		—				—				318				24,662				—	—			—			8,951				—		—			—			116		9,067

Dividends declared	—	—		—				(6,207		)	—		—				—				—				(6,207		)
Dividend declared																													—	—			—			(2,310		)		—		—			—			—		(2,310		)

Activity under stock plans	—	—		(343		)		—			(141,373	)	3,464				—				—				3,121				—	—			(2,431		)	—				(63,020	)	1,544			—			—		(887		)

Other comprehensive items	—	—		—				—			—		—				(328		)		40				(288		)		—	—			—			—				—		—			5,095			46		5,141

Balance at October 1, 2016	14,624,159	$	146	$	100,193			$	315,395		3,709,406		$	(90,895	)		$	(37,300	)		$	1,694			$	289,233
Balance at April 1, 2017																													14,624,159	$	146		$	98,974		$	327,691			3,623,512		$	(88,791	)	$	(44,542	)	$	1,812	$	295,290

Balance at December 31, 2016	14,624,159	$	146	$	101,405			$	321,050		3,686,532		$	(90,335	)		$	(49,637	)		$	1,650			$	284,279
Balance at December 30, 2017																													14,624,159	$	146		$	103,221		$	342,893			3,613,838		$	(88,554	)	$	(26,715	)	$	1,513	$	332,504

Net income	—	—		—				30,332			—		—				—				343				30,675				—	—			—			10,858				—		—			—			150		11,008

Dividends declared	—	—		—				(6,933		)	—		—				—				—				(6,933		)
Adoption of ASU No. 2014-09 (Note 1)																													—	—			—			119				—		—			—			—		119

Dividend paid to noncontrolling interest	—	—		—				—			—		—				—				(882		)		(882		)
Adoption of ASU No. 2016-16 (Note 1)																													—	—			—			(75		)		—		—			—			—		(75		)

Dividend declared																													—	—			—			(2,440		)		—		—			—			—		(2,440		)

Activity under stock plans	—	—		369				—			(69,694	)	1,708				—				—				2,077				—	—			(3,393		)	—				(79,888	)	1,958			—			—		(1,435		)

Other comprehensive items	—	—		—				—			—		—				21,440				231				21,671				—	—			—			—				—		—			5,503			43		5,546

Balance at September 30, 2017	14,624,159	$	146	$	101,774			$	344,449		3,616,838		$	(88,627	)		$	(28,197	)		$	1,342			$	330,887
Balance at March 31, 2018																													14,624,159	$	146		$	99,828		$	351,355			3,533,950		$	(86,596	)	$	(21,212	)	$	1,706	$	345,227

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

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. ~~(collectively, "Kadant," "the Company," or "the Registrant")~~ was incorporated in Delaware in November 1991 and currently trades on the New York Stock Exchange under the ticker symbol "KAI."

~~The Company~~Kadant Inc. and its subsidiaries' (collectively, the Company) operations include two reportable operating segments, Papermaking Systems and Wood Processing Systems, and a separate product line, Fiber-based Products.

Through its Papermaking Systems segment, the Company develops, manufactures, and markets a range of equipment and products ~~primarily~~ for the global papermaking, paper recycling, recycling and waste management, and other process ~~industries worldwide.~~industries. The Company's principal products ~~in this segment~~ include custom-engineered stock-preparation systems and equipment for the preparation of wastepaper for conversion into recycled paper and balers and related equipment used in the processing of recyclable and waste materials; fluid-handling systems and equipment used in industrial piping systems to compensate for movement and to efficiently transfer fluid, power, and data; doctoring systems and equipment and related consumables important to the efficient operation of paper machines and other industrial processes; and filtration and cleaning systems essential for draining, purifying, and recycling process water and cleaning fabrics, belts, and rolls in various process industries.

Through its Wood Processing Systems segment, the Company develops, manufactures, and markets stranders, debarkers, ~~stranders,~~chippers, and ~~timber harvesting equipment~~logging machinery used in the harvesting and production of lumber and oriented strand ~~board (OSB), an engineered wood panel product used primarily in home construction.~~board. Through this segment, the Company also provides refurbishment and repair of pulping equipment for the pulp and paper industry.

Through its Fiber-based Products business, the Company manufactures and sells biodegradable, absorbent granules derived from papermaking by-products ~~primarily~~ for use primarily as ~~agricultural~~ carriers ~~and~~ for agricultural, home lawn and garden, and professional lawn, turf and ornamental applications, as well as for oil and grease absorption.

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 30, 2017~~March 31, 2018 and its results of operations and comprehensive income for the ~~three- and nine-month~~three-month periods ended ~~September 30,~~March 31, 2018 and April 1, 2017, ~~and October 1, 2016,~~ and its cash flows and stockholders' equity for the ~~nine-month~~three-month periods ended ~~September 30, 2017~~March 31, 2018 and ~~October~~April 1, ~~2016.~~2017. 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 ~~31, 2016~~30, 2017 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 ~~31, 2016.~~30, 2017. The condensed consolidated financial statements and related notes are presented as permitted by the Securities and Exchange Commission (SEC) rules and regulations for Form 10-Q and do not contain certain information included in the annual consolidated financial statements and related notes of the Company. The condensed consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December ~~31, 2016,~~30, 2017, filed with the SEC.

Financial Statement Presentation

Certain reclassifications have been made to prior periods to conform with current reporting. As a result of the adoption of the Financial Accounting Standards Board's (FASB) Accounting Standards Update (ASU) No. 2017-07, Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost, certain components of net benefit cost have been reclassified from operating income to non-operating expenses and included in other expense, net in the condensed consolidated statement of income in the 2017 period. In addition, as a result of the adoption of the FASB's ASU No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash, the change in restricted cash has been reclassified from financing activities and exchange rate effect on cash and included in cash, cash equivalents, and restricted cash in the condensed consolidated statement of cash flows in the 2017 period.

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of Operations and Summary of Significant Accounting Policies (continued)

Effective at the beginning of fiscal 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (Topic 606), using a modified retrospective method. See Recently Adopted Accounting Pronouncements in this footnote for further discussion. Results for fiscal 2018 are presented under Topic 606, while prior period amounts are not adjusted and are reported under the Company's prior method of reporting revenue recognition in accordance with Revenue Recognition (Topic 605) (Topic 605). The impact on any financial statement line item created by applying Topic 606 versus Topic 605 to the Company's results for the first quarter of 2018 is not material.

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 revenues and expenses during the reporting period.

Critical accounting policies are defined as those that entail significant judgments and estimates, and could potentially result in materially different results under different assumptions and conditions. The Company believes that the most critical accounting policies upon which its financial position depends, and which involve the most complex or subjective decisions or assessments, concern revenue recognition, ~~and accounts receivable, warranty obligations,~~ income taxes, the valuation of goodwill and intangible assets, inventories, and pension obligations. A discussion of the application of these and other accounting policies is included in Notes 1 and 3 to the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended December ~~31, 2016.~~

~~Table of Contents~~

~~KADANT INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~1. Nature of Operations~~30, 2017, and ~~Summary of Significant~~in Revenue Recognition and Recently Adopted Accounting ~~Policies (continued)~~

~~Use of Estimates~~

~~The preparation of financial statements~~Pronouncements, Revenue from Contracts with Customers (Topic 606), in conformity with accounting principles generally accepted in the United States of America (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 revenues and expenses during the reporting period.this footnote.

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.

Supplemental Cash Flow Information


	Nine Months Ended						Three Months Ended
(In thousands)	September 30, 2017			October 1, 2016			March 31, 2018		April 1, 2017
Cash Paid for Interest							$	2,459	$	388
Cash Paid for Income Taxes, Net of Refunds							$	8,455	$	3,774

Non-Cash Investing Activities:
Fair value of assets acquired	$	241,141		$	87,060
Cash paid for acquired businesses	(206,447		)	(58,894		)
Liabilities assumed of acquired businesses	$	34,694		$	28,166
Estimated post-closing adjustment (a)							$	400	$	—

Non-cash additions to property, plant and equipment							$	1,816	$	125

Non-Cash Financing Activities:
Issuance of Company common stock	$	3,018		$	3,260
Issuance of Company common stock upon vesting of restricted stock units							$	2,755	$	2,640
Dividends declared but unpaid	$	2,312		$	2,074		$	2,440	$	2,310

(a) Represents an estimated post-closing purchase price adjustment related to the 2017 acquisition of certain assets of Unaflex, LLC, which is expected to be settled in 2018.

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of Operations and Summary of Significant Accounting Policies (continued)

Restricted Cash

~~As of September 30, 2017 and December 31, 2016, the Company had~~The Company's restricted ~~cash of $766,000 and $2,082,000, respectively. This~~ cash serves as collateral for bank guarantees primarily associated with providing assurance to customers that the Company will fulfill certain customer obligations entered into in the normal course of business. The majority of the bank guarantees will expire by the end of 2018.

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



(In thousands)	March 31, 2018		April 1, 2017		December 30, 2017		December 31, 2016
Cash and cash equivalents	$	72,210	$	71,540	$	75,425	$	71,487
Restricted cash	1,532		1,543		1,421		2,082
Total Cash, Cash Equivalents, and Restricted Cash	$	73,742	$	73,083	$	76,846	$	73,569

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 banker's acceptance drafts are ~~noninterest-bearing~~noninterest bearing obligations of the issuing bank and mature within six months of the origination date. The Company's 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 ~~$16,687,000~~$12,021,000 at March 31, 2018 and ~~$7,852,000~~$15,960,000 at ~~September~~December 30, 2017, ~~and December 31, 2016, respectively,~~ 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.

Inventories

The components of inventories are as follows:


	September 30, 2017			December 31, 2016				March 31, 2018				December 30, 2017
(In thousands)								March 31, 2018				December 30, 2017
Raw Materials and Supplies	September 30, 2017	$	40,969	December 31, 2016		$	21,086			$	42,582			$	38,952
Work in Process	20,158			12,293				22,395				18,203
Finished Goods	29,323			21,572				30,863				27,778
Total Inventories	$	90,450		$	54,951
								$	95,840			$	84,933

910

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of Operations and Summary of Significant Accounting Policies (continued)

Intangible Assets, Net

~~The changes in the carrying amount of~~Acquired intangible ~~assets are as follows:~~

September 30,
2017 December 31,
2016
(In thousands)
Indefinite-Lived, Gross $ 8,100
$ 8,100
Acquisition (Note 2) 8,500
—
Currency translation 271
—
Indefinite-Lived, Net 16,871
8,100

Definite-Lived, Gross 101,743
77,052
Acquisitions (Note 2) 75,540
24,691
Accumulated amortization (56,913 ) (49,040 )
Currency translation (2,010 ) (8,073 )
Definite-Lived, Net 118,360
44,630

Total Intangible Assets, Net $ 135,231
$ 52,730

~~Intangible~~ assets by major asset class are as follows:


(In thousands)	Gross		Currency Translation			Accumulated Amortization			Net		Gross		Currency Translation			Accumulated Amortization			Net
September 30, 2017
March 31, 2018
Definite-Lived
Customer relationships	$	111,801	$	(821	)	$	(26,404	)	$	84,576	$	113,283	$	(419	)	$	(31,196	)	$	81,668
Intellectual property	46,501		(817		)	(18,846		)	26,838
Product technology											46,501		(584		)	(20,797		)	25,120
Tradenames	21,827		(39		)	(1,382		)	20,406		5,227		(218		)	(1,628		)	3,381
Other	13,754		(62		)	(10,281		)	3,411		13,744		(28		)	(11,178		)	2,538
	$	193,883	$	(1,739	)	$	(56,913	)	$	135,231	178,755		(1,249		)	(64,799		)	112,707
December 31, 2016
Indefinite-Lived
Tradenames											16,600		328			—			16,928
Acquired Intangible Assets											$	195,355	$	(921	)	$	(64,799	)	$	129,635

December 30, 2017
Definite-Lived
Customer relationships	$	59,101	$	(5,202	)	$	(21,805	)	$	32,094	$	113,301	$	(621	)	$	(28,789	)	$	83,891
Intellectual property	27,101		(2,052		)	(17,105		)	7,944
Product technology											46,501		(737		)	(19,841		)	25,923
Tradenames	12,547		(591		)	(1,065		)	10,891		5,227		(262		)	(1,504		)	3,461
Other	11,094		(228		)	(9,065		)	1,801		13,754		(35		)	(10,863		)	2,856
	$	109,843	$	(8,073	)	$	(49,040	)	$	52,730	178,783		(1,655		)	(60,997		)	116,131
Indefinite-Lived
Tradenames											16,600		305			—			16,905
Acquired Intangible Assets											$	195,383	$	(1,350	)	$	(60,997	)	$	133,036

Intangible assets are initially recorded at fair value at the date of acquisition and 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.

~~Table of Contents~~

~~KADANT INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~1. Nature of Operations and Summary of Significant Accounting Policies (continued)~~

Goodwill

The changes in the carrying amount of goodwill by segment are as follows:


(In thousands)	Papermaking Systems Segment			Wood Processing Systems Segment		Total			Papermaking Systems Segment			Wood Processing Systems Segment			Total
Balance at December 31, 2016
Balance at December 30, 2017
Gross balance	$	219,699		$	17,265	$	236,964		$	247,014		$	106,496		$	353,510
Accumulated impairment losses	(85,509		)	—		(85,509		)	(85,509		)	—			(85,509		)
Net balance	134,190			17,265		151,455			161,505			106,496			268,001
2017 Adjustments
Acquisitions (Note 2)	15,277			84,606		99,883
2018 Adjustments
Acquisitions (a)									(309		)	(75		)	(384		)
Currency translation	9,937			3,565		13,502			2,131			(234		)	1,897
Total 2017 adjustments	25,214			88,171		113,385
Balance at September 30, 2017
Total 2018 adjustments									1,822			(309		)	1,513
Balance at March 31, 2018
Gross balance	244,913			105,436		350,349			248,836			106,187			355,023
Accumulated impairment losses	(85,509		)	—		(85,509		)	(85,509		)	—			(85,509		)
Net balance	$	159,404		$	105,436	$	264,840		$	163,327		$	106,187		$	269,514

~~Warranty Obligations~~

The Company provides for the estimated cost of product warranties at the time of sale based on the actual historical occurrence rates and repair costs, as well as knowledge of any specific warranty problems that indicate that projected warranty costs may vary from historical patterns. The Company typically negotiates the terms regarding warranty coverage and length of warranty depending on the products and applications. While the Company engages in extensive product quality programs and processes, the Company's warranty obligation is affected by product failure rates, repair costs, service delivery costs incurred in correcting a product failure, and supplier warranties on parts delivered to the Company. Should actual product failure rates,

~~repair costs, service delivery costs, or supplier warranties on parts differ from the Company's estimates, revisions to the estimated warranty liability would be required.~~

~~The changes in the carrying amount of accrued warranty costs included in other current liabilities in the accompanying condensed consolidated balance sheet are as follows:~~

Nine Months Ended
(In thousands) September 30,
2017 October 1,
2016
Balance at Beginning of Year $ 3,843
$ 3,670
Provision charged to income 1,931
2,454
Usage (1,506 ) (2,574 )
Acquisitions 790
991
Currency translation 382
(19 )
Balance at End of Period $ 5,440
$ 4,522

~~Recent Accounting Pronouncements~~

Revenue from Contracts with Customers (Topic 606), Section A-Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40). In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. In March 2016, the FASB issued ASU No. 2016-08, which further clarifies the guidance on the principal versus agent considerations within ASU No. 2014-09. In April 2016, the FASB issued ASU No. 2016-10 to expand the guidance on identifying performance

Table of Contents

KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of Operations and Summary of Significant Accounting Policies (continued)

(a) Relates to adjustments to the purchase price allocation, principally for inventory, for acquisitions completed in 2017. The purchase price allocation for the Company's 2017 acquisitions will be finalized by the second quarter of 2018 and any resulting adjustments are not expected to be material.

Warranty Obligations

The changes in the carrying amount of accrued warranty costs included in other current liabilities in the accompanying condensed consolidated balance sheet are as follows:



	Three Months Ended
(In thousands)	March 31, 2018			April 1, 2017
Balance at December 30, 2017	$	5,498		$	3,843
Provision charged to expense	715			804
Usage	(364		)	(570		)
Currency translation	61			62
Balance at March 31, 2018	$	5,910		$	4,139

Revenue Recognition

Effective at the beginning of fiscal 2018, the Company adopted Topic 606, using a modified retrospective method. See Recently Adopted Accounting Pronouncements in this footnote for further discussion. Results for fiscal 2018 are presented under Topic 606, while prior period amounts are not adjusted and are reported in accordance with Topic 605. The impact on any financial statement line item created by applying Topic 606 versus Topic 605 to the Company's results for the first quarter of 2018 is not material.

Approximately 95% of the Company’s revenue in the first quarter of 2018 was recognized at a point in time for each performance obligation under the contract when the customer obtains control of the goods or service. The majority of the Company’s parts and consumables products and capital products with minimal customization are accounted for at a point in time. The Company has made a policy election to not treat the obligation to ship as a separate performance obligation under the contract and, as a result, the associated shipping costs are accrued when revenue is recognized.

The remaining 5% of the Company’s revenue in the first quarter of 2018 was recognized on an over time basis based on an input method that compares the costs incurred to date to the total expected costs required to satisfy the performance obligation. 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. The majority of the contracts recognized on an over time basis are for large capital projects within the Company's Stock-Preparation product line and, to a lesser extent, its Fluid-Handling and Doctoring, Cleaning, and Filtration product lines. 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 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. The Company negotiates the terms regarding warranty coverage and length of warranty depending on the products and applications.

Table of Contents

KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of Operations and Summary of Significant Accounting Policies (continued)

The Company disaggregates its revenue from contracts with customers by product line, product type, and geography as this best depicts how its revenue is affected by economic factors as shown below:



	Three Months Ended
	March 31,		April 1,
(In thousands)	2018		2017
Revenues by Product Line:
Papermaking Systems:
Stock-Preparation	$	45,483	$	41,153
Doctoring, Cleaning, & Filtration	27,222		25,350
Fluid-Handling	32,886		22,047
Papermaking Systems	$	105,591	$	88,550
Wood Processing Systems	39,141		9,943
Fiber-based Products	4,461		4,364
	$	149,193	$	102,857
Revenue by Product Type:
Parts and Consumables	$	95,985	$	70,444
Capital	53,208		32,413
	$	149,193	$	102,857
Revenue by Geography:
North America	$	77,616	$	50,166
Europe	41,493		32,751
Asia	20,148		11,898
Rest of World	9,936		8,042
	$	149,193	$	102,857

The following table presents revenue by revenue recognition method:



	Three Months Ended
	March 31,
(In thousands)	2018
Timing of Revenue Recognition:
Point in Time	$	142,005
Over Time	7,188
	$	149,193

Table of Contents

KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of Operations and Summary of Significant Accounting Policies (continued)

The following tables present the balances from contracts with customers and the significant changes in contract asset and contract liabilities:



	March 31, 2018			December 30, 2017
(In thousands)	March 31, 2018			December 30, 2017
Balances from Contracts with Customers:
Accounts receivable, net	$	91,529		$	89,624
Contract assets	2,375			2,374
Contract liabilities	(47,759		)	(38,702		)



	Contract Assets			Contract Liabilities
(In thousands)	Contract Assets			Contract Liabilities
Balance at December 30, 2017	$	2,374		$	(38,702	)
Impact from the adoption of Topic 606	2,021			(3,932		)
Reclassification to accounts receivable, net	(3,476		)	—
Contract assets recognized	1,403			—
Revenue recognized	—			27,325
Cash received and not recognized as revenue	—			(31,503		)
Currency translation	53			(947		)
Balance at March 31, 2018	$	2,375		$	(47,759	)

Contract assets relate to unbilled revenue associated with revenue recognized on contracts accounted for on an over time basis. Unbilled amounts will be billed in future periods based on the contract terms. Contract liabilities consist of customer deposits, advanced billings and deferred revenue included in other current 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 advanced 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 been delivered and ~~licensing~~control of the asset has transferred to the customer.

Customers in China will often settle their accounts receivable with a banker's acceptance draft, in which case cash settlement will be delayed until the banker's acceptance draft matures or is settled prior to maturity. For customers outside of China, final payment for the majority of the Company's products is received in the quarter following the product shipment. Certain of the Company's contracts include a longer period before final payment is due, which is typically within ~~ASU 2014-09.~~one year of final shipment or transfer of control to the customer.

Recently Adopted Accounting Pronouncements

Revenue from Contracts with Customers (Topic 606), Section A-Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40). In May ~~2016,~~2014, the FASB issued ASU No. ~~2016-11,~~2014-09, which ~~rescinds certain previously-issued guidance, including, among other items, guidance relating~~requires an entity to ~~accounting for shipping and handling fees and freight services effective upon adoption~~recognize the amount of ~~ASU No. 2014-09. Also in May 2016, the FASB issued ASU No. 2016-12,~~revenue to which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition. In December 2016, the FASB issued ASU No. 2016-20, which clarifies narrow aspects of Topic 606 and corrects unintended application of the guidance. These new ASUs are effectiveit expects to be entitled for the ~~Company beginning in fiscal 2018. Early adoption is permitted in fiscal 2017.~~transfer of promised goods or services to customers. The Company is continuing to assess the potential effects of these ASUs on its condensed consolidated financial statements, business processes, systems and controls. While the assessment process is ongoing, the Company currently anticipates adopting these ASUsadopted this ASU using the modified retrospective transition ~~approach. Under this~~ approach ~~this~~effective at the beginning of fiscal 2018. The guidance ~~would apply~~applies to all new contracts initiated in fiscal 2018. For existing contracts that have remaining obligations as of the beginning of fiscal 2018, any difference between the recognition criteria in ~~these ASUs~~this ASU and the ~~Company’s current~~Company's previous revenue recognition practices ~~would be~~under Topic 605 was recognized using a ~~cumulative effect~~cumulative-effect adjustment that increased retained earnings by $119,000. The increase in retained earnings primarily related to contracts, which meet the over time criteria under the new revenue standard and, as a result, the portion of the contract completed as of the beginning of fiscal 2018 was recognized immediately in retained earnings. Partially offsetting this increase was a reduction of retained earnings associated with certain contracts which were previously accounted for under the percentage-of-completion method of accounting, but do not meet the requirements for over time recognition under Topic 606. Amounts previously recognized in fiscal 2017 based on the percentage-of-completion method of accounting were deferred at the beginning of fiscal 2018 and will be recognized along with the remaining revenue and costs in fiscal 2018 when control of the asset has been transferred to the ~~opening balance~~customer.

Table of ~~retained earnings.~~ Contents

KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of Operations and Summary of Significant Accounting Policies (continued)

The Company ~~is also in the process of developing and implementing appropriate changes~~has implemented certain modifications to its ~~business processes, systems and~~existing internal controls to support the recognition criteria and disclosure ~~requirements~~requirement of ~~these ASUs.~~this ASU. See Revenue Recognition in this footnote for further disclosures required by this ASU.

~~Inventory~~Statement of Cash Flows (Topic ~~330)~~230), ~~Simplifying the Measurement~~Classification of ~~Inventory~~Certain Cash Receipts and Cash Payments.. In ~~July 2015,~~August 2016, the FASB issued ASU No. ~~2015-11,~~2016-15, which ~~requires that an entity measure inventory within~~simplifies the ~~scope~~diversity in practice related to the presentation and classification of ~~this ASU at the lower of cost or net realizable value. Net realizable value is the estimated selling price~~certain cash receipts and cash payments in the ~~ordinary course~~statement of business, less reasonably predictable costs of completion, disposal, and transportation. Substantial and unusual losses that result from subsequent measurement of inventory should be disclosed in the financial statements.cash flows under Topic 230. The Company adopted this ASU at the beginning of fiscal ~~2017. Adoption~~2018 with no impact on the Company's condensed consolidated statement of cash flows.

Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory. In October 2016, the FASB issued ASU No. 2016-16, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory. The Company adopted this ASU at the beginning of fiscal 2018 on a modified retrospective basis, which resulted in an immaterial adjustment to retained earnings. The impact of the adoption of this standard to future periods will be dependent on future asset transfers, which generally occur in connection with acquisitions and other business structuring activities.

Statement of Cash Flows (Topic 230), Restricted Cash. In November 2016, the FASB issued ASU No. 2016-18, which requires inclusion of restricted cash and restricted cash equivalents within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this ASU at the beginning of fiscal 2018. Prior period amounts related to the Company's cash flows from financing activities, exchange rate effect on cash, and cash, cash equivalents, and restricted cash were restated as required by this ASU, which did not have a material effect on the Company's statement of cash flows. See Restricted Cash in this footnote for further disclosures required by this ASU.

Business Combinations (Topic 805), Clarifying the Definition of a Business. In January 2017, the FASB issued ASU No. 2017-01, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The Company adopted this ASU on a prospective basis at the beginning of fiscal 2018. The adoption of this ASU will impact how the Company assesses acquisitions and disposals of businesses in the future.

Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost. In March 2017, the FASB issued ASU No. 2017-07, which requires employers to include only the service cost component of net periodic pension cost and net periodic post-retirement benefit cost in costs and operating expenses in the same income statement line item as the related employees' compensation costs. The other components of net benefit cost are to be included in non-operating expenses. The Company adopted this ASU at the beginning of fiscal 2018 and prior period amounts were reclassified with no impact on the Company’s condensed consolidated net income. As a result of the adoption, the Company reclassified $204,000 from operating income to other expense, net in the accompanying condensed consolidated statement of income for the three months ended April 1, 2017.

Compensation - Stock Compensation (Topic 718), Scope of Modification Accounting. In May 2017, the FASB issued ASU No. 2017-09, which provides clarity on which changes to the terms or conditions of share-based payment awards require entities to apply the modification accounting provisions required in Topic 718. The Company adopted this ASU on a prospective basis at the beginning of fiscal 2018. The adoption of this ASU did not have a material impact on the Company's condensed consolidated financial statements.

Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. In March 2018, the FASB issued ASU No. 2018-05, an amendment to the December 2017 SEC Staff Accounting Bulletin No. 118 (SAB 118), which allowed SEC registrants to record provisional amounts in earnings due to the complexities involved in accounting for the December 22, 2017 enactment of the Tax Cuts and Jobs Act of 2017. While the Company’s accounting for certain tax effects is incomplete, it has determined reasonable estimates for those effects and has recorded provisional amounts in the condensed consolidated financial statements as of March 31, 2018 and December 30, 2017.

Recent Accounting Pronouncements Not Yet Adopted

Leases (Topic 842). In February 2016, the FASB issued ASU No. 2016-02, which requires a lessee to recognize a right-of-use asset and a lease liability for operating leases, initially measured at the present value of the future lease payments,

Table of Contents

KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of Operations and Summary of Significant Accounting Policies (continued)

in its balance sheet. This ASU also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. This new guidance is effective for the Company in fiscal ~~2019. Early~~2019 using the modified retrospective transition method and early adoption is permitted. ~~As part of the implementation of this new standard, the~~The Company is ~~in the process of reviewing current accounting policies and~~ assessing the practical expedients allowed under this new ~~guidance.~~guidance as well as reviewing the impact on its systems, processes and controls to account for its leases. The Company ~~expects that most~~has not completed its evaluation but believes this standard will have a significant impact on its balance sheet but is not expected to have a material impact on the Company’s results of ~~its operating~~operations or cash flows. As of the end of fiscal 2017, the Company had approximately $8.1 million of future lease payments due after fiscal 2018. The actual impact of this new standard will depend on the total amount of the Company’s lease commitments ~~will be subject to the new standard and recognized~~ as ~~operating lease liabilities and right-of-use assets upon adoption, which is required using the modified retrospective transition method. The Company is currently evaluating the other effects that~~of the adoption ~~of this ASU will have on its condensed consolidated financial statements.~~date.

Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. In June 2016, the FASB issued ASU No. 2016-13, which significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining lives. This new guidance is effective for the Company in fiscal ~~2020. Early~~2020 with early adoption is permitted beginning in fiscal 2019. The Company is currently evaluating the effects that the adoption of this ASU will have on its condensed consolidated financial statements.

~~Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments.~~ In August 2016, the FASB issued ASU No. 2016-15, which simplifies the diversity in practice related to the presentation and classification of certain cash receipts and cash payments in the statement of cash flows under Topic 230. This ASU addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This new guidance is effective for the Company in fiscal 2018. Early adoption is permitted. The Company does not believe that adoption of this ASU will have a material impact on its condensed consolidated financial statements.

~~Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory.~~ In October 2016, the FASB issued ASU No. 2016-16, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory. This new guidance is effective for the Company in fiscal 2018 with adoption required on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Early

~~Table of Contents~~

~~KADANT INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~1. Nature of Operations and Summary of Significant Accounting Policies (continued)~~

~~adoption is permitted. The Company is currently evaluating the effect that the adoption of this ASU will have on its condensed consolidated financial statements.~~

~~Statement of Cash Flows (Topic 230), Restricted Cash.~~ In November 2016, the FASB issued ASU No. 2016-18, which requires inclusion of restricted cash and restricted cash equivalents within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This new guidance is effective for the Company in fiscal 2018. Early adoption is permitted. As this ASU is presentation-related only, adoption of this ASU will not have a material impact on the Company's condensed consolidated financial statements.

~~Business Combinations (Topic 805), Clarifying the Definition of a Business.~~ In January 2017, the FASB issued ASU No. 2017-01, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The revised definition of a business under this ASU will reduce the number of transactions that are accounted for as business combinations. This new guidance is effective on a prospective basis for the Company in fiscal 2018. Early adoption is allowed for certain transactions. The Company is currently evaluating the effects that the adoption of this ASU will have on its condensed consolidated financial statements.

~~Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment.~~In January 2017, the FASB issued ASU No. 2017-04, which eliminates Step 2 in goodwill impairment testing, which requires that goodwill impairment losses be measured as the difference between the implied value of a reporting unit’s goodwill and its carrying amount. This ASU will reduce the cost and complexity of impairment testing by requiring goodwill impairment losses to be measured as the excess of the reporting unit’s carrying amount, including goodwill and related goodwill tax effects, over its fair value. This new guidance is effective on a prospective basis for the Company in fiscal 2020. Early adoption is permitted. The Company does not believe that adoption of this ASU will have a material effect on its condensed consolidated financial statements.

~~Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost.~~ In March 2017, the FASB issued ASU No. 2017-07, which requires employers to include only the service cost component of net periodic pension cost and net periodic post-retirement benefit cost in operating expenses in the same income statement line item as the related employees' compensation costs. The other components of net benefit cost, including interest costs, amortization of prior service costs and settlement and curtailment effects, are to be included in non-operating expenses. The ASU also stipulates that only the service cost component of net benefit cost is eligible for capitalization. This new guidance is effective on a retrospective basis for the Company in fiscal 2018. Early adoption is permitted. The Company is currently evaluating the effects that adoption of this ASU will have on its condensed consolidated financial statements.

~~Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting~~. In May 2017, the FASB issued ASU No. 2017-09, which provides clarity on which changes to the terms or conditions of share-based payment awards require entities to apply the modification accounting provisions required in Topic 718. This new guidance is effective on a prospective basis for the Company in fiscal 2018. Early adoption is permitted. The Company does not believe that adoption of this ASU will have a material effect on its condensed consolidated financial statements.

Derivatives and Hedging (Topic 815):, Targeted Improvements in Accounting for Hedging ~~Activity~~Activity.. In August 2017, the FASB issued ASU No. 2017-12, which provides improvements to current hedge accounting to better portray the economic results of an entity’s risk management activities and to simplify the application of current hedge accounting guidance. This new guidance is effective on a prospective basis for the Company in fiscal 2019. Early adoption is permitted. The Company does not believe that adoption of this ASU will have a material effect on its condensed consolidated financial statements.

Income Statement - Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. In February 2018, the FASB issued ASU No. 2018-02, which allows a reclassification from accumulated other comprehensive items (AOCI) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The reclassification is elective and would allow the income tax effects on items that were originally recorded in AOCI be reclassified from AOCI to retained earnings. This ASU is effective for the Company in fiscal year 2019 and interim periods therein and should be applied either at the beginning of the period of adoption or retrospectively to each period in which the income tax effects of the Tax Cuts and Jobs Act of 2017 are recognized. Early adoption is permitted. The Company is currently evaluating the effects that the adoption of this ASU will have on its condensed consolidated financial statements.

2. Restructuring Costs

In 2017, the Company constructed a 160,000 square foot manufacturing facility in the United States that will integrate its U.S. and Swedish Papermaking stock-preparation product lines into a single manufacturing facility to achieve economies of scale and greater efficiencies. As a result of the consolidation and integration of these facilities, the Company developed a restructuring plan totaling approximately $1,900,000, primarily related to costs for the relocation of machinery and equipment and administrative offices, severance, and abandonment of leased facilities in the Papermaking Systems segment. As a result of this plan, the Company recorded restructuring charges of $203,000 in 2017 associated with severance costs for the reduction of four employees in the United States and six employees in Sweden. In the first three months of 2018, the Company recorded additional restructuring costs of $770,000 related to this plan, including $563,000 for the relocation of machinery and equipment and administrative offices, and $210,000 associated with employee retention costs and abandonment of excess facility and other closure costs. The Company expects to record additional restructuring charges of approximately $900,000, including $750,000 for the relocation of machinery and equipment and $150,000 of other costs, in 2018 when certain specified criteria are met.

~~Table of Contents~~

~~KADANT INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~2. Acquisitions~~

The Company’s acquisitions are accounted for using the purchase method of accounting and their results are included in the accompanying financial statements from their respective dates of acquisition. Historically, the Company’s acquisitions have been made at prices above the fair value of identifiable net assets, resulting in goodwill. Acquisition transaction costs are included inselling, general, and administrative expenses (SG&A) in the accompanying condensed consolidated statement of income as incurred. The Company recorded acquisition transaction costs of $5,002,000 in the first nine months of 2017.

~~Unaflex, LLC~~

On August 14, 2017, the Company acquired certain assets of Unaflex, LLC (Unaflex) for approximately $31,274,000 in cash, subject to a post-closing adjustment. The Company funded the acquisition through borrowings under its 2017 Amended and Restated Credit Agreement (see Note 6). Unaflex, located principally in South Carolina, is a leading manufacturer of expansion joints and related products for process industries. Revenues for Unaflex were approximately $17,494,000 for the twelve months ended December 31, 2016. This acquisition complements the Company’s existing Fluid-Handling product line within the Company’s Papermaking Systems segment. The Company expects several synergies in connection with this acquisition, including expanding sales of products offered by Unaflex by leveraging the Company’s sales efforts, as well as sourcing and manufacturing efficiencies. Goodwill from the Unaflex acquisition was $15,277,000, all of which is expected to be deductible for tax purposes. For the quarter ended September 30, 2017, the Company recorded revenues and an operating loss from Unaflex from its date of acquisition of $2,522,000 and $36,000, respectively. Included in the operating loss was amortization expense of $106,000 associated with acquired profit in inventory.

~~NII FPG Company~~

On July 5, 2017, the Company acquired the forest products business of NII FPG Company (NII) pursuant to a Stock and Asset Purchase Agreement dated May 24, 2017, for approximately $170,655,000, net of cash acquired, which includes a post-closing adjustment of $2,134,000 that was received subsequent to the end of the third quarter. In connection with the acquisition, the Company borrowed an aggregate $170,018,000 under its 2017 Amended and Restated Credit Agreement (see Note 6) in the third quarter of 2017, including $62,690,000 of Canadian dollar-denominated and $61,769,000 of euro-denominated borrowings. NII, which has two primary manufacturing facilities located in Canada and Finland, is a global leader in the design and manufacture of equipment used by sawmills, veneer mills, and other manufacturers in the forest products industry. NII also designs and manufactures harvesting equipment used in cutting, gathering, and removing timber from forest plantations. Revenues for NII were approximately $81,000,000 for the twelve months ended December 31, 2016. This acquisition extends the Company's presence deeper into the forest products industry and complements its existing Wood Processing Systems segment. The Company expects several synergies in connection with this acquisition, including expansion of product sales at the Company's existing businesses by leveraging NII's geographic presence, as well as sourcing and manufacturing efficiencies. Goodwill from the acquisition was $84,606,000, of which $32,990,000 is expected to be deductible for tax purposes. For the quarter ended September 30, 2017, the Company recorded revenues and operating income from NII from its date of acquisition of $26,668,000 and $1,124,000, respectively. Included in operating income was amortization expense of $4,212,000 associated with acquired profit in inventory and backlog.

1416

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

2. ~~Acquisitions~~Restructuring Costs (continued)

~~The following table summarizes~~A summary of the ~~estimated fair values of assets acquired and liabilities assumed and~~changes in accrued restructuring costs included in other accrued expenses in the ~~purchase price for NII and Unaflex. The final purchase accounting and purchase price allocation remain subject to change~~accompanying condensed consolidated balance sheet are as ~~the Company continues to refine its preliminary valuation of certain acquired assets and the valuation of acquired intangibles.~~follows:

NII Unaflex
(In thousands) July 5, 2017 August 14, 2017

Net Assets Acquired:
Cash and Cash Equivalents $ 2,219
$ —
Accounts Receivable 6,542
2,079
Inventories 26,181
1,903
Property, Plant, and Equipment 12,981
1,357
Other Assets 1,732
90
Definite-Lived Intangible Assets
Product technology 17,100
2,300
Customer relationships 44,700
8,000
Other 2,540
900
Indefinite-Lived Intangible Assets
Tradenames 8,500
—
Goodwill 84,606
15,277
Total assets acquired 207,101
31,906

Accounts Payable 4,970
358
Customer Deposits 7,396
100
Long-Term Deferred Tax Liability 17,073
—
Other Liabilities 4,788
174
Total liabilities assumed 34,227
632
Net assets acquired $ 172,874
$ 31,274

Purchase Price:

Cash $ 4,990
$ —
Cash Paid to Seller Borrowed Under the Revolving Credit Facility 170,018
31,274
Post-closing Adjustment (2,134 ) —
Total purchase price $ 172,874
$ 31,274



(In thousands)	Severance			Relocation			Other (a)			Total
Balance at December 30, 2017	$	203		$	—		$	—		$	203
Provision (reversal)	(3		)	563			210			770
Usage	—			(358		)	(120		)	(478		)
Currency translation	(1		)	—			—			(1		)
Balance at March 31, 2018	$	199		$	205		$	90		$	494

~~For~~(a) Includes employee retention costs that are accrued ratably over the ~~NII acquisition, the weighted-average amortization~~ period through which employees must work to qualify for ~~definite-lived intangible assets acquired is 12 years, including weighted-average amortization periods of 15 years for product technology, 11 years for customer relationships,~~a payment and 4 years for other intangible assets. For the Unaflex acquisition, the weighted average amortization period for definite-lived intangible assets acquired, including customer relationships, product technologyfacility closure and ~~other intangible assets, is 10 years.~~

~~Table of Contents~~

~~KADANT INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~2. Acquisitions (continued)~~

~~Unaudited Supplemental Pro Forma Information~~

Had the acquisitions of NII and Unaflex been completed as of the beginning of 2016, the Company’s pro forma results of operations for the nine months ended September 30, 2017 and October 1, 2016 would have been as follows:

Nine Months Ended
(In thousands, except per share amounts) September 30,
2017 October 1,
2016
Revenues $ 416,570
$ 383,450

Net Income Attributable to Kadant $ 40,929
$ 20,680

Earnings per Share Attributable to Kadant:
Basic $ 3.73
$ 1.91
Diluted $ 3.63
$ 1.86

~~Pro forma results include the following non-recurring pro forma adjustments that were directly attributable to the business combination:~~

~~Pre-tax charge to SG&A expenses of $5,002,000 in 2016 and reversal in 2017, for acquisition transaction costs.~~

~~Estimated pre-tax charge to cost of revenues of $4,986,000 in 2016 and reversal of $3,360,000 in 2017, for the sale of NII and Unaflex inventory revalued at the date of acquisition.~~

~~Estimated pre-tax charge to SG&A expenses of $1,610,000 in 2016 and reversal of $958,000 in 2017, for intangible asset amortization related to acquired backlog.~~

~~Reversal of pre-tax income of $852,000 in 2017, related to NII's gain on the sale of a building.~~

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 of NII and Unaflex occurred as of the beginning of 2016, or that may result in the future.

~~PAALGROUP~~

~~In the first quarter of 2017, the Company paid additional post-closing consideration of $165,000~~clean-up costs associated with the ~~April 2016 acquisition of RT Holding GmbH, the parent corporation of a group of companies known as the PAALGROUP (PAAL).~~U.S. stock-preparation operations.

The Company expects to complete this restructuring plan and pay all accrued restructuring costs in 2018.

3. ~~Other Income~~

~~In the first nine months of 2016, other income consisted of a pre-tax gain of $317,000 from the sale of real estate in Sweden for cash proceeds of $368,000.~~

~~Table of Contents~~

~~KADANT INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

4. Earnings per Share

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


	Three Months Ended					Nine Months Ended						Three Months Ended
	September 30, 2017		October 1, 2016			September 30, 2017			October 1, 2016			March 31, 2018		April 1, 2017
(In thousands, except per share amounts)						September 30, 2017			October 1, 2016			March 31, 2018		April 1, 2017
Amounts Attributable to Kadant:	September 30, 2017
Income from Continuing Operations	$	13,285	October 1, 2016	$	9,154		$	30,332		$	24,341
Income from Discontinued Operation	—		3			—			3
Net Income	$	13,285	$	9,157		$	30,332		$	24,344		$	10,858	$	8,951

Basic Weighted Average Shares	11,004		10,901			10,986			10,854			11,042		10,952
Effect of Stock Options, Restricted Stock Units and Employee Stock Purchase Plan Shares	340		288			296			266			300		253
Diluted Weighted Average Shares	11,344		11,189			11,282			11,120			11,342		11,205

Basic Earnings per Share	$	1.21	$	0.84		$	2.76		$	2.24		$	0.98	$	0.82

Diluted Earnings per Share	$	1.17	$	0.82		$	2.69		$	2.19		$	0.96	$	0.80

~~Unvested restricted~~Restricted stock units (RSUs) ~~equivalent to approximately 4,000~~totaling 30,000 shares in the first three months of 2018 and ~~13,000~~39,000 shares in the first three months of 2017 of common stock ~~in the third quarter of 2017 and 2016, respectively, and 21,000 and 62,000 shares of common stock in the first nine months of 2017 and 2016, respectively,~~ were not included in the computation of diluted EPS, 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.

5.4. Provision for Income Taxes

The Tax Cuts and Jobs Act of 2017 (2017 Tax Act) was signed into law on December 22, 2017 and its provisions are generally effective for tax years beginning January 1, 2018. The most significant impacts of the 2017 Tax Act to the Company include a decrease in the federal corporate income tax rate from 35% to 21% and a one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings. On December 22, 2017, the SEC staff issued SAB 118 to provide guidance on accounting for the 2017 Tax Act’s impact. In accordance with SAB 118, the Company recognized the provisional tax impacts related to the re-measurement of its deferred income tax assets and liabilities and the one-time mandatory transition tax on deemed repatriation of unremitted foreign earnings in the three months ended December 30, 2017. In the first quarter of 2018, the Company recorded an additional provisional net income tax expense of $787,000, including the impact of state taxes, for the one-time mandatory transition tax, primarily due to a 2018 tax law change associated with the 2017 Tax Act that impacted the provisional amount initially recorded.

Additional work is still necessary to finalize the provisional tax impacts of the 2017 Tax Act, including the completion of a more detailed analysis of the Company’s historical foreign earnings and the understanding and application of anticipated additional regulatory guidance regarding the provisions of the 2017 Tax Act that may be issued by the Internal Revenue Service

Table of Contents

KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

4. Provision for Income Taxes (continued)

and state and local jurisdictions. Any subsequent adjustment to the provisional amounts will be recorded to current tax expense in the quarter of 2018 in which the analysis is complete.

The provision for income taxes was ~~$10,550,000 and $9,500,000~~$3,861,000 in the first ~~nine~~three months of ~~2017~~2018 and ~~2016, respectively, and represented 26% and 28%~~$2,735,000 in the first three months of ~~pre-tax income.~~2017. The effective tax rate of 26% in the first ~~nine~~three months of 2018 was higher than the Company's 2018 statutory tax rate of 21% primarily due to a true-up to the federal provisional net income tax expense initially recorded in 2017 for the 2017 Tax Act, the U.S. tax cost of foreign operations, including the global intangible low-taxed income provisions of the 2017 Tax Act, and the distribution of the Company's worldwide earnings. This incremental tax expense was offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements, the release of tax reserves, and a favorable impact to state taxes primarily related to the true-up to the provisional net income tax expense initially recorded in 2017 for the 2017 Tax Act. The effective tax rate of 23% in the first three months of 2017 was lower than the Company's 2017 statutory tax rate of 35% primarily due to the distribution of the Company's worldwide earnings and the net excess income tax benefits from stock-based compensation arrangements, offset in part by an increase in tax related to non-deductible expenses and unrecognized tax benefits. The effective tax rate of 28% in the first nine months of 2016 was lower than the Company's statutory tax rate primarily due to the distribution of the Company's worldwide earnings, the adoption of a new accounting standard that resulted in a favorable adjustment for the net excess income tax benefits from stock-based compensation arrangements, a partial release of the U.S. valuation allowance related to state net operating losses, and a partial benefit of current-year state losses. These items were offset in part by an increase in tax related to non-deductible expenses.

6.5. Long-Term Obligations

Long-term obligations are as follows:


	September 30, 2017			December 31, 2016				March 31, 2018				December 30, 2017
(In thousands)								March 31, 2018				December 30, 2017
Revolving Credit Facility, due 2022	September 30, 2017	$	273,577	December 31, 2016		$	61,494			$	235,851			$	237,011
Obligations Under Capital Lease, due 2017 to 2022	4,639			4,309
Other Borrowings, due 2017 to 2023	582			608
Obligations Under Capital Lease, due 2018 to 2022								4,689				4,633
Other Borrowings, due 2018 to 2023								396				436
Total	278,798			66,411				240,936				242,080
Less: Current Maturities of Long-Term Obligations	(707		)	(643		)		(710		)		(696		)
Long-Term Obligations	$	278,091		$	65,768			$	240,226			$	241,384

See ~~Table of Contents~~Note 10

~~KADANT INC.~~

~~Notes~~ for the fair value information related to ~~Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~6. Long-Term Obligations (continued)~~

the Company's long-term obligations.

Revolving Credit Facility

~~On March 1,~~In 2017, the Company entered into an Amended and Restated Credit Agreement, ~~that became effective on March 2,~~as amended (the 2017 Credit Agreement), which is a five-year unsecured multi-currency revolving credit facility in the aggregate principal amount of up ~~to $200,000,000. On May 24, 2017, the Company entered into a first amendment and limited consent (as amended, the "2017 Credit Agreement"), which increased the revolving loan commitment~~ to $300,000,000. The 2017 Credit Agreement also includes an uncommitted unsecured incremental borrowing facility of up to an additional $100,000,000. The principal on any borrowings ~~made under the 2017 Credit Agreement~~ is due on March 1, 2022. Borrowing may be denominated in U.S. dollars or certain foreign currencies as defined in the 2017 Credit Agreement. Interest on any loans outstanding ~~under the 2017 Credit Agreement~~ accrues and generally is payable quarterly in arrears at one of the following rates selected by the Company: (i) the Base Rate, calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate as published by Citizens Bank, and (c) the thirty-day London Inter-Bank Offered Rate (LIBOR) rate, as defined, plus 0.50%; or (ii) the LIBOR rate (with a zero percent floor), as defined, plus an applicable margin of 1% to 2%. The applicable margin is determined based upon the ratio of the Company's total debt, net of certain cash, as defined, to earnings before interest, taxes, depreciation, and amortization (EBITDA), as defined in the 2017 Credit Agreement. For this purpose, total debt net of certain cash is defined as total debt less the sum of (i) unrestricted U.S. cash, and (ii) 65% of unrestricted cash outside of the United States, but no more than an aggregate amount of $30,000,000.

The obligations of the Company under the 2017 Credit Agreement may be accelerated upon the occurrence of an event of default under the 2017 Credit Agreement, which includes customary events of default including, without limitation, payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy- and insolvency-related defaults, defaults relating to such matters as the Employment Retirement Income Security Act (ERISA), unsatisfied judgments, the failure to pay certain indebtedness, and a change of control default. In addition, the 2017 Credit Agreement contains negative covenants applicable to the Company and its subsidiaries, including financial covenants requiring the Company to comply with a maximum consolidated leverage ratio of 3.5 to 1, a minimum consolidated interest coverage ratio of 3 to 1, and restrictions on liens, indebtedness, fundamental changes, dispositions of property, making certain restricted payments (including dividends and stock repurchases), investments, transactions with affiliates, sale and leaseback transactions, swap agreements, changing its fiscal year, arrangements affecting subsidiary distributions, entering into

Table of Contents

KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

5. Long-Term Obligations (continued)

new lines of business, and certain actions related to a discontinued operation. As of ~~September 30, 2017,~~March 31, 2018, the Company was in compliance with these covenants.

Loans under the 2017 Credit Agreement are guaranteed by certain domestic subsidiaries of the Company pursuant to an Amended and Restated Guarantee ~~Agreement, dated as of March 1, 2017.~~Agreement. In addition, one of the Company's foreign subsidiaries entered into a ~~Guarantee Agreement~~guarantee agreement limited to certain obligations of two foreign subsidiary ~~borrowers pursuant to a Guarantee Agreement dated as~~borrowers.

As of March ~~1, 2017.~~

In the first nine months of 2017, the Company borrowed an aggregate $222,019,000 under the 2017 Credit Agreement, including $70,691,000 of Canadian dollar-denominated and $61,769,000 of euro-denominated borrowings. As of September 30, 2017,31, 2018, the outstanding balance under the 2017 Credit Agreement was ~~$273,577,000,~~$235,851,000, including ~~$90,410,000 of euro-denominated and $66,608,000~~$56,796,000 of Canadian dollar-denominated borrowings and $50,055,000 of euro-denominated borrowings. As of ~~September 30, 2017,~~March 31, 2018, the Company had ~~$26,421,000~~$63,737,000 of borrowing capacity available under its 2017 Credit Agreement, which was calculated by translating its foreign-denominated borrowings using ~~transaction~~borrowing date foreign exchange rates.

The weighted average interest rate for the ~~borrowings under the 2017 Credit Agreement~~revolving credit facility was ~~1.88%~~2.86% as of ~~September 30, 2017.~~

~~Debt Issuance Costs~~

During the first nine months of 2017, the Company incurred an additional $1,257,000 of debt issuance costs related to the 2017 Credit Agreement. Unamortized debt issuance costs were $1,362,000 as of September 30, 2017, which are included in other assets in the accompanying condensed consolidated balance sheet and are being amortized to interest expense using the straight-line method.

~~Table of Contents~~

~~KADANT INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~6. Long-Term Obligations (continued)~~

March 31, 2018.

Obligations Under Capital Lease

~~In connection with the acquisition of PAAL, the Company assumed~~The Company's obligations under capital leases include a sale-leaseback financing arrangement for ~~PAAL's~~a manufacturing facility in Germany. Under this arrangement, the quarterly lease payment includes principal, ~~and~~ interest, based on an interest rate which is reset, from time to time, to prevailing short-term borrowing rates in Germany. The interest rate at September 30, 2017 was 1.70%. The quarterly lease payment also includesand a payment to the landlord toward a ~~corresponding~~ loan receivable. The interest rate on the outstanding obligation is 1.79%. The loan receivable, which is included in other assets in the accompanying condensed consolidated balance sheet, was ~~$426,000~~$458,000 at ~~September 30, 2017.~~March 31, 2018. The lease arrangement provides for a fixed price purchase option, net of the projected loan receivable, of ~~$1,644,000~~$1,639,000 at the end of the lease term in 2022. If the Company does not exercise the purchase option for the facility, the Company will receive cash from the landlord to settle the loan receivable. As of ~~September 30, 2017, $4,532,000~~March 31, 2018, $4,596,000 was outstanding under this capital lease ~~obligation.~~

~~The Company also assumed capital lease obligations for certain equipment as part of the PAAL acquisition. These capital lease obligations bear a weighted average interest rate of 3.43%~~obligation and ~~have an average remaining term of 2.6 years. As of September 30, 2017, $107,000~~$93,000 was outstanding under ~~these~~other capital lease obligations.

7.6. Stock-Based Compensation

The Company recognized stock-based compensation expense of ~~$1,547,000 and $1,269,000 in the third quarters of 2017 and 2016, respectively, and $4,283,000 and $3,865,000~~$1,464,000 in the first ~~nine~~three months of 2018 and $1,295,000 in the first three months of 2017 within selling, general, and ~~2016, respectively, within SG&A~~administrative 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 trading 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 ~~forfeitures.~~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 at each reporting period until the total number of RSUs to be issued is known. During the first quarter of 2017, the Company granted stock-based compensation to executive officers and employees consisting of 39,229 shares of performance-based RSUs and 38,331 shares of time-based RSUs and granted 12,000 shares of time-based RSUs to its non-employee directors. Unrecognized compensation expense related to stock-based compensation totaled approximately ~~$6,037,000~~$8,987,000 at ~~September 30, 2017,~~March 31, 2018, and will be recognized over a weighted average period of ~~1.7~~2.0 years.

~~8. Employee Benefit Plans~~

~~The~~On March 7, 2018, the Company ~~sponsors a noncontributory defined benefit pension plan for eligible employees at one~~granted to certain of its ~~U.S. divisions and its corporate office. Certain~~officers performance-based RSUs, which represented, in aggregate, the right to receive 28,637 shares (the target RSU amount), subject to adjustment, with an aggregate grant date fair value of $2,794,000. The RSUs are subject to adjustment based on the achievement of the ~~Company’s non-U.S. subsidiaries also sponsor defined benefit pension plans covering certain employees at those subsidiaries. Funds~~performance measure selected for the ~~U.S. pension plan~~2018 fiscal year, which is a specified target for adjusted EBITDA generated from operations for the 2018 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 ~~one~~100% of the ~~non-U.S. pension plans are contributed~~target adjusted EBITDA results in an adjustment of 50% to 100% of the RSU amount. Actual adjusted EBITDA between 100% and 115% of the target adjusted EBITDA results in an adjustment using a ~~trustee as necessary to provide~~straight-line linear scale between 100% and 150% of the RSU amount. Actual adjusted EBITDA in excess of 115% results in an adjustment capped at 150% of the RSU amount. If actual adjusted EBITDA is below 50% of the target adjusted EBITDA for current service and for any unfunded projected benefit obligation over a reasonable period. The remaining non-U.S. pension plans are unfunded as permitted under their plans and applicable laws. Benefits under the ~~Company’s pension plans are~~2018 fiscal year, these performance-based RSUs will be forfeited. In the first three months of 2018, the Company recognized compensation expense based on ~~years~~the probable number of ~~service~~performance-based RSUs expected to vest, which was 100% of the target RSU amount. Following the adjustment, the performance-based RSUs will be subject to additional time-based vesting, and ~~employee compensation.~~

~~The~~will vest in three equal annual installments on March 10 of 2019, 2020, and 2021, provided that the officer is employed by the Company on the applicable vesting dates. On March 7, 2018, the Company also ~~provides other post-retirement benefits under plans in the United States~~granted time-based RSUs representing 28,086 shares to its officers and ~~at one~~employees with an aggregate grant date fair value of its non-U.S. subsidiaries. In addition, the Company provides a restoration plan for certain executive officers which fully supplements benefits lost under the noncontributory defined benefit retirement plan as a consequence of applicable Internal Revenue Service limits and restores benefits for the limitation of years of service under the retirement plan.

$2,741,000. These time-

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

~~8. Employee Benefit Plans~~6. Stock-Based Compensation (continued)

based RSUs generally vest in three equal annual installments on March 10 of 2019, 2020, and 2021, provided the employee remains employed by the Company on the applicable vesting dates.

7. Retirement Benefit Plans

Effective at the beginning of fiscal 2018, the Company retrospectively adopted ASU No. 2017-07. See Recently Adopted Accounting Pronouncements in Note 1 for further discussion. As a result, only the service cost component of net periodic benefit cost is included in operating income. All other components are included in other expense, net in the accompanying condensed consolidated statement of income. The components of net periodic benefit cost ~~for the Company's U.S. and non-U.S. pension plans and other post-retirement benefit plans~~ are as follows:

Three Months Ended
September 30, 2017 Three Months Ended
October 1, 2016
(In thousands, except percentages) U.S. Pension Non-U.S. Pension Other Post-Retirement U.S. Pension Non-U.S. Pension Other Post-Retirement
Components of Net Periodic Benefit Cost:
Service cost $ 171
$ 35
$ 43
$ 181
$ 25
$ 33
Interest cost 307
28
43
318
26
38
Expected return on plan assets (331 ) (10 ) (1 ) (322 ) (5 ) (1 )
Recognized net actuarial loss 110
10
22
124
9
12
Amortization of prior service cost 14
2
22
14
2
22
Net Periodic Benefit Cost $ 271
$ 65
$ 129
$ 315
$ 57
$ 104

The weighted average assumptions used to determine net periodic benefit cost are as follows:

Discount Rate 4.03 % 3.42 % 4.12 % 4.22 % 3.85 % 4.30 %
Expected Long-Term Return on Plan Assets 5.00 % 7.72 % 7.72 % 5.00 % 6.90 % 6.90 %
Rate of Compensation Increase 3.00 % 3.41 % 3.08 % 3.00 % 2.98 % 3.03 %



	Three Months Ended March 31, 2018									Three Months Ended April 1, 2017
(In thousands, except percentages)	U.S. Pension			Non-U.S. Pension			Other Post-Retirement			U.S. Pension			Non-U.S. Pension			Other Post-Retirement
Service Cost	$	175		$	36		$	53		$	196		$	32		$	35
Interest Cost	298			30			43			314			24			39
Expected Return on Plan Assets	(322		)	(11		)	(1		)	(335		)	(8		)	—
Recognized Net Actuarial Loss	135			16			34			113			9			13
Amortization of Prior Service Cost	—			2			22			13			1			21
	$	286		$	73		$	151		$	301		$	58		$	108

The weighted average assumptions used to determine net periodic benefit cost are as follows:

Discount Rate	3.51		%	3.80		%	3.65		%	4.03		%	3.39		%	4.13		%
Expected Long-Term Return on Plan Assets	4.50		%	7.43		%	7.43		%	5.00		%	7.72		%	7.72		%
Rate of Compensation Increase	3.00		%	3.69		%	3.07		%	3.00		%	3.40		%	3.08		%

Nine Months Ended
September 30, 2017 Nine Months Ended
October 1, 2016
(In thousands, except percentages) U.S. Pension Non-U.S. Pension Other Post-Retirement U.S. Pension Non-U.S. Pension Other Post-Retirement
Components of Net Periodic Benefit Cost:
Service cost $ 514
$ 100
$ 131
$ 543
$ 77
$ 99
Interest cost 923
78
127
954
78
114
Expected return on plan assets (994 ) (27 ) (1 ) (966 ) (19 ) (1 )
Recognized net actuarial loss 331
28
62
372
29
36
Amortization of prior service cost 40
4
66
42
4
67
Settlement loss —
—
—
—
—
114
Net Periodic Benefit Cost $ 814
$ 183
$ 385
$ 945
$ 169
$ 429

The weighted average assumptions used to determine net periodic benefit cost are as follows:

Discount Rate 4.03 % 3.43 % 4.12 % 4.22 % 3.88 % 4.28 %
Expected Long-Term Return on Plan Assets 5.00 % 7.72 % 7.72 % 5.00 % 6.90 % 6.90 %
Rate of Compensation Increase 3.00 % 3.42 % 3.07 % 3.00 % 2.98 % 3.02 %

The Company ~~made~~does not plan to make any material cash contributions ~~of $810,000~~ to its ~~U.S. noncontributory defined benefit pension plan in the first nine months of 2017 and expects to make cash contributions of $270,000 over the remainder of 2017. For the remaining~~ pension and post-retirement benefit plans ~~no material cash contributions~~ other than to fund current benefit payments ~~are expected~~ in ~~2017.~~2018.

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~~KADANT INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

9.8. 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, including foreign currency translation adjustments, unrecognized prior service cost and deferred losses associated with pension and other post-retirement benefit plans, and deferred gains (losses) on hedging instruments.sheet.

Changes in each component of ~~accumulated other comprehensive items (AOCI),~~AOCI, net of tax, ~~in the accompanying condensed consolidated balance sheet~~ are as follows:

(In thousands)
Foreign
Currency
Translation
Adjustment

Unrecognized
Prior Service
Cost on Pension and Other Post-
Retirement Benefit Plans

Deferred Loss
on Pension and
Other Post-
Retirement Benefit Plans

Deferred Gain (Loss)
on Hedging
Instruments

Accumulated
Other
Comprehensive
Items
Balance at December 31, 2016 $ (41,094 ) $ (397 ) $ (8,158 ) $ 12
$ (49,637 )
Other comprehensive income (loss) before reclassifications 21,196
(115 ) (78 ) 51
21,054
Reclassifications from AOCI —
70
275
41
386
Net current period other comprehensive income (loss) 21,196
(45 ) 197
92
21,440
Balance at September 30, 2017 $ (19,898 ) $ (442 ) $ (7,961 ) $ 104
$ (28,197 )

Balance at January 2, 2016 $ (27,932 ) $ (489 ) $ (8,322 ) $ (229 ) $ (36,972 )
Other comprehensive loss before reclassifications (283 ) (1 ) (575 ) (265 ) (1,124 )
Reclassifications from AOCI —
71
361
364
796
Net current period other comprehensive (loss) income (283 ) 70
(214 ) 99
(328 )
Balance at October 1, 2016 $ (28,215 ) $ (419 ) $ (8,536 ) $ (130 ) $ (37,300 )



(In thousands)	Foreign Currency Translation Adjustment			Unrecognized Prior Service Cost on Pension and Other Post- Retirement Benefit Plans			Net Actuarial Loss on Pension and Other Post- Retirement Benefit Plans			Deferred Gain on Cash Flow Hedges		Total
Balance at December 30, 2017	$	(17,501	)	$	(319	)	$	(8,974	)	$	79	$	(26,715	)
Other comprehensive income (loss) before reclassifications	5,293			(1		)	(39		)	89		5,342
Reclassifications from AOCI	—			18			139			4		161
Net current period other comprehensive income	5,293			17			100			93		5,503
Balance at March 31, 2018	$	(12,208	)	$	(302	)	$	(8,874	)	$	172	$	(21,212	)

~~Amounts reclassified from AOCI are as follows:~~

Three Months Ended Nine Months Ended
(In thousands) September 30,
2017 October 1,
2016 September 30,
2017 October 1,
2016
Statement of Income
Line Item
Pension and Other Post-Retirement Plans: (a)
Amortization of actuarial losses $ (142 ) $ (145 ) $ (421 ) $ (551 ) SG&A expenses
Amortization of prior service costs (38 ) (38 ) (110 ) (113 ) SG&A expenses
Total expense before income taxes (180 ) (183 ) (531 ) (664 )
Income tax benefit 63
64
186
232
Provision for income taxes
(117 ) (119 ) (345 ) (432 )
Cash Flow Hedges: (b)

Interest rate swap agreements (8 ) (21 ) (26 ) (157 ) Interest expense
Forward currency-exchange contracts —
—
—
(24 ) Revenues
Forward currency-exchange contracts (26 ) (113 ) (37 ) (182 ) Cost of revenues
Total expense before income taxes (34 ) (134 ) (63 ) (363 )
Income tax benefit (provision) 11
47
22
(1 ) Provision for income taxes
(23 ) (87 ) (41 ) (364 )
Total Reclassifications $ (140 ) $ (206 ) $ (386 ) $ (796 )


~~(a)~~	~~Included in the computation of net periodic benefit cost. See Note 8 for additional information.~~


~~(b)~~	~~See Note 10 for additional information.~~

2120

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

8. Accumulated Other Comprehensive Items (continued)

~~10.~~Amounts reclassified from AOCI are as follows:



	Three Months Ended
(In thousands)	March 31, 2018			April 1, 2017			Statement of Income Line Item
Pension and Other Post-Retirement Plans: (a)
Amortization of actuarial loss	$	(185	)	$	(135	)	Other expense, net
Amortization of prior service cost	(24		)	(35		)	Other expense, net
Total expense before income taxes	(209		)	(170		)
Income tax benefit	52			59			Provision for income taxes
	(157		)	(111		)
Cash Flow Hedges: (b)
Interest rate swap agreement	(5		)	(12		)	Interest expense
Forward currency-exchange contracts	—			(11		)	Cost of revenues
Total expense before income taxes	(5		)	(23		)
Income tax benefit	1			8			Provision for income taxes
	(4		)	(15		)
Total Reclassifications	$	(161	)	$	(126	)


(a)	Included in the computation of net periodic benefit cost. See Note 7 for additional information.


(b)	See Note 9 for additional information.

9. Derivatives

The Company uses derivative instruments primarily to reduce its exposure to changes in currency exchange rates and interest rates. When the Company enters into a derivative contract, the Company ~~determines~~makes a determination as to whether the transaction is deemed to be a hedge for accounting purposes. For a contract deemed to be a hedge, the Company formally documents the relationship between the derivative instrument and the risk being hedged. In this documentation, the Company specifically identifies the asset, liability, forecasted transaction, cash flow, or net investment that has been designated as the hedged item, and evaluates whether the derivative instrument is expected to reduce the risks associated with the hedged item. To the extent these criteria are not met, the Company does not use hedge accounting for the derivative. The changes in the fair value of a derivative not deemed to be a hedge are recorded currently in earnings. The Company does not hold or engage in transactions involving derivative instruments for purposes other than risk management.

Accounting Standards Codification (ASC) 815, Derivatives and Hedging, requires that all derivatives be recognized inon the ~~accompanying condensed consolidated~~ balance sheet at fair value. For derivatives designated as cash flow hedges, the related gains or losses on these contracts are deferred as a component of AOCI. These deferred gains and losses are recognized in the ~~accompanying condensed consolidated~~ statement of income in the period in which the underlying anticipated transaction occurs. For derivatives designated as fair value hedges, the unrealized gains and losses resulting from the impact of currency exchange rate movements are recognized in earnings in the period in which the exchange rates change and offset the currency gains and losses on the underlying exposures being hedged. The Company performs an evaluation of the effectiveness of the hedge both at inception and on an ongoing basis. The ineffective portion of a hedge, if any, and changes in the fair value of a derivative not deemed to be a hedge, are recorded in the accompanying condensed consolidated statement of income.

Interest Rate Swap Agreement

OnIn January ~~16,~~ 2015, the Company entered into a swap agreement (2015 Swap Agreement) to hedge its exposure to movements in the three-month LIBOR rate on future outstanding debt and has designated the 2015 Swap Agreement as a cash flow hedge. The 2015 Swap Agreement expires on March 27, 2020 and has a $10,000,000 notional value. Under the 2015 Swap Agreement, on a quarterly basis, the Company receives a three-month LIBOR rate and pays a fixed rate of interest of 1.50% plus an applicable margin. The fair value of the 2015 Swap Agreement is included in other assets, with an offset to AOCI, net of tax, in the accompanying condensed consolidated balance sheet.

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

9. Derivatives (continued)

The Company has structured the 2015 Swap Agreement to be 100% effective and, as a result, there is no current impact to earnings resulting from hedge ineffectiveness. Management believes that any credit risk associated with the 2015 Swap Agreement is remote based on the Company's financial position and the creditworthiness of the financial institution that issued the 2015 Swap Agreement.

The counterparty to the 2015 Swap Agreement could demand an early termination of the 2015 Swap Agreement if the Company iswere to be in default under the 2017 Credit Agreement, or any agreement that amends or replaces the 2017 Credit Agreement in which the counterparty is a member, and if the Company iswere to be unable to cure the default. An event of default under the 2017 Credit Agreement includes customary events of default and failure to comply with financial covenants, including a maximum consolidated leverage ratio of 3.5 to 1, a minimum consolidated interest coverage ratio of 3 to 1, and restrictions on liens, indebtedness, fundamental changes, dispositions of property, making certain restricted payments (including dividends and stock repurchases), investments, transactions with affiliates, sale and leaseback transactions, swap agreements, changing its fiscal year, arrangements affecting subsidiary distributions, entering into new lines of business, and certain actions related to a discontinued operation. As of ~~September 30, 2017,~~March 31, 2018, the Company was in compliance with these covenants. The unrealized gain associated with the 2015 Swap Agreement was ~~$65,000~~$204,000 as of ~~September 30, 2017,~~March 31, 2018, which represents the estimated amount that the Company would receive from the counterparty in the event of an early termination.

Forward Currency-Exchange Contracts

The Company uses forward currency-exchange contracts primarily to hedge exposures resulting from fluctuations in currency exchange rates. Such exposures result primarily from portions of the Company's operations and assets and liabilities that are denominated in currencies other than the functional currencies of the businesses conducting the operations or holding the assets and liabilities. The Company typically manages its level of exposure to the risk of currency-exchange fluctuations by hedging a portion of its anticipated currency exposures over the ensuing 12-month period, using forward currency-exchange contracts that have maturities of 12twelve months or less.

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~~KADANT INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~10. Derivatives (continued)~~

Forward currency-exchange contracts that hedge forecasted accounts receivable or accounts payable are designated as cash flow hedges. The fair value for these instruments is included in other current assets for unrecognized gains and in other current liabilities for unrecognized losses, with an offset in AOCI, net of tax. For forward currency-exchange contracts that are designated as fair value hedges, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item are recognized currently in earnings. The fair value of forward currency-exchange contracts that are not designated as hedges is recorded currently in earnings with gains reported in other current assets and losses reported in other current liabilities.

In the second quarter of 2017, the Company entered into forward currency-exchange contracts associated with the anticipated consideration to be paid for the acquisition of NII and recognized a loss of $1,754,000 associated with these transactions. The Company recognized within SG&A expenses in the accompanying condensed consolidated statement of income ~~a gain~~gains of ~~$109,000 and a loss of $120,000 in the third quarters of 2017 and 2016, respectively, and losses of $1,384,000 and $556,000~~$13,000 in the first ~~nine~~three months of 2018 and $471,000 in the first three months of 2017 ~~and 2016, respectively,~~ associated with ~~its~~ forward currency-exchange contracts that were not designated as ~~hedges, including the contracts related to the NII acquisition.~~hedges. Management believes that any credit risk associated with forward currency-exchange contracts is remote based on the Company's financial position and the creditworthiness of the financial institutions issuing the contracts.

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

9. Derivatives (continued)

The following table summarizes the fair value of the Company's derivative instruments ~~designated and not designated as hedging instruments, the notional value of the associated derivative contracts, and the location of these instruments~~ in the accompanying condensed consolidated balance sheet:


			September 30, 2017					December 31, 2016							March 31, 2018					December 30, 2017
		Balance Sheet Location	Asset (Liability) (a)			Notional Amount (b)		Asset (Liability) (a)			Notional Amount			Balance Sheet Location	Asset (Liability) (a)			Notional Amount (b)		Asset (Liability) (a)			Notional Amount
(In thousands)								Asset (Liability) (a)			Notional Amount			Balance Sheet Location	Asset (Liability) (a)			Notional Amount (b)		Asset (Liability) (a)			Notional Amount
Derivatives Designated as Hedging Instruments:	Derivatives Designated as Hedging Instruments:		Asset (Liability) (a)													Derivatives Designated as Hedging Instruments:
Derivatives in an Asset Position:		Balance Sheet Location				Notional Amount (b)
Forward currency-exchange contracts		Other Current Assets	$	88		$	950	$	—		$	—
Interest rate swap agreement		Other Long-Term Assets	$	65		$	10,000	$	62		$	10,000		Other Long-Term Assets	$	204		$	10,000	$	126		$	10,000
Derivatives in a Liability Position:
Forward currency-exchange contracts		Other Current Liabilities	$	—		$	—	$	(41	)	$	2,380

Forward currency-exchange contract														Other Current Assets	$	24		$	1,002	$	—		$	—

Derivatives Not Designated as Hedging Instruments:	Derivatives Not Designated as Hedging Instruments:												Derivatives Not Designated as Hedging Instruments:
Derivatives in an Asset Position:
Forward currency-exchange contracts		Other Current Assets	$	8		$	2,169	$	2		$	227		Other Current Assets	$	—		$	—	$	17		$	1,244
Derivatives in a Liability Position:
Forward currency-exchange contracts		Other Current Liabilities	$	(4	)	$	886	$	(237	)	$	17,185		Other Current Liabilities	$	(1	)	$	2,366	$	(16	)	$	2,049


(a)	See Note 1110 for the fair value measurements relating to these financial instruments.


(b)	The total notional amount is indicative of the level of the Company's derivative activity during the first ~~nine~~three months of ~~2017, except for the purchase of forward currency-exchange contracts entered into in the second quarter of 2017 in anticipation of consideration paid for the acquisition of NII.~~2018.

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~~KADANT INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~10. Derivatives (continued)~~

The following table summarizes the activity in AOCI associated with the Company's derivative instruments designated as cash flow hedges as of and for the ~~nine~~three months ended ~~September 30, 2017:~~March 31, 2018:

(In thousands)
Interest Rate Swap
Agreement

Forward Currency-
Exchange
Contracts
Total
Unrealized Gain (Loss), Net of Tax, at December 31, 2016 $ 40
$ (28 ) $ 12
Loss reclassified to earnings (a) 17
24
41
(Loss) gain recognized in AOCI (15 ) 66
51
Unrealized Gain, Net of Tax, at September 30, 2017 $ 42
$ 62
$ 104



(In thousands)	Interest Rate Swap Agreement		Forward Currency- Exchange Contract		Total
Unrealized Gain, Net of Tax, at December 30, 2017	$	79	$	—	$	79
Loss reclassified to earnings (a)	4		—		4
Gain recognized in AOCI	71		18		89
Unrealized Gain, Net of Tax, at March 31, 2018	$	154	$	18	$	172

(a) See Note 98 for the income statement classification.

As of ~~September 30, 2017,~~March 31, 2018, the Company expects to reclassify ~~$64,000~~$85,000 of the net unrealized ~~gains~~gain included in AOCI to earnings over the next twelve ~~months.~~months as a result of forward contract maturities and the interest rate swap's estimated cash flows.

~~11.~~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.

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

10. Fair Value Measurements and Fair Value of Financial Instruments (continued)

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 30, 2017
(In thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
March 31, 2018
Assets:
Money market funds and time deposits	$	15,829	$	—	$	—	$	15,829	$	19,745	$	—	$	—	$	19,745
Forward currency-exchange contracts	$	—	$	96	$	—	$	96
Forward currency-exchange contract									$	—	$	24	$	—	$	24
Interest rate swap agreement	$	—	$	65	$	—	$	65	$	—	$	204	$	—	$	204
Banker's acceptance drafts (a)	$	—	$	16,687	$	—	$	16,687	$	—	$	12,021	$	—	$	12,021

Liabilities:
Forward currency-exchange contracts	$	—	$	4	$	—	$	4	$	—	$	1	$	—	$	1


	Fair Value as of December 31, 2016
(In thousands)	Level 1		Level 2		Level 3		Total
December 30, 2017
Assets:
Money market funds and time deposits	$	10,855	$	—	$	—	$	10,855	$	17,728	$	—	$	—	$	17,728
Forward currency-exchange contracts	$	—	$	2	$	—	$	2	$	—	$	17	$	—	$	17
Interest rate swap agreement	$	—	$	62	$	—	$	62	$	—	$	126	$	—	$	126
Banker's acceptance drafts (a)	$	—	$	7,852	$	—	$	7,852	$	—	$	15,960	$	—	$	15,960

Liabilities:
Forward currency-exchange contracts	$	—	$	278	$	—	$	278	$	—	$	16	$	—	$	16


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

~~Table of Contents~~

~~KADANT INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~11. Fair Value Measurements and Fair Value of Financial Instruments (continued)~~

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~~three months of ~~2017.~~2018. The Company's financial assets and liabilities carried at fair value are cash equivalents, banker's acceptance drafts, ~~and~~ derivative instruments used to hedge the Company's foreign currency and interest rate ~~risks.~~risks, variable rate debt, and capital lease obligations. The Company's cash equivalents are comprised of money market funds and bank deposits which are highly liquid and readily tradable. These cash equivalents are valued using inputs observable in active markets for identical securities. The carrying value of banker's acceptance drafts approximates their fair value due to the short-term nature of the negotiable instrument. The fair ~~value of the Company's interest rate swap agreement is based on LIBOR yield curves at the reporting date. The fair~~ values of the Company's forward currency-exchange contracts are based on quoted forward foreign exchange rates at the reporting date. The fair value of the Company's interest rate swap agreement is based on LIBOR yield curves at the reporting date. The forward currency-exchange contracts and interest rate swap agreement are hedges of either recorded assets or liabilities or anticipated transactions. Changes in values of the underlying hedged assets and liabilities or anticipated transactions are not reflected in the table above.

The carrying value and fair value of the Company's long-term debt obligations are as follows:


	September 30, 2017						December 31, 2016								March 31, 2018								December 30, 2017
	Carrying Value		Fair Value				Carrying Value				Fair Value				Carrying Value				Fair Value				Carrying Value				Fair Value
(In thousands)							Carrying Value				Fair Value				Carrying Value				Fair Value				Carrying Value				Fair Value
Long-term Debt Obligations:	Carrying Value
Revolving credit facility	$	273,577	Fair Value		$	273,577			$	61,494			$	61,494			$	235,851			$	235,851			$	237,011			$	237,011
Capital lease obligations	4,115		4,115				3,857				3,857				4,141				4,141				4,101				4,101
Other borrowings	399		399				417				417				234				234				272				272
	$	278,091	$	278,091			$	65,768			$	65,768			$	240,226			$	240,226			$	241,384			$	241,384

The carrying ~~values~~value of the Company's revolving credit facility ~~and capital lease obligations approximate~~approximates the fair value as the ~~obligations bear~~obligation bears variable rates of interest, which adjust quarterly based on prevailing market rates. The carrying values of the Company's capital lease obligations and other borrowings approximate fair value as the stipulated interest rates are comparable to prevailing market rates for those obligations.

~~12.~~

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

11. Business Segment Information

The Company has combined its operating entities into two reportable operating segments, Papermaking Systems and Wood Processing Systems, and a separate product line, Fiber-based Products. In classifying operational entities into a particular segment, the Company has aggregated businesses with similar economic characteristics, products and services, production processes, customers, and methods of distribution.

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


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,			October 1,			September 30,			October 1,			March 31,			April 1,
(In thousands)	2017			2016			2017			2016			2018			2017
Revenues:
Papermaking Systems(a)	$	111,135		$	96,078		$	295,416		$	280,436		$	105,591		$	88,550
Wood Processing Systems(b)	39,714			7,962			61,050			25,437			39,141			9,943
Fiber-based Products	1,945			1,479			9,427			8,012			4,461			4,364
	$	152,794		$	105,519		$	365,893		$	313,885		$	149,193		$	102,857

Income Before Provision for Income Taxes:
Papermaking Systems ~~(a)~~(c)	$	21,544		$	16,915		$	52,932		$	44,747		$	14,584		$	14,299
Wood Processing Systems ~~(b)~~(d)	4,418			2,150			6,196			5,406			7,363			2,504
Corporate and Fiber-based Products ~~(c)~~(e)	(6,504		)	(6,504		)	(16,181		)	(15,255		)	(5,283		)	(4,553		)
Total operating income	19,458			12,561			42,947			34,898			16,664			12,250
Interest expense, net(f)	(1,188		)	(251		)	(1,722		)	(739		)	(1,549		)	(244		)
Other expense, net													(246		)	(204		)
	$	18,270		$	12,310		$	41,225		$	34,159		$	14,869		$	11,802

Capital Expenditures:
Papermaking Systems													$	4,649		$	1,484
Wood Processing Systems													376			186
Other													126			52
													$	5,151		$	1,722


(a)	Includes $5,900,000 in the three-month period ended March 31, 2018 from 2017 acquisitions.

(b) Includes $28,870,000 in the three-month period ended March 31, 2018 from a 2017 acquisition.

(d) Includes acquisition-related expenses of $252,000 in the three-month period ended March 31, 2018 for the amortization of acquired backlog and $319,000 in the three-month period ended April 1, 2017 for acquisition transaction costs.

(e) Corporate primarily includes general and administrative expenses.

(f) The Company does not allocate interest expense, net to its segments.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

~~12. Business Segment Information (continued)~~

Three Months Ended Nine Months Ended
September 30, October 1, September 30, October 1,
(In thousands) 2017 2016 2017 2016
Capital Expenditures:

Papermaking Systems $ 3,790
$ 1,632
$ 6,567
$ 3,341
Other 1,493
211
2,151
238
$ 5,283
$ 1,843
$ 8,718
$ 3,579

September 30, December 31,
(In thousands) 2017 2016
Total Assets:

Papermaking Systems $ 492,071
$ 407,538
Wood Processing Systems 259,487
52,407
Other (d) 36,101
10,746
$ 787,659
$ 470,691

(a) Includes $278,000, and $593,000 of acquisition-related expenses in the three- and nine-month periods ended September 30, 2017, respectively. Includes $114,000 and $3,491,000 of acquisition-related expenses in the three- and nine-month periods ended October 1, 2016, respectively. Acquisition-related expenses include acquisition transaction costs and amortization of acquired profit in inventory and backlog.

~~(b) Includes $4,625,000 and $8,727,000 of acquisition-related expenses in the three- and nine-month periods ended September 30, 2017, respectively.~~

~~(c) Corporate primarily includes general and administrative expenses.~~

~~(d) Primarily includes Corporate and Fiber-based Products' cash and cash equivalents and property, plant and equipment.~~

~~13.~~12. Commitments and Contingencies

Right of Recourse

In the ordinary course of business, the Company's subsidiaries in China may receive banker's acceptance drafts from customers as payment for ~~outstanding~~their trade accounts receivable. ~~These~~The banker's acceptance drafts are noninterest-bearing obligations of the issuing bank and mature within six months of the origination date. The Company's subsidiaries in China 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. ~~As of September~~The Company had $9,890,000 at March 31, 2018 and $10,035,000 at December 30, 2017 ~~and December 31, 2016, the Company had $11,222,000 and $4,824,000, respectively,~~ 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.

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KADANT INC.

Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q includes forward-looking statements ~~that~~within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements are not statements of historical fact, and may include statements regarding possible or assumed future results of operations. Forward-looking statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management, using information currently available to our management. When we use words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "seeks," "should," "likely," "will," "would," "may," "continue," "could," or similar expressions, we are making forward-looking statements.

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions. Our future results of operations may differ materially from those expressed in the forward-looking statements. Many of the important factors that will determine these results and values are beyond our ability to control or predict. You should not put undue reliance on any forward-looking statements. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise. For a discussion of important factors that may cause our actual results to differ materially from those suggested by the forward-looking statements, you should read carefully the section captioned "Risk Factors" in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December ~~31, 2016~~30, 2017 (fiscal ~~2016)~~2017), as filed with the Securities and Exchange Commission (SEC) and subsequent filings with the SEC.

Overview

Company Background

We are a leading global supplier of equipment and critical components used in process industries worldwide. In addition, we manufacture granules made from papermaking by-products. We have a diverse and large customer base, including most of the world's major paper, lumber and oriented strand board (OSB) manufacturers, and our products, technologies, and services play an integral role in enhancing process efficiency, optimizing energy utilization, and maximizing productivity in resource-intensive industries. We believe our large installed base provides us with a spare parts and consumables business that yields higher margins than our capital equipment business. In the first nine months of 2017, approximately 61% of our revenue was from the sale of parts and consumables products.

On August 14, 2017, we acquired certain assets of Unaflex, LLC (Unaflex) for approximately $31.3 million in cash, subject to a post-closing adjustment. Unaflex, located principally in South Carolina, is a leading manufacturer of expansion joints and related products for process industries. This acquisition complements our existing Fluid-Handling product line within our Papermaking Systems segment.

On July 5, 2017, we acquired the forest products business of NII FPG Company (NII) pursuant to a Stock and Asset Purchase Agreement dated May 24, 2017, for approximately $170.7 million, net of cash acquired, which includes a post-closing adjustment of $2.1 million received subsequent to the end of the third quarter. NII is a global leader in the design and manufacture of equipment used by sawmills, veneer mills, and other manufacturers in the forest products industry. NII also designs and manufactures harvesting equipment used in cutting, gathering, and removing timber from forest plantations. This acquisition extends our presence deeper into the forest products industry and complements our existing Wood Processing Systems segment.

Our operations are comprised of two reportable operating segments: Papermaking Systems and Wood Processing Systems, and a separate product line, Fiber-based Products, as detailed below.

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~~Overview (continued)~~

Papermaking Systems Segment

Through our Papermaking Systems segment, we develop, manufacture, and market ~~a range of~~ equipment and products for the global papermaking, paper recycling, recycling and waste management, and other process industries. This segment consists of the following product lines:



	-	Stock-Preparation: custom-engineered systems and equipment, as well as standard individual components, for baling, pulping, de-inking, screening, cleaning, and refining primarily ~~recyclable fibers; balers~~recycled fiber for preparation for entry into the paper machine, and ~~related equipment used in the processing of recyclable and waste materials; and filtering,~~ recausticizing and evaporation equipment and systems used in the production of virgin ~~pulp;~~pulp. Our baling equipment is also used to compress a variety of other secondary materials to prepare them for transport or storage;
	-	Doctoring, Cleaning, & Filtration: doctoring, cleaning, and filtration systems and related consumables that ~~continuously clean rolls to~~ keep paper machines and other industrial processes running efficiently; doctor blades made of a variety of materials to perform functions including cleaning, creping, web removal, flaking, and the application of coatings; ~~profiling systems that control moisture, web curl, and gloss during paper converting;~~ and systems and equipment used to continuously clean fabrics ~~belts,~~ and rolls, drain water from pulp mixtures, form the sheet or web, and filter the process water for reuse. Doctoring and cleaning systems are also used in other process industries such as carbon fiber, textiles and food processing; and
	-	Fluid-Handling: rotary joints, ~~expansion joints,~~ precision unions, steam and condensate systems, components, and controls used to transfer fluids, power, and data in numerous process industries and expansion joints used in industrial piping ~~systems to efficiently transfer fluid, power, and data.~~systems.

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Overview (continued)

Wood Processing Systems Segment

Through our Wood Processing Systems segment, we develop, manufacture, and market stranders and related equipment used in the production of OSB. We also supply stranders, debarkers, chippers and logging machinery used in the harvesting and production of lumber and OSB. ~~We also~~In addition, we provide refurbishment and repair of pulping equipment for the pulp and paper industry. Our principal wood-processing products include:



	-	~~Stranders: disc and ring stranders and related parts and consumables that cut batch-fed logs into strands for OSB production;~~
	-	Debarkers: ring and rotary debarkers and related parts and consumables that employ a combination of mechanical abrasion and log-to-log contact to efficiently remove bark from logs of all shapes and species;
	-	Stranders: disc and ring stranders and related parts and consumables that cut batch-fed logs into strands for OSB production;
	-	Chippers: disc, drum, and veneer chippers and related parts and consumables ~~that~~ are high quality, robust chipper systems for waste-wood and whole-log applications found in pulp woodrooms, chip plants, ~~and~~ sawmill, and planer mill sites; and
	-	Logging machinery: feller bunchers, log loaders, and swing yarders that are used to harvest and gather timber for lumber production.

Fiber-based Products

Through our Fiber-based Products business, we manufacture and sell biodegradable, absorbent granules derived from papermaking by-products for use primarily as carriers for agricultural, home lawn and garden, and professional lawn, turf and ornamental applications, as well as for oil and grease absorption.

Acquisitions

We expect that a significant driver of our growth over the next several years will be the acquisition of technologies and businesses that complement or augment our existing products and services or may involve entry into a new process industry. We continue to actively pursue additional acquisition opportunities. Certain of our recent acquisitions are described below.

On July 5, 2017, we acquired the forest products business of NII FPG Company (NII FPG) pursuant to a Stock and Asset Purchase Agreement dated May 24, 2017, for $170.8 million, net of cash acquired. NII FPG is a global leader in the design and manufacture of equipment used by sawmills, veneer mills, and other manufacturers in the forest products industry. NII FPG also designs and manufactures logging equipment used in harvesting timber from forest plantations. This acquisition extends our presence deeper into the forest products industry and complements our existing Wood Processing Systems segment.

On August 14, 2017, we acquired certain assets of Unaflex, LLC (Unaflex) for $31.7 million, including $31.3 million in cash and an estimated $0.4 million post-closing adjustment to be paid in 2018. Unaflex is a leading manufacturer of expansion joints and related products for process industries. This acquisition complements our existing Fluid-Handling product line within our Papermaking Systems segment.

International Sales

~~During the first nine months of 2017 and 2016, approximately 64% and 59%, respectively, of our~~Our sales ~~were~~ to customers outside the United States, ~~principally~~mainly in Europe, Asia and ~~Asia.~~Canada, were approximately 58% of total revenue in both the first three months of 2018 and 2017. We generally seek to charge our customers in the same currency in which our operating costs are incurred. However, our financial performance and competitive position can be affected by currency exchange rate fluctuations affecting the relationship between the U.S. dollar and foreign currencies. We seek to reduce our exposure to currency fluctuations through the use of forward currency exchange contracts. We may enter into forward contracts to hedge certain firm purchase and sale commitments denominated in currencies other than our subsidiaries' functional currencies.

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Overview (continued)

Application of Critical Accounting Policies and Estimates

Management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Our actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that entail significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that our most critical accounting policies upon which our financial position depends, and which involve the most complex or subjective decisions or assessments, are those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the section captioned "Application of Critical Accounting Policies and Estimates" in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended December ~~31, 2016,~~30, 2017, filed with the SEC. There have been no material changes to these critical accounting policies since fiscal year-end ~~2016~~2017 that warrant ~~disclosure.~~disclosure, except for the adoption of the Financial Accounting Standards Board's Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), as described in Recently Adopted Accounting Pronouncements and Revenue Recognition in Note 1 to the accompanying condensed consolidated financial statements.

Industry and Business Outlook

Our products are primarily sold in global process industries and used to produce packaging, tissue, OSB, and lumber, among other products. Major markets for our products are as follows:

Packaging, Tissue and Other Paper

InApproximately 44% of our revenue in the first ~~nine~~three months of ~~2017, approximately 56% of our revenue~~2018 was from the sale of products that support packaging, tissue, and other paper ~~production, other than~~grades excluding printing and writing and ~~newsprint paper grades.~~newsprint. Consumption of packaging, which is primarily comprised of containerboard and boxboard, is driven by many factors, including regional economic conditions, consumer spending on non-durable goods, increased use of e-commerce, demand for food and beverage packaging, and greater urbanization in developing regions. The growth of e-commerce in particular has caused and is expected to continue to cause increased demand for packaging grades used to make boxes. Consumption of tissue is fairly stable and in the developed world tends to grow with the population. For both ~~tissue~~packaging and ~~packaging,~~tissue, growth rates in the developing world are expected to increase as per capita consumption of paper products increases with rising standards of living. For balers and related equipment, demand is generally driven by rising standards of living and population growth, shortage and costs of landfilling, increasing recycling rates, and environmental regulation. In

Printing, Writing and Newsprint

Approximately 11% of our revenue in the first ~~nine~~three months of ~~2017, 12% of our revenue~~2018 was related to products ~~that support~~used to produce printing and writing paper grades as well as newsprint, which have been negatively affected by the development and increased use of digital media. ~~While we~~We expect the decline in the use of printing and writing and newsprint paper grades to continue due to the use of digital ~~media, we expect global packaging and tissue production to increase modestly.~~media.

Wood Processing

InApproximately 26% of our revenue in the first ~~nine~~three months of ~~2017, 17% of our revenue~~2018 was from sales to manufacturers in the wood processing industries, including lumber mills, engineered wood panel producers, and sawmills, ~~and other manufacturers in the forest products industry who~~that use stranders, debarkers, and related equipment to prepare logs to be converted into OSB or lumber, and use harvesting equipment to cut, gather, and remove timber from forest plantations. Demand for OSB and lumber is tied to ~~residential housing~~new home construction and home remodeling in all markets we serve. The majority of OSB and lumber demand is in North America, as North American houses are more often constructed of wood compared to other parts of the world. ~~The remainder of our~~

Other

Our remaining revenue was from sales to other process industries, which tend to grow with the overall economy. These industries include metals, food and beverage, chemical, petrochemical, and energy, among others.

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Overview (continued)

Bookings by Geographic Region

Our bookings increased ~~43%~~53% to ~~$135~~$182 million in the ~~third quarter~~first three months of ~~2017~~2018 compared to ~~$95~~$119 million in the ~~third quarter~~first three months of ~~2016. Third quarter bookings~~2017. Bookings in ~~2017~~2018 included a ~~$20~~$40 million, or ~~22%~~34%, increase resulting from ~~the~~our acquisitions ~~of the businesses of NII~~ and ~~Unaflex and a $2~~an $8 million, or 2%7%, increase from the favorable ~~effects~~effect of foreign currency translation. Excluding the impact of ~~the~~ acquisitions and the favorable effect of foreign currency translation, our bookings in the ~~third quarter~~first three months of ~~2017~~2018 increased ~~19%~~12% compared to the ~~third quarter~~first three months of ~~2016,~~2017, primarily due to strong performance in our ~~Stock-Preparation~~Wood Processing, Fluid-Handling, and ~~Fluid-Handling~~Stock-Preparation product lines. Bookings for our capital equipment tend to be variable and are dependent on regional economic conditions and the level of capital spending by our customers, among other factors. ~~Demand~~By comparison, demand for our parts and consumables products tends to be more predictable. We believe our large installed base provides us with a relatively stable parts and consumables business that yields higher margins than our capital equipment business. Bookings for our parts and consumables products increased to ~~$81~~$103 million in the ~~third quarter~~first three months of ~~2017,~~2018, or ~~60%~~57% of total bookings, compared to ~~$64~~$75 million, or ~~67%~~63% of total bookings, in the ~~third quarter~~first three months of ~~2016,~~2017, primarily due to bookings of ~~$14~~$22 million from ~~the NII and Unaflex businesses.~~our acquisitions.

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~~KADANT INC.~~

~~Overview (continued)~~

North America

The largest and most impactful regional market for our products in the ~~third quarter~~first three months of ~~2017~~2018 was North America, and we expect this ~~will~~to continue to be the case for the remainder of ~~2017.~~2018. The primary pulp and paper ~~market~~markets we serve in North America ~~tends~~tend to be stable. The strength of the U.S. housing market has led to continued growth in our Wood Processing product line, which we recently expanded with our ~~NII~~forest products business acquisition. ~~Our bookings~~We expect to see continued strength in ~~North America were $60 million in~~this market as home ownership among millennials continues to increase and the ~~third quarter of 2017, up 28% compared to $47 million in the third quarter of 2016, including bookings of $13 million from the NII~~tight U.S. labor market and ~~Unaflex businesses. According to Resource Information Systems Inc. (RISI) reports, U.S.~~limited inventory support demand for corrugated boxes remained relatively strong in 2017 with year-to-date average-week shipments up more than 3%. As a result, containerboard production in the first nine months of 2017 increased 3% compared to the same period in 2016 and containerboard mill operating rates were robust at 97% through the first nine months of 2017. U.S. housing starts in September 2017 were at a seasonally adjusted annual rate of 1.127 million, or 6.1% above the September 2016 rate, according to the U.S. Census Bureau. Continuednew housing. Projected continued growth in housing starts for the next several years is expected to have a positive impact on demand for structural wood panels, which includes OSB and lumber. In addition, the U.S. tax law passed in 2017 and repatriation of offshore cash may result in additional capital investment activity by our customers in the United States. Our bookings in North America were $93 million in the first three months of 2018, including bookings of $28 million from our acquisitions, up 64% compared to $57 million in the first three months of 2017. According to a PPI Pulp & Paper Week report, U.S. containerboard production increased in 2017 by 3.1% over 2016, and according to a Resource Information Systems Inc. (RISI) report, containerboard mill operating rates were 96% in the first three months of 2018. For the month of March 2018, U.S. housing starts increased 11% over March 2017 to 1.319 million due to a rebound in the construction of multifamily housing units.

Europe

We saw increased business activity in Europe in the ~~third quarter~~first three months of ~~2017~~2018 compared to the ~~third quarter~~first three months of ~~2016,~~2017, particularly in the lumber, industrial and packaging ~~segments.~~markets. We expect the ~~overall economy~~solid growth in the euro zone economies in the first three months of 2018 to be ~~stable in Europe~~sustained for the remainder of ~~2017 and our markets have shown strength in the first nine months of the year.~~2018. Our bookings in Europe were ~~$40~~$50 million in the ~~third quarter~~first three months of ~~2017,~~2018, up ~~29%~~55% compared to ~~$31~~$32 million in the ~~third quarter~~first three months of ~~2016,~~2017, including ~~a $4~~an $8 million increase from ~~NII~~our acquisitions and a favorable foreign currency translation effect of $2$5 million. Excluding ~~NII~~acquisitions and the favorable effect of foreign currency translation, our bookings in Europe ~~were up 12%.~~increased 14% in the first three months of 2018 compared to the first three months of 2017.

Asia

Our bookings in Asia were ~~$24~~$25 million in the ~~third quarter~~first three months of ~~2017,~~2018, up ~~128%~~18% compared to ~~$11~~$21 million in the ~~third quarter~~first three months of ~~2016.~~2017. The market in Asia ~~continues~~continued to be ~~quite strong~~healthy for both our capital equipment and parts and consumables ~~products.~~products in the first three months of 2018. We saw continued strength in project activity in containerboard grades during the ~~third quarter~~first three months of ~~2017,~~2018, particularly in China. We expect to see a gradual weakening of demand for pulp and paper-related capital projects in China ~~which has had strong bookings throughout 2017. The most recent RISI outlook for containerboard~~in the second half of 2018. However, while OSB is a fairly new product in China and its consumption is low compared to North America, we foresee increased demand in China ~~forecasts growth rates~~for our stranding equipment used in OSB mills in 2018 as producers explore the use of ~~approximately 3% per year for~~OSB in the ~~next few years. New capacity additions~~production of furniture and in ~~China are forecasted to exceed this growth rate over the next several years due in part to the closure~~export packaging.

Rest of ~~smaller, less efficient mills as the result of both increased governmental regulatory actions and competitive factors.~~

World

Our bookings in the rest of the world were ~~$12~~$14 million in the ~~third quarter~~first three months of ~~2017, up 74% compared to $7 million in the third quarter of 2016,~~2018, including bookings of $4 million from ~~NII.~~our acquisitions, up 61% compared to $9 million in the first three months of 2017.

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KADANT INC.

Overview (continued)

Guidance

Based on our performance in the first three months of 2018 and current visibility for the remainder of the year, we expect for the full year ~~2017~~2018 GAAP diluted earnings per share (EPS) of ~~$3.56~~$4.98 to ~~$3.60,~~$5.08, revised from our previous guidance of ~~$3.18~~$4.74 to ~~$3.26.~~$4.84. For 2018, we expect revenue of $625 to $635 million, revised from our previous guidance of $605 to $615 million. The ~~revised~~2018 guidance includes pre-tax ~~acquisition~~restructuring costs of ~~$5.0~~$1.7 million, or ~~$0.38~~$0.11 per diluted share, discrete tax expense of $0.4 million, or $0.04 per diluted share, and pre-tax amortization expense associated with acquired ~~profit in inventory and~~ backlog of ~~$6.6~~$0.2 million, or ~~$0.43~~$0.02 per diluted share. For ~~2017, we expect revenue of $509 to $512 million, revised from our previous guidance of $488 to $494 million. For~~ the ~~fourth~~second quarter of ~~2017,~~2018, we expect to achieve GAAP diluted EPS of ~~$0.87~~$0.89 to ~~$0.91~~$0.94 on revenue of ~~$143~~$150 to ~~$146~~$154 million. The second quarter of 2018 guidance includes pre-tax restructuring costs of $0.8 million, ~~including $0.15 of amortization expense associated with acquired profit in inventory and backlog.~~or $0.06 per diluted share.

Results of Operations

~~Third~~First Quarter ~~2017~~2018 Compared With ~~Third~~First Quarter ~~2016~~2017

Revenues

The following table presents changes in revenues by segment and product line between the ~~third~~first quarters of ~~2017~~2018 and ~~2016,~~2017, and the changes in revenues by segment and product line between the ~~third~~first quarters of ~~2017~~2018 and ~~2016~~2017 excluding the effect of currency translation and acquisitions. Currency translation is calculated by converting ~~third~~first quarter of ~~2017~~2018 revenues in local currency into U.S. dollars at ~~the third~~first quarter of ~~2016~~2017 exchange rates and then comparing this result to actual revenues in the ~~third~~first quarter of ~~2017.~~2018. The presentation of the changes in revenues excluding the effect of currency translation and acquisitions is a non-GAAP measure. We believe this non-GAAP measure helps investors gain an understanding of our underlying operations consistent with how management measures and forecasts its performance, especially when comparing such results to prior periods. This non-GAAP measure should not be considered superior to or a substitute for the corresponding GAAP measures.

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~~KADANT INC.~~

~~Results of Operations (continued)~~

Revenues for the ~~third~~first quarters of ~~2017~~2018 and ~~2016~~2017 are as follows:


	Three Months Ended										(Non-GAAP) Adjusted Total Increase		Three Months Ended										(Non-GAAP) Adjusted Total
(In thousands)	September 30, 2017		October 1, 2016		Total Increase		Currency Translation		Acquisitions		(Non-GAAP) Adjusted Total Increase		March 31, 2018		April 1, 2017		Total Increase		Currency Translation		Acquisitions		Increase (Decrease)

Stock-Preparation	$	52,065	$	44,099	$	7,966	$	1,061	$	—	$	6,905	$	45,483	$	41,153	$	4,330	$	3,456	$	—	$	874
Doctoring, Cleaning, & Filtration	30,538		28,955		1,583		454		—		1,129		27,222		25,350		1,872		1,201		—		671
Fluid-Handling	28,532		23,024		5,508		616		2,522		2,370		32,886		22,047		10,839		1,599		5,900		3,340
Papermaking Systems	111,135		96,078		15,057		2,131		2,522		10,404		105,591		88,550		17,041		6,256		5,900		4,885
Wood Processing Systems	39,714		7,962		31,752		510		26,668		4,574		39,141		9,943		29,198		467		28,870		(139		)
Fiber-based Products	1,945		1,479		466		—		—		466		4,461		4,364		97		—		—		97
	$	152,794	$	105,519	$	47,275	$	2,641	$	29,190	$	15,444	$	149,193	$	102,857	$	46,336	$	6,723	$	34,770	$	4,843

Papermaking Systems Segment

Revenues from our Papermaking Systems ~~Segment~~segment increased ~~$15.0~~$17.0 million, or ~~16%~~19%, to ~~$111.1~~$105.6 million in the ~~third~~first quarter of 2018 from $88.6 million in the first quarter of 2017, including $5.9 million from ~~$96.1 million in~~ the ~~third quarter~~inclusion of ~~2016, and included $2.5 million in revenues~~revenue from ~~Unaflex, which was acquired on August 14, 2017,~~acquisitions and a ~~$2.1~~$6.3 million increase from the favorable effect of foreign currency translation. Excluding acquisitions and the ~~Unaflex acquisition and~~ favorable effect of foreign currency translation, revenues increased ~~$10.4~~$4.9 million ~~or 11%,~~ as explained in the product line discussions below.

Revenues from our Stock-Preparation product line in the ~~third~~first quarter of ~~2017~~2018 increased ~~$8.0~~$4.3 million, or ~~18%~~11%, compared to the ~~third~~first quarter of ~~2016, and included~~2017, including a ~~$1.1~~$3.5 million increase from the favorable effect of foreign currency translation. Excluding the favorable effect of foreign currency translation, revenues increased ~~$6.9~~$0.9 million, or ~~16%~~2%, primarily due to ~~increases in~~increased demand for our capital equipment at our Chinese and ~~European operations.~~

Revenues from our Doctoring, Cleaning, & Filtration product line in the third quarter of 2017 increased $1.6 million, or 5%, compared to the third quarter of 2016. Excluding a favorable effect of foreign currency translation of $0.5 million, revenues increased $1.1 million, or 4%, compared to the third quarter of 2016 due to increases in demand in all regions for our parts and consumables products and for our capital equipment at our Chinese operations. These increases wereNorth American operations that was partially offset by ~~decreases in~~decreased demand for our capital equipment at our European ~~and North American~~ operations.

Revenues from our Fluid-Handling product line in the third quarter of 2017 increased $5.5 million, or 24%, compared to the third quarter of 2016, including $2.5 million in revenues from Unaflex. Excluding the Unaflex acquisition and a favorable effect of foreign currency translation of $0.6 million, revenues increased $2.4 million, or 10%, compared to the third quarter of 2016, due to increases in demand for our products in all our major geographic markets.

~~Wood Processing Systems Segment~~

Revenues from our Wood Processing Systems Segment increased $31.7 million to $39.7 million in the third quarter of 2017 from $8.0 million in the third quarter of 2016, including $26.7 million in revenues from NII, which was acquired on July 5, 2017, and a favorable effect from foreign currency translation of $0.5 million. Excluding the NII acquisition and favorable effect of foreign currency translation, revenues increased $4.6 million, or 57%, primarily due to increased demand for our products as a result of the strength of the U.S. housing industry.

~~Fiber-based Products~~

Revenues from our Fiber-based Products business increased $0.4 million, or 32%, to $1.9 million in the third quarter of 2017 from $1.5 million in the third quarter of 2016, primarily due to increased demand for our biodegradable granular products.

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~~KADANT INC.~~

~~Results of Operations (continued)~~

~~Gross Profit Margin~~

~~Gross profit margins for the third quarters of 2017 and 2016 are as follows:~~

Three Months Ended
September 30,
2017 October 1,
2016
Gross Profit Margin:
Papermaking Systems 45.5 % 46.0 %
Wood Processing Systems 33.5 % 45.9 %
Fiber-based Products 35.7 % 15.0 %
42.3 % 45.6 %

~~Papermaking Systems Segment~~. The gross profit margin in our Papermaking Systems segment decreased to 45.5% in the third quarter of 2017 from 46.0% in the third quarter of 2016 due to lower gross profit margins on our capital products and, to a lesser extent, an increase in the proportion of lower-margin capital revenues compared to the third quarter of 2016.

~~Wood Processing Systems Segment.~~ The gross profit margin in our Wood Processing Systems segment decreased to 33.5% in the third quarter of 2017 from 45.9% in the third quarter of 2016 primarily due to the amortization of $3.3 million of acquired profit in inventory related to the NII acquisition, which lowered gross profit margin by 820 basis points, and a change in product mix to an increased proportion of lower-margin capital revenues compared to the third quarter of 2016.

~~Fiber-based Products.~~ The gross profit margin in our Fiber-based Products business increased to 35.7% in the third quarter of 2017 from 15.0% in the third quarter of 2016 due to the combined effects of increased revenues in the third quarter of 2017 and increased manufacturing efficiency related to higher production volumes.

~~Operating Expenses~~

Selling, general, and administrative (SG&A) expenses as a percentage of revenues was 28% in the third quarter of 2017 compared to 32% in the third quarter of 2016. SG&A expenses increased $9.0 million, or 27%, to $42.5 million in the third quarter of 2017 from $33.5 million in the third quarter of 2016, primarily due to $5.8 million from the inclusion of SG&A expenses from NII and Unaflex and $1.4 million of incremental acquisition-related expenses. This increase also included a $0.6 million increase from the unfavorable effect of foreign currency translation.

Total stock-based compensation expense was $1.5 million and $1.3 million in the third quarters of 2017 and 2016, respectively, and is included in SG&A expenses in the accompanying condensed consolidated statement of income.

Research and development (R&D) expenses increased $0.6 million, or 32%, to $2.6 million in the third quarter of 2017 from $2.0 million in the third quarter of 2016, primarily due to the inclusion of R&D expenses from NII, and represented 2% of revenues in both periods.

~~Interest Expense~~

Interest expense increased $1.0 million to $1.3 million in the third quarter of 2017 from $0.3 million in the third quarter of 2016 related to interest expense on additional borrowings in 2017 primarily due to the acquisitions.

~~Provision for Income Taxes~~

Our provision for income taxes was $4.9 million and $3.1 million in the third quarters of 2017 and 2016, respectively, and represented 27% and 25% of pre-tax income. The effective tax rate of 27% in the third quarter of 2017 was lower than our statutory tax rate primarily due to the distribution of our worldwide earnings, offset in part by an increase in tax related to non-deductible expenses and unrecognized tax benefits. The effective tax rate of 25% in the third quarter of 2016 was lower than our statutory tax rate primarily due to the distribution of our worldwide earnings, a partial release of the U.S. valuation allowance related to state net operating losses, and a partial benefit of current-year state losses. These benefits were offset in part by an increase in tax related to non-deductible expenses.

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~~KADANT INC.~~

~~Results of Operations (continued)~~

~~Net Income~~

Net income increased $4.2 million to $13.4 million in the third quarter of 2017 from $9.2 million in the third quarter of 2016 due to a $6.9 million increase in operating income that was partially offset by increases in our provision for income taxes of $1.8 million and interest expense of $1.0 million (see ~~Revenues, Gross Profit Margin, Operating Expenses, Interest Expense~~ ~~and~~ ~~Provision for Income Taxes~~ ~~discussed above).~~

~~First Nine Months 2017 Compared With First Nine Months 2016~~

~~Revenues~~

The following table presents changes in revenues by segment and product line between the first nine months of 2017 and 2016, and the changes in revenues by segment and product line between the first nine months of 2017 and 2016 excluding the effect of currency translation and acquisitions. Currency translation is calculated by converting the first nine months of 2017 revenues in local currency into U.S. dollars at the first nine months of 2016 exchange rates and then comparing this result to actual revenues in the first nine months of 2017. The presentation of the changes in revenues excluding the effect of currency translation and acquisitions is a non-GAAP measure. We believe this non-GAAP measure helps investors gain an understanding of our underlying operations consistent with how management measures and forecasts its performance, especially when comparing such results to prior periods. This non-GAAP measure should not be considered superior to or a substitute for the corresponding GAAP measures.

~~Revenues for the first nine months of 2017 and 2016 are as follows:~~

Nine Months Ended (Non-GAAP) Adjusted Total Increase (Decrease)

(In thousands) September 30,
2017 October 1,
2016 Total Increase Currency Translation Acquisitions

Stock-Preparation $ 139,396
$ 132,158
$ 7,238
$ (675 ) $ 13,311
$ (5,398 )
Doctoring, Cleaning, & Filtration 82,921
80,374
2,547
(749 ) —
3,296
Fluid-Handling 73,099
67,904
5,195
(54 ) 2,522
2,727
Papermaking Systems 295,416
280,436
14,980
(1,478 ) 15,833
625
Wood Processing Systems 61,050
25,437
35,613
358
26,668
8,587
Fiber-based Products 9,427
8,012
1,415
—
—
1,415
$ 365,893
$ 313,885
$ 52,008
$ (1,120 ) $ 42,501
$ 10,627

~~Papermaking Systems Segment~~

Revenues from our Papermaking Systems Segment increased $15.0 million to $295.4 million in the first nine months of 2017 from $280.4 million in the first nine months of 2016, including $13.3 million of revenues in the first quarter of 2017 from the PAALGROUP (PAAL), which was acquired in April 2016, and $2.5 million in revenues from Unaflex, which was acquired on August 14, 2017, offset in part by a $1.5 million decrease from the unfavorable effect of foreign currency translation. Excluding the acquisitions and unfavorable effect of foreign currency translation, revenues increased $0.6 million as explained in the product line discussions below.

Revenues from our Stock-Preparation product line in the first nine months of 2017 increased $7.2 million, or 5%, compared to the first nine months of 2016, including $13.3 million of revenues in the first quarter of 2017 from PAAL, which was acquired in April 2016, that were offset in part by a $0.7 million decrease from the unfavorable effect of foreign currency translation. Excluding the incremental PAAL revenues and unfavorable effect of foreign currency translation, revenues decreased $5.4 million, or 4%, compared to the first nine months of 2016, primarily due to decreases in demand for our products at both our North American and European operations, which were partially offset by an increase in demand for our products at our Chinese operations.

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KADANT INC.

Results of Operations (continued)

Revenues from our Doctoring, Cleaning, & Filtration product line in the first ~~nine months~~quarter of ~~2017~~2018 increased ~~$2.5~~$1.9 million, or 3%7%, including a ~~$0.8~~$1.2 million ~~decrease~~increase from the ~~unfavorable~~favorable effect of foreign currency translation. Excluding the ~~unfavorable~~favorable effect of foreign currency translation, revenues increased ~~$3.3~~$0.7 million, or 4%3%, compared to the first ~~nine months~~quarter of ~~2016~~2017 due to increased demand for our ~~products at our European~~parts and ~~Chinese operations, offset in part by decreased demand for our capital equipment at our South American operations.~~consumables products.

Revenues from our Fluid-Handling product line in the first ~~nine months~~quarter of ~~2017~~2018 increased ~~$5.2~~$10.8 million, or 8%49%, compared to the first ~~nine months~~quarter of ~~2016, including $2.5~~2017, due to the inclusion of $5.9 million in revenues from acquisitions, principally from Unaflex, and a ~~$0.1~~$1.6 million ~~decrease~~increase from the ~~unfavorable~~favorable effect of foreign currency translation. Excluding acquisitions and the ~~Unaflex acquisition and unfavorable~~favorable effect of foreign currency translation, revenues increased ~~$2.7~~$3.3 million, or 4%15%, largely due to increased ~~demand for our parts and consumables products primarily at our European and North American operations, offset in part by decreased~~ demand for our capital equipment primarily at our North American and European operations.

Wood Processing Systems Segment

Revenues from our Wood Processing Systems ~~Segment~~segment increased ~~$35.6~~$29.2 million to ~~$61.0~~$39.1 million in the first ~~nine months~~quarter of ~~2017~~2018 from ~~$25.4~~$9.9 million in the first ~~nine months~~quarter of ~~2016, including $26.7~~2017 due to the inclusion of $28.9 million in revenues from ~~NII,~~our forest products business, which was acquired onin July 5, 2017, and ~~an increase of $0.4~~$0.5 million from the favorable effect of foreign currency translation. Excluding the ~~NII~~ acquisition and the favorable effect of foreign currency translation, revenues ~~increased $8.6 million, or 34%, primarily related to increased demand for our products due to continued strength~~were essentially flat in the ~~U.S. housing industry.~~first quarter of 2018 compared with the first quarter of 2017.

Fiber-based Products

Revenues from our Fiber-based Products business ~~increased $1.4 million, or 18%, to $9.4~~were relatively unchanged at $4.5 million in the first ~~nine months~~quarter of ~~2017 from $8.0~~2018 compared with $4.4 million in the first ~~nine months~~quarter of ~~2016, primarily due to increased demand for our biodegradable granular products.~~2017.

Gross Profit Margin

Gross profit margins for the first ~~nine months~~quarters of 2018 and 2017 ~~and 2016 are~~were as follows:


	Nine Months Ended				Three Months Ended
	September 30, 2017		October 1, 2016		March 31, 2018		April 1, 2017
Gross Profit Margin:
Papermaking Systems	47.1	%	45.7	%	45.6	%	47.9	%
Wood Processing Systems	37.1	%	41.7	%	39.5	%	42.2	%
Fiber-based Products	50.1	%	45.7	%	56.0	%	55.0	%
	45.5	%	45.3	%	44.3	%	47.7	%

Papermaking Systems Segment.

The gross profit margin in our Papermaking Systems segment ~~increased~~decreased to ~~47.1%~~45.6% in the first ~~nine months~~quarter of ~~2017~~2018 from ~~45.7%~~47.9% in the first ~~nine months~~quarter of ~~2016. This increase was~~2017, primarily due to ~~higher~~lower gross profit margins on our parts and consumables products, ~~and, to~~as well as a ~~lesser extent, an increase~~decrease in the proportion of higher-margin parts and consumables revenues.

Wood Processing Systems ~~Segment.~~Segment

The gross profit margin in our Wood Processing Systems segment decreased to ~~37.1%~~39.5% in the first ~~nine months~~quarter of ~~2017~~2018 from ~~41.7%~~42.2% in the first ~~nine months~~quarter of ~~2016~~2017 primarily due to the ~~amortization~~inclusion of ~~$3.3 million of acquired profit in inventory related to the NII acquisition, which lowered~~lower gross profit ~~margin by 530 basis points.~~margins in our timber harvesting product line.

Fiber-based ~~Products.~~Products

The gross profit margin in our Fiber-based Products business increased to ~~50.1%~~56.0% in the first ~~nine months~~quarter of ~~2017~~2018 from ~~45.7%~~55.0% in the first ~~nine months of 2016 due to the combined effects of increased revenues in the first nine months~~quarter of 2017 ~~and~~due to increased manufacturing efficiency related to higher production ~~volumes.~~volumes and lower natural gas prices.

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KADANT INC.

Results of Operations (continued)

~~Operating~~Selling, General, and Administrative Expenses

Selling, general, and administrative (SG&A) expenses for the first quarters of 2018 and 2017 were as follows:



	Three Months Ended
(In thousands)	March 31, 2018		April 1, 2017		Increase
Papermaking Systems	$	30,756	$	26,185	$	4,571
Wood Processing Systems	7,299		1,522		5,777
Corporate and Other	7,721		6,913		808
	$	45,776	$	34,620	$	11,156

SG&A expenses as a percentage of revenues ~~was 32%~~decreased to 31% in ~~both~~ the first ~~nine months~~quarter of 2018 from 34% in the first quarter of 2017 ~~and 2016.~~due to improved operating leverage as a result of our recent acquisitions. SG&A expenses increased ~~$14.4~~$11.2 million, or ~~14%~~32%, to ~~$116.5~~$45.8 million in the first ~~nine months~~quarter of ~~2017~~2018 from ~~$102.1~~$34.6 million in the first ~~nine months~~quarter of ~~2016,~~2017 primarily due to ~~$5.8 million from~~ the inclusion of $7.2 million of incremental SG&A expenses from ~~NII~~our acquisitions and ~~Unaflex, $2.7~~a $2.0 million unfavorable effect from foreign currency translation. We expect further improvements in operating leverage in the second half of ~~incremental acquisition-related expenses, and $3.1 million of first quarter 2017~~ 2018 as our revenue increases.

Papermaking Systems Segment

SG&A expenses ~~from PAAL, which was acquired~~ in ~~April 2016. These increases were offset in part by a $0.6~~our Papermaking Systems segment increased $4.6 million, ~~decrease from the favorable effect of foreign currency translation.~~

~~Total stock-based compensation expense was $4.3 million and $3.9~~or 17%, to $30.8 million in the first ~~nine months~~quarter of ~~2017 and 2016, respectively, and is included in SG&A expenses in the accompanying condensed consolidated statement of income.~~

~~R&D expenses increased $1.4 million, or 24%, to $7.0~~2018 from $26.2 million in the first ~~nine months~~quarter of 2017, primarily due to a $1.9 million unfavorable effect from ~~$5.6~~foreign currency translation and $1.7 million of incremental SG&A expenses from our acquisitions.

Wood Processing Systems Segment

SG&A expenses in our Wood Processing Systems segment increased $5.8 million to $7.3 million in the first ~~nine months~~quarter of ~~2016,~~2018 from $1.5 million in the first quarter of 2017 primarily due to ~~$0.6~~$5.5 million ~~from the inclusion~~ of ~~R&D~~incremental SG&A expenses from ~~NII~~our acquisitions.

Corporate and ~~$0.4~~Other

SG&A expenses for Corporate and Other increased $0.8 million ofto $7.7 million in the first quarter of 2018 from $6.9 million in the first quarter of 2017 ~~R&D~~primarily due to increased incentive compensation expense.

Research and Development Expenses

Research and development expenses, ~~from PAAL,~~ which ~~was acquired in April 2016, and~~ represented 2% of revenues in both ~~periods.~~

~~Other Income~~

~~Other income~~periods, increased $0.7 million, or 34%, to $2.9 million in the first ~~nine months~~quarter of ~~2016 represents a pre-tax gain~~2018 from $2.1 million in the first quarter of ~~$0.3~~2017 largely due to the inclusion of research and development expenses from our acquisitions.

Restructuring Costs

Restructuring costs in the first quarter of 2018 of $0.8 million related to the ~~sale~~integration of ~~real estate~~our U.S. and Swedish Papermaking Stock-Preparation product lines into a single manufacturing facility to achieve economies of scale and greater efficiencies, and included $0.6 million of costs for the relocation of machinery and equipment and administrative offices and $0.2 million associated with employee retention costs and abandonment of excess facility and other closure costs. We expect to record additional restructuring charges of approximately $0.9 million in ~~Sweden~~2018 primarily for ~~cash proceeds~~the relocation of ~~$0.4 million.~~machinery and equipment when certain specified criteria are met.

Interest Expense

Interest expense increased ~~$1.1~~$1.4 million to ~~$2.0~~$1.7 million in the first ~~nine months~~quarter of ~~2017~~2018 from ~~$0.9~~$0.3 million in the first ~~nine months~~quarter of ~~2016 related~~2017 primarily due to interest expense on additional borrowings made in ~~2017 primarily due to~~ the ~~acquisitions.~~second half of 2017.

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KADANT INC.

Results of Operations (continued)

Provision for Income Taxes

Our provision for income taxes was ~~$10.6 million and $9.5~~$3.9 million in the first ~~nine months~~quarter of ~~2017~~2018 and ~~2016, respectively, and represented 26% and 28%~~$2.7 million in the first quarter of ~~pre-tax income.~~2017. The effective tax rate of 26% in the first ~~nine months~~quarter of 2018 was higher than our 2018 statutory tax rate of 21% primarily due to a true-up to the federal provisional net income tax expense initially recorded in 2017 for the Tax Cuts and Jobs Act of 2017 (2017 Tax Act), the U.S. tax cost of foreign operations, including the global intangible low-taxed income provisions of the 2017 Tax Act, and the distribution of our worldwide earnings. This incremental tax expense was offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements, the release of tax reserves, and a favorable impact to state taxes primarily related to the true-up to the provisional net income tax expense initially recorded in 2017 for the 2017 Tax Act. The effective tax rate of 23% in the first quarter of 2017 was lower than our 2017 statutory tax rate of 35% primarily due to the distribution of our worldwide earnings and the net excess income tax benefits from stock-based compensation arrangements, offset in part by an increase in tax related to non-deductible ~~expenses~~expenses.

Additional work is still necessary to finalize the provisional tax impacts of the 2017 Tax Act, including the completion of a more detailed analysis of our historical foreign earnings and ~~unrecognized~~the understanding and application of anticipated additional regulatory guidance regarding the provisions of the 2017 Tax Act that may be issued by the Internal Revenue Service and state and local jurisdictions. Any subsequent adjustment to the provisional amounts will be recorded to current tax ~~benefits. The effective tax rate of 28%~~expense in the ~~first nine months~~quarter of ~~2016 was lower than our statutory tax rate primarily due to~~2018 in which the distribution of our worldwide earnings, the adoption of a new accounting standard that resulted in a favorable adjustment for the net excess income tax benefits from stock-based compensation arrangements, a partial release of the U.S. valuation allowance related to state net operating losses, and a partial benefit of current-year state losses. These items were offset in part by an increase in tax related to non-deductible expenses.analysis is complete.

Net Income

Net income increased ~~$6.0~~$1.9 million, or 21%, to ~~$30.7~~$11.0 million in the first ~~nine months~~quarter of ~~2017 compared to $24.7~~2018 from $9.1 million in the first ~~nine months~~quarter of ~~2016~~2017 due to ~~an $8.0~~a $4.4 million increase in ~~our~~ operating income that was partially offset by increases in our interest expense of ~~$1.1~~$1.4 million ~~in both~~and our provision for income taxes ~~and interest expense~~of $1.1 million (seeRevenues, Gross Profit Margin, ~~Operating~~Selling, General and Administrative Expenses, Research and Development Expenses, Restructuring Costs, Interest Expenseand Provision for Income Taxes discussed above).

Recent Accounting Pronouncements

~~Revenue from Contracts with Customers (Topic 606)~~See Note 1, ~~Section A-Summary~~ under the headings Recently Adopted Accounting Pronouncements and ~~Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40).~~ ~~In May 2014,~~Recent Accounting Pronouncements Not Yet Adopted, in the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. In March 2016, the FASB issued ASU No. 2016-08, which further clarifies the guidance on the principal versus agent considerations within ASU No. 2014-09. In April 2016, the FASB issued ASU No. 2016-10 to expand the guidance on identifying performance obligations and licensing within ASU 2014-09. In May 2016, the FASB issued ASU No. 2016-11, which rescinds certain previously-issued guidance, including, among other items, guidance relating to accounting for shipping and handling fees and freight services effective upon adoption of ASU No. 2014-09. Also in May 2016, the FASB issued ASU No. 2016-12, which

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~~KADANT INC.~~

~~Results of Operations (continued)~~

narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition. In December 2016, the FASB issued ASU No. 2016-20, which clarifies narrow aspects of Topic 606 and corrects unintended application of the guidance. These new ASUs are effective for us beginning in fiscal 2018. Early adoption is permitted in fiscal 2017.

~~We are continuing to assess the potential effects of these ASUs on our~~accompanying condensed consolidated financial statements business processes, systems and controls. We are analyzing our current contracts and comparing our current accounting policies and practices pertaining to revenue recognition to those required under the new ASUs to identify potential differences. Based on procedures performed to date, we have identified certain contracts that would likely be impacted by applying the new revenue standard. These include contracts that are currently accounted for under the completed-contract method of accounting and contracts for products that are specific to the customer's requirements. We recognize revenue for long-term contracts under the completed-contract method of accounting when the contract is substantially complete, the product is delivered and, if applicable, customer acceptance criteria is met. Contracts that contain customer-specific components and do not meet the requirements for percentage of completion method of accounting are accounted for when the risks and rewards of ownership have transferred, provided all other revenue recognition criteria are met. Under the new guidance, revenue related to such contracts will be accelerated if the "over time" criteria are met.

We are still in the process of evaluating these contracts and other types of contracts and quantifying the expected impact that the standard will have on our financial statements and related disclosures. While the assessment process is ongoing, we currently anticipate adopting these ASUs using the modified retrospective transition approach. Under this approach, this guidance would apply to all new contracts initiated in fiscal 2018. For existing contracts that have remaining obligations as of the beginning of fiscal 2018, any difference between the recognition criteria in these ASUs and our current revenue recognition practices would be recognized using a cumulative effect adjustment to the opening balance of retained earnings. The amount of this adjustment is yet to be determined and will be impacted by many factors including the number and value of contracts in

progress at the transition date, the nature and composition of contracts in progress at the transition date, the terms of the respective contracts in progress at the transition date and the relevant accounting conclusions on each of these contracts in progress at the transition date. We are also in the process of developing and implementing appropriate changes to our business processes, systems and controls to support the recognition criteria and disclosure requirements of these ASUs.

See Note 1, under the heading “Recent Accounting Pronouncements,” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information on recently implemented and issued accounting standards.further details.

Liquidity and Capital Resources

Consolidated working capital was ~~$174.6~~$145.7 million at ~~September 30, 2017,~~March 31, 2018, compared with ~~$118.4~~$133.8 million at December ~~31, 2016.~~30, 2017. Included in working capital were cash and cash equivalents of ~~$90.6~~$72.2 million at ~~September 30, 2017,~~March 31, 2018, compared with ~~$71.5~~$75.4 million at December 30, 2017. At March 31, ~~2016. At September 30, 2017, $62.5~~2018, $71.2 million of cash and cash equivalents was held by our foreign subsidiaries.

Cash Flows

First ~~Nine~~Three Months of ~~2017~~2018

Our operating activities provided cash of ~~$32.3~~$7.2 million in 2018 primarily due to cash generated by our operating subsidiaries from product sales. This is largely represented within operating cash flows in net income, excluding non-cash charges for depreciation and amortization and stock-based compensation. Aside from cash generated from items which impacted net income, operating cash flows were also impacted by changes in working capital due to the ~~first nine months~~timing of ~~2017.~~cash receipts and payments. Working capital used cash of ~~$14.4~~$11.3 million in the first ~~nine months~~quarter of ~~2017,~~2018, including ~~increases~~$9.7 million of ~~$16.2 million in accounts receivable~~cash used to purchase inventory primarily ~~related to increased capital shipments in the third quarter, $3.5 million in inventories primarily related to purchases~~ associated with the expected shipment of ~~Stock-Preparation~~stock-preparation capital orders later in ~~the fourth quarter of 2017~~2018 and ~~the first half of 2018, $2.6~~$6.3 million in unbilled contract costs and fees primarily in our Stock-Preparation product line, and $2.5 million in other current assets largely related to an increase in refundable income taxes. Partially offsetting these uses of cash ~~were increases of $8.4 million in~~used to settle other current liabilities that was primarily related to ~~an increase in billings in excess~~the payment of ~~costs~~incentive compensation and ~~fees connected with large orders at our Stock-Preparation product line and $2.0 million in accounts payable related to purchases of inventory.~~taxes.

Our investing activities used cash of ~~$212.8~~$5.1 million in the first ~~nine months~~quarter of ~~2017, including the use of $204.2 million for acquisitions and $8.7 million for~~2018 related to purchases of property, plant, and ~~equipment.~~equipment, including $3.8 million for a manufacturing facility project in Ohio.

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Liquidity and Capital Resources (continued)

Our financing activities used cash of $6.7 million in the first quarter of 2018. Cash uses of $13.4 million for principal payments on our outstanding debt obligations, $3.6 million for tax withholding payments related to stock-based compensation, and $2.3 million for cash dividends paid to stockholders were partially offset by U.S. dollar-denominated borrowings of $12.0 million under our revolving credit agreement and $0.7 million received primarily from employee purchases of our common stock.

First Three Months of 2017

Our operating activities provided cash of ~~$191.9~~$1.7 million in 2017 primarily due to cash generated by our operating subsidiaries from product sales. This is largely represented within operating cash flows in net income, excluding non-cash charges for depreciation and amortization and stock-based compensation. Aside from cash generated from items which impacted net income, operating cash flows were also impacted by changes in working capital due to the timing of cash receipts and payments. Working capital used cash of $12.2 million in the first ~~nine months~~quarter of 2017, including increases of $6.2 million in accounts receivable and unbilled revenue primarily in our Stock-Preparation product line and $4.0 million in inventory primarily from purchases related to the expected shipment of stock-preparation capital orders. To a lesser extent, cash of $1.9 million was used to fund increases in other current assets largely related to prepayments for raw material and equipment and an increase in refundable income taxes. In addition, we used cash of $1.0 million for other current liabilities primarily related to the payment of incentive compensation in the first quarter of 2017.

Our investing activities used cash of $1.9 million in the first quarter of 2017, primarily related to $1.7 million of purchases of property, plant, and equipment.

Our financing activities used cash of $1.6 million in the first quarter of 2017. We ~~borrowed $222.0~~received cash proceeds of $8.0 million from borrowings under our ~~2017 Credit Agreement (as defined below under the heading~~ ~~Revolving Credit Facility), including $70.7 million of Canadian dollar-denominated and $61.8 million of euro-denominated borrowings. These borrowings~~revolving credit agreement, which were ~~partially~~more than offset by ~~$20.3~~$4.6 million used for principal payments on our outstanding debt obligations, ~~$6.7 million used for cash dividends paid to stockholders,~~ $2.2 million used for tax withholding payments related to stock-based compensation, and ~~$1.3 million used for the payment of debt issuance costs.~~

~~First Nine Months of 2016~~

Our operating activities provided cash of $34.7 million in the first nine months of 2016. Working capital used cash of $4.2 million in the first nine months of 2016, including decreases of $5.6 million in accounts payable due to reduced project activity in our Stock-Preparation product line and $6.7 million in other current liabilities primarily related to income tax and incentive compensation payments and a decrease in billings in excess of costs and fees. These uses of cash were offset in part by $5.4 million of cash provided by decreases in accounts receivable and unbilled contract costs and fees primarily in our Stock-Preparation product line, and $2.1 ~~million from a decrease in inventory primarily due to the shipment of Stock-Preparation orders in the third quarter of 2016.~~

Our investing activities used cash of $59.8 million in the first nine months of 2016 primarily related to the acquisition of PAAL for approximately $56.6 million in cash, net of cash acquired. In addition, we used $3.6 million for purchases of property, plant, and equipment.

Our financing activities provided cash of $24.0 million in the first nine months of 2016. We received cash proceeds of $48.0 million from borrowings, of which $29.9 million was used to fund the PAAL acquisition, and $1.8 million from the issuance of our common stock due to the exercise of employee stock options. These sources of cash were offset in part by $15.4 million used for principal payments on our outstanding debt obligations in the first nine months of 2016, $6.0 million used for cash dividends paid to stockholders, and $2.6 million used for tax withholding payments related to stock-based compensation. In addition, we paid $1.1 million of contingent consideration in the first nine months of 2016 related to a prior period acquisition.stockholders.

Additional Liquidity and Capital Resources

On May 17, 2017, our board of directors approved the repurchase ~~by us~~ of up to $20 million of our equity securities during the period from May 17, 2017 to May 17, 2018. We ~~did~~have not ~~purchase~~purchased any shares of our common stock under this ~~authorization or under the previous authorization, which expired in the second quarter of 2017.~~authorization.

We paid ~~quarterly~~ cash dividends ~~totaling $6.7~~of $2.3 million in the first ~~nine months~~quarter of ~~2017.~~2018. On ~~September 20, 2017,~~March 8, 2018, we declared a quarterly cash dividend of ~~$0.21~~$0.22 per ~~outstanding~~ share ~~of our common stock, which~~totaling $2.4 million that will be paid on ~~November 9, 2017.~~May 10, 2018. Future declarations of dividends are subject to our board of directors' approval and may be adjusted as business needs or market conditions change. The declaration of cash dividends is subject to our compliance with the consolidated leverage ratio contained in our ~~2017 Credit Agreement.~~revolving credit facility.

As of March 31, 2018, we had cash and cash equivalents of $72.2 million, of which $71.2 million was held by our foreign subsidiaries. As of March 31, 2018, we had approximately $272.1 million of total unremitted foreign earnings. It is our intent to indefinitely reinvest ~~indefinitely the~~$247.0 million of these earnings ~~of our international subsidiaries in order~~ to support the current and future capital needs of ~~their~~our foreign operations, including debt repayments. ~~We do not anticipate~~In the ~~need~~first quarter of 2018, we recorded withholding taxes on the earnings in certain foreign subsidiaries that we plan to repatriate ~~funds to the United States to satisfy domestic liquidity needs arising~~ in the ~~ordinary course of business. Through September 30, 2017, we have not provided for U.S. income~~foreseeable future. The foreign withholding taxes ~~on approximately $229.1 million of unremitted foreign earnings. The U.S. tax cost has not been determined due to the fact~~ that ~~it is not practicable to estimate at this time. The related foreign tax withholding, which~~ would be required if we were to remit the indefinitely reinvested foreign earnings to the ~~U.S.,~~United States would be approximately ~~$3.4~~$4.0 million.

On July 5, 2017, we acquired the forest products business of NII pursuant to a Stock and Asset Purchase Agreement dated May 24, 2017, for approximately $170.7 million, net of cash acquired, which includes a post-closing adjustment of $2.1 million that was received subsequent to the end of the third quarter. On August 14, 2017, we acquired certain assets of Unaflex for approximately $31.3 million in cash, subject to a post-closing adjustment.

We plan to make expenditures of approximately ~~$9.0~~$13.0 to ~~$10.0~~$14.0 million during the remainder of ~~2017~~2018 for property, plant, and ~~equipment.~~

~~Table~~equipment, including approximately $3.0 million for our Ohio manufacturing facility, which will be completed in the first half of ~~Contents~~

~~KADANT INC.~~

~~Liquidity and Capital Resources (continued)~~2018.

In the future, our liquidity position will be primarily affected by the level of cash flows from operations, cash paid to satisfy debt repayments, capital projects, dividends, stock repurchases, or acquisitions. We believe that our existing resources, together with the cash available from our credit facilities and the cash we expect to generate from operations, will be sufficient to meet the capital requirements of our current operations for the foreseeable future.

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KADANT INC.

Liquidity and Capital Resources (continued)

Revolving Credit Facility

~~On March 1,~~In 2017, we entered into an Amended and Restated Credit Agreement, ~~that became effective on March 2,~~as amended (the 2017 Credit Agreement), which is a five-year unsecured multi-currency revolving credit facility in the aggregate principal amount of up to ~~$200 million. On May 24, 2017, we entered into a first amendment and limited consent (as amended, the "2017 Credit Agreement"), which increased the revolving loan commitment to~~ $300 million. The 2017 Credit Agreement also ~~included~~includes an uncommitted unsecured incremental borrowing facility of up to an additional $100 million. The principal on any borrowings ~~made under the 2017 Credit Agreement~~ is due on March 1, 2022. Borrowing may be denominated in U.S. dollars or certain foreign currencies as defined in the 2017 Credit Agreement. Interest on any loans outstanding under the 2017 Credit Agreement accrues and generally is payable quarterly in arrears at one of the following rates selected by us: (i) the Base Rate, calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate as published by Citizens Bank, and (c) the thirty-day London Inter-Bank Offered Rate (LIBOR) rate, as defined, plus 0.50%; or (ii) the LIBOR rate (with a zero percent floor), as defined, plus an applicable margin of 1% to 2%. The applicable margin is determined based upon the ratio of our total debt, net of certain cash, as defined, to earnings before interest, taxes, depreciation, and amortization (EBITDA), as defined in the 2017 Credit Agreement. For this purpose, total debt net of certain cash is defined as total debt less the sum of (i) unrestricted U.S. cash, and (ii) 65% of unrestricted cash outside of the United States, but no more than an aggregate amount of $30 million.

In the first nine months of 2017, we borrowed an aggregate $222.0 million under the 2017 Credit Agreement. As of September 30, 2017, the outstanding balance under the 2017 Credit Agreement was $273.6 million, including $90.4 million of euro-denominated and $66.6 million of Canadian dollar-denominated borrowings. As of September 30, 2017, we had $26.4 million of borrowing capacity available under our 2017 Credit Agreement, which is calculated by translating its foreign-denominated borrowings using transaction date foreign exchange rates.

Our obligations under the 2017 Credit Agreement may be accelerated upon the occurrence of an event of default under the 2017 Credit Agreement, which includes customary events of default including, without limitation, payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy- and insolvency-related defaults, defaults relating to such matters as the Employment Retirement Income Security Act (ERISA), unsatisfied judgments, the failure to pay certain indebtedness, and a change of control default. In addition, the 2017 Credit Agreement contains negative covenants applicable to us, including financial covenants requiring us to comply with a maximum consolidated leverage ratio of 3.5 to 1, a minimum consolidated interest coverage ratio of 3 to 1, and restrictions on liens, indebtedness, fundamental changes, dispositions of property, making certain restricted payments (including dividends and stock repurchases), investments, transactions with affiliates, sale and leaseback transactions, swap agreements, changing our fiscal year, arrangements affecting subsidiary distributions, entering into new lines of business, and certain actions related to a discontinued operation. As of ~~September 30, 2017,~~March 31, 2018, we were in compliance with these covenants.

Loans under the 2017 Credit Agreement are guaranteed by certain of our domestic subsidiaries pursuant to an Amended and Restated Guarantee ~~Agreement, dated as of March 1, 2017.~~Agreement. In addition, one of our foreign subsidiaries entered into a ~~Guarantee Agreement~~guarantee agreement limited to certain obligations of two foreign subsidiary ~~borrowers pursuant to a Guarantee~~borrowers.

As of March 31, 2018, the outstanding balance under the 2017 Credit Agreement ~~dated~~was $235.9 million, including $56.8 million of Canadian dollar-denominated and $50.1 million of euro-denominated borrowings. As of March 31, 2018, we had $63.7 million of borrowing capacity available under the 2017 Credit Agreement, which was calculated by translating our foreign-denominated borrowings using borrowing date foreign exchange rates.

The weighted average interest rate for the revolving credit facility was 2.86% as of March ~~1, 2017.~~31, 2018.

Sale-Leaseback Financing Arrangement

~~In connection with the acquisition of PAAL in April 2016, we assumed~~We have a sale-leaseback financing arrangement for ~~PAAL's~~a manufacturing facility in Germany. Under this arrangement, the quarterly lease payment includes principal, interest, and ~~interest based on an interest rate which is reset, from time~~a payment to ~~time, to prevailing short-term borrowing rates in Germany. The interest rate at September 30, 2017 was 1.70%.~~the landlord toward a loan receivable. The lease arrangement includes a net fixed price purchase option of $1.6 million at the end of the lease term in 2022. At ~~September 30, 2017, $4.5~~March 31, 2018, $4.6 million was outstanding under this capital lease obligation with an interest rate of 1.79% on the outstanding obligation.

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~~KADANT INC.~~

~~Liquidity and Capital Resources (continued)~~

Interest Rate Swap Agreement

OnIn January ~~16,~~ 2015, we entered into a swap agreement (2015 Swap Agreement) to hedge our exposure to movements in the three-month LIBOR rate on future outstanding debt. The 2015 Swap Agreement expires on March 27, 2020, and has a $10 million notional value. Under the 2015 Swap Agreement, on a quarterly basis we receive a three-month LIBOR rate and pay a fixed rate of interest of 1.50% plus an applicable margin.

~~As of September 30, 2017, the 2015 Swap Agreement had an unrealized gain of $65,000.~~ We believe that any credit risk associated with the swap agreement is remote based on our financial position and the creditworthiness of the financial institution that issued the 2015 Swap Agreement. At March 31, 2018, the 2015 Swap Agreement had an unrealized gain of $0.2 million, which represents the estimated amount that we would receive from the counterparty in the event of an early termination.

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KADANT INC.

Liquidity and Capital Resources (continued)

The counterparty to the 2015 Swap Agreement could demand an early termination of the 2015 Swap Agreement if we ~~are~~were to be in default under the 2017 Credit Agreement, or any agreement that amends or replaces the 2017 Credit Agreement in which the counterparty is a member, and if we ~~are~~were to be unable to cure the default. An event of default under the 2017 Credit Agreement includes customary events of default and failure to comply with financial covenants, including a maximum consolidated leverage ratio of 3.5 to 1 and a minimum consolidated interest coverage ratio of 3 to 1. The unrealized gain of $65,000 associated with the 2015 Swap Agreement as of September 30, 2017 represents the estimated amount that we would receive from the counterparty in the event of an early termination.

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk from changes in interest rates and foreign currency exchange rates has not changed materially from our exposure at fiscal year-end ~~2016~~2017 as disclosed in Item 7A of our Annual Report on Form 10-K for the fiscal year ended December ~~31, 2016,~~30, 2017, filed with the SEC, except for the interest rate and foreign currency risk associated with the $273.6 million in borrowings at September 30, 2017 under our revolving credit facility. In the first nine months of 2017, we entered into $70.7 million of Canadian dollar-denominated borrowings and $61.8 million of euro-denominated borrowings. We also have outstanding $22.6 million from euro-denominated borrowings made in 2016. The translation of our foreign-denominated debt impacts our borrowing capacity available under our 2017 Credit Agreement, which is calculated in U.S. dollars. A 10% movement in the euro and Canadian dollar rates against the U.S. dollar would have decreased our borrowing capacity by approximately $15.7 million as of September 30, 2017. Our borrowings under the revolving credit facility are subject to interest rate risk as they bear variable rates of interest, which adjust quarterly. A 10% increase in interest rates associated with our borrowings outstanding at September 30, 2017 would have the effect of increasing our annual interest expense by approximately $0.2 million.SEC.

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~~KADANT INC.~~

Item 4 – Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of ~~September 30, 2017.~~March 31, 2018. The term "disclosure controls and procedures," as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon the evaluation of our disclosure controls and procedures as of ~~September 30, 2017,~~March 31, 2018, our Chief Executive Officer and Chief Financial Officer concluded that as of ~~September 30, 2017,~~March 31, 2018, our disclosure controls and procedures were effective at the reasonable assurance level.

(b) Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the fiscal quarter ended ~~September 30, 2017~~March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1A – Risk Factors

~~There~~Except for the addition of the sentences below to the "Our global operations subject us to various risks that may adversely affect our results of operations" risk factor, there have been no material changes from the risk factors disclosed in Part I, Item 1A of ~~our~~the Company’s Annual Report on Form 10-K for the fiscal year ended December ~~31, 2016 and subsequent filings,~~30, 2017, filed with the SEC.

Among the $50 billion in U.S. trade tariffs proposed by the Trump administration against China, pulp and paper machinery equipment is a potential target facing a 25% duty. If the United States were to impose significant tariffs or taxes on goods imported into the United States, the cost of our products could significantly increase, which in turn could have a material adverse effect on our business and results of operations.

The United States also imposed new trade sanctions against certain persons in Russia in April 2018, in addition to those previously imposed in 2014 and 2017.

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KADANT INC.

Item 6 – Exhibits



Exhibit Number
Exhibit Number		Description of Exhibit

~~10.1~~10.1*		~~Executive Transition~~Form of Performance-Based Restricted Stock Unit Award Agreement between the ~~Registrant~~Company and ~~Sandra L. Lambert as of September 20, 2017.~~its executive officers used for restricted stock unit awards on or after March 5, 2014.

~~10.2~~10.2*		~~Notice dated September 20, 2017~~Form of ~~the termination of the Amended and Restated Executive Retention~~Time-Based Restricted Stock Unit Award Agreement ~~dated December 8, 2008~~ between the ~~Registrant~~Company and ~~Sandra L. Lambert.~~its executive officers used for restricted stock unit awards on or after March 5, 2014.

~~10.3~~10.3*		~~Notice dated September 20, 2017~~Summary of non-employee director compensation of the ~~amendment to certain~~Registrant.

10.4*		Form of Directors Restricted Stock Unit Award Agreement between the Company and its non-employee directors used for restricted stock unit ~~award agreements granted by the Registrant to Sandra L. Lambert.~~awards on or after March 5, 2014.

31.1		Certification of the Principal Executive Officer of the Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2		Certification of the Principal Financial Officer of the Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32		Certification of the Chief Executive Officer and the Chief Financial Officer of the Registrant Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document.**

101.SCH		XBRL Taxonomy Extension Schema Document.**

101.CAL		XBRL Taxonomy Calculation Linkbase Document.**

101.LAB		XBRL Taxonomy Label Linkbase Document.**

101.PRE		XBRL Taxonomy Presentation Linkbase Document.**

101.DEF		XBRL Taxonomy Definition Linkbase Document.**




*	Management contract or compensatory plan or arrangement.
**	Submitted electronically herewith.

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheet ~~at September~~as of March 31, 2018 and December 30, 2017, ~~and December 31, 2016,~~ (ii) Condensed Consolidated Statement of Income for the ~~three- and nine-month~~three-month periods ended ~~September 30,~~March 31, 2018 and April 1, 2017, ~~and October 1, 2016,~~ (iii) Condensed Consolidated Statement of Comprehensive Income for the ~~three- and nine-month~~three-month periods ended ~~September 30,~~March 31, 2018 and April 1, 2017, ~~and October 1, 2016,~~ (iv) Condensed Consolidated Statement of Cash Flows for the ~~nine-month~~three-month periods ended ~~September 30,~~March 31, 2018 and April 1, 2017, ~~and October 1, 2016,~~ (v) Condensed Consolidated Statement of Stockholders' Equity for the ~~nine-month~~three-month periods ended ~~September 30,~~March 31, 2018 and April 1, 2017, ~~and October 1, 2016,~~ and (vi) Notes to Condensed Consolidated Financial Statements.

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KADANT INC.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly ~~authorized as of the 8th day of November 2017.~~authorized.



	KADANT INC.

Date: May 9, 2018	/s/ Michael J. McKenney
	Michael J. McKenney
	~~Senior~~Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)

4239



	NII			Unaflex
(In thousands)	July 5, 2017			August 14, 2017

Net Assets Acquired:
Cash and Cash Equivalents	$	2,219		$	—
Accounts Receivable	6,542			2,079
Inventories	26,181			1,903
Property, Plant, and Equipment	12,981			1,357
Other Assets	1,732			90
Definite-Lived Intangible Assets
Product technology	17,100			2,300
Customer relationships	44,700			8,000
Other	2,540			900
Indefinite-Lived Intangible Assets
Tradenames	8,500			—
Goodwill	84,606			15,277
Total assets acquired	207,101			31,906

Accounts Payable	4,970			358
Customer Deposits	7,396			100
Long-Term Deferred Tax Liability	17,073			—
Other Liabilities	4,788			174
Total liabilities assumed	34,227			632
Net assets acquired	$	172,874		$	31,274

Purchase Price:
Cash	$	4,990		$	—
Cash Paid to Seller Borrowed Under the Revolving Credit Facility	170,018			31,274
Post-closing Adjustment	(2,134		)	—
Total purchase price	$	172,874		$	31,274



	Three Months Ended September 30, 2017									Three Months Ended October 1, 2016
(In thousands, except percentages)	U.S. Pension			Non-U.S. Pension			Other Post-Retirement			U.S. Pension			Non-U.S. Pension			Other Post-Retirement
Components of Net Periodic Benefit Cost:
Service cost	$	171		$	35		$	43		$	181		$	25		$	33
Interest cost	307			28			43			318			26			38
Expected return on plan assets	(331		)	(10		)	(1		)	(322		)	(5		)	(1		)
Recognized net actuarial loss	110			10			22			124			9			12
Amortization of prior service cost	14			2			22			14			2			22
Net Periodic Benefit Cost	$	271		$	65		$	129		$	315		$	57		$	104

The weighted average assumptions used to determine net periodic benefit cost are as follows:

Discount Rate	4.03		%	3.42		%	4.12		%	4.22		%	3.85		%	4.30		%
Expected Long-Term Return on Plan Assets	5.00		%	7.72		%	7.72		%	5.00		%	6.90		%	6.90		%
Rate of Compensation Increase	3.00		%	3.41		%	3.08		%	3.00		%	2.98		%	3.03		%



	Nine Months Ended September 30, 2017									Nine Months Ended October 1, 2016
(In thousands, except percentages)	U.S. Pension			Non-U.S. Pension			Other Post-Retirement			U.S. Pension			Non-U.S. Pension			Other Post-Retirement
Components of Net Periodic Benefit Cost:
Service cost	$	514		$	100		$	131		$	543		$	77		$	99
Interest cost	923			78			127			954			78			114
Expected return on plan assets	(994		)	(27		)	(1		)	(966		)	(19		)	(1		)
Recognized net actuarial loss	331			28			62			372			29			36
Amortization of prior service cost	40			4			66			42			4			67
Settlement loss	—			—			—			—			—			114
Net Periodic Benefit Cost	$	814		$	183		$	385		$	945		$	169		$	429

The weighted average assumptions used to determine net periodic benefit cost are as follows:

Discount Rate	4.03		%	3.43		%	4.12		%	4.22		%	3.88		%	4.28		%
Expected Long-Term Return on Plan Assets	5.00		%	7.72		%	7.72		%	5.00		%	6.90		%	6.90		%
Rate of Compensation Increase	3.00		%	3.42		%	3.07		%	3.00		%	2.98		%	3.02		%



(In thousands)	Interest Rate Swap Agreement			Forward Currency- Exchange Contracts			Total
Unrealized Gain (Loss), Net of Tax, at December 31, 2016	$	40		$	(28	)	$	12
Loss reclassified to earnings (a)	17			24			41
(Loss) gain recognized in AOCI	(15		)	66			51
Unrealized Gain, Net of Tax, at September 30, 2017	$	42		$	62		$	104



	Nine Months Ended											(Non-GAAP) Adjusted Total Increase (Decrease)
(In thousands)	September 30, 2017		October 1, 2016		Total Increase		Currency Translation			Acquisitions		(Non-GAAP) Adjusted Total Increase (Decrease)

Stock-Preparation	$	139,396	$	132,158	$	7,238	$	(675	)	$	13,311	$	(5,398	)
Doctoring, Cleaning, & Filtration	82,921		80,374		2,547		(749		)	—		3,296
Fluid-Handling	73,099		67,904		5,195		(54		)	2,522		2,727
Papermaking Systems	295,416		280,436		14,980		(1,478		)	15,833		625
Wood Processing Systems	61,050		25,437		35,613		358			26,668		8,587
Fiber-based Products	9,427		8,012		1,415		—			—		1,415
	$	365,893	$	313,885	$	52,008	$	(1,120	)	$	42,501	$	10,627