SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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



¨☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



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)~~	~~(Zip Code)~~

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $.01 par value

KAI

New York Stock Exchange

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 (§ 232.405 of this chapter) 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.

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~~As of April 30, 2021, the ~~number of~~registrant had 11,577,780 shares ~~outstanding of each of the issuer's classes~~ of common stock ~~as of the latest practicable date.~~outstanding.



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

PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Statements


	April 3, 2021		January 2, 2021
(In thousands, except share and per share amounts)
Assets
Current Assets:
Cash and cash equivalents	$	65,982	$	65,682
Restricted cash	726		958
Accounts receivable, net of allowances of $2,797 and $2,977	104,378		91,540
Inventories	112,590		106,814
Unbilled revenue	6,204		7,576
Other current assets	19,874		17,250
Total Current Assets	309,754		289,820
Property, Plant, and Equipment, net of accumulated depreciation of $109,426 and $107,832	82,204		84,642
Other Assets	39,669		40,391
Intangible Assets, Net	155,534		160,965
Goodwill	348,504		351,753
Total Assets	$	935,665	$	927,571

Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term obligations (Note 4)	$	1,417	$	1,474
Accounts payable	38,988		32,264
Accrued payroll and employee benefits	25,525		31,168
Customer deposits	37,434		29,433
Advanced billings	9,801		8,513
Other current liabilities	33,429		31,836
Total Current Liabilities	146,594		134,688
Long-Term Obligations (Note 4)	221,067		232,000
Other Long-Term Liabilities	63,696		63,978

Commitments and Contingencies (Note 10)	0		0

Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; NaN issued	0		0
Common stock, $.01 par value, 150,000,000 shares authorized; 14,624,159 shares issued	146		146
Capital in excess of par value	108,064		110,824
Retained earnings	493,067		479,400
Treasury stock at cost, 3,046,379 and 3,081,919 shares	(74,649)		(75,519)
Accumulated other comprehensive items (Note 6)	(24,040)		(19,492)
Total Kadant Stockholders' Equity	502,588		495,359
Noncontrolling interest	1,720		1,546
Total Stockholders' Equity	504,308		496,905
Total Liabilities and Stockholders' Equity	$	935,665	$	927,571

September 30,
2017 December 31,
2016
(In thousands, except share amounts)
Assets
Current Assets:
Cash and cash equivalents $ 90,622
$ 71,487
Restricted cash (Note 1) 766
2,082
Accounts receivable, less allowances of $2,640 and $2,395 (Note 1) 94,664
65,963
Inventories (Note 1) 90,450
54,951
Unbilled contract costs and fees 6,256
3,068
Other current assets 20,911
9,799
Total Current Assets 303,669
207,350

Property, Plant, and Equipment, at Cost 153,878
124,424
Less: accumulated depreciation and amortization 83,505
76,720
70,373
47,704

Other Assets 13,546
11,452
Intangible Assets, Net (Notes 1 and 2) 135,231
52,730
Goodwill (Notes 1 and 2) 264,840
151,455
Total Assets $ 787,659
$ 470,691

Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term obligations (Note 6) $ 707
$ 643
Accounts payable 35,136
23,929
Customer deposits 27,940
21,168
Accrued payroll and employee benefits 25,448
20,508
Billings in excess of costs and fees 10,781
1,271
Other current liabilities 29,068
21,394
Total Current Liabilities 129,080
88,913

Long-Term Deferred Income Taxes 31,070
14,631
Other Long-Term Liabilities 18,531
17,100
Long-Term Obligations (Note 6) 278,091
65,768

Commitments and Contingencies (Note 13)

Stockholders' Equity:

Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued —
—
Common stock, $.01 par value, 150,000,000 shares authorized; 14,624,159 shares issued 146
146
Capital in excess of par value 101,774
101,405
Retained earnings 344,449
321,050
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 )
Total Kadant Stockholders' Equity 329,545
282,629
Noncontrolling interest 1,342
1,650
Total Stockholders' Equity 330,887
284,279
Total Liabilities and Stockholders' Equity $ 787,659
$ 470,691

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


	Three Months Ended
	April 3, 2021		March 28, 2020
(In thousands, except per share amounts)
Revenue (Notes 1 and 9)	$	172,463	$	159,127

Costs and Operating Expenses:
Cost of revenue	96,748		90,804
Selling, general, and administrative expenses	49,431		45,592
Research and development expenses	2,857		3,076
	149,036		139,472
Operating Income	23,427		19,655
Interest Income	65		51
Interest Expense	(1,111)		(2,459)
Other Expense, Net	(24)		(32)
Income Before Provision for Income Taxes	22,357		17,215
Provision for Income Taxes (Note 3)	5,561		4,559
Net Income	16,796		12,656
Net Income Attributable to Noncontrolling Interest	(235)		(125)
Net Income Attributable to Kadant	$	16,561	$	12,531

Earnings per Share Attributable to Kadant (Note 2)
Basic	$	1.43	$	1.10
Diluted	$	1.43	$	1.09

Weighted Average Shares (Note 2)
Basic	11,553		11,432
Diluted	11,612		11,508

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

Revenues (Note 12) $ 152,794
$ 105,519
$ 365,893
$ 313,885

Costs and Operating Expenses:

Cost of revenues 88,166
57,440
199,449
171,569
Selling, general, and administrative expenses 42,535
33,527
116,493
102,095
Research and development expenses 2,635
1,991
7,004
5,640
Other income (Note 3) —
—
—
(317 )
133,336
92,958
322,946
278,987

Operating Income 19,458
12,561
42,947
34,898

Interest Income 94
54
300
175
Interest Expense (1,282 ) (305 ) (2,022 ) (914 )

Income Before Provision for Income Taxes 18,270
12,310
41,225
34,159
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

Net Income 13,410
9,232
30,675
24,662

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

Net Income Attributable to Kadant $ 13,285
$ 9,157
$ 30,332
$ 24,344

Earnings per Share Attributable to Kadant (Note 4):

Basic $ 1.21
$ 0.84
$ 2.76
$ 2.24
Diluted $ 1.17
$ 0.82
$ 2.69
$ 2.19

Weighted Average Shares (Note 4):

Basic 11,004
10,901
10,986
10,854
Diluted 11,344
11,189
11,282
11,120

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


	Three Months Ended
	April 3, 2021		March 28, 2020
(In thousands)
Net Income	$	16,796	$	12,656
Other Comprehensive Items:
Foreign currency translation adjustment	(4,750)		(12,574)
Post-retirement liability adjustments, net (net of tax of $10 and $20)	28		50
Effect of post-retirement plan settlement	0		(119)
Deferred gain (loss) on cash flow hedges (net of tax of $19 and $(119))	113		(302)
Other comprehensive items	(4,609)		(12,945)
Comprehensive Income (Loss)	12,187		(289)
Comprehensive Income Attributable to Noncontrolling Interest	(174)		(114)
Comprehensive Income (Loss) Attributable to Kadant	$	12,013	$	(403)

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

Net Income $ 13,410
$ 9,232
$ 30,675
$ 24,662

Other Comprehensive Items:

Foreign currency translation adjustment 7,740
(979 ) 21,427
(243 )
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
Other Comprehensive Items 7,787
(713 ) 21,671
(288 )
Comprehensive Income 21,197
8,519
52,346
24,374
Comprehensive Income Attributable to Noncontrolling Interest (193 ) (92 ) (574 ) (358 )
Comprehensive Income Attributable to Kadant $ 21,004
$ 8,427
$ 51,772
$ 24,016


	Three Months Ended
	April 3, 2021		March 28, 2020
(In thousands)
Operating Activities
Net income attributable to Kadant	$	16,561	$	12,531
Net income attributable to noncontrolling interest	235		125

Net income	16,796		12,656
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	7,686		7,598
Stock-based compensation expense	1,499		1,639
(Benefit) provision for losses on accounts receivable	(129)		103
Loss (gain) on sale of property, plant, and equipment	48		(10)
Other items, net	(430)		(877)
Changes in current assets and liabilities, net of effects of an acquisition:
Accounts receivable	(13,955)		1,929
Unbilled revenue	1,231		844
Inventories	(6,612)		(3,735)
Other current assets	(2,690)		(1,107)
Accounts payable	8,031		(3,440)
Other current liabilities	7,617		(9,431)


Net cash provided by operating activities	19,092		6,169

Investing Activities
Acquisition	(125)		0
Purchases of property, plant, and equipment	(2,259)		(2,686)
Proceeds from sale of property, plant, and equipment	32		14

Net cash used in investing activities	(2,352)		(2,672)

Financing Activities
Repayment of long-term obligations	(19,563)		(2,969)
Proceeds from issuance of long-term obligations	10,139		0
Tax withholding payments related to stock-based compensation	(3,388)		(2,318)
Dividends paid	(2,770)		(2,628)

Proceeds from issuance of Company common stock	0		913



Net cash used in financing activities	(15,582)		(7,002)

Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash	(1,090)		(2,693)

Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash	68		(6,198)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period	66,640		68,273
Cash, Cash Equivalents, and Restricted Cash at End of Period	$	66,708	$	62,075

Nine Months Ended
September 30,
2017 October 1,
2016
(In thousands)

Operating Activities:
Net income attributable to Kadant $ 30,332
$ 24,344
Net income attributable to noncontrolling interest 343
318
Income from discontinued operation —
(3 )
Net income 30,675
24,659
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 13,056
10,934
Stock-based compensation expense 4,283
3,865
Provision for losses on accounts receivable 238
420
Loss (gain) on the sale of property, plant, and equipment 37
(384 )
Other items, net (738 ) 256
Contributions to U.S. pension plan (810 ) (810 )
Changes in current assets and liabilities, net of effects of acquisitions:

Accounts receivable (16,225 ) 3,731
Unbilled contract costs and fees (2,582 ) 1,713
Inventories (3,504 ) 2,051
Other current assets (2,517 ) 620
Accounts payable 2,049
(5,599 )
Other current liabilities 8,366
(6,717 )
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

Investing Activities:

Acquisitions, net of cash acquired (Note 2) (204,228 ) (56,617 )
Purchases of property, plant, and equipment (8,718 ) (3,579 )
Proceeds from sale of property, plant, and equipment 111
409
Net cash used in investing activities (212,835 ) (59,787 )

Financing Activities:

Proceeds from issuance of debt (Note 6) 222,019
48,046
Repayment of debt (20,272 ) (15,429 )
Dividends paid (6,699 ) (5,964 )
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
Change in restricted cash 1,523
(793 )
Dividend paid to noncontrolling interest (882 ) —
Other financing activities (288 ) —
Net cash provided by financing activities 191,938
23,950

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

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

under the heading Supplemental Cash Flow Information for ~~supplemental cash flow information.~~further details.


	Three Months Ended April 3, 2021
(In thousands, except share and per share amounts)	Common Stock			Capital in Excess of Par Value		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Items		Noncontrolling Interest		Total Stockholders' Equity
	Shares	Amount						Shares	Amount
Balance at January 2, 2021	14,624,159	$	146	$	110,824	$	479,400	3,081,919	$	(75,519)	$	(19,492)	$	1,546	$	496,905
Net income	—	—		—		16,561		—	—		—		235		16,796
Dividend declared – Common Stock, $0.25 per share	—	—		—		(2,894)		—	—		—		—		(2,894)
Activity under stock plans	—	—		(2,760)		—		(35,540)	870		—		—		(1,890)
Other comprehensive items	—	—		—		—		—	—		(4,548)		(61)		(4,609)
Balance at April 3, 2021	14,624,159	$	146	$	108,064	$	493,067	3,046,379	$	(74,649)	$	(24,040)	$	1,720	$	504,308

(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
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

  Net income —
—
—
24,344
—
—
—
318
24,662

  Dividends declared —
—
—
(6,207 ) —
—
—
—
(6,207 )

  Activity under stock plans —
—
(343 ) —
(141,373 ) 3,464
—
—
3,121

  Other comprehensive items —
—
—
—
—
—
(328 ) 40
(288 )

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 December 31, 2016 14,624,159
$ 146
$ 101,405
$ 321,050
3,686,532
$ (90,335 ) $ (49,637 ) $ 1,650
$ 284,279

  Net income —
—
—
30,332
—
—
—
343
30,675

  Dividends declared —
—
—
(6,933 ) —
—
—
—
(6,933 )

Dividend paid to noncontrolling interest —
—
—
—
—
—
—
(882 ) (882 )

  Activity under stock plans —
—
369
—
(69,694 ) 1,708
—
—
2,077

  Other comprehensive items —
—
—
—
—
—
21,440
231
21,671

Balance at September 30, 2017 14,624,159
$ 146
$ 101,774
$ 344,449
3,616,838
$ (88,627 ) $ (28,197 ) $ 1,342
$ 330,887


	Three Months Ended March 28, 2020
(In thousands, except share and per share amounts)	Common Stock			Capital in Excess of Par Value		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Items		Noncontrolling Interest		Total Stockholders' Equity
	Shares	Amount						Shares	Amount
Balance at December 28, 2019	14,624,159	$	146	$	106,698	$	435,249	3,214,888	$	(78,778)	$	(37,620)	$	1,384	$	427,079
Net income	—	—		—		12,531		—	—		—		125		12,656
Dividend declared – Common Stock, $0.24 per share	—	—		—		(2,753)		—	—		—		—		(2,753)
Activity under stock plans	—	—		(1,241)		—		(60,244)	1,476		—		—		235
Other comprehensive items	—	—		—		—		—	—		(12,934)		(11)		(12,945)
Balance at March 28, 2020	14,624,159	$	146	$	105,457	$	445,027	3,154,644	$	(77,302)	$	(50,554)	$	1,498	$	424,272

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. (together with its subsidiaries, the Company) is a global supplier of high-value, critical components and ~~its subsidiaries' 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 papermaking, paper recycling, recycling and waste management, and otherengineered systems used in process industries worldwide. ~~The Company's principal~~Its products, technologies, and services play an integral role in ~~this segment include custom-engineered stock-preparation systems~~enhancing process efficiency, optimizing energy utilization, and ~~equipment for the preparation of wastepaper for conversion into recycled paper and balers and related equipment used~~maximizing productivity in the processing of recyclable and waste materials; fluid-handling systems and equipment used in industrial piping systems 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 processresource-intensive industries.

Through its Wood Processing Systems segment, the Company develops, manufactures, and markets debarkers, stranders, and timber harvesting equipment used in the production of lumber and oriented strand board (OSB), an engineered wood panel product used primarily in home construction. 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 granules derived from papermaking by-products primarily for use as agricultural carriers and for home lawn and garden 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 and~~April 3, 2021, its results of operations, ~~and~~ comprehensive income ~~for the three- and nine-month periods ended September 30, 2017 and October 1, 2016, and its~~(loss), cash flows, and stockholders' equity for the ~~nine-month~~three-month periods ended ~~September 30, 2017~~April 3, 2021 and ~~October 1, 2016.~~March 28, 2020. 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~~January 2, 2021 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.~~January 2, 2021. The condensed consolidated financial statements and related notes are presented as permitted by the rules and regulations of 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,~~January 2, 2021, filed with the SEC.

~~Critical Accounting Policies~~

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 and Summary of Significant Accounting Policies (continued)~~

Use of Estimates and Critical Accounting Policies

The preparation of financial statements in conformity with ~~accounting principles~~U.S. generally accepted ~~in the United States of America~~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~~revenue and expenses during the reporting period.

Although the Company makes every effort to ensure the accuracy of the estimates and assumptions used in the preparation of its condensed consolidated financial statements or in the application of accounting policies, if business conditions were different, or if the Company were to use different estimates and assumptions, it is possible that materially different amounts could be reported in the Company's condensed consolidated financial statements.

Note 1 to the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2021 describes the significant accounting estimates and policies used in preparation of the consolidated financial statements. There have been no material changes in the Company’s significant accounting policies during the three months ended April 3, 2021.

Supplemental Cash Flow Information


	Three Months Ended
(In thousands)	April 3, 2021		March 28, 2020




Cash Paid for Interest	$	892	$	2,212
Cash Paid for Income Taxes, Net of Refunds	$	5,344	$	4,698

Non-Cash Investing Activities:
Non-cash additions to property, plant, and equipment	$	169	$	128

Non-Cash Financing Activities:
Issuance of Company common stock upon vesting of restricted stock units	$	3,203	$	3,670
Dividends declared but unpaid	$	2,894	$	2,753

Nine Months Ended
(In thousands) September 30,
2017 October 1,
2016
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
Non-Cash Financing Activities:

Issuance of Company common stock $ 3,018
$ 3,260
Dividends declared but unpaid $ 2,312
$ 2,074

Table of Contents

KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

~~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 certain banker's acceptance drafts issued to vendors and 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 over the next twelve months.

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


(In thousands)	April 3, 2021		March 28, 2020		January 2, 2021		December 28, 2019
Cash and cash equivalents	$	65,982	$	60,012	$	65,682	$	66,786
Restricted cash	726		2,063		958		1,487
Total Cash, Cash Equivalents, and Restricted Cash	$	66,708	$	62,075	$	66,640	$	68,273

The components of inventories are as follows:


	April 3, 2021		January 2, 2021
(In thousands)
Raw Materials	$	45,697	$	46,413
Work in Process	23,789		17,692
Finished Goods	43,104		42,709
	$	112,590	$	106,814

Intangible Assets, Net

Acquired intangible assets by major asset class are as follows:


(In thousands)	Gross		Accumulated Amortization		Currency Translation		Net
April 3, 2021
Definite-Lived
Customer relationships	$	173,728	$	(68,910)	$	(1,760)	$	103,058
Product technology	56,111		(32,557)		(1,200)		22,354
Tradenames	6,027		(3,054)		(325)		2,648
Other	18,248		(14,569)		(541)		3,138
	254,114		(119,090)		(3,826)		131,198
Indefinite-Lived
Tradenames	24,100		—		236		24,336
Acquired Intangible Assets	$	278,214	$	(119,090)	$	(3,590)	$	155,534

January 2, 2021
Definite-Lived
Customer relationships	$	173,728	$	(65,488)	$	(1,316)	$	106,924
Product technology	56,111		(31,655)		(1,005)		23,451
Tradenames	6,027		(2,946)		(282)		2,799
Other	18,248		(14,369)		(515)		3,364
	254,114		(114,458)		(3,118)		136,538
Indefinite-Lived
Tradenames	24,100		—		327		24,427
Acquired Intangible Assets	$	278,214	$	(114,458)	$	(2,791)	$	160,965

Intangible assets are recorded at fair value at the ~~end~~date of ~~2018.~~acquisition. Subsequent impairment charges are reflected as a reduction in the gross balance, as applicable. Definite-lived intangible assets are stated net of accumulated amortization and currency translation in the accompanying condensed consolidated balance sheet. The Company amortizes definite-lived intangible assets over lives that have been determined based on the anticipated cash flow benefits of the intangible asset.

Table of Contents

KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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


(In thousands)	Flow Control		Industrial Processing		Material Handling		Total
Balance at January 2, 2021
Gross balance	$	101,437	$	215,881	$	119,944	$	437,262
Accumulated impairment losses	0		(85,509)		0		(85,509)
Net balance	101,437		130,372		119,944		351,753
2021 Adjustment
Currency translation	(1,273)		(466)		(1,510)		(3,249)
Total 2021 adjustment	(1,273)		(466)		(1,510)		(3,249)
Balance at April 3, 2021
Gross balance	100,164		215,415		118,434		434,013
Accumulated impairment losses	0		(85,509)		0		(85,509)
Net balance	$	100,164	$	129,906	$	118,434	$	348,504

Warranty Obligations

The Company's contracts covering the sale of its products include warranty provisions that provide assurance to its customers that the products will comply with agreed-upon specifications during a defined period of time. The Company provides for the estimated cost of product warranties at the time of sale based on historical occurrence rates and repair costs, as well as knowledge of any specific warranty problems that indicate projected warranty costs may vary from historical patterns. The Company negotiates the terms regarding warranty coverage and length of warranty depending on the products and applications.

The Company's liability for warranties is included in other current liabilities in the accompanying condensed consolidated balance sheet. The changes in the carrying amount of product warranty obligations are as follows:


	Three Months Ended
(In thousands)	April 3, 2021		March 28, 2020
Balance at Beginning of Year	$	7,064	$	6,467
Provision charged to expense	1,664		1,270
Usage	(1,361)		(1,365)

Currency translation	(133)		(162)
Balance at End of Period	$	7,234	$	6,210

Most of the Company’s revenue relates to products and services that require minimal customization and is recognized at a point in time for each performance obligation under the contract when the customer obtains control of the goods or service. The remaining portion of the Company’s revenue is recognized 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. Most of the contracts recognized on an over time basis are for large capital projects. These projects are highly customized for the customer and, as a result, would include a significant cost to rework in the event of cancellation.

The following table presents revenue by revenue recognition method:


	Three Months Ended
	April 3,		March 28,
(In thousands)	2021		2020
Point in Time	$	154,417	$	136,092
Over Time	18,046		23,035
	$	172,463	$	159,127

Table of Contents

KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company disaggregates its revenue from contracts with customers by reportable operating segment, product type and geography as this best depicts how its revenue is affected by economic factors.

The following table presents the disaggregation of revenue by product type and geography:


	Three Months Ended
	April 3,		March 28,
(In thousands)	2021		2020
Revenue by Product Type:
Parts and Consumables	$	118,107	$	105,098
Capital	54,356		54,029
	$	172,463	$	159,127
Revenue by Geography (based on customer location):
North America	$	95,092	$	93,823
Europe	44,641		36,014
Asia	21,813		15,908
Rest of World	10,917		13,382
	$	172,463	$	159,127

See Note 9, Business Segment Information, for information on the disaggregation of revenue by reportable operating segment.

The following table presents contract balances from contracts with customers:


	April 3, 2021		January 2, 2021
(In thousands)
Accounts Receivable	$	104,378	$	91,540
Contract Assets	$	6,204	$	7,576
Contract Liabilities	$	48,286	$	39,269

Contract assets represent unbilled revenue associated with revenue recognized on contracts accounted for on an over time basis, which will be billed in future periods based on the contract terms. Contract liabilities consist of customer deposits, advanced billings, and deferred revenue. Deferred revenue is 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 advance payments on contracts accounted for at a point in time. These advance payments will be recognized as revenue when the Company's performance obligations have been satisfied, which typically occurs when the product has shipped and control of the asset has transferred to the customer.

The Company recognized revenue of $17,140,000 in the first three months of 2021 and $19,708,000 in the first three months of 2020 that was included in the contract liabilities balance at the beginning of 2021 and 2020. The majority of the Company's contracts for capital equipment have an original expected duration of one year or less. Certain capital contracts require long lead times and could take up to 24 months to complete. For contracts with an original expected duration of over one year, the aggregate amount of the transaction price allocated to the remaining unsatisfied or partially unsatisfied performance obligations as of April 3, 2021 was $16,990,000. The Company will recognize revenue for these performance obligations as they are satisfied, approximately 48% of which is expected to occur within the next twelve months and the remaining 52% within the following twelve months.

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 obligations of the issuing bank and mature within six months of the origination date. The Company's Chinese subsidiaries may sell the drafts at a discount to a third-party financial institution or transfer the drafts to vendors in settlement of current accounts payable prior to the scheduled maturity date. These drafts, which totaled ~~$16,687,000~~$10,347,000 at April 3, 2021 and ~~$7,852,000~~$9,445,000 at ~~September 30, 2017 and December 31, 2016, respectively,~~January 2, 2021, 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.

~~The components of inventories are as follows:~~

September 30,
2017 December 31,
2016
(In thousands)
Raw Materials and Supplies $ 40,969
$ 21,086
Work in Process 20,158
12,293
Finished Goods 29,323
21,572
Total Inventories $ 90,450
$ 54,951

Table of Contents

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 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
September 30, 2017
Customer relationships $ 111,801
$ (821 ) $ (26,404 ) $ 84,576
Intellectual property 46,501
(817 ) (18,846 ) 26,838
Tradenames 21,827
(39 ) (1,382 ) 20,406
Other 13,754
(62 ) (10,281 ) 3,411
$ 193,883
$ (1,739 ) $ (56,913 ) $ 135,231
December 31, 2016

Customer relationships $ 59,101
$ (5,202 ) $ (21,805 ) $ 32,094
Intellectual property 27,101
(2,052 ) (17,105 ) 7,944
Tradenames 12,547
(591 ) (1,065 ) 10,891
Other 11,094
(228 ) (9,065 ) 1,801
$ 109,843
$ (8,073 ) $ (49,040 ) $ 52,730

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
Balance at December 31, 2016
Gross balance $ 219,699
$ 17,265
$ 236,964
Accumulated impairment losses (85,509 ) —
(85,509 )
Net balance 134,190
17,265
151,455
2017 Adjustments
   Acquisitions (Note 2) 15,277
84,606
99,883
   Currency translation 9,937
3,565
13,502
   Total 2017 adjustments 25,214
88,171
113,385
Balance at September 30, 2017

Gross balance 244,913
105,436
350,349
Accumulated impairment losses (85,509 ) —
(85,509 )
Net balance $ 159,404
$ 105,436
$ 264,840

~~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~~

Recently Adopted Accounting Pronouncements

Income Taxes (Topic ~~606)~~740), ~~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).~~ Simplifying the Accounting for Income Taxes. In ~~May 2014,~~December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. ~~2014-09,~~2019-12, which ~~requires an entity~~simplifies the accounting for income taxes by removing certain exceptions to ~~recognize~~ the ~~amount~~general principles in Topic 740 and by clarifying and amending existing guidance, including the recognition of ~~revenue to which it expects to be entitled~~franchise tax, the treatment of a step up in the tax basis of goodwill, and the timing for recognition of enacted changes in tax laws or rates in the ~~transfer of promised goods or services to customers. The~~interim period annual effective tax rate computation. This new guidance ~~provides a five-step analysis~~is effective in fiscal 2021, and the transition requirements are primarily prospective. The Company adopted this ASU prospectively at the beginning of ~~transactions to determine when~~fiscal 2021 and ~~how revenue is recognized. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective.~~ its adoption did not have an impact on the condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In March ~~2016,~~2020, the FASB issued ASU No. ~~2016-08,~~2020-04, which ~~further clarifies~~provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of reference rates, such as the London Interbank Offered Rate (LIBOR), if certain criteria are met. Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date. The guidance onin this ASU is applicable to 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)~~

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 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 the Company beginning in fiscal 2018. Early adoption is permitted in fiscal 2017. 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 ASUs using the modified retrospective transition approach. Under this approach, this guidance would apply to all new contracts initiated in fiscal 2018. ForCompany's existing contracts and hedging relationships that ~~have remaining obligations as of the beginning of fiscal 2018, any difference between the recognition criteria in these ASUs~~reference LIBOR and ~~the Company’s current revenue recognition practices would~~may be recognized using a cumulative effect adjustment to the opening balance of retained earnings. The Company is also in the process of developing and implementing appropriate changes to its business processes, systems and controls to support the recognition criteria and disclosure requirements of these ASUs.

~~Inventory (Topic 330), Simplifying the Measurement of Inventory~~. In July 2015, the FASB issued ASU No. 2015-11, which requires that an entity measure inventory within the scope of this ASU at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course 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. The Company adopted ~~this ASU at the beginning of fiscal 2017. Adoption of this ASU did not have a material effect on the Company's condensed consolidated financial statements.~~

~~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, 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 adoption is permitted. As part of the implementation of this new standard, the Company is in the process of reviewing current accounting policies and assessing the practical expedients allowed under this new guidance. The Company expects that most of its operating 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 the adoption of this ASU will have on its condensed consolidated financial statements.

~~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 adoption is permitted beginning in fiscal 2019.prospectively through December 31, 2022. 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~~. 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.

~~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.

~~Table of Contents~~

~~KADANT INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~2. Acquisitions (continued)~~

The following table summarizes the estimated fair values of assets acquired and liabilities assumed and the purchase price for NII and Unaflex. The final purchase accounting and purchase price allocation remain subject to change as the Company continues to refine its preliminary valuation of certain acquired assets and the valuation of acquired intangibles.

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

For the NII acquisition, the weighted-average amortization period 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, 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 technology 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 associated with the April 2016 acquisition of RT Holding GmbH, the parent corporation of a group of companies known as the PAALGROUP (PAAL).

~~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~~were calculated as follows:


	Three Months Ended
	April 3, 2021		March 28, 2020
(In thousands, except per share amounts)

Net Income Attributable to Kadant	$	16,561	$	12,531

Basic Weighted Average Shares	11,553		11,432
Effect of Stock Options, Restricted Stock Units and Employee Stock Purchase Plan Shares	59		76
Diluted Weighted Average Shares	11,612		11,508

Basic Earnings per Share	$	1.43	$	1.10

Diluted Earnings per Share	$	1.43	$	1.09

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

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

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

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

~~Unvested~~The effect of outstanding and unvested restricted stock units (RSUs) ~~equivalent to approximately 4,000 and 13,000 shares~~ of the Company's common stock ~~in the third quarter of 2017 and 2016, respectively, and 21,000 and 62,000~~totaling 44,000 shares ~~of common stock~~ in the first ~~nine months~~quarter of ~~2017~~2021 and ~~2016, respectively, were~~43,000 shares in the first quarter of 2020 was not included in the computation of diluted EPS for the respective periods as the effect would have been antidilutive or, for unvested performance-based RSUs, the performance conditions had not been met as of the end of the reporting periods.

5.3. Provision for Income Taxes

The provision for income taxes was ~~$10,550,000 and $9,500,000~~$5,561,000 in the first ~~nine~~three months of ~~2017~~2021 and ~~2016, respectively,~~$4,559,000 in the first three months of 2020. The effective tax rate of 25% in the first three months of 2021 was higher than the Company's statutory rate of 21% primarily due to nondeductible expenses, the distribution of the Company's worldwide earnings, state taxes, and ~~represented 26% and 28% of pre-tax income.~~tax expense associated with the Global Intangible Low-Taxed Income (GILTI) provisions. 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 effective tax rate of 26% in the first ~~nine~~three months of ~~2017~~2020 was ~~lower~~higher than the Company's statutory ~~tax~~ rate of 21% primarily due to nondeductible expenses, state taxes, the distribution of the ~~Company's~~Company’s worldwide earnings, and ~~the net excess income~~ tax ~~benefits from stock-based compensation arrangements,~~expense associated with GILTI. This incremental tax expense was offset in part by ~~an increase in~~the reversal of tax ~~related to non-deductible expenses and unrecognized~~reserves associated with uncertain 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. Long-Term Obligations~~

~~Long-term obligations are as follows:~~positions.

September 30,
2017 December 31,
2016
(In thousands)
Revolving Credit Facility, due 2022 $ 273,577
$ 61,494
Obligations Under Capital Lease, due 2017 to 2022 4,639
4,309
Other Borrowings, due 2017 to 2023 582
608
Total 278,798
66,411
Less: Current Maturities of Long-Term Obligations (707 ) (643 )
Long-Term Obligations $ 278,091
$ 65,768

Table of Contents

KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

Long-term obligations are as follows:


	April 3, 2021		January 2, 2021
(In thousands)
Revolving Credit Facility, due 2023	$	207,257	$	217,963
Senior Promissory Notes, due 2023 to 2028	10,000		10,000
Finance Leases, due 2021 to 2025	1,570		1,631
Other Borrowings, due 2021 to 2023	3,657		3,880
Total	222,484		233,474
Less: Current Maturities of Long-Term Obligations	(1,417)		(1,474)
Long-Term Obligations	$	221,067	$	232,000

See Note 8, Fair Value Measurements and Fair Value of Financial Instruments, for the fair value information related to the Company's long-term obligations.

Revolving Credit Facility

~~On March 1, 2017, the~~The Company entered into an ~~Amended and Restated Credit Agreement that became effective on March 2, 2017, which is a five-year~~ unsecured multi-currency revolving credit facility, indated as of March 1, 2017 (as amended and restated to date, the ~~aggregate principal amount of up~~Credit Agreement). Pursuant to ~~$200,000,000. On May 24, 2017,~~the Credit Agreement, the Company ~~entered into~~has 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~~borrowing capacity of $400,000,000, with 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.$150,000,000, with a maturity date of December 14, 2023. Interest on ~~any loans~~borrowings outstanding ~~under the 2017 Credit Agreement~~ accrues and ~~generally~~ is payable ~~quarterly~~ in arrears calculated at one of the following rates selected by the Company: (i) the Base Rate, plus an applicable margin of 0% to 1.25%, or (ii) LIBOR (with a 0 percent floor), as defined, plus an applicable margin of 1% to 2.25%. The Base Rate is calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate as published by Citizens Bank, N.A. (Citizens Bank) and (c) ~~the~~ thirty-day ~~London Inter-Bank Offered Rate (LIBOR) rate,~~U.S. dollar LIBOR (USD LIBOR), 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 unrestricted cash up to $30,000,000 and certain ~~cash, as defined,~~debt obligations, 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 tounder such ~~matters as the Employment Retirement Income Security Act (ERISA), unsatisfied judgments, the failure to pay certain indebtedness, and a change of control default.~~financing arrangements. 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~~maintain a maximum consolidated leverage ratio of ~~3.5~~3.75 to 1,1.00, or, if the Company elects, for the quarter during which a ~~minimum consolidated interest coverage ratio of 3~~material acquisition occurs and for the three fiscal quarters thereafter, 4.00 to 1,1.00, and ~~restrictions~~limitations 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, 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.~~Company. In addition, one of the ~~Company's~~Company’s foreign subsidiaries entered into a ~~Guarantee Agreement~~separate guarantee agreement limited to certain obligations of two foreign subsidiary ~~borrowers pursuant to a Guarantee Agreement dated as~~borrowers.

As of ~~March 1, 2017.~~

InApril 3, 2021, the ~~first nine months of 2017, the Company borrowed an aggregate $222,019,000~~outstanding balance under the ~~2017~~ Credit Agreement ~~including $70,691,000 of Canadian dollar-denominated and $61,769,000~~was $207,257,000, which included $48,257,000 of euro-denominated borrowings. As of September 30, 2017, the outstanding balance under the 2017 Credit Agreement was $273,577,000, including $90,410,000 of euro-denominated and $66,608,000 of Canadian dollar-denominated borrowings. As of September 30, 2017,April 3, 2021, the Company had ~~$26,421,000~~$192,819,000 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.

See Note 7, Derivatives, under the heading Interest Rate Swap Agreement, for information relating to the swap agreement used to hedge the Company’s exposure to movements in the three-month USD LIBOR on its U.S. dollar-denominated debt borrowed under the Credit Agreement.

The weighted average interest rate for the ~~borrowings~~outstanding balance under the ~~2017~~ Credit Agreement was ~~1.88%~~1.56% as of ~~September 30, 2017.~~April 3, 2021.

~~Debt Issuance Costs~~Senior Promissory Notes

~~During the first nine months of 2017,~~In 2018, the Company ~~incurred~~entered into an ~~additional $1,257,000~~uncommitted, unsecured Multi-Currency Note Purchase and Private Shelf Agreement (Note Purchase Agreement). Simultaneous with the execution of ~~debt issuance costs related~~the Note Purchase Agreement, the Company issued senior promissory notes (Initial Notes) in an aggregate principal amount of $10,000,000, with a per annum interest rate of 4.90% payable semiannually, and a maturity date of December 14, 2028. The Company is required to prepay a portion of the ~~2017 Credit~~principal of the Initial Notes beginning on December 14, 2023 and each year thereafter, and may optionally prepay the principal on the Initial Notes, together with any prepayment premium, at any time (in a minimum amount of $1,000,000, or the foreign currency equivalent thereof, if applicable) in accordance with the Note Purchase Agreement. ~~Unamortized debt issuance costs were $1,362,000 as~~The obligations 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)~~

may be accelerated upon an event of default as defined in the Note Purchase Agreement, which includes customary events of default under such financing arrangements.

~~Obligations Under Capital Lease~~

In ~~connection~~accordance with the ~~acquisition of PAAL,~~Note Purchase Agreement, the Company ~~assumed~~may also issue additional senior promissory notes (together with the Initial Notes, the Senior Promissory Notes) up to an additional $115,000,000 until the earlier of December 14, 2021 or the thirtieth day after written notice to terminate the issuance and sale of additional notes pursuant to the Note Purchase Agreement. The Senior Promissory Notes are pari passu with the Company’s indebtedness under the Credit Agreement, and any other senior debt of the Company, subject to certain specified exceptions, and participate in a sharing agreement with respect to the obligations of the Company and its subsidiaries under the Credit Agreement. The Senior Promissory Notes are guaranteed by certain of the Company’s domestic subsidiaries.

As of April 3, 2021, the Company was in compliance with the covenants related to its debt obligations.

The Company's finance leases primarily relate to contracts for vehicles.

Other borrowings 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 secured loan receivable, which is included in other assets in the accompanying condensed consolidated balance sheet, was ~~$426,000~~$1,266,000 at ~~September 30, 2017.~~April 3, 2021. The lease arrangement provides for a fixed price purchase option, net of the projected loan receivable, of ~~$1,644,000~~$1,566,000 at the end of the lease term in August 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~~April 3, 2021, $3,615,000 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% and have an average remaining term of 2.6 years. As of September 30, 2017, $107,000 was outstanding under these capital lease obligations.

7.5. 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~~$1,499,000 in the first ~~nine months~~quarter of ~~2017~~2021 and ~~2016, respectively,~~$1,639,000 in the first quarter of 2020 within ~~SG&A~~selling, general, and administrative (SG&A) expenses in the accompanying condensed consolidated statement of income. The Company recognizes compensation expense for all stock-based awards granted to employees and directors based on the grant date estimate of fair value for those awards. The fair value of RSUs is based on the grant date ~~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~~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~~$11,500,000 at ~~September 30, 2017,~~April 3, 2021 and will be recognized over a weighted average period of ~~1.7~~2.1 years.

Performance-based RSUs

~~8. Employee Benefit Plans~~

~~The~~On March 9, 2021, the Company ~~sponsors a noncontributory defined benefit pension plan for eligible employees at one~~granted performance-based RSUs to certain of its ~~U.S. divisions and its corporate office. Certain~~officers, which represented, in aggregate, the right to receive 22,613 shares (the target RSU amount), with an aggregate grant date fair value of $3,962,000. 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~~2021 fiscal year, which is a specified target for adjusted earnings before interest, taxes, depreciation, and ~~one~~amortization (adjusted EBITDA) generated from operations for the 2021 fiscal year. The RSUs are adjusted by comparing the actual adjusted EBITDA for the performance period to the target adjusted EBITDA. Actual adjusted EBITDA between 50% and 100% of the ~~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 for current service~~straight-line linear scale between 100% 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~~150% of the ~~Company’s pension plans are based on years~~RSU amount. Actual adjusted EBITDA in excess of ~~service and employee compensation.~~

~~The Company also provides other post-retirement benefits under plans~~115% results in an adjustment capped at 150% of the United States and at one 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.

RSU amount. If actual

Table of Contents

KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

~~8. Employee Benefit Plans (continued)~~

~~The components~~adjusted EBITDA is below 50% of ~~net periodic benefit cost~~the target adjusted EBITDA 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 %

2021 fiscal year, these performance-based RSUs will be forfeited. The Company ~~made cash contributions~~recognizes compensation expense based on the probable number of ~~$810,000~~performance-based RSUs expected to vest. Following the adjustment, the performance-based RSUs will be subject to additional time-based vesting, and will vest in three equal annual installments on March 10 of 2022, 2023, and 2024, provided that the officer is employed by the Company on the applicable vesting dates.

On March 9, 2021, the Company also granted time-based RSUs representing 21,559 shares to its ~~U.S. noncontributory defined benefit pension plan~~officers and employees with an aggregate grant date fair value of $3,777,000. These time-based RSUs generally vest in three equal annual installments on March 10 of 2022, 2023, and 2024, provided that a recipient remains employed by the ~~first nine months of 2017 and expects to make cash contributions of $270,000 over~~Company on 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.~~applicable vesting dates.

~~Table of Contents~~

~~KADANT INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

9.6. Accumulated Other Comprehensive Items

Comprehensive income (loss) 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.

Changes in each component of accumulated other comprehensive items (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		Post-Retirement Benefit Liability Adjustments		Deferred Loss on Cash Flow Hedges		Total
Balance at January 2, 2021	$	(17,894)	$	(770)	$	(828)	$	(19,492)
Other comprehensive items before reclassifications	(4,689)		18		30		(4,641)
Reclassifications from AOCI	0		10		83		93
Net current period other comprehensive items	(4,689)		28		113		(4,548)
Balance at April 3, 2021	$	(22,583)	$	(742)	$	(715)	$	(24,040)

Amounts reclassified from AOCI are as follows:


	Three Months Ended
(In thousands)	April 3, 2021		March 28, 2020		Statement of Income Line Item
Post-retirement Benefit Plans
Recognized net actuarial loss	$	(11)	$	(15)	Other expense, net
Amortization of prior service cost	(3)		(2)		Other expense, net
Total expense before income taxes	(14)		(17)
Income tax benefit	4		124		Provision for income taxes
	(10)		107
Cash Flow Hedges (a)
Interest rate swap agreements	(109)		(34)		Interest expense
Forward currency-exchange contracts	0		(23)		Cost of revenue
Total expense before income taxes	(109)		(57)
Income tax benefit	26		14		Provision for income taxes
	(83)		(43)
Total Reclassifications	$	(93)	$	64

(a)See Note 7, Derivatives, for additional information.

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 )

Table of Contents

KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

~~10.~~7. 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 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 in 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

~~On January 16, 2015,~~In 2018, the Company entered into aan interest rate swap agreement ~~(2015~~(2018 Swap Agreement) with Citizens Bank to hedge its exposure to movements in ~~the three-month~~USD LIBOR ~~rate~~ on ~~future outstanding debt and has designated the 2015~~its U.S. dollar-denominated debt. The 2018 Swap Agreement ashas a ~~cash flow hedge. The 2015 Swap Agreement~~$15,000,000 notional value and expires on ~~March 27, 2020 and has a $10,000,000 notional value. Under the 2015 Swap Agreement, on~~June 30, 2023. On a quarterly basis, the Company receives three-month USD LIBOR, which is subject to a ~~three-month LIBOR rate~~zero percent floor, and pays a fixed rate of interest of ~~1.50%~~3.15% plus an applicable ~~margin.~~ margin as defined in the Credit Agreement.

The Company designated its 2018 Swap Agreement as a cash flow hedge and structured it to be 100% effective. Unrealized gains and losses related to the fair value of the ~~2015~~2018 Swap Agreement ~~is included in other assets, with an offset~~are recorded to AOCI, net of ~~tax, in~~tax. In the ~~accompanying condensed consolidated balance sheet.~~

~~The~~event of early termination, the Company ~~has structured~~will receive from or pay to the ~~2015~~counterparty the fair value of the 2018 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.~~unrealized gain or loss outstanding will be recognized in earnings.

The counterparty to the ~~2015~~2018 Swap Agreement could demand an early termination of ~~the 2015 Swap Agreement~~that 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 ~~the Company is~~if it 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, 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)See Note 4, 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, the Company was in compliance with these covenants. The unrealized gain associated with the 2015 Swap Agreement was $65,000 as of September 30, 2017, which represents the estimated amount that the Company would receive from the counterparty in the event of an early termination.Long-Term Obligations, for further details.

Forward Currency-Exchange Contracts

The Company uses forward currency-exchange contracts ~~primarily~~that generally have maturities of twelve months or less 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 12 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~~hedges and unrecognized gains and ~~in other current liabilities for unrecognized~~ losses ~~with an offset in~~are recorded to AOCI, net of tax. ~~For~~Deferred gains and losses are recognized in the statement of income in the period in which the underlying transaction occurs. The fair values of forward currency-exchange contracts that are designated as fair value hedges ~~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~~and forward currency-exchange contracts that are not designated as hedges ~~is recorded~~are recognized currently in ~~earnings with gains reported~~earnings.

The Company recognized losses of $3,000 in ~~other current assets and losses reported in other current liabilities.~~

In the ~~second~~first quarter of ~~2017,~~2021 and $34,000 in the ~~Company entered into forward currency-exchange contracts associated with the anticipated consideration to be paid for the acquisition~~first quarter of ~~NII and recognized a loss of $1,754,000 associated with these transactions. The Company recognized~~2020 within SG&A expenses in the accompanying condensed consolidated statement of income ~~a gain 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 in the first nine 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. 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.

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:


		April 3, 2021				January 2, 2021
	Balance Sheet Location	Asset (Liability) (a)		Notional Amount (b)		Asset (Liability) (a)		Notional Amount
(In thousands)
Derivatives Designated as Hedging Instruments:
Derivatives in an Asset Position:
Forward currency-exchange contract	Other Current Assets	$	0	$	0	$	25	$	842
Derivatives in a Liability Position:
Forward currency-exchange contract	Other Current Liabilities	$	(9)	$	842	$	0	$	0
2018 Swap Agreement	Other Long-Term Liabilities	$	(933)	$	15,000	$	(1,099)	$	15,000

Derivatives Not Designated as Hedging Instruments:
Derivatives in an Asset Position:
Forward currency-exchange contracts	Other Current Assets	$	0	$	0	$	12	$	582
Derivatives in a Liability Position:
Forward currency-exchange contracts	Other Current Liabilities	$	(3)	$	266	$	(7)	$	825

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

Derivatives Not Designated as Hedging Instruments:

Derivatives in an Asset Position:

Forward currency-exchange contracts Other Current Assets $ 8
$ 2,169
$ 2
$ 227
Derivatives in a Liability Position:
Forward currency-exchange contracts Other Current Liabilities $ (4 ) $ 886
$ (237 ) $ 17,185

(a) See Note 8, Fair Value Measurements and Fair Value of Financial Instruments, for the fair value measurements relating to these financial instruments.

(b) The 2021 notional amounts are indicative of the level of the Company's recurring derivative activity.

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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:~~April 3, 2021:

(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 Contracts		Total
Unrealized (Loss) Gain, Net of Tax, at January 2, 2021	$	(846)	$	18	$	(828)
Loss reclassified to earnings (a)	83		0		83
Gain (loss) recognized in AOCI	55		(25)		30
Unrealized Loss, Net of Tax, at April 3, 2021	$	(708)	$	(7)	$	(715)

(a) See Note 96, Accumulated Other Comprehensive Items, for the income statement classification.

As of ~~September 30, 2017,~~April 3, 2021, the Company expects to reclassify ~~$64,000~~losses of ~~the net unrealized gains included in~~$346,000 from AOCI to earnings over the next twelve ~~months.~~months based on the estimated cash flows of the 2018 Swap Agreement and the maturity date of the forward currency-exchange contract.

~~11.~~8. Fair Value Measurements and Fair Value of Financial Instruments

Fair value measurement is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

•Level 1—Quoted prices in active markets for identical assets or liabilities.

•Level 2—Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.

•Level 3—Unobservable inputs based on the Company's own assumptions.

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis:


	Fair Value as of April 3, 2021
(In thousands)	Level 1		Level 2		Level 3		Total
Assets:
Money market funds and time deposits	$	10,637	$	0	$	0	$	10,637

Banker's acceptance drafts (a)	$	0	$	10,347	$	0	$	10,347

Liabilities:
2018 Swap Agreement	$	0	$	933	$	0	$	933
Forward currency-exchange contracts	$	0	$	12	$	0	$	12

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

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

Liabilities:

Forward currency-exchange contracts $ —
$ 278
$ —
$ 278


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

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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. The Company's financial assets and liabilities~~2021. Banker's acceptance drafts are 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. The Company's cash equivalents are comprised of money market funds and bank depositsface value. 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 2018 Swap Agreement is based on USD LIBOR yield curves at the reporting date. The forward currency-exchange contracts and ~~interest rate swap agreement~~the 2018 Swap Agreement are hedges of either recorded assets or liabilities or anticipated ~~transactions.~~transactions and represent the estimated amount the Company would receive or pay upon liquidation of the contracts. Changes in values of the underlying hedged assets and liabilities or anticipated transactions are not reflected in the table above.

The carrying value and fair value of ~~the Company's long-term~~ debt obligations, excluding lease obligations and other borrowings, are as follows:


	April 3, 2021				January 2, 2021
	Carrying Value		Fair Value		Carrying Value		Fair Value
(In thousands)
Debt Obligations:
Revolving credit facility	$	207,257	$	207,257	$	217,963	$	217,963
Senior promissory notes	10,000		11,130		10,000		11,157
	$	217,257	$	218,387	$	227,963	$	229,120

September 30, 2017 December 31, 2016
Carrying Value Fair Value Carrying Value Fair Value
(In thousands)
Long-term Debt Obligations:
Revolving credit facility $ 273,577
$ 273,577
$ 61,494
$ 61,494
Capital lease obligations 4,115
4,115
3,857
3,857
Other borrowings 399
399
417
417
$ 278,091
$ 278,091
$ 65,768
$ 65,768

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~~frequently, based on prevailing market rates. The fair value of the senior promissory notes is primarily calculated based on quoted market rates plus an applicable margin available to the Company at the respective period ends, which represent Level 2 measurements.

~~12.~~9. Business Segment Information

The Company has combined its operating entities into ~~two~~3 reportable operating ~~segments, Papermaking Systems~~segments: Flow Control, Industrial Processing, and ~~Wood~~Material Handling. The Flow Control segment consists of the fluid-handling and doctoring, cleaning, & filtration product lines; the Industrial Processing ~~Systems,~~segment consists of the wood processing and ~~a separate~~stock-preparation product ~~line, Fiber-based Products.~~lines; and the Material Handling segment consists of the conveying and screening, baling, and fiber-based product lines. A description of each segment follows.

•Flow Control – Custom-engineered products, systems, and technologies that control the flow of fluids used in industrial and commercial applications to keep critical processes running efficiently in the packaging, tissue, food, metals, and other industrial sectors. The Company's primary products include rotary sealing devices, steam systems, expansion joints, doctor systems, roll and fabric cleaning devices, and filtration and fiber recovery systems.

•Industrial Processing – Equipment, machinery, and technologies used to recycle paper and paperboard and process timber for use in the packaging, tissue, wood products and alternative fuel industries, among others. The Company's primary products include stock-preparation systems and recycling equipment, chemical pulping equipment, debarkers, stranders, chippers, and logging machinery. In ~~classifying operational entities into a particular segment,~~addition, the Company ~~has aggregated businesses with similar economic characteristics,~~provides industrial automation and digitization solutions to process industries.

•Material Handling – Products and engineered systems used to handle bulk and discrete materials for secondary processing or transport in the aggregates, mining, food, and waste management industries, among others. The Company's primary products include conveying and ~~services, production processes, customers,~~vibratory equipment and ~~methods of distribution.~~balers. In addition, the Company manufactures and sells biodegradable, absorbent granules used as carriers in agricultural applications and for oil and grease absorption.

Three Months Ended Nine Months Ended
September 30, October 1, September 30, October 1,
(In thousands) 2017 2016 2017 2016
Revenues:
Papermaking Systems $ 111,135
$ 96,078
$ 295,416
$ 280,436
Wood Processing Systems 39,714
7,962
61,050
25,437
Fiber-based Products 1,945
1,479
9,427
8,012
$ 152,794
$ 105,519
$ 365,893
$ 313,885

Income Before Provision for Income Taxes:

Papermaking Systems (a) $ 21,544
$ 16,915
$ 52,932
$ 44,747
Wood Processing Systems (b) 4,418
2,150
6,196
5,406
Corporate and Fiber-based Products (c) (6,504 ) (6,504 ) (16,181 ) (15,255 )
Total operating income 19,458
12,561
42,947
34,898
Interest expense, net (1,188 ) (251 ) (1,722 ) (739 )
$ 18,270
$ 12,310
$ 41,225
$ 34,159

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

~~12. Business Segment Information (continued)~~The following table presents financial information for the Company's reportable operating segments:


	Three Months Ended
	April 3,		March 28,
(In thousands)	2021		2020
Revenue
Flow Control	$	63,754	$	57,149
Industrial Processing	69,154		64,709
Material Handling	39,555		37,269
	$	172,463	$	159,127

Income Before Provision for Income Taxes
Flow Control	$	16,443	$	13,330
Industrial Processing	11,133		9,436
Material Handling	4,443		4,134
Corporate (a)	(8,592)		(7,245)
Total operating income	23,427		19,655
Interest expense, net (b)	(1,046)		(2,408)
Other expense, net (b)	(24)		(32)
	$	22,357	$	17,215

Capital Expenditures
Flow Control	$	334	$	821
Industrial Processing	1,804		1,464
Material Handling	121		398
Corporate	0		3
	$	2,259	$	2,686

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~~Represents general and administrative expenses.

~~(d) Primarily includes Corporate~~(b) The Company does not allocate interest and ~~Fiber-based Products' cash and cash equivalents and property, plant and equipment.~~other expense, net to its segments.

~~13.~~10. Commitments and Contingencies

Right of Recourse

In the ordinary course of business, the Company's Chinese subsidiaries ~~in China~~ may receive banker's acceptance drafts from customers as payment for ~~outstanding~~their trade accounts receivable. ~~These banker's acceptance~~The drafts are noninterest-bearing obligations of the issuing bank and mature within six months of the origination date. The Company's Chinese 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 30, 2017 and December 31, 2016, the~~The Company had ~~$11,222,000~~$6,476,000 at April 3, 2021 and ~~$4,824,000, respectively,~~$7,568,000 at January 2, 2021 of banker's acceptance drafts subject to recourse, which were transferred to vendors and had not reached their scheduled maturity dates. Historically, the banker's acceptance drafts have settled upon maturity without any claim of recourse against the Company.

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

When we use the terms “we,” “us,” “our,” and the “Company,” we mean Kadant Inc., a Delaware corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.

This Quarterly Report on Form 10-Q ~~includes~~and the documents we incorporate by reference in this report include 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"~~Risk Factors included in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended ~~December 31, 2016 (fiscal 2016),~~January 2, 2021, as filed with the Securities and Exchange Commission (SEC) and as may be further amended and/or restated in subsequent filings with the SEC.

Overview

Company Background

We are a ~~leading~~ global supplier of ~~equipment~~high-value, critical components and ~~critical components~~engineered systems 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 ourOur 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~~financial results are ~~comprised of two~~reported in three reportable operating segments: ~~Papermaking Systems~~Flow Control, Industrial Processing, and ~~Wood~~Material Handling. The Flow Control segment consists of our fluid-handling and doctoring, cleaning, & filtration product lines; the Industrial Processing ~~Systems,~~segment consists of our wood processing and ~~a separate~~stock-preparation product ~~line, Fiber-based~~lines; and the Material Handling segment consists of our conveying and screening, baling, and fiber-based product lines.

A description of each segment is as follows:

•Flow Control – Custom-engineered products, systems, and technologies that control the flow of fluids used in industrial and commercial applications to keep critical processes running efficiently in the packaging, tissue, food, metals, and other industrial sectors. Our primary products include rotary sealing devices, steam systems, expansion joints, doctor systems, roll and fabric cleaning devices, and filtration and fiber recovery systems.

•Industrial Processing – Equipment, machinery, and technologies used to recycle paper and paperboard and process timber for use in the packaging, tissue, wood products, and alternative fuel industries, among others. Our primary products include stock-preparation systems and recycling equipment, chemical pulping equipment, debarkers, stranders, chippers, and logging machinery. In addition, we provide industrial automation and digitization solutions to process industries.

•Material Handling – Products ~~as detailed below.~~

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~~KADANT INC.~~

~~Overview (continued)~~

~~Papermaking Systems Segment~~

~~Through our Papermaking Systems segment, we develop, manufacture,~~ and ~~market a range of equipment~~engineered systems used to handle bulk and ~~products~~discrete materials for secondary processing or transport in the ~~global papermaking, paper recycling, recycling~~aggregates, mining, food, and waste management industries, among others. Our primary products include conveying and ~~other process industries. This segment consists of the following product lines:~~



	-	~~Stock-Preparation: custom-engineered systems and~~vibratory equipment as well as standard individual components, for baling, pulping, de-inking, screening, cleaning, and refining primarily recyclable fibers; balers 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;
	-	Doctoring, Cleaning, & Filtration: doctoring 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 in industrial piping systems to efficiently transfer fluid, power, and data.

~~Wood Processing Systems Segment~~

~~Through our Wood Processing Systems segment, we develop, manufacture,~~ and market stranders, debarkers, chippers, and logging machinery used in the harvesting and production of lumber and OSB. We also 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;
	-	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,~~balers. In addition, we manufacture and sell biodegradable, absorbent granules ~~derived from papermaking by-products for use primarily~~used as carriers ~~for~~in agricultural ~~home lawn~~applications and ~~garden, and professional lawn, turf and ornamental applications, as well as~~ for oil and grease absorption.

Industry and Business Overview

We had record bookings of $204 million in the first quarter of 2021 due to strong demand for our parts and consumables products, as well as a high level of capital project activity. This follows the previous bookings record set in the fourth quarter of 2020 as our businesses rebounded from the impact of the COVID-19 pandemic, which began to affect our Chinese operations in February 2020 and our other major operations late in the first quarter of 2020. As a result, our bookings and revenue were adversely impacted for a substantial part of 2020 due to reduced or delayed spending by our customers.

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KADANT INC.

However, many of the markets in which we operate began to normalize in the latter part of 2020. We ended the first quarter of 2021 with a record backlog of $223 million. An overview of our business by segment is as follows:

•Flow Control – Orders for our parts and consumables products at all our Flow Control businesses began to recover in the latter part of 2020 and this trend continued through the first quarter of 2021. This was partially due to pent-up demand resulting from the adverse effect of COVID-19 pandemic-related downtimes and shutdowns, as well as visitation restrictions at many customer facilities earlier in 2020. Capital equipment bookings increased from depressed levels encountered during most of 2020, with capital equipment revenue anticipated to increase in the second quarter of 2021.

•Industrial Processing – Our wood processing business continues to experience strong demand for its products, fueled by a robust U.S. housing market and high demand for lumber, oriented strand board and plywood, which increased mill run rates resulting in higher parts consumption and capital equipment investment by our customers at our North American operations. Additionally, our European wood processing operation is experiencing a similar impact. While bookings for both parts and consumables products and capital equipment have been strong, revenue related to capital equipment orders will not accelerate until the second quarter of 2021. Conversely, despite several large project orders at our U.S. and Chinese operations in the fourth quarter of 2020, our stock-preparation business continues to be negatively impacted by delays on large capital projects and reductions in capital equipment spending due to the COVID-19 pandemic, as well as uncertainty in Asia surrounding our customers' response to China's recovered paper import restriction. The continued strength for our stock-preparation parts and consumables products, due in part to the ongoing recovery from a significant downturn in mid-2020 as a result of the COVID-19 pandemic, partially mitigated the effects of depressed capital equipment orders.

•Material Handling – Bookings for parts and consumables products rebounded in the first quarter of 2021 primarily due to increased customer spending as a result of the relaxation of COVID-19 pandemic-related shutdowns and visitation restrictions, which we expect to continue. Demand for our capital equipment has increased in the last few quarters driven by our baling business, which has experienced improved business conditions, including the recovery of recycled commodity prices.

While we have seen improved market conditions and increased demand for our products over the last two quarters, there is uncertainty surrounding the continued recovery in certain regions of the world due to variability around vaccine availability and COVID-19 infection rates. Travel and visitation restrictions continue to have an impact on our ability to interact with our customers, which affects the timing of orders. For more information on risks related to health epidemics to our business, including COVID-19, please see Part I, Item 1A, Risk Factors, included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021.

International Sales

~~During the first nine months of 2017 and 2016, approximately 64% and 59%, respectively,~~Slightly more than half of our sales ~~were~~are to customers outside the United States, ~~principally~~mainly in Europe, Asia, and ~~Asia. We~~Canada. As a result, our financial performance can be materially affected by currency exchange rate fluctuations between the U.S. dollar and foreign currencies. To mitigate the impact of foreign currency fluctuations, 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. WeAdditionally, we may enter into forward currency exchange contracts to hedge certain firm purchase and sale commitments denominated in currencies other than our subsidiaries' functional currencies. We currently do not use derivative instruments to hedge our exposure to exchange rate fluctuations created by the translation into the U.S. dollar of our foreign subsidiaries' results that are in functional currencies other than the U.S. dollar.

Global Trade

In 2018, the United States began imposing tariffs on certain imports from China, which has and will continue to increase the cost of some of the equipment that we import. Although we have worked to mitigate the impact of tariffs through pricing and sourcing strategies, we cannot be sure these strategies will effectively mitigate the impact of these costs. For more information on risks associated with our global operations, including tariffs, please see Part I, Item 1A, Risk Factors, included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021.

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Acquisitions

~~Overview (continued)~~We expect that a significant driver of our growth over the next several years will be the acquisition of businesses and technologies that complement or augment our existing products and services or may involve entry into a new process industry. We continue to pursue acquisition opportunities. In June 2020, we made an acquisition in our Industrial Processing segment for approximately $6.9 million, net of cash acquired.

Results of Operations

First Quarter 2021 Compared With First Quarter 2020

Revenue

The following table presents the change in revenue by segment between the first quarters of 2021 and 2020, and those changes excluding the effect of foreign currency translation and an acquisition which we refer to as change in organic revenue. The presentation of the change in organic revenue 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 U.S. generally accepted accounting principles (GAAP) measure.

Revenue by segment in the first quarters of 2021 and 2020 was as follows:


													(Non-GAAP)
	Three Months Ended								Currency Translation		Acquisition		Change in Organic Revenue
(In thousands, except percentages)	April 3, 2021		March 28, 2020		Total Increase		% Change						Increase		% Change
Flow Control	$	63,754	$	57,149	$	6,605	12	%	$	1,630	$	—	$	4,975	9	%
Industrial Processing	69,154		64,709		4,445		7	%	3,027		509		909		1	%
Material Handling	39,555		37,269		2,286		6	%	1,355		—		931		2	%
Consolidated Revenue	$	172,463	$	159,127	$	13,336	8	%	$	6,012	$	509	$	6,815	4	%

Consolidated revenue in the first quarter of 2021 increased 8%, while consolidated organic revenue increased 4%, driven by higher demand for parts and consumables products at our Flow Control and Industrial Processing segments as described below.

Revenue at our Flow Control segment increased 12% in the first quarter of 2021, while organic revenue increased 9%. These increases resulted from higher demand for parts and consumables products across all our operations, which was due in part to maintenance requirements at many of our customer locations and pent-up demand resulting from the adverse effect of the COVID-19 pandemic during most of 2020. Organic revenue for capital equipment declined slightly in the first quarter of 2021 compared to the first quarter of 2020. The continued impact of curtailed capital equipment orders by our customers during 2020 primarily at our North American operations was mostly offset by an increase in capital equipment revenue at our Chinese business due to lower revenues in the first quarter of 2020 from customer-requested deferrals of equipment installations and a rebound in the Chinese economy in the first quarter of 2021.

Revenue at our Industrial Processing segment increased 7% in the first quarter of 2021, while organic revenue increased 1%. Increased demand for parts and consumables products at our wood processing business was driven by continued near-capacity mill run rates resulting in higher parts consumption. Revenue for parts and consumables at most of our stock-preparation operations also increased, due in part to pent-up demand related to the impact of the COVID-19 pandemic and lower revenue from the adverse effects of COVID-19 in the 2020 quarter. These increases were largely offset by a decline in demand for capital equipment at our stock-preparation business due to the continued impact of curtailed capital equipment spending by our customers as a result of the COVID-19 pandemic.

Revenue at our Material Handling segment increased 6% in the first quarter of 2021, while organic revenue increased 2%. Organic revenue increased at our conveying and screening business primarily due to incremental capital equipment revenue related to a large order which began in the fourth quarter of 2019 that will be essentially complete in the second quarter of 2021, and at our baling business due to improved business conditions, including the recovery of recycled commodity prices. These increases were partially offset by a decline in demand for parts and consumables at our conveying and screening business due to a reduction in customer spending as a result of the continued impact of shutdowns and visitation restrictions related to the COVID-19 pandemic.

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Gross Profit Margin

Gross profit margin by segment in the first quarters of 2021 and 2020 was as follows:


	Three Months Ended		Basis Point Change
	April 3, 2021	March 28, 2020
Flow Control	53.3%	52.9%	40	bps
Industrial Processing	40.5%	38.4%	210	bps
Material Handling	34.7%	35.5%	(80)	bps
Consolidated Gross Profit Margin	43.9%	42.9%	100	bps

Consolidated gross profit margin increased in the first quarter of 2021 compared with the first quarter of 2020 primarily due to a greater proportion of higher-margin parts and consumables revenue and improved margins on our capital equipment products.

Gross profit margin at our Flow Control segment was relatively unchanged in the first quarter of 2021.

Gross profit margin at our Industrial Processing segment increased in the first quarter of 2021 driven by improved margins at our wood processing business resulting from a greater proportion of higher-margin parts and consumables revenue, manufacturing efficiencies related to higher production volumes, and benefits received from government employee retention assistance programs.

Gross profit margin at our Material Handling segment decreased in the first quarter of 2021 primarily due to a greater proportion of lower-margin capital equipment revenue at our conveying and screening business, offset in part by improved margins on our capital equipment at our baling business.

Selling, General, and Administrative Expenses

Selling, general, and administrative (SG&A) expenses by segment in the first quarters of 2021 and 2020 were as follows:


	Three Months Ended
(In thousands, except percentages)	April 3, 2021		% of Revenue		March 28, 2020		% of Revenue		Increase		% Change
Flow Control	$	16,508	26	%	$	15,942	28	%	$	566	4%
Industrial Processing	15,662		23	%	13,820		21	%	1,842		13%
Material Handling	8,786		22	%	8,681		23	%	105		1%
Corporate	8,475		N/A		7,149		N/A		1,326		19%
Consolidated SG&A Expenses	$	49,431	29	%	$	45,592	29	%	$	3,839	8%

Consolidated SG&A expenses as a percentage of revenue remained unchanged at 29% in the first quarters of 2021 and 2020. Consolidated SG&A expenses were adversely impacted by the unfavorable effect of currency translation of $1.7 million, incremental professional services fees at Corporate, and the impact of foreign currency transactions of $1.3 million primarily related to gains in the 2020 period on U.S. dollar-denominated cash at foreign operations. These increases were offset in part by reduced travel-related costs in the first quarter of 2021.

SG&A expenses as a percentage of revenue at our Flow Control segment decreased to 26% in the first quarter of 2021 compared with 28% in the first quarter of 2020 due to higher revenues in the 2021 period. SG&A expenses increased in the first quarter of 2021 compared with the first quarter of 2020 principally due to $0.5 million from the unfavorable effect of foreign currency translation and the impact of foreign currency transactions primarily related to gains in the 2020 period on U.S. dollar-denominated cash at our Mexican business, offset in part by reduced travel-related costs.

SG&A expenses at our Industrial Processing segment increased to 23% of revenue in the first quarter of 2021 compared with 21% in the first quarter of 2020 principally due to $0.9 million from the unfavorable effect of foreign currency translation and $0.6 million from the impact of foreign currency transactions primarily related to gains in the 2020 period on U.S. dollar-denominated cash at this segment's Canadian operations.

SG&A expenses as a percentage of revenue at our Material Handling segment decreased to 22% in the first quarter of 2021 compared with 23% in the first quarter of 2020 due to higher revenues in the 2021 period.

SG&A expenses at Corporate increased in the first quarter of 2021 compared with the first quarter of 2020 primarily due to incremental professional services fees.

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Interest Expense

Interest expense decreased to $1.1 million in the first quarter of 2021 from $2.5 million in the first quarter of 2020 due to lower outstanding debt and a lower weighted-average interest rate.

Provision for Income Taxes

Our provision for income taxes increased to $5.6 million in the first quarter of 2021 from $4.6 million in the first quarter of 2020. The effective tax rate of 25% in the first quarter of 2021 was higher than our statutory rate of 21% primarily due to nondeductible expenses, the distribution of our worldwide earnings, state taxes, and tax expense associated with Global Intangible Low-Taxed Income (GILTI) provisions. 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 effective tax rate of 26% in the first quarter of 2020 was higher than our statutory rate of 21% primarily due to nondeductible expenses, state taxes, the distribution of our worldwide earnings, and tax expense associated with GILTI. This incremental tax expense was offset in part by the reversal of tax reserves associated with uncertain tax positions.

Net Income

Net income increased $4.1 million to $16.8 million in the first quarter of 2021 from $12.7 million in the first quarter of 2020 primarily due to a $3.8 million increase in operating income and a $1.3 million decrease in interest expense, offset in part by a $1.0 million increase in provision for income taxes (see discussions above for further details).

Liquidity and Capital Resources

Consolidated working capital was $163.2 million at April 3, 2021, compared with $155.1 million at January 2, 2021. Cash and cash equivalents were $66.0 million at April 3, 2021, compared with $65.7 million at January 2, 2021, which included cash and cash equivalents held by our foreign subsidiaries of $64.2 million at April 3, 2021 and $63.6 million at January 2, 2021.

Cash Flows

Cash flow information in the first quarter of 2021 and 2020 was as follows:


	Three Months Ended
(In thousands)	April 3, 2021		March 28, 2020
Net Cash Provided by Operating Activities	$	19,092	$	6,169
Net Cash Used in Investing Activities	(2,352)		(2,672)
Net Cash Used in Financing Activities	(15,582)		(7,002)
Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash	(1,090)		(2,693)
Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash	$	68	$	(6,198)

Operating Activities

Cash provided by operating activities increased to $19.1 million in the first quarter of 2021 from $6.2 million in the first quarter of 2020. Our operating cash flows are primarily from cash received from customers, offset by cash payments for items such as inventory, employee compensation, operating leases, income taxes and interest payments on outstanding debt obligations. The increase in cash provided by operating activities in the 2021 period was driven by a reduction in cash used for working capital and improved net income.

Cash used for working capital was $6.4 million in the first quarter of 2021 and $14.9 million in the first quarter of 2020. Cash used for working capital in the first quarter of 2021 included cash used of $14.0 million for accounts receivable due to revenue growth and the timing of revenue and $6.6 million for inventories relating to purchases for orders that will be shipped later in fiscal 2021. These uses of cash were offset in part by $8.0 million of cash provided by accounts payable primarily for inventory purchases related to increased order activity and $7.6 million from other current liabilities primarily for customer deposits related to capital equipment orders anticipated to ship later in fiscal 2021. Cash used for working capital in the first quarter of 2020 included cash used of $3.7 million related to the buildup of inventory for large capital orders, $3.4 million in accounts payable for payments related to inventory purchases made in 2019 for large capital orders, and $9.4 million for other current liabilities primarily related to incentive compensation payments and a final payment of $2.4 million to settle our post-retirement restoration plan.

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Investing Activities

Cash used in investing activities was $2.4 million in the first quarter of 2021 and $2.7 million in the first quarter of 2020 primarily related to capital expenditures in both periods.

Financing Activities

Cash used in financing activities was $15.6 million in the first quarter of 2021 and $7.0 million in the first quarter of 2020. Repayment of long-term obligations was $19.6 million in the first quarter of 2021 and $3.0 million in the first quarter of 2020. Borrowings under our revolving credit facility were $10.1 million in the 2021 period.

Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash

The exchange rate effect on cash, cash equivalents, and restricted cash represents the impact of translation of cash balances at our foreign subsidiaries. The $1.1 million reduction in cash, cash equivalents, and restricted cash in the first quarter of 2021 is primarily attributable to the strengthening of the U.S. dollar against the euro. The $2.7 million reduction in cash, cash equivalents, and restricted cash in the first quarter of 2020 primarily related to the strengthening of the U.S. dollar against the Mexican peso, Canadian dollar and Brazilian real.

Borrowing Capacity and Debt Obligations

We entered into an unsecured multi-currency revolving credit facility, dated as of March 1, 2017 (as amended and restated to date, the Credit Agreement). As of April 3, 2021, we have a borrowing capacity of over $450 million, including $192.8 million available under the Credit Agreement, an additional $150 million in an uncommitted, unsecured incremental borrowing facility under the Credit Agreement, and $115 million of senior promissory notes available for issuance under our uncommitted Multi-Currency Note Purchase and Private Shelf Agreement (Note Purchase Agreement). Under these agreements, our leverage ratio must be less than 3.75, or, if we elect, for the quarter during which a material acquisition occurs and for the three fiscal quarters thereafter, must be less than 4.00. As of April 3, 2021, our leverage ratio was 1.50 and we were in compliance with our debt covenants. We do not have any mandatory principal payments on our long-term debt obligations until 2023. See Note 4, Long-Term Obligations, in the accompanying condensed consolidated financial statements for additional information regarding our debt obligations.

Additional Liquidity and Capital Resources

On May 13, 2020, our board of directors approved the repurchase of up to $20 million of our equity securities during the period from May 13, 2020 to May 13, 2021. We have not repurchased any shares of our common stock under this authorization.

We paid cash dividends of $2.8 million in the first quarter of 2021. On March 10, 2021, we declared a quarterly cash dividend of $0.25 per share totaling $2.9 million that was paid on May 12, 2021. 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 covenant in our revolving credit facility related to our consolidated leverage ratio.

We plan to make expenditures of approximately $12 to $13 million during the remainder of 2021 for property, plant, and equipment.

As of April 3, 2021, we had approximately $275.1 million of total unremitted foreign earnings. It is our intent to indefinitely reinvest $252.0 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments, if any. In the first quarter of 2021, we recorded withholding taxes on the earnings in certain foreign subsidiaries that we plan to repatriate in the foreseeable future. The foreign withholding taxes that would be required if we were to remit the indefinitely-reinvested foreign earnings to the United States would be approximately $5.9 million.

In the future, our liquidity position will be affected by the level of cash flows from operations, cash paid to service our debt obligations, acquisitions, capital projects, dividends, and stock repurchases. We believe that our existing resources, together with the borrowings available under our Credit Agreement and available through our Note Purchase Agreement, and the cash we expect to generate from operations, will be sufficient to meet the capital requirements of our operations for the foreseeable future.

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Contractual Obligations and Other Commercial Commitments

There have been no significant changes to our contractual obligations and other commercial commitments during the first quarter of 2021 compared with those disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended January 2, 2021.

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).~~GAAP. The preparation of these ~~condensed~~ consolidated financial statements requires us to make estimates and assumptions that affectthe 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~~revenue and expenses during the reporting period. Our ~~actual results may differ from these estimates under different assumptions or conditions.~~

~~Critical~~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. Management evaluates its estimates on an ongoing basis based on historical experience, current economic and market conditions, and other assumptions management believes are reasonable. We believe that our most critical accounting policies ~~upon~~ which are significant to our consolidated financial ~~position depends~~statements, 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, filed with the SEC.~~January 2, 2021. There have been no material changes to these critical accounting policies since the end of fiscal ~~year-end 2016~~2020 that warrant disclosure.

~~Industry~~Recent Accounting Pronouncements

See Note 1, under the headings Recently Adopted Accounting Pronouncements and ~~Business Outlook~~

~~Our products are primarily sold in global process industries and used to produce packaging, tissue, OSB, and lumber, among other products.~~

In the first nine months of 2017, approximately 56% of our revenue was from the sale of products that support packaging, tissue, and other paper production, other than printing and writing and newsprint paper grades. 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. Consumption of tissue is fairly stable and in the developed world tends to grow with the population. For both tissue and packaging, 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 the first nine months of 2017, 12% of our revenue was related to products that support 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 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.

In the first nine months of 2017, 17% of our revenue was from sales to engineered wood panel producers, sawmills, and other manufacturers in the forest products industry who use stranders, debarkers, and related equipment to prepare logs to be converted into OSB or lumber, and harvesting equipment to cut, gather, and remove timber from forest plantations. Demand for OSB and lumber is tied to residential housing construction and 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 revenue was from sales to other process industries, which tend to grow with the overall economy.

~~Our bookings increased 43% to $135 million in the third quarter of 2017 compared to $95 million in the third quarter of 2016. Third quarter bookings in 2017 included a $20 million, or 22%~~Recent Accounting Pronouncements Not Yet Adopted, increase resulting from the acquisitions of the businesses of NII and Unaflex and a $2 million, or 2%, increase from the favorable effects of foreign currency translation. Excluding the impact of the acquisitions and foreign currency translation, our bookings in the third quarter of 2017 increased 19% compared to the third quarter of 2016, primarily due to strong performance in our Stock-Preparation and Fluid-Handling 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 for our parts and consumables products tends to be more predictable. Bookings for our parts and consumables products increased to $81 million in the third quarter of 2017, or 60% of total bookings, compared to $64 million, or 67% of total bookings, in the third quarter of 2016, primarily due to bookings of $14 million from the NII and Unaflex businesses.

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~~KADANT INC.~~

~~Overview (continued)~~

The largest and most impactful regional market for our products in the third quarter of 2017 was North America, and we expect this will continue to be the case for the remainder of 2017. The pulp and paper market in North America tends 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 acquisition. Our bookings in North America were $60 million in 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 and Unaflex businesses. According to Resource Information Systems Inc. (RISI) reports, U.S. 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. Continued growth in housing starts is expected to have a positive impact on demand for structural wood panels, which includes OSB, and lumber.

We saw increased business activity in Europe in the third quarter of 2017 compared to the third quarter of 2016, particularly in the lumber, industrial and packaging segments. We expect the overall economy to be stable in Europe for the remainder of 2017 and our markets have shown strength in the first nine months of the year. Our bookings in Europe were $40 million in the third quarter of 2017, up 29% compared to $31 million in the third quarter of 2016, including a $4 million increase from NII and a favorable foreign currency translation effect of $2 million. Excluding NII and the favorable effect of foreign currency translation, our bookings in Europe were up 12%.

Our bookings in Asia were $24 million in the third quarter of 2017, up 128% compared to $11 million in the third quarter of 2016. The market in Asia continues to be quite strong for both our capital and parts and consumables products. We saw continued strength in project activity in containerboard grades during the third quarter of 2017, particularly in China, which has had strong bookings throughout 2017. The most recent RISI outlook for containerboard demand in China forecasts growth rates of approximately 3% per year for the next few years. New capacity additions in China are forecasted to exceed this growth rate over the next several years due in part to the closure of smaller, less efficient mills as the result of both increased governmental regulatory actions and competitive factors.

~~Our bookings in the rest of the world were $12 million in the third quarter of 2017, up 74% compared to $7 million in the third quarter of 2016, including bookings of $4 million from NII.~~

We expect full year 2017 GAAP diluted earnings per share (EPS) of $3.56 to $3.60, revised from our previous guidance of $3.18 to $3.26. The revised guidance includes pre-tax acquisition costs of $5.0 million, or $0.38 per diluted share, and pre-tax amortization expense associated with acquired profit in inventory and backlog of $6.6 million, or $0.43 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 quarter of 2017, we expect to achieve GAAP diluted EPS of $0.87 to $0.91 on revenue of $143 to $146 million, including $0.15 of amortization expense associated with acquired profit in inventory and backlog.

~~Results of Operations~~

~~Third Quarter 2017 Compared With Third Quarter 2016~~

~~Revenues~~

The following table presents changes in revenues by segment and product line between the third quarters of 2017 and 2016, and the changes in revenues by segment and product line between the third quarters of 2017 and 2016 excluding the effect of currency translation and acquisitions. Currency translation is calculated by converting third quarter of 2017 revenues in local currency into U.S. dollars at the third quarter of 2016 exchange rates and then comparing this result to actual revenues in the third quarter 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.

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~~KADANT INC.~~

~~Results of Operations (continued)~~

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

Three Months Ended (Non-GAAP) Adjusted Total Increase

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

Stock-Preparation $ 52,065
$ 44,099
$ 7,966
$ 1,061
$ —
$ 6,905
Doctoring, Cleaning, & Filtration 30,538
28,955
1,583
454
—
1,129
Fluid-Handling 28,532
23,024
5,508
616
2,522
2,370
Papermaking Systems 111,135
96,078
15,057
2,131
2,522
10,404
Wood Processing Systems 39,714
7,962
31,752
510
26,668
4,574
Fiber-based Products 1,945
1,479
466
—
—
466
$ 152,794
$ 105,519
$ 47,275
$ 2,641
$ 29,190
$ 15,444

~~Papermaking Systems Segment~~

Revenues from our Papermaking Systems Segment increased $15.0 million, or 16%, to $111.1 million in the third quarter of 2017 from $96.1 million in the third quarter of 2016, and included $2.5 million in revenues from Unaflex, which was acquired on August 14, 2017, and a $2.1 million increase from the favorable effect of foreign currency translation. Excluding the Unaflex acquisition and favorable effect of foreign currency translation, revenues increased $10.4 million, or 11%, as explained in the product line discussions below.

Revenues from our Stock-Preparation product line in the third quarter of 2017 increased $8.0 million, or 18%, compared to the third quarter of 2016, and included a $1.1 million increase from the favorable effect of foreign currency translation. Excluding the favorable effect of foreign currency translation, revenues increased $6.9 million, or 16%, primarily due to increases in 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 were partially offset by decreases in 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 of 2017 increased $2.5 million, or 3%, including a $0.8 million decrease from the unfavorable effect of foreign currency translation. Excluding the unfavorable effect of foreign currency translation, revenues increased $3.3 million, or 4%, compared to the first nine months of 2016 due to increased demand for our products at our European and Chinese operations, offset in part by decreased demand for our capital equipment at our South American operations.

Revenues from our Fluid-Handling product line in the first nine months of 2017 increased $5.2 million, or 8%, compared to the first nine months of 2016, including $2.5 million in revenues from Unaflex, and a $0.1 million decrease from the unfavorable effect of foreign currency translation. Excluding the Unaflex acquisition and unfavorable effect of foreign currency translation, revenues increased $2.7 million, or 4%, 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 operations.

~~Wood Processing Systems Segment~~

Revenues from our Wood Processing Systems Segment increased $35.6 million to $61.0 million in the first nine months of 2017 from $25.4 million in the first nine months of 2016, including $26.7 million in revenues from NII, which was acquired on July 5, 2017, and an increase of $0.4 million from the favorable effect of foreign currency translation. Excluding the NII acquisition and 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 in the U.S. housing industry.

~~Fiber-based Products~~

Revenues from our Fiber-based Products business increased $1.4 million, or 18%, to $9.4 million in the first nine months of 2017 from $8.0 million in the first nine months of 2016, primarily due to increased demand for our biodegradable granular products.

~~Gross Profit Margin~~

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

Nine Months Ended
September 30,
2017 October 1,
2016
Gross Profit Margin:
Papermaking Systems 47.1 % 45.7 %
Wood Processing Systems 37.1 % 41.7 %
Fiber-based Products 50.1 % 45.7 %
45.5 % 45.3 %

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

~~Wood Processing Systems Segment.~~ The gross profit margin in our Wood Processing Systems segment decreased to 37.1% in the first nine months of 2017 from 41.7% in the first nine months of 2016 due to the amortization of $3.3 million of acquired profit in inventory related to the NII acquisition, which lowered gross profit margin by 530 basis points.

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

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~~KADANT INC.~~

~~Results of Operations (continued)~~

~~Operating Expenses~~

SG&A expenses as a percentage of revenues was 32% in both the first nine months of 2017 and 2016. SG&A expenses increased $14.4 million, or 14%, to $116.5 million in the first nine months of 2017 from $102.1 million in the first nine months of 2016, primarily due to $5.8 million from the inclusion of SG&A expenses from NII and Unaflex, $2.7 million of incremental acquisition-related expenses, and $3.1 million of first quarter 2017 SG&A expenses from PAAL, which was acquired in April 2016. These increases were offset in part by a $0.6 million decrease from the favorable effect of foreign currency translation.

Total stock-based compensation expense was $4.3 million and $3.9 million in the first nine months 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 million in the first nine months of 2017 from $5.6 million in the first nine months of 2016, primarily due to $0.6 million from the inclusion of R&D expenses from NII and $0.4 million of first quarter 2017 R&D expenses from PAAL, which was acquired in April 2016, and represented 2% of revenues in both periods.

~~Other Income~~

~~Other income in the first nine months of 2016 represents a pre-tax gain of $0.3 million related to the sale of real estate in Sweden for cash proceeds of $0.4 million.~~

~~Interest Expense~~

Interest expense increased $1.1 million to $2.0 million in the first nine months of 2017 from $0.9 million in the first nine months 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 $10.6 million and $9.5 million in the first nine months of 2017 and 2016, respectively, and represented 26% and 28% of pre-tax income. The effective tax rate of 26% in the first nine months of 2017 was lower than our statutory tax rate 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 and unrecognized tax benefits. The effective tax rate of 28% in the first nine months of 2016 was lower than our statutory tax rate primarily due to 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.

~~Net Income~~

Net income increased $6.0 million to $30.7 million in the first nine months of 2017 compared to $24.7 million in the first nine months of 2016 due to an $8.0 million increase in our operating income that was partially offset by increases of $1.1 million in both our provision for income taxes and interest expense (see ~~Revenues, Gross Profit Margin, Operating Expenses, Interest Expense~~ ~~and~~ ~~Provision for Income Taxes~~ ~~discussed above).~~

~~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 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 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.details.

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.

~~Liquidity and Capital Resources~~

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

~~First Nine Months of 2017~~

Our operating activities provided cash of $32.3 million in the first nine months of 2017. Working capital used cash of $14.4 million in the first nine months of 2017, including increases of $16.2 million in accounts receivable 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 capital orders in the fourth quarter of 2017 and the first half of 2018, $2.6 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 other current liabilities primarily related to an increase in billings in excess of costs and fees connected with large orders at our Stock-Preparation product line and $2.0 million in accounts payable related to purchases of inventory.

Our investing activities used cash of $212.8 million in the first nine months of 2017, including the use of $204.2 million for acquisitions and $8.7 million for purchases of property, plant, and equipment.

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~~KADANT INC.~~

~~Liquidity and Capital Resources (continued)~~

~~Our financing activities provided cash of $191.9 million in the first nine months of 2017. We borrowed $222.0 million 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 were partially offset by $20.3 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.

~~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 not purchase any shares of our common stock under this authorization or under the previous authorization, which expired in the second quarter of 2017.

We paid quarterly cash dividends totaling $6.7 million in the first nine months of 2017. On September 20, 2017, we declared a quarterly cash dividend of $0.21 per outstanding share of our common stock, which will be paid on November 9, 2017. 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.

It is our intent to reinvest indefinitely the earnings of our international subsidiaries in order to support the current and future capital needs of their operations, including debt repayments. We do not anticipate the need 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 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 foreign earnings to the U.S., would be approximately $3.4 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 to $10.0 million during the remainder of 2017 for property, plant, and equipment.~~

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~~Liquidity and Capital Resources (continued)~~

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.

~~Revolving Credit Facility~~

On March 1, 2017, we entered into an Amended and Restated Credit Agreement that became effective on March 2, 2017, 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 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, 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. In addition, one of our foreign subsidiaries entered into a Guarantee Agreement limited to certain obligations of two foreign subsidiary borrowers pursuant to a Guarantee Agreement, dated as of March 1, 2017.

~~Sale-Leaseback Financing Arrangement~~

In connection with the acquisition of PAAL in April 2016, we assumed a sale-leaseback financing arrangement for PAAL's 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 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 million was outstanding under this capital lease obligation.

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~~KADANT INC.~~

~~Liquidity and Capital Resources (continued)~~

~~Interest Rate Swap Agreement~~

On 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.

The counterparty to the 2015 Swap Agreement could demand an early termination of the 2015 Swap Agreement if we are 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 we are 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~~ as disclosed in Part II, Item 7A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, 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.January 2, 2021.

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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.~~April 3, 2021. 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,~~April 3, 2021, our Chief Executive Officer and Chief Financial Officer concluded that as of ~~September 30, 2017,~~April 3, 2021, 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~~April 3, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1A – Risk Factors

There have been no material changes from the risk factors disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended ~~December 31, 2016 and subsequent filings, filed with the SEC.~~January 2, 2021.

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Item 6 – Exhibits


Exhibit Number
			Description of Exhibit

~~Exhibit Number~~10.1*
	~~Description of Exhibit~~

~~10.1~~		~~Executive Transition Agreement between~~Summary of non-employee director compensation of the ~~Registrant and Sandra L. Lambert as of September 20, 2017.~~Registrant.

~~10.2~~31.1			~~Notice dated September 20, 2017 of the termination of the Amended and Restated Executive Retention Agreement dated December 8, 2008 between the Registrant and Sandra L. Lambert.~~

~~10.3~~		~~Notice dated September 20, 2017 of the amendment to certain restricted stock unit award agreements granted by the Registrant to Sandra L. Lambert.~~

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

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

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

101.INS			Inline XBRL Instance Document.*Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH			Inline XBRL Taxonomy Extension Schema Document.*

101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase Document.*

~~101.LAB~~101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB			Inline XBRL Taxonomy Extension Label Linkbase Document.*

101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase Document.*

~~101.DEF~~104			Cover Page Interactive Data File (formatted as Inline XBRL Taxonomy Definition Linkbase Document.*and contained in Exhibit 101).



*			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 30, 2017 and December 31, 2016, (ii) Condensed Consolidated Statement of Income for the three- and nine-month periods ended September 30, 2017 and October 1, 2016, (iii) Condensed Consolidated Statement of Comprehensive Income for the three- and nine-month periods ended September 30, 2017 and October 1, 2016, (iv) Condensed Consolidated Statement of Cash Flows for the nine-month periods ended September 30, 2017 and October 1, 2016, (v) Condensed Consolidated Statement of Stockholders' Equity for the nine-month periods ended September 30, 2017 and October 1, 2016, and (vi) Notes to Condensed Consolidated Financial Statements.

Table of Contents

KADANT INC.

SIGNATURE

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



			KADANT INC.

Date: May 12, 2021			/s/ Michael J. McKenney
			Michael J. McKenney
			~~Senior~~Executive Vice President and Chief Financial Officer
			(Principal Financial Officer)

4228


					Page
PART I: Financial Information

Item 1.			Financial Statements

				~~Page~~
~~PART I: Financial Information~~

~~Item 1.~~	~~Financial Statements~~

	Condensed Consolidated Balance Sheet as of ~~September 30, 2017~~April 3, 2021 and ~~December 31, 2016~~January 2, 2021 (unaudited)	3

			Condensed Consolidated Statement of Income for the ~~three- and nine-month~~three-month periods ended ~~September 30, 2017~~April 3, 2021 and ~~October 1, 2016~~March 28, 2020 (unaudited)		4

			Condensed Consolidated Statement of Comprehensive Income (Loss) for the ~~three- and nine-month~~three-month periods ended ~~September 30, 2017~~April 3, 2021 and ~~October 1, 2016~~March 28, 2020 (unaudited)		5

			Condensed Consolidated Statement of Cash Flows for the ~~nine-month~~three-month periods ended ~~September 30, 2017~~April 3, 2021 and ~~October 1, 2016~~March 28, 2020 (unaudited)		6

			Condensed Consolidated Statement of Stockholders' Equity for the ~~nine-month~~three-month periods ended ~~September 30, 2017~~April 3, 2021 and ~~October 1, 2016~~March 28, 2020 (unaudited)		7

			Notes to Condensed Consolidated Financial Statements (unaudited)		8

Item 2.			Management's Discussion and Analysis of Financial Condition and Results of Operations		2719

Item 3.			Quantitative and Qualitative Disclosures About Market Risk		3926

Item 4.			Controls and Procedures		4026

PART II: Other Information

Item 1A.			Risk Factors		4027

Item 6.			Exhibits		4127



	September 30, 2017			December 31, 2016
(In thousands, except share amounts)	September 30, 2017			December 31, 2016
Assets
Current Assets:
Cash and cash equivalents	$	90,622		$	71,487
Restricted cash (Note 1)	766			2,082
Accounts receivable, less allowances of $2,640 and $2,395 (Note 1)	94,664			65,963
Inventories (Note 1)	90,450			54,951
Unbilled contract costs and fees	6,256			3,068
Other current assets	20,911			9,799
Total Current Assets	303,669			207,350

Property, Plant, and Equipment, at Cost	153,878			124,424
Less: accumulated depreciation and amortization	83,505			76,720
	70,373			47,704

Other Assets	13,546			11,452
Intangible Assets, Net (Notes 1 and 2)	135,231			52,730
Goodwill (Notes 1 and 2)	264,840			151,455
Total Assets	$	787,659		$	470,691

Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term obligations (Note 6)	$	707		$	643
Accounts payable	35,136			23,929
Customer deposits	27,940			21,168
Accrued payroll and employee benefits	25,448			20,508
Billings in excess of costs and fees	10,781			1,271
Other current liabilities	29,068			21,394
Total Current Liabilities	129,080			88,913

Long-Term Deferred Income Taxes	31,070			14,631
Other Long-Term Liabilities	18,531			17,100
Long-Term Obligations (Note 6)	278,091			65,768

Commitments and Contingencies (Note 13)

Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued	—			—
Common stock, $.01 par value, 150,000,000 shares authorized; 14,624,159 shares issued	146			146
Capital in excess of par value	101,774			101,405
Retained earnings	344,449			321,050
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		)
Total Kadant Stockholders' Equity	329,545			282,629
Noncontrolling interest	1,342			1,650
Total Stockholders' Equity	330,887			284,279
Total Liabilities and Stockholders' Equity	$	787,659		$	470,691



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

Revenues (Note 12)	$	152,794		$	105,519		$	365,893		$	313,885

Costs and Operating Expenses:
Cost of revenues	88,166			57,440			199,449			171,569
Selling, general, and administrative expenses	42,535			33,527			116,493			102,095
Research and development expenses	2,635			1,991			7,004			5,640
Other income (Note 3)	—			—			—			(317		)
	133,336			92,958			322,946			278,987

Operating Income	19,458			12,561			42,947			34,898

Interest Income	94			54			300			175
Interest Expense	(1,282		)	(305		)	(2,022		)	(914		)

Income Before Provision for Income Taxes	18,270			12,310			41,225			34,159
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

Net Income	13,410			9,232			30,675			24,662

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

Net Income Attributable to Kadant	$	13,285		$	9,157		$	30,332		$	24,344

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

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

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



(In thousands)	Papermaking Systems Segment			Wood Processing Systems Segment		Total
Balance at December 31, 2016
Gross balance	$	219,699		$	17,265	$	236,964
Accumulated impairment losses	(85,509		)	—		(85,509		)
Net balance	134,190			17,265		151,455
2017 Adjustments
Acquisitions (Note 2)	15,277			84,606		99,883
Currency translation	9,937			3,565		13,502
Total 2017 adjustments	25,214			88,171		113,385
Balance at September 30, 2017
Gross balance	244,913			105,436		350,349
Accumulated impairment losses	(85,509		)	—		(85,509		)
Net balance	$	159,404		$	105,436	$	264,840



	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)	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	)


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



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

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


~~(a)~~	~~See Note 11 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 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.


	Fair Value as of September 30, 2017									Fair Value as of January 2, 2021
(In thousands)	Level 1		Level 2		Level 3		Total		(In thousands)	Level 1		Level 2		Level 3		Total
Assets:									Assets:
Money market funds and time deposits	$	15,829	$	—	$	—	$	15,829	Money market funds and time deposits	$	8,054	$	0	$	0	$	8,054
Banker's acceptance drafts (a)									Banker's acceptance drafts (a)	$	0	$	9,445	$	0	$	9,445
Forward currency-exchange contracts	$	—	$	96	$	—	$	96	Forward currency-exchange contracts	$	0	$	37	$	0	$	37
Interest rate swap agreement	$	—	$	65	$	—	$	65
Banker's acceptance drafts (a)	$	—	$	16,687	$	—	$	16,687

Liabilities:									Liabilities:
2018 Swap Agreement									2018 Swap Agreement	$	0	$	1,099	$	0	$	1,099
Forward currency-exchange contracts	$	—	$	4	$	—	$	4	Forward currency-exchange contracts	$	0	$	7	$	0	$	7



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

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



	Three Months Ended						Nine Months Ended
	September 30,			October 1,			September 30,			October 1,
(In thousands)	2017			2016			2017			2016
Revenues:
Papermaking Systems	$	111,135		$	96,078		$	295,416		$	280,436
Wood Processing Systems	39,714			7,962			61,050			25,437
Fiber-based Products	1,945			1,479			9,427			8,012
	$	152,794		$	105,519		$	365,893		$	313,885

Income Before Provision for Income Taxes:
Papermaking Systems (a)	$	21,544		$	16,915		$	52,932		$	44,747
Wood Processing Systems (b)	4,418			2,150			6,196			5,406
Corporate and Fiber-based Products (c)	(6,504		)	(6,504		)	(16,181		)	(15,255		)
Total operating income	19,458			12,561			42,947			34,898
Interest expense, net	(1,188		)	(251		)	(1,722		)	(739		)
	$	18,270		$	12,310		$	41,225		$	34,159



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

Stock-Preparation	$	52,065	$	44,099	$	7,966	$	1,061	$	—	$	6,905
Doctoring, Cleaning, & Filtration	30,538		28,955		1,583		454		—		1,129
Fluid-Handling	28,532		23,024		5,508		616		2,522		2,370
Papermaking Systems	111,135		96,078		15,057		2,131		2,522		10,404
Wood Processing Systems	39,714		7,962		31,752		510		26,668		4,574
Fiber-based Products	1,945		1,479		466		—		—		466
	$	152,794	$	105,519	$	47,275	$	2,641	$	29,190	$	15,444



	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