UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~July 1,~~September 30, 2023


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

For the transition period from ________ to _________

Commission file number 001-11406

KADANT INC.

(Exact name of registrant as specified in its charter)


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

One Technology Park Drive

Westford, Massachusetts 01886

(Address of principal executive offices, including zip code)

(978) 776-2000

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ 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", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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 ☒

As of ~~July 28,~~October 27, 2023, the registrant had ~~11,705,898~~11,707,096 shares of common stock outstanding.

Table of Contents

Kadant Inc.

Report on Form 10-Q

For the Quarterly Period Ended ~~July 1,~~September 30, 2023

Table of Contents


		Page
PART I: Financial Information

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheet as of ~~July 1,~~September 30, 2023 and December 31, 2022	3

	Condensed Consolidated Statement of Income for the three- and ~~six-month~~nine-month periods ended ~~July 1,~~September 30, 2023 and ~~July 2,~~October 1, 2022	4

	Condensed Consolidated Statement of Comprehensive Income for the three- and ~~six-month~~nine-month periods ended ~~July 1,~~September 30, 2023 and ~~July 2,~~October 1, 2022	5

	Condensed Consolidated Statement of Cash Flows for the ~~six-month~~nine-month periods ended ~~July 1,~~September 30, 2023 and ~~July 2,~~October 1, 2022	6

	Condensed Consolidated Statement of Stockholders' Equity for the three- and ~~six-month~~nine-month periods ended ~~July 1,~~September 30, 2023 and ~~July 2,~~October 1, 2022	7

	Notes to Condensed Consolidated Financial Statements	89

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2123

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3133

Item 4.	Controls and Procedures	3134

PART II: Other Information

Item 1A.	Risk Factors	3134

Item 5.	Other Information	3134

Item 6.	Exhibits	3235

Table of Contents

PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Statements

KADANT INC.

Condensed Consolidated Balance Sheet

(Unaudited)


		July 1, 2023			December 31, 2022			September 30, 2023		December 31, 2022
(In thousands, except share and per share amounts)	(In thousands, except share and per share amounts)			(In thousands, except share and per share amounts)
Assets	Assets								Assets
Current Assets:	Current Assets:						Current Assets:
Cash and cash equivalents	Cash and cash equivalents	$	66,725		$	76,371	Cash and cash equivalents	$	76,793	$	76,371
Restricted cash	Restricted cash	3,470			3,354		Restricted cash	2,260		3,354
Accounts receivable, net of allowances of $3,578 and $3,595		135,633			130,297
Accounts receivable, net of allowances of $4,024 and $3,595							Accounts receivable, net of allowances of $4,024 and $3,595	140,075		130,297
Inventories	Inventories	176,380			163,672		Inventories	164,346		163,672
Contract assets	Contract assets	11,986			14,898		Contract assets	12,113		14,898
Other current assets	Other current assets	41,449			26,818		Other current assets	40,535		26,818
Total Current Assets	Total Current Assets	435,643			415,410		Total Current Assets	436,122		415,410
Property, Plant, and Equipment, net of accumulated depreciation of $128,555 and $121,442		125,875			118,855
Property, Plant, and Equipment, net of accumulated depreciation of $128,416 and $121,442							Property, Plant, and Equipment, net of accumulated depreciation of $128,416 and $121,442	128,738		118,855
Other Assets	Other Assets	43,775			54,516		Other Assets	43,893		54,516
Intangible Assets, Net	Intangible Assets, Net	167,327			175,645		Intangible Assets, Net	161,034		175,645
Goodwill	Goodwill	388,802			385,455		Goodwill	384,317		385,455
Total Assets	Total Assets	$	1,161,422		$	1,149,881	Total Assets	$	1,154,104	$	1,149,881

Liabilities and Stockholders' Equity	Liabilities and Stockholders' Equity						Liabilities and Stockholders' Equity
Current Liabilities:	Current Liabilities:						Current Liabilities:
Short-term obligations and current maturities of long-term obligations (Note 5)	Short-term obligations and current maturities of long-term obligations (Note 5)	$	3,464		$	3,821	Short-term obligations and current maturities of long-term obligations (Note 5)	$	3,116	$	3,821
Accounts payable	Accounts payable	48,911			58,060		Accounts payable	44,286		58,060
Accrued payroll and employee benefits	Accrued payroll and employee benefits	32,003			35,672		Accrued payroll and employee benefits	37,226		35,672
Customer deposits	Customer deposits	70,580			64,361		Customer deposits	67,090		64,361
Advanced billings	Advanced billings	12,043			7,966		Advanced billings	10,498		7,966
Other current liabilities	Other current liabilities	46,217			43,581		Other current liabilities	51,348		43,581
Total Current Liabilities	Total Current Liabilities	213,218			213,461		Total Current Liabilities	213,564		213,461
Long-Term Obligations (Note 5)	Long-Term Obligations (Note 5)	153,409			197,340		Long-Term Obligations (Note 5)	126,123		197,340
Long-Term Deferred Income Taxes	Long-Term Deferred Income Taxes	38,690			38,745		Long-Term Deferred Income Taxes	37,805		38,745
Other Long-Term Liabilities	Other Long-Term Liabilities	43,080			44,764		Other Long-Term Liabilities	42,695		44,764

Commitments and Contingencies (Note 11)	Commitments and Contingencies (Note 11)						Commitments and Contingencies (Note 11)

Stockholders' Equity:	Stockholders' Equity:						Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued	Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued	—			—		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	Common stock, $.01 par value, 150,000,000 shares authorized; 14,624,159 shares issued	146			146		Common stock, $.01 par value, 150,000,000 shares authorized; 14,624,159 shares issued	146		146
Capital in excess of par value	Capital in excess of par value	120,117			119,924		Capital in excess of par value	122,444		119,924
Retained earnings	Retained earnings	711,664			660,644		Retained earnings	739,133		660,644
Treasury stock at cost, 2,918,261 and 2,949,997 shares		(71,509)			(72,287)
Treasury stock at cost, 2,917,063 and 2,949,997 shares							Treasury stock at cost, 2,917,063 and 2,949,997 shares	(71,480)		(72,287)
Accumulated other comprehensive items (Note 7)	Accumulated other comprehensive items (Note 7)	(49,547)			(54,578)		Accumulated other comprehensive items (Note 7)	(58,591)		(54,578)
Total Kadant Stockholders' Equity	Total Kadant Stockholders' Equity	710,871			653,849		Total Kadant Stockholders' Equity	731,652		653,849
Noncontrolling interest	Noncontrolling interest	2,154			1,722		Noncontrolling interest	2,265		1,722
Total Stockholders' Equity	Total Stockholders' Equity	713,025			655,571		Total Stockholders' Equity	733,917		655,571
Total Liabilities and Stockholders' Equity	Total Liabilities and Stockholders' Equity	$	1,161,422		$	1,149,881	Total Liabilities and Stockholders' Equity	$	1,154,104	$	1,149,881

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

Table of Contents

KADANT INC.

Condensed Consolidated Statement of Income

(Unaudited)


		Three Months Ended							Six Months Ended									Three Months Ended						Nine Months Ended
		July 1, 2023				July 2, 2022			July 1, 2023				July 2, 2022					September 30, 2023				October 1, 2022		September 30, 2023		October 1, 2022
(In thousands, except per share amounts)	(In thousands, except per share amounts)							(In thousands, except per share amounts)
Revenue (Notes 1 and 10)	Revenue (Notes 1 and 10)			$	245,053						$	221,649				$	474,811			$	448,129		Revenue (Notes 1 and 10)	$	244,182	$	224,510	$	718,993	$	672,639

Costs and Operating Expenses:	Costs and Operating Expenses:														Costs and Operating Expenses:
Cost of revenue	Cost of revenue	138,503				125,611			266,215				253,880		Cost of revenue			138,456				129,154		404,671		383,034
Selling, general, and administrative expenses	Selling, general, and administrative expenses	59,990				55,319			118,552				114,487		Selling, general, and administrative expenses			57,889				53,153		176,441		167,640
Research and development expenses	Research and development expenses	3,408				3,251			6,778				6,329		Research and development expenses			3,324				3,245		10,102		9,574
Gain on sale and other costs, net (Note 2)	Gain on sale and other costs, net (Note 2)	74				—			74				(20,008)		Gain on sale and other costs, net (Note 2)			969				72		1,043		(19,936)
		201,975				184,181			391,619				354,688					200,638				185,624		592,257		540,312
Operating Income	Operating Income	43,078				37,468			83,192				93,441		Operating Income			43,544				38,886		126,736		132,327
Interest Income	Interest Income	316				277			615				379		Interest Income			438				271		1,053		650
Interest Expense	Interest Expense	(2,245)				(1,366)			(4,615)				(2,600)		Interest Expense			(2,107)				(1,721)		(6,722)		(4,321)
Other Expense, Net	Other Expense, Net	(21)				(19)			(42)				(41)		Other Expense, Net			(20)				(19)		(62)		(60)
Income Before Provision for Income Taxes	Income Before Provision for Income Taxes	41,128				36,360			79,150				91,179		Income Before Provision for Income Taxes			41,855				37,417		121,005		128,596
Provision for Income Taxes (Note 4)	Provision for Income Taxes (Note 4)	11,182				9,951			20,945				23,329		Provision for Income Taxes (Note 4)			10,816				9,746		31,761		33,075
Net Income	Net Income	29,946				26,409			58,205				67,850		Net Income			31,039				27,671		89,244		95,521
Net Income Attributable to Noncontrolling Interest	Net Income Attributable to Noncontrolling Interest	(212)				(239)			(396)				(488)		Net Income Attributable to Noncontrolling Interest			(175)				(184)		(571)		(672)
Net Income Attributable to Kadant	Net Income Attributable to Kadant	$	29,734			$	26,170		$	57,809			$	67,362	Net Income Attributable to Kadant			$	30,864			$	27,487	$	88,673	$	94,849

Earnings per Share Attributable to Kadant (Note 3)	Earnings per Share Attributable to Kadant (Note 3)														Earnings per Share Attributable to Kadant (Note 3)
Basic	Basic	$	2.54			$	2.24		$	4.94			$	5.78	Basic			$	2.64			$	2.36	$	7.58	$	8.14
Diluted	Diluted	$	2.54			$	2.24		$	4.94			$	5.77	Diluted			$	2.63			$	2.35	$	7.57	$	8.12

Weighted Average Shares (Note 3)	Weighted Average Shares (Note 3)														Weighted Average Shares (Note 3)
Basic	Basic	11,704				11,660			11,693				11,645		Basic			11,706				11,662		11,697		11,651
Diluted	Diluted	11,723				11,689			11,709				11,672		Diluted			11,740				11,700		11,719		11,681

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

Table of Contents

KADANT INC.

Condensed Consolidated Statement of Comprehensive Income

(Unaudited)


		Three Months Ended							Six Months Ended									Three Months Ended						Nine Months Ended
		July 1, 2023				July 2, 2022			July 1, 2023				July 2, 2022					September 30, 2023				October 1, 2022		September 30, 2023		October 1, 2022
(In thousands)	(In thousands)							(In thousands)
Net Income	Net Income			$	29,946						$	26,409				$	58,205			$	67,850		Net Income	$	31,039	$	27,671	$	89,244	$	95,521
Other Comprehensive Items:	Other Comprehensive Items:														Other Comprehensive Items:
Foreign currency translation adjustment	Foreign currency translation adjustment	(400)				(19,364)			5,173				(21,648)		Foreign currency translation adjustment			(9,104)				(22,798)		(3,931)		(44,446)
Post-retirement liability adjustments, net (net of tax of $(1), $11, $(3) and $13)		(2)				31			(8)				40
Deferred (loss) gain on cash flow hedges (net of tax of $(18), $46, $(32) and $114)		(59)				146			(98)				423
Post-retirement liability adjustments, net (net of tax of $1, $8, $(2) and $21)															Post-retirement liability adjustments, net (net of tax of $1, $8, $(2) and $21)			5				24		(3)		64
Deferred (loss) gain on cash flow hedges (net of tax of $(3), $27, $(35) and $141)															Deferred (loss) gain on cash flow hedges (net of tax of $(3), $27, $(35) and $141)			(9)				83		(107)		506
Other comprehensive items	Other comprehensive items	(461)				(19,187)			5,067				(21,185)		Other comprehensive items			(9,108)				(22,691)		(4,041)		(43,876)
Comprehensive Income	Comprehensive Income	29,485				7,222			63,272				46,665		Comprehensive Income			21,931				4,980		85,203		51,645
Comprehensive Income Attributable to Noncontrolling Interest	Comprehensive Income Attributable to Noncontrolling Interest	(213)				(129)			(432)				(332)		Comprehensive Income Attributable to Noncontrolling Interest			(111)				(73)		(543)		(405)
Comprehensive Income Attributable to Kadant	Comprehensive Income Attributable to Kadant	$	29,272			$	7,093		$	62,840			$	46,333	Comprehensive Income Attributable to Kadant			$	21,820			$	4,907	$	84,660	$	51,240

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

Table of Contents

KADANT INC.

Condensed Consolidated Statement of Cash Flows

(Unaudited)


		Six Months Ended						Nine Months Ended
		July 1, 2023			July 2, 2022			September 30, 2023		October 1, 2022
(In thousands)	(In thousands)			(In thousands)
Operating Activities	Operating Activities								Operating Activities
Net income attributable to Kadant	Net income attributable to Kadant	$	57,809		$	67,362	Net income attributable to Kadant	$	88,673	$	94,849
Net income attributable to noncontrolling interest	Net income attributable to noncontrolling interest	396			488		Net income attributable to noncontrolling interest	571		672

Net income	Net income	58,205			67,850		Net income	89,244		95,521
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:						Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	16,683			17,931		Depreciation and amortization	24,917		26,387
Stock-based compensation expense	Stock-based compensation expense	4,886			4,536		Stock-based compensation expense	7,243		6,576
Gain on sale of assets (Note 2)	Gain on sale of assets (Note 2)	—			(20,190)		Gain on sale of assets (Note 2)	—		(20,190)

Other items, net	Other items, net	1,584			7,579		Other items, net	2,346		9,127
Changes in assets and liabilities, net of effects of acquisitions:	Changes in assets and liabilities, net of effects of acquisitions:						Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable	Accounts receivable	(4,002)			(12,336)		Accounts receivable	(10,676)		(20,700)
Contract assets	Contract assets	2,790			(3,694)		Contract assets	2,465		(8,528)
Inventories	Inventories	(10,808)			(26,816)		Inventories	(1,461)		(33,784)
Other assets	Other assets	211			3,589		Other assets	667		(947)
Accounts payable	Accounts payable	(9,364)			(287)		Accounts payable	(12,913)		(262)
Customer deposits	Customer deposits	464			9,329		Customer deposits	(1,463)		16,163
Other liabilities	Other liabilities	(1,305)			(4,926)		Other liabilities	5,942		(1,901)

Net cash provided by operating activities	Net cash provided by operating activities	59,344			42,565		Net cash provided by operating activities	106,311		67,462

Investing Activities	Investing Activities						Investing Activities
Acquisitions, net of cash acquired	Acquisitions, net of cash acquired	277			(62)		Acquisitions, net of cash acquired	277		138
Purchases of property, plant, and equipment	Purchases of property, plant, and equipment	(13,246)			(9,815)		Purchases of property, plant, and equipment	(22,094)		(16,191)
Proceeds from sale of property, plant, and equipment	Proceeds from sale of property, plant, and equipment	97			1,942		Proceeds from sale of property, plant, and equipment	535		2,091

Other investing activities	Other investing activities	(30)			41		Other investing activities	1,222		39
Net cash used in investing activities	Net cash used in investing activities	(12,902)			(7,894)		Net cash used in investing activities	(20,060)		(13,923)

Financing Activities	Financing Activities						Financing Activities
Proceeds from issuance of short- and long-term obligations	Proceeds from issuance of short- and long-term obligations	—			16,516		Proceeds from issuance of short- and long-term obligations	—		21,554
Repayment of short- and long-term obligations	Repayment of short- and long-term obligations	(46,143)			(51,379)		Repayment of short- and long-term obligations	(71,868)		(69,460)
Tax withholding payments related to stock-based compensation	Tax withholding payments related to stock-based compensation	(3,915)			(4,589)		Tax withholding payments related to stock-based compensation	(3,915)		(4,607)
Dividends paid	Dividends paid	(6,430)			(5,936)		Dividends paid	(9,825)		(8,969)

Dividend paid to noncontrolling interest							Dividend paid to noncontrolling interest	—		(630)
Other financing activities	Other financing activities	(63)			—		Other financing activities	(63)		—
Net cash used in financing activities	Net cash used in financing activities	(56,551)			(45,388)		Net cash used in financing activities	(85,671)		(62,112)

Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash	Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash	579			(5,418)		Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash	(1,252)		(10,474)

Decrease in Cash, Cash Equivalents, and Restricted Cash	Decrease in Cash, Cash Equivalents, and Restricted Cash	(9,530)			(16,135)		Decrease in Cash, Cash Equivalents, and Restricted Cash	(672)		(19,047)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period	Cash, Cash Equivalents, and Restricted Cash at Beginning of Period	79,725			94,161		Cash, Cash Equivalents, and Restricted Cash at Beginning of Period	79,725		94,161
Cash, Cash Equivalents, and Restricted Cash at End of Period	Cash, Cash Equivalents, and Restricted Cash at End of Period	$	70,195		$	78,026	Cash, Cash Equivalents, and Restricted Cash at End of Period	$	79,053	$	75,114

See Note 1, Nature of Operations and Summary of Significant Accounting Policies,

under the heading Supplemental Cash Flow Information for further details.

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

Table of Contents

KADANT INC.

Condensed Consolidated Statement of Stockholders' Equity

(Unaudited)

Three Months Ended July 1, 2023
(In thousands, except share and per share amounts) Common
Stock Capital in
Excess of Par Value Retained Earnings Treasury
Stock Accumulated
Other
Comprehensive Items Noncontrolling Interest Total
Stockholders' Equity
Shares Amount Shares Amount
Balance at April 1, 2023 14,624,159 $ 146 $ 117,547 $ 685,325 2,920,678 $ (71,569) $ (49,085) $ 1,941 $ 684,305
Net income — — — 29,734 — — — 212 29,946
Dividend declared – Common Stock, $0.29 per share — — — (3,395) — — — — (3,395)
Activity under stock plans — — 2,570 — (2,417) 60 — — 2,630
Other comprehensive items — — — — — — (462) 1 (461)
Balance at July 1, 2023 14,624,159 $ 146 $ 120,117 $ 711,664 2,918,261 $ (71,509) $ (49,547) $ 2,154 $ 713,025
Six Months Ended July 1, 2023
(In thousands, except share and per share amounts) Common
Stock Capital in
Excess of Par Value Retained Earnings Treasury
Stock Accumulated
Other
Comprehensive Items Noncontrolling Interest Total
Stockholders' Equity
Shares Amount Shares Amount
Balance at December 31, 2022 14,624,159 $ 146 $ 119,924 $ 660,644 2,949,997 $ (72,287) $ (54,578) $ 1,722 $ 655,571
Net income — — — 57,809 — — — 396 58,205
Dividends declared – Common Stock, $0.58 per share — — — (6,789) — — — — (6,789)
Activity under stock plans — — 193 — (31,736) 778 — — 971
Other comprehensive items — — — — — — 5,031 36 5,067
Balance at July 1, 2023 14,624,159 $ 146 $ 120,117 $ 711,664 2,918,261 $ (71,509) $ (49,547) $ 2,154 $ 713,025


		Three Months Ended July 2, 2022																												Three Months Ended September 30, 2023
(In thousands, except share and per share amounts)	(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		(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									Shares							Amount							Shares						Amount
Balance at April 2, 2022		14,624,159	$	146			$	112,651			$	590,009		2,964,786			$	(72,649)			$	(32,302)			$	1,883		$	599,738
Balance at July 1, 2023																											Balance at July 1, 2023			14,624,159			$	146	$	120,117			$	711,664			2,918,261		$	(71,509)			$	(49,547)	$	2,154	$	713,025
Net income	Net income	—	—		—				26,170				—		—				—		239				26,409		Net income			—			—		—				30,864				—		—				—		175		31,039
Dividend declared – Common Stock, $0.26 per share		—	—		—				(3,033)				—		—				—		—				(3,033)
Dividend declared – Common Stock, $0.29 per share																											Dividend declared – Common Stock, $0.29 per share			—			—		—				(3,395)				—		—				—		—		(3,395)
Activity under stock plans																											Activity under stock plans			—			—		2,327				—				(1,198)		29				—		—		2,356

Other comprehensive items																											Other comprehensive items			—			—		—				—				—		—				(9,044)		(64)		(9,108)
Balance at September 30, 2023																											Balance at September 30, 2023			14,624,159			$	146	$	122,444			$	739,133			2,917,063		$	(71,480)			$	(58,591)	$	2,265	$	733,917

																														Nine Months Ended September 30, 2023
(In thousands, except share and per share amounts)																											(In thousands, except share and per share amounts)			Common Stock					Capital in Excess of Par Value				Retained Earnings				Treasury Stock						Accumulated Other Comprehensive Items		Noncontrolling Interest		Total Stockholders' Equity
																														Shares			Amount								Shares			Amount
Balance at December 31, 2022																											Balance at December 31, 2022			14,624,159			$	146			$	119,924			$	660,644		2,949,997			$	(72,287)			$	(54,578)	$	1,722	$	655,571
Net income																											Net income			—			—		—				88,673				—		—				—		571		89,244
Dividends declared – Common Stock, $0.87 per share																											Dividends declared – Common Stock, $0.87 per share			—			—		—				(10,184)				—		—				—		—		(10,184)
Activity under stock plans	Activity under stock plans	—	—		2,174				—				(2,600)		63				—		—				2,237		Activity under stock plans			—			—		2,520				—				(32,934)		807				—		—		3,327

Other comprehensive items	Other comprehensive items	—	—		—				—				—		—				(19,077)		(110)				(19,187)		Other comprehensive items			—			—		—				—				—		—				(4,013)		(28)		(4,041)
Balance at July 2, 2022		14,624,159	$	146	$	114,825			$	613,146			2,962,186		$	(72,586)			$	(51,379)	$	2,012			$	606,164

		Six Months Ended July 2, 2022
(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 1, 2022		14,624,159	$	146			$	115,888			$	551,848		3,003,419			$	(73,596)					$	(30,350)				$	1,680		$	565,616
Net income		—	—		—				67,362				—		—				—		488				67,850
Dividends declared – Common Stock, $0.52 per share		—	—		—				(6,064)				—		—				—		—				(6,064)
Activity under stock plans		—	—		(1,063)				—				(41,233)		1,010				—		—				(53)

Other comprehensive items		—	—		—				—				—		—				(21,029)		(156)				(21,185)
Balance at July 2, 2022		14,624,159	$	146	$	114,825			$	613,146			2,962,186		$	(72,586)			$	(51,379)	$	2,012			$	606,164
Balance at September 30, 2023																											Balance at September 30, 2023			14,624,159			$	146	$	122,444			$	739,133			2,917,063		$	(71,480)			$	(58,591)	$	2,265	$	733,917

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

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KADANT INC.

Condensed Consolidated Statement of Stockholders' Equity (continued)

(Unaudited)


	Three Months Ended October 1, 2022
(In thousands, except share and per share amounts)	Common Stock			Capital in Excess of Par Value		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Items		Noncontrolling Interest		Total Stockholders' Equity
	Shares	Amount						Shares	Amount
Balance at July 2, 2022	14,624,159	$	146	$	114,825	$	613,146	2,962,186	$	(72,586)	$	(51,379)	$	2,012	$	606,164
Net income	—	—		—		27,487		—	—		—		184		27,671
Dividend declared – Common Stock, $0.26 per share	—	—		—		(3,032)		—	—		—		—		(3,032)
Activity under stock plans	—	—		1,982		—		(1,628)	40		—		—		2,022
Dividend paid to noncontrolling interest	—	—		—		—		—	—		—		(630)		(630)


Other comprehensive items	—	—		—		—		—	—		(22,580)		(111)		(22,691)
Balance at October 1, 2022	14,624,159	$	146	$	116,807	$	637,601	2,960,558	$	(72,546)	$	(73,959)	$	1,455	$	609,504

	Nine Months Ended October 1, 2022
(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 1, 2022	14,624,159	$	146	$	115,888	$	551,848	3,003,419	$	(73,596)	$	(30,350)	$	1,680	$	565,616
Net income	—	—		—		94,849		—	—		—		672		95,521
Dividends declared – Common Stock, $0.78 per share	—	—		—		(9,096)		—	—		—		—		(9,096)
Activity under stock plans	—	—		919		—		(42,861)	1,050		—		—		1,969
Dividend paid to noncontrolling interest	—	—		—		—		—	—		—		(630)		(630)


Other comprehensive items	—	—		—		—		—	—		(43,609)		(267)		(43,876)
Balance at October 1, 2022	14,624,159	$	146	$	116,807	$	637,601	2,960,558	$	(72,546)	$	(73,959)	$	1,455	$	609,504

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

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Kadant Inc. was incorporated in Delaware in November 1991 and trades on the New York Stock Exchange under the ticker symbol "KAI."

Kadant Inc. (together with its subsidiaries, the Company) is a global supplier of technologies and engineered systems that drive Sustainable Industrial Processing. Its products and services play an integral role in enhancing efficiency, optimizing energy utilization, and maximizing productivity in process industries while helping customers advance their sustainability initiatives with products that reduce waste or generate more yield with fewer inputs, particularly fiber, energy, and water. Producing more while consuming less is a core aspect of Sustainable Industrial Processing and a major element of the strategic focus of the Company's three reportable operating segments: Flow Control, Industrial Processing, and Material Handling.

Interim Financial Statements

The interim condensed consolidated financial statements and related notes presented have been prepared by the Company, are unaudited, and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the Company's financial position at ~~July 1,~~September 30, 2023, its results of operations, comprehensive income, and stockholders' equity for the three- and ~~six-month~~nine-month periods ended ~~July 1,~~September 30, 2023 and ~~July 2,~~October 1, 2022 and its cash flows for the ~~six-month~~nine-month periods ended ~~July 1,~~September 30, 2023 and ~~July 2, 2023.~~October 1, 2022. 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, 2022 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, 2022 ~~(the Annual~~(Annual Report). The condensed consolidated financial statements and related notes are presented as permitted by the rules and regulations of the Securities and Exchange Commission (SEC) for Form 10-Q and do not contain certain information included in the annual consolidated financial statements and related notes of the Company. The condensed consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and related notes included in the Annual Report.

Use of Estimates and Critical Accounting Policies

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Although the Company makes every effort to ensure the accuracy of the estimates and assumptions used in the preparation of its condensed consolidated financial statements or in the application of accounting policies, if business conditions were different, or if the Company were to use different estimates and assumptions, it is possible that materially different amounts could be reported in the Company's condensed consolidated financial statements.

Note 1 to the consolidated financial statements in the Annual Report describes the significant accounting estimates and policies used in preparation of the consolidated financial statements. There have been no material changes in the Company’s significant accounting policies during the ~~six~~nine months ended ~~July 1,~~September 30, 2023.

Supplemental Cash Flow Information


		Six Months Ended					Nine Months Ended
(In thousands)	(In thousands)	July 1, 2023		July 2, 2022		(In thousands)	September 30, 2023		October 1, 2022
Cash Paid for Interest	Cash Paid for Interest	$	4,443	$	2,408	Cash Paid for Interest	$	6,341	$	3,907
Cash Paid for Income Taxes, Net of Refunds	Cash Paid for Income Taxes, Net of Refunds	$	23,792	$	19,167	Cash Paid for Income Taxes, Net of Refunds	$	34,037	$	28,692

Non-Cash Investing Activities:	Non-Cash Investing Activities:					Non-Cash Investing Activities:
Reduction in fair value of assets acquired	Reduction in fair value of assets acquired	$	(270)	$	(1,568)	Reduction in fair value of assets acquired	$	(270)	$	(1,768)
Cash received (paid) for acquired businesses		277		(62)
Cash received for acquired businesses						Cash received for acquired businesses	277		138
Increase (decrease) in liabilities assumed	Increase (decrease) in liabilities assumed	$	7	$	(1,630)	Increase (decrease) in liabilities assumed	$	7	$	(1,630)

Purchase of property with outstanding loan receivable						Purchase of property with outstanding loan receivable	—		$	1,397

Purchases of property, plant, and equipment in accounts payable	Purchases of property, plant, and equipment in accounts payable	$	1,134	$	26	Purchases of property, plant, and equipment in accounts payable	$	749	$	36

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)


		Six Months Ended					Nine Months Ended
(In thousands)	(In thousands)	July 1, 2023		July 2, 2022		(In thousands)	September 30, 2023		October 1, 2022
Non-Cash Financing Activities:	Non-Cash Financing Activities:					Non-Cash Financing Activities:
Issuance of Company common stock upon vesting of restricted stock units	Issuance of Company common stock upon vesting of restricted stock units	$	4,717	$	5,040	Issuance of Company common stock upon vesting of restricted stock units	$	4,951	$	5,295
Dividends declared but unpaid	Dividends declared but unpaid	$	3,395	$	3,033	Dividends declared but unpaid	$	3,395	$	3,032

Restricted Cash

The Company's restricted cash generally serves as collateral for bank guarantees associated with providing assurance to customers that the Company will fulfill certain customer obligations entered into in the normal course of business and for certain banker's acceptance drafts issued to vendors. The majority of 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)	(In thousands)	July 1, 2023		July 2, 2022		December 31, 2022		January 1, 2022		(In thousands)	September 30, 2023		October 1, 2022		December 31, 2022		January 1, 2022
Cash and cash equivalents	Cash and cash equivalents	$	66,725	$	76,540	$	76,371	$	91,186	Cash and cash equivalents	$	76,793	$	72,936	$	76,371	$	91,186
Restricted cash	Restricted cash	3,470		1,486		3,354		2,975		Restricted cash	2,260		2,178		3,354		2,975
Total Cash, Cash Equivalents, and Restricted Cash	Total Cash, Cash Equivalents, and Restricted Cash	$	70,195	$	78,026	$	79,725	$	94,161	Total Cash, Cash Equivalents, and Restricted Cash	$	79,053	$	75,114	$	79,725	$	94,161

Inventories

The components of inventories are as follows:


		July 1, 2023				December 31, 2022					September 30, 2023		December 31, 2022
(In thousands)	(In thousands)			(In thousands)
Raw Materials	Raw Materials			$	73,075				$	71,040		Raw Materials	$	67,647	$	71,040
Work in Process	Work in Process	45,428				38,612		Work in Process			41,883		38,612
Finished Goods	Finished Goods	57,877				54,020		Finished Goods			54,816		54,020
		$	176,380			$	163,672				$	164,346	$	163,672

Intangible Assets, Net

Gross intangible assets were $342,742,000 at ~~July 1,~~September 30, 2023 and $343,130,000 at December 31, 2022. Intangible assets are recorded at fair value at the date of acquisition. Subsequent impairment charges are reflected as a reduction in the gross balance, as applicable. Definite-lived intangible assets are stated net of accumulated amortization and currency translation in the accompanying condensed consolidated balance sheet. The Company amortizes definite-lived intangible assets over lives that have been determined based on the anticipated cash flow benefits of the intangible asset. Accumulated amortization was ~~$165,300,000~~$169,804,000 at ~~July 1,~~September 30, 2023 and $155,834,000 at December 31, 2022.

910

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Goodwill

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


(In thousands)	(In thousands)	Flow Control		Industrial Processing		Material Handling		Total		(In thousands)	Flow Control		Industrial Processing		Material Handling		Total
Balance at December 31, 2022	Balance at December 31, 2022									Balance at December 31, 2022
Gross balance	Gross balance	$	118,309	$	209,919	$	142,765	$	470,993	Gross balance	$	118,309	$	209,919	$	142,765	$	470,993
Accumulated impairment losses	Accumulated impairment losses	—		(85,538)		—		(85,538)		Accumulated impairment losses	—		(85,538)		—		(85,538)
Net balance	Net balance	118,309		124,381		142,765		385,455		Net balance	118,309		124,381		142,765		385,455
2023 Activity	2023 Activity									2023 Activity
Acquisition adjustments	Acquisition adjustments	—		—		4		4		Acquisition adjustments	—		—		4		4
Currency translation	Currency translation	1,169		1,428		746		3,343		Currency translation	(609)		(224)		(309)		(1,142)
Total 2023 activity	Total 2023 activity	1,169		1,428		750		3,347		Total 2023 activity	(609)		(224)		(305)		(1,138)
Balance at July 1, 2023
Balance at September 30, 2023										Balance at September 30, 2023
Gross balance	Gross balance	119,478		211,347		143,515		474,340		Gross balance	117,700		209,695		142,460		469,855
Accumulated impairment losses	Accumulated impairment losses	—		(85,538)		—		(85,538)		Accumulated impairment losses	—		(85,538)		—		(85,538)
Net balance	Net balance	$	119,478	$	125,809	$	143,515	$	388,802	Net balance	$	117,700	$	124,157	$	142,460	$	384,317

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:


		Six Months Ended					Nine Months Ended
(In thousands)	(In thousands)	July 1, 2023		July 2, 2022		(In thousands)	September 30, 2023		October 1, 2022
Balance at Beginning of Year	Balance at Beginning of Year	$	7,283	$	7,298	Balance at Beginning of Year	$	7,283	$	7,298
Provision charged to expense	Provision charged to expense	3,154		2,657		Provision charged to expense	4,879		3,637
Usage	Usage	(2,335)		(2,548)		Usage	(3,391)		(3,361)

Currency translation	Currency translation	97		(429)		Currency translation	(90)		(877)
Balance at End of Period	Balance at End of Period	$	8,199	$	6,978	Balance at End of Period	$	8,681	$	6,697

Revenue Recognition

Most of the Company’s revenue relates to products and services that require minimal customization and is recognized at a point in time for each performance obligation under the contract when the customer obtains control of the goods or service. The remaining portion of the Company’s revenue is recognized over time based on an input method that compares the costs incurred to date to the total expected costs required to satisfy the performance obligation. Contracts are accounted for on an over time basis when they include products which have no alternative use and an enforceable right to payment over time. Most of the contracts recognized on an over time basis are for large capital equipment projects. These projects are highly customized for the customer and, as a result, would include a significant cost to rework in the event of cancellation.

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following table presents revenue by revenue recognition method:


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
		July 1,		July 2,		July 1,		July 2,			September 30,		October 1,		September 30,		October 1,
(In thousands)	(In thousands)	2023		2022		2023		2022		(In thousands)	2023		2022		2023		2022
Point in Time	Point in Time	$	222,235	$	198,249	$	426,474	$	401,560	Point in Time	$	216,956	$	201,557	$	643,430	$	603,117
Over Time	Over Time	22,818		23,400		48,337		46,569		Over Time	27,226		22,953		75,563		69,522
		$	245,053	$	221,649	$	474,811	$	448,129		$	244,182	$	224,510	$	718,993	$	672,639

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

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

Three Months Ended Six Months Ended
July 1, July 2, July 1, July 2,
(In thousands) 2023 2022 2023 2022
Revenue by Product Type:
Parts and consumables $ 153,082 $ 145,680 $ 304,645 $ 291,924
Capital 91,971 75,969 170,166 156,205
$ 245,053 $ 221,649 $ 474,811 $ 448,129
Revenue by Geography (based on customer location) (a):
North America $ 135,385 $ 124,080 267,838 248,416
Europe 60,625 58,489 114,782 116,855
Asia 32,867 28,976 60,637 60,963
Rest of world 16,176 10,104 31,554 21,895
$ 245,053 $ 221,649 $ 474,811 $ 448,129

~~(a) The components of revenue by geography in the three and six months ended July 2, 2022 have been recast to conform to the current period presentation.~~


	Three Months Ended				Nine Months Ended
	September 30,		October 1,		September 30,		October 1,
(In thousands)	2023		2022		2023		2022
Revenue by Product Type:
Parts and consumables	$	149,564	$	141,857	$	454,209	$	433,781
Capital	94,618		82,653		264,784		238,858
	$	244,182	$	224,510	$	718,993	$	672,639
Revenue by Geography (based on customer location):
North America	$	133,780	$	126,699	401,618		375,115
Europe	66,491		57,409		181,273		174,264
Asia	27,393		26,953		88,030		87,916
Rest of world	16,518		13,449		48,072		35,344
	$	244,182	$	224,510	$	718,993	$	672,639

See Note 10, Business Segment Information, for information on the disaggregation of revenue by reportable operating segment.

The following table presents contract balances from contracts with customers:


		July 1, 2023				December 31, 2022					September 30, 2023		December 31, 2022
(In thousands)	(In thousands)			(In thousands)
Contract Assets	Contract Assets			$	11,986				$	14,898		Contract Assets	$	12,113	$	14,898
Contract Liabilities	Contract Liabilities	$	87,780			$	82,413	Contract Liabilities			$	83,035	$	82,413

Contract assets represent unbilled revenue associated with revenue recognized on contracts accounted for on an over time basis, which will be billed in future periods based on the contract terms. Contract liabilities consist of short- and long-term customer deposits, advanced billings, and deferred revenue. Deferred revenue is included in other current liabilities, and long-term customer deposits are included in other long-term liabilities in the accompanying condensed consolidated balance sheet. Contract liabilities will be recognized as revenue in future periods once the revenue recognition criteria are met. The majority of the contract liabilities relate to advance payments on contracts accounted for at a point in time. These advance payments will be recognized as revenue when the Company's performance obligations have been satisfied, which typically occurs when the product has shipped and control of the asset has transferred to the customer.

The Company recognized revenue of ~~$20,212,000~~$9,613,000 in the ~~second~~third quarter of 2023 and ~~$13,424,000~~$11,912,000 in the ~~second~~third quarter of 2022, and ~~$47,228,000~~$56,841,000 in the first ~~six~~nine months of 2023 and ~~$47,901,000~~$59,813,000 in the first ~~six~~nine months of 2022 that was included in the contract liabilities balance at the beginning of 2023 and 2022, respectively. The majority of the Company's contracts for capital equipment have an original expected duration of one year or less. Certain capital equipment contracts require longer lead times and could take up to 24 months to complete. For contracts with an original expected duration of over one year, the aggregate amount of the transaction price allocated to the remaining unsatisfied or partially unsatisfied performance obligations was $47,568,000 as of September 30, 2023. The Company will recognize revenue for these performance obligations as they are satisfied, approximately 74% of which is expected to occur within the next twelve months and the remaining 26% after the third quarter of 2024.

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

was $54,925,000 as of July 1, 2023. The Company will recognize revenue for these performance obligations as they are satisfied, approximately 75% of which is expected to occur within the next twelve months and the remaining 25% after the second quarter of 2024.

Banker's Acceptance Drafts Included in Accounts Receivable

The Company's Chinese subsidiaries may receive banker's acceptance drafts from customers as payment for their trade accounts receivable. The drafts are non-interest bearing obligations of the issuing bank and generally mature within six months of the origination date. The Company's Chinese subsidiaries may sell the drafts at a discount to a third-party financial institution or transfer the drafts to vendors in settlement of current accounts payable prior to the scheduled maturity date. These drafts, which totaled ~~$3,550,000~~$8,558,000 at ~~July 1,~~September 30, 2023 and $5,729,000 at December 31, 2022, 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.

Recent Accounting Pronouncements Not Yet Adopted

Business Combinations - Joint Venture Formations (Topic 805), Recognition and Initiation Measurement. In August 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2023-05, to address the diversity in practice on the accounting treatment of joint venture formations. Under this ASU, a joint venture is required to apply a new basis of accounting at its formation date by valuing the net assets contributed at fair value for both business and asset transactions. The value of the net assets in total is then allocated to individual assets and liabilities by applying Topic 805 with certain exceptions. This new guidance is effective for joint ventures with a formation date on or after January 1, 2025 and is required to be applied prospectively. Additionally, joint ventures with a formation date prior to January 1, 2025, have an option to elect to apply the guidance retrospectively, provided adequate information is available. The impact of the adoption of this ASU on the Company's consolidated financial statements will be dependent upon joint ventures formed in future periods.

2. Gain on Sale and Other Costs, Net

A summary of the items included in gain on sale and other costs, net is as follows:


	Three Months Ended				Nine Months Ended
	September 30,		October 1,		September 30,		October 1,
(In thousands)	2023		2022		2023		2022
Gain on Sale of Assets	$	—	$	—	$	—	$	(20,190)
Relocation Costs	535		—		609		—
Restructuring Costs	398		72		398		72
Impairment Costs	36		—		36		182
	$	969	$	72	$	1,043	$	(19,936)

Gain on Sale of Assets

The Company entered into several agreements with the local government in China to sell the existing manufacturing building and land use rights of one of its subsidiaries in China for $25,159,000 and relocate to a new facility ~~(the China~~(China Transaction). The agreements became effective in the first quarter of 2022 after a 31% down payment was received, including 25% in 2021 and 6% in the first quarter of 2022, and a land use right in a new location was secured. As a result, the Company recognized a gain on the China Transaction of $20,190,000, or $15,143,000 net of deferred taxes of $5,047,000, in the first quarter of 2022. A receivable of $16,082,000 was recognized for the present value of the remaining amount of the sale proceeds, which is due the earlier of when the government sells the property or within two years from the effective date of the agreements. The subsidiary, which is part of the Industrial Processing segment, ~~will continue~~relocated to ~~occupy its current facility until construction of~~ its new facility ~~is complete, which is expected~~ during the ~~second half~~third quarter of 2023.

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

A summary of the change in the outstanding receivable on the China Transaction is as follows:


(In thousands)	~~July 1, 2023~~Total
Balance at Inception	$	17,294
Present value discount	(1,212)
Receivable recorded, net	16,082
Accretion of interest income	422
Currency translation	(1,323)
Balance at December 31, 2022 (included in other assets)	15,181
Accretion of interest income	~~278~~411
Currency translation	~~(707)~~(794)
Balance at ~~July 1,~~September 30, 2023 (included in other current assets)	$	~~14,752~~14,798

Other Costs

~~Other~~Relocation Costs

As part of the China Transaction, the Company incurred costs of ~~$74,000~~$535,000 in the ~~second~~third quarter of 2023 and $609,000 in the first nine months of 2023 related to the relocation of machinery and equipment and administrative offices to the new manufacturing facility.

Restructuring and Impairment Costs

The Company initiated restructuring plans within its Flow Control segment as follows:

•During the third quarter of 2023, the Company initiated a restructuring plan to consolidate a small manufacturing operation into a larger facility in Germany (2023 Restructuring Plan). The Company recorded total restructuring and impairment charges of $434,000 in the third quarter of 2023 and first nine months of 2023, which consisted of severance costs of $369,000 for the termination of 10 employees, asset-write downs of $36,000, and facility and other closure costs of $29,000.

•During the fourth quarter of 2021, the Company initiated a restructuring plan to eliminate a redundant ceramic blade manufacturing operation in France (2021 Restructuring Plan). The Company recorded additional restructuring costs of $72,000 in the third quarter and first nine months of 2022 related to this plan, which consisted of severance costs for the termination of two employees.

A summary of the changes in accrued restructuring costs included in other current liabilities in the accompanying condensed consolidated balance sheet, which are expected to be paid in the fourth quarter of 2023 and early 2024, are as follows:


(In thousands)	Severance Costs		Facility and Other Closure Costs		Total
2021 Restructuring Plan
Balance at December 31, 2022	$	189	$	200	$	389
Usage	(187)		(199)		(386)
Currency translation	(2)		(1)		(3)
Balance at September 30, 2023	$	—	$	—	$	—

2023 Restructuring Plan
Provision	$	369	$	29	$	398
Usage	(23)		—		(23)
Currency translation	(10)		(1)		(11)
Balance at September 30, 2023	$	336	$	28	$	364

In addition, the Company recorded an impairment charge of $182,000 in the first ~~quarter~~nine months of 2022 ~~consisted of charges in the Company's Industrial Processing segment associated with the China Transaction~~ for the write-down of certain fixed assets that ~~will~~were not be moved to the new ~~manufacturing~~ facility inrelated to the China ~~and facility moving costs.~~Transaction.

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

3. Earnings per Share

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


		Three Months Ended							Six Months Ended									Three Months Ended						Nine Months Ended
		July 1, 2023				July 2, 2022			July 1, 2023				July 2, 2022					September 30, 2023				October 1, 2022		September 30, 2023		October 1, 2022
(In thousands, except per share amounts)	(In thousands, except per share amounts)							(In thousands, except per share amounts)
Net Income Attributable to Kadant	Net Income Attributable to Kadant			$	29,734						$	26,170				$	57,809			$	67,362		Net Income Attributable to Kadant	$	30,864	$	27,487	$	88,673	$	94,849

Basic Weighted Average Shares	Basic Weighted Average Shares	11,704				11,660			11,693				11,645		Basic Weighted Average Shares			11,706				11,662		11,697		11,651
Effect of Restricted Stock Units and Employee Stock Purchase Plan Shares	Effect of Restricted Stock Units and Employee Stock Purchase Plan Shares	19				29			16				27		Effect of Restricted Stock Units and Employee Stock Purchase Plan Shares			34				38		22		30
Diluted Weighted Average Shares	Diluted Weighted Average Shares	11,723				11,689			11,709				11,672		Diluted Weighted Average Shares			11,740				11,700		11,719		11,681

Basic Earnings per Share	Basic Earnings per Share	$	2.54			$	2.24		$	4.94			$	5.78	Basic Earnings per Share			$	2.64			$	2.36	$	7.58	$	8.14

Diluted Earnings per Share	Diluted Earnings per Share	$	2.54			$	2.24		$	4.94			$	5.77	Diluted Earnings per Share			$	2.63			$	2.35	$	7.57	$	8.12

The effect of outstanding and unvested restricted stock units (RSUs) of the Company's common stock totaling ~~26,000~~5,000 shares in the ~~second~~third quarter of 2023, ~~8,000~~4,000 shares in the ~~second~~third quarter of 2022, ~~32,000~~23,000 shares in the first ~~six~~nine months of 2023 and ~~13,000~~10,000 shares in the first ~~six~~nine months of 2022 were not included in the computation of diluted EPS for the respective periods as the effect would have been antidilutive or, for unvested performance-based RSUs, the performance conditions had not been met as of the end of the respective reporting periods.

4. Provision for Income Taxes

The provision for income taxes was ~~$20,945,000~~$31,761,000 in the first ~~six~~nine months of 2023 and ~~$23,329,000~~$33,075,000 in the first ~~six~~nine months of 2022. The effective tax rate of 26% in the first ~~six~~nine months of 2023 and 2022 was higher than the Company's statutory rate of 21% primarily due to the distribution of the Company's worldwide earnings, state taxes, and nondeductible expenses. ~~The effective tax rate of 26% in the first six months of 2022 was higher than the Company's statutory rate of 21% primarily~~ ~~due to the distribution of the Company's worldwide earnings, nondeductible expenses, and state taxes. These increases in tax expense in the first six months of 2022 were offset in part by a decrease in tax expense related to the net excess income tax benefits from stock-based compensation arrangements.~~

5. Short- and Long-Term Obligations

Short- and long-term obligations are as follows:


		July 1, 2023				December 31, 2022					September 30, 2023		December 31, 2022
(In thousands)	(In thousands)			(In thousands)
Revolving Credit Facility, due 2027	Revolving Credit Facility, due 2027			$	142,562				$	186,131		Revolving Credit Facility, due 2027	$	115,494	$	186,131
Senior Promissory Notes, due 2023 to 2028	Senior Promissory Notes, due 2023 to 2028	10,000				10,000		Senior Promissory Notes, due 2023 to 2028			10,000		10,000
Finance Leases, due 2023 to 2026	Finance Leases, due 2023 to 2026	1,757				1,940		Finance Leases, due 2023 to 2026			1,704		1,940
Other Borrowings, due 2023 to 2028	Other Borrowings, due 2023 to 2028	2,554				3,090		Other Borrowings, due 2023 to 2028			2,041		3,090
Total	Total	156,873				201,161		Total			129,239		201,161
Less: Short-term Obligations and Current Maturities of Long-Term Obligations	Less: Short-term Obligations and Current Maturities of Long-Term Obligations	(3,464)				(3,821)		Less: Short-term Obligations and Current Maturities of Long-Term Obligations			(3,116)		(3,821)
Long-Term Obligations	Long-Term Obligations	$	153,409			$	197,340	Long-Term Obligations			$	126,123	$	197,340

See Note 9, Fair Value Measurements and Fair Value of Financial Instruments, for the fair value information related to the Company's long-term obligations.

Revolving Credit Facility

The Company's unsecured multi-currency revolving credit facility, originally entered into on March 1, 2017 (as amended and restated to date, the Credit Agreement) matures on November 30, 2027 and has a borrowing capacity of $400,000,000, in addition to an uncommitted, unsecured incremental borrowing facility of $200,000,000. Interest on

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~~KADANT INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

borrowings outstanding accrues and is payable in arrears calculated at one of the following rates selected by the Company: (i) the Base Rate, as defined, plus an applicable margin of 0% to 1.25%, or (ii) Eurocurrency Rate, Term SOFR (plus a 10 basis point credit spread adjustment), CDOR Rate, and RFR, as applicable and defined, plus an applicable margin of 1.0% to 2.25%.

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The margin is determined based upon the ratio of the Company's total debt, net of unrestricted cash up to $50,000,000, to earnings before interest, taxes, depreciation, and amortization as defined in the Credit Agreement. Additionally, the Credit Agreement requires the payment of a commitment fee payable in arrears on the available borrowing capacity under the Credit Agreement, which ranges from 0.125% to 0.350%.

Obligations under the Credit Agreement may be accelerated upon the occurrence of an event of default, which includes customary events of default under such financing arrangements. In addition, the Credit Agreement contains negative covenants applicable to the Company and its subsidiaries, including financial covenants requiring the Company to maintain a maximum consolidated leverage ratio of 3.75 to 1.00, or, if the Company elects, for the quarter during which a material acquisition occurs and for the three fiscal quarters thereafter, 4.25 to 1.00, and limitations on making certain restricted payments (including dividends and stock repurchases).

Loans under the Credit Agreement are guaranteed by certain domestic subsidiaries of the Company.

As of ~~July 1,~~September 30, 2023, the outstanding balance under the Credit Agreement was ~~$142,562,000,~~$115,494,000, which included ~~$74,562,000~~$72,494,000 of euro-denominated borrowings. The Company had ~~$257,267,000~~$284,911,000 of borrowing capacity available as of ~~July 1,~~September 30, 2023, which was calculated by translating its foreign-denominated borrowings using the administrative agent's borrowing date foreign exchange rates, in addition to the $200,000,000 uncommitted, unsecured incremental borrowing facility.

The weighted average interest rate for the outstanding balance under the Credit Agreement was ~~5.27%~~5.43% as of ~~July 1,~~September 30, 2023 and 4.33% as of year-end 2022.

See Note 8, Derivatives, under the heading Interest Rate Swap Agreement, for information relating to the swap agreement, which matured on June 30, 2023.

Senior Promissory Notes

In 2018, the Company entered into an uncommitted, unsecured Multi-Currency Note Purchase and Private Shelf Agreement (Note Purchase Agreement). Simultaneous with the execution of the Note Purchase Agreement, the Company issued senior promissory notes (Initial Notes) in an aggregate principal amount of $10,000,000, with a per annum interest rate of 4.90% payable semiannually, and a maturity date of December 14, 2028. The Company is required to prepay a portion of the principal of the Initial Notes beginning on December 14, 2023 and each year thereafter, and may optionally prepay the principal on the Initial Notes, together with any prepayment premium, at any time in accordance with the Note Purchase Agreement. The obligations of the Initial Notes may be accelerated upon an event of default as defined in the Note Purchase Agreement, which includes customary events of default under such financing arrangements.

The Initial Notes are pari passu with the Company’s indebtedness under the Credit Agreement, and any other senior debt of the Company, subject to certain specified exceptions, and participate in a sharing agreement with respect to the obligations of the Company and its subsidiaries under the Credit Agreement. The ~~Senior Promissory~~Initial Notes are guaranteed by certain of the Company’s domestic subsidiaries.

Debt Compliance

As of ~~July 1,~~September 30, 2023, the Company was in compliance with the covenants related to its debt obligations.

6. Stock-Based Compensation

The Company recognized stock-based compensation expense of ~~$2,648,000~~$2,357,000 in the ~~second~~third quarter of 2023, ~~$2,276,000~~$2,040,000 in the ~~second~~third quarter of 2022, ~~$4,886,000~~$7,243,000 in the first ~~six~~nine months of 2023 and ~~$4,536,000~~$6,576,000 in the first ~~six~~nine months of 2022 within 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 price of the Company's common stock, reduced by the present value of estimated dividends foregone during the requisite service period. For time-based RSUs, compensation expense is recognized ratably over the requisite service period for the entire award based on the grant date fair value, and net of actual forfeitures recorded when they occur. For performance-based RSUs, compensation expense is recognized ratably over the requisite service period for each separately vesting portion of the award based on the grant date fair value, net of actual forfeitures recorded when they occur, and remeasured each reporting period until the total number of RSUs to be issued is known. Unrecognized compensation expense related to stock-based compensation totaled approximately ~~$12,021,000~~$9,716,000 at ~~July 1,~~September 30, 2023, which will be recognized over a weighted average period of ~~1.8~~1.7 years.

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Non-Employee Director RSUs

In May 2023, the Company granted an aggregate of 4,340 RSUs to its non-employee directors with an aggregate grant date fair value of $849,000, of which 50% vested on June 1, 2023, 25% ~~vest~~vested on the last day of the third fiscal quarter of 2023 and the remaining 25% are to vest on the last day of the fourth fiscal quarter of 2023.

Performance-based RSUs

On March 7, 2023, the Company granted performance-based RSUs to certain of its officers, which represented, in aggregate, the right to receive 21,009 shares (target RSU amount), with an aggregate grant date fair value of $4,528,000. The RSUs are subject to adjustment based on the achievement of the performance measure selected for the fiscal year, which is a specified target for adjusted earnings before interest, taxes, depreciation, and amortization (target adjusted EBITDA) generated from operations for the fiscal year. The RSUs are adjusted by comparing the actual adjusted EBITDA for the performance period to the target adjusted EBITDA. Actual adjusted EBITDA between 50% and 100% of the target adjusted EBITDA results in an adjustment of 50% to 100% of the target RSU amount. Actual adjusted EBITDA between 100% and 115% of the target adjusted EBITDA results in an adjustment using a straight-line linear scale between 100% and 150% of the target RSU amount. Actual adjusted EBITDA in excess of 115% results in an adjustment capped at 150% of the target RSU amount. If actual adjusted EBITDA is below 50% of the target adjusted EBITDA for the 2023 fiscal year, these performance-based RSUs will be forfeited. The Company recognizes compensation expense based on the probable number of performance-based RSUs expected to vest. Following the adjustment, the performance-based RSUs will be subject to additional time-based vesting, and will vest in three equal annual installments on March 10 of 2024, 2025, and 2026, provided that the officer is employed by the Company on the applicable vesting dates.

Time-based RSUs

On March 7, 2023, the Company granted time-based RSUs representing 16,528 shares to certain of its officers and employees with an aggregate grant date fair value of $3,562,000. These time-based RSUs vest in three equal annual installments on March 10 of 2024, 2025, and 2026, provided that a recipient is employed by the Company on the applicable vesting dates.

7. Accumulated Other Comprehensive Items

Comprehensive income combines net income and other comprehensive items, which represent certain amounts that are reported as components of stockholders' equity in the accompanying condensed consolidated balance sheet.

Changes in each component of accumulated other comprehensive items (AOCI), net of tax, are as follows:


(In thousands)	(In thousands)	Foreign Currency Translation Adjustment		Pension and Other Post-Retirement Benefit Liability Adjustments		Deferred Gain (Loss) on Cash Flow Hedges		Total		(In thousands)	Foreign Currency Translation Adjustment		Pension and Other Post-Retirement Benefit Liability Adjustments		Deferred Gain (Loss) on Cash Flow Hedges		Total
Balance at December 31, 2022	Balance at December 31, 2022	$	(54,488)	$	(148)	$	58	$	(54,578)	Balance at December 31, 2022	$	(54,488)	$	(148)	$	58	$	(54,578)
Other comprehensive items before reclassifications	Other comprehensive items before reclassifications	5,137		(13)		1		5,125		Other comprehensive items before reclassifications	(3,903)		(10)		(8)		(3,921)
Reclassifications from AOCI	Reclassifications from AOCI	—		5		(99)		(94)		Reclassifications from AOCI	—		7		(99)		(92)
Net current period other comprehensive items	Net current period other comprehensive items	5,137		(8)		(98)		5,031		Net current period other comprehensive items	(3,903)		(3)		(107)		(4,013)
Balance at July 1, 2023		$	(49,351)	$	(156)	$	(40)	$	(49,547)
Balance at September 30, 2023										Balance at September 30, 2023	$	(58,391)	$	(151)	$	(49)	$	(58,591)

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

Amounts reclassified from AOCI are as follows:


		Three Months Ended				Six Months Ended						Three Months Ended				Nine Months Ended
(In thousands)	(In thousands)	July 1, 2023		July 2, 2022		July 1, 2023		July 2, 2022		Statement of Income Line Item	(In thousands)	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022		Statement of Income Line Item
Retirement Benefit Plans	Retirement Benefit Plans										Retirement Benefit Plans
Recognized net actuarial loss	Recognized net actuarial loss	$	(1)	$	(6)	$	(2)	$	(13)	Other expense, net	Recognized net actuarial loss	$	(1)	$	(6)	$	(3)	$	(19)	Other expense, net
Amortization of prior service cost	Amortization of prior service cost	(3)		(2)		(5)		(5)		Other expense, net	Amortization of prior service cost	(2)		(2)		(7)		(7)		Other expense, net
Total expense before income taxes	Total expense before income taxes	(4)		(8)		(7)		(18)			Total expense before income taxes	(3)		(8)		(10)		(26)
Income tax benefit	Income tax benefit	1		2		2		5		Provision for income taxes	Income tax benefit	1		2		3		7		Provision for income taxes
		(3)		(6)		(5)		(13)				(2)		(6)		(7)		(19)
Cash Flow Hedges (a)	Cash Flow Hedges (a)										Cash Flow Hedges (a)
Interest rate swap agreement	Interest rate swap agreement	76		(83)		136		(194)		Interest expense	Interest rate swap agreement	—		(33)		136		(227)		Interest expense

Income tax (provision) benefit		(23)		20		(37)		47		Provision for income taxes
Income tax benefit (provision)											Income tax benefit (provision)	—		8		(37)		55		Provision for income taxes
		53		(63)		99		(147)				—		(25)		99		(172)
Total Reclassifications	Total Reclassifications	$	50	$	(69)	$	94	$	(160)		Total Reclassifications	$	(2)	$	(31)	$	92	$	(191)

(a)See Note 8, Derivatives, for additional information.

8. Derivatives

Interest Rate Swap Agreement

In 2018, the Company entered into an interest rate swap agreement (2018 Swap Agreement) with Citizens Bank, N.A. to hedge its exposure to movements in USD LIBOR on its U.S. dollar-denominated debt. The 2018 Swap Agreement, which had a $15,000,000 notional value, matured on June 30, 2023. Prior to the maturity of the 2018 Swap Agreement, on a quarterly basis, the Company received three-month USD LIBOR, which was subject to a zero percent floor, and paid a fixed rate of interest of 3.15% plus an applicable margin as was defined in the Credit Agreement.

The Company had designated its 2018 Swap Agreement as a cash flow hedge and structured it to be 100% effective. Unrealized gains and losses related to the fair value of the 2018 Swap Agreement were recorded to AOCI, net of tax.

Forward Currency-Exchange Contracts

The Company uses forward currency-exchange contracts that generally have maturities of twelve months or less to hedge exposures resulting from fluctuations in currency exchange rates. Such exposures result from assets and liabilities that are denominated in currencies other than the functional currencies of the Company's subsidiaries.

Forward currency-exchange contracts that hedge forecasted accounts receivable or accounts payable are designated as cash flow hedges and unrecognized gains and losses are recorded to AOCI, net of tax. Deferred gains and losses are recognized in the statement of income in the period in which the underlying transaction occurs. The fair values of forward currency-exchange contracts that are designated as fair value hedges and forward currency-exchange contracts that are not designated as hedges are recognized currently in earnings.

Gains and losses reported within SG&A expenses in the accompanying condensed consolidated statement of income associated with the Company's forward currency-exchange contracts that were not designated as hedges were not material for the three- and ~~six-month~~nine-month periods ended ~~July 1,~~September 30, 2023 and ~~July 2,~~October 1, 2022.

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KADANT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following table summarizes the fair value of derivative instruments in the accompanying condensed consolidated balance sheet:


				July 1, 2023								December 31, 2022												September 30, 2023								December 31, 2022
		Balance Sheet Location		Asset (Liability) (a)				Notional Amount (b)				Asset (Liability) (a)				Notional Amount					Balance Sheet Location			Asset (Liability) (a)				Notional Amount (b)				Asset (Liability) (a)				Notional Amount
(In thousands)	(In thousands)									(In thousands)
Derivatives Designated as Hedging Instruments:	Derivatives Designated as Hedging Instruments:																						Derivatives Designated as Hedging Instruments:
Derivative in an Asset Position:	Derivative in an Asset Position:																	Derivative in an Asset Position:
2018 Swap Agreement	2018 Swap Agreement		Other Current Assets			$	—			$	—			$	131			$	15,000	2018 Swap Agreement		Other Current Assets				$	—			$	—			$	131			$	15,000
Derivatives in a Liability Position:	Derivatives in a Liability Position:																	Derivatives in a Liability Position:
Forward currency-exchange contract	Forward currency-exchange contract	Other Current Liabilities		$	(52)			$	430			$	(54)			$	430	Forward currency-exchange contract			Other Current Liabilities			$	(65)			$	430			$	(54)			$	430

Derivatives Not Designated as Hedging Instruments:	Derivatives Not Designated as Hedging Instruments:																	Derivatives Not Designated as Hedging Instruments:
Derivatives in an Asset Position:	Derivatives in an Asset Position:																	Derivatives in an Asset Position:
Forward currency-exchange contracts	Forward currency-exchange contracts	Other Current Assets		$	—			$	—			$	15			$	647	Forward currency-exchange contracts			Other Current Assets			$	—			$	—			$	15			$	647
Derivatives in a Liability Position:	Derivatives in a Liability Position:																	Derivatives in a Liability Position:
Forward currency-exchange contract		Other Current Liabilities		$	(1)			$	100			$	—			$	—
Forward currency-exchange contracts																		Forward currency-exchange contracts			Other Current Liabilities			$	(23)			$	801			$	—			$	—

(a) See Note 9, Fair Value Measurements and Fair Value of Financial Instruments, for the fair value measurements relating to these financial instruments.

(b) The 2023 notional amounts are indicative of the level of the Company's recurring derivative activity.

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 ~~six~~nine months ended ~~July 1,~~September 30, 2023:


(In thousands)	(In thousands)	Interest Rate Swap Agreement		Forward Currency-Exchange Contract		Total		(In thousands)	Interest Rate Swap Agreement		Forward Currency-Exchange Contract		Total
Unrealized Gain (Loss), Net of Tax, at December 31, 2022	Unrealized Gain (Loss), Net of Tax, at December 31, 2022	$	99	$	(41)	$	58	Unrealized Gain (Loss), Net of Tax, at December 31, 2022	$	99	$	(41)	$	58
Gain reclassified to earnings (a)	Gain reclassified to earnings (a)	(99)		—		(99)		Gain reclassified to earnings (a)	(99)		—		(99)
Gain recognized in AOCI		—		1		1
Unrealized Loss, Net of Tax, at July 1, 2023		$	—	$	(40)	$	(40)
Loss recognized in AOCI								Loss recognized in AOCI	—		(8)		(8)
Unrealized Loss, Net of Tax, at September 30, 2023								Unrealized Loss, Net of Tax, at September 30, 2023	$	—	$	(49)	$	(49)

(a) See Note 7, Accumulated Other Comprehensive Items, for the income statement classification.

As of ~~July 1,~~September 30, 2023, the Company expects to reclassify losses of ~~$40,000~~$49,000 from AOCI to earnings over the next twelve months based on the maturity date of the forward currency-exchange contract.

9. Fair Value Measurements and Fair Value of Financial Instruments

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

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

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

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

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

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 July 1, 2023									Fair Value as of September 30, 2023
(In thousands)	(In thousands)	Level 1		Level 2		Level 3		Total		(In thousands)	Level 1		Level 2		Level 3		Total
Assets:	Assets:									Assets:
Money market funds and time deposits	Money market funds and time deposits	$	4,541	$	—	$	—	$	4,541	Money market funds and time deposits	$	7,474	$	—	$	—	$	7,474

Banker's acceptance drafts (a)	Banker's acceptance drafts (a)	$	—	$	3,550	$	—	$	3,550	Banker's acceptance drafts (a)	$	—	$	8,558	$	—	$	8,558

Liabilities:	Liabilities:									Liabilities:

Forward currency-exchange contracts	Forward currency-exchange contracts	$	—	$	53	$	—	$	53	Forward currency-exchange contracts	$	—	$	88	$	—	$	88


	Fair Value as of December 31, 2022
(In thousands)	Level 1		Level 2		Level 3		Total
Assets:
Money market funds and time deposits	$	8,351	$	—	$	—	$	8,351
Banker's acceptance drafts (a)	$	—	$	5,729	$	—	$	5,729
2018 Swap Agreement (b)	$	—	$	131	$	—	$	131
Forward currency-exchange contracts	$	—	$	15	$	—	$	15
Liabilities:
Forward currency-exchange contract	$	—	$	54	$	—	$	54

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

(b)The 2018 Swap Agreement matured on June 30, 2023.

The Company uses the market approach technique to value its financial assets and liabilities, and there were no changes in valuation techniques during the first ~~six~~nine months of 2023. Banker's acceptance drafts are carried at face value, which approximates their fair value due to the short-term nature of the negotiable instrument. The fair values of the forward currency-exchange contracts are based on quoted forward foreign exchange rates at the reporting date. The fair value of the 2018 Swap Agreement was based on USD LIBOR yield curves at the reporting date. The forward currency-exchange contracts and the 2018 Swap Agreement prior to its maturity were hedges of either recorded assets or liabilities or anticipated transactions and represent or represented 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 debt obligations, excluding lease obligations, are as follows:


		July 1, 2023					December 31, 2022					September 30, 2023				December 31, 2022
		Carrying Value		Fair Value			Carrying Value		Fair Value			Carrying Value		Fair Value		Carrying Value		Fair Value
(In thousands)	(In thousands)					(In thousands)
Debt Obligations:	Debt Obligations:														Debt Obligations:
Revolving credit facility	Revolving credit facility	$	142,562	$	142,562		$	186,131	$	186,131	Revolving credit facility	$	115,494	$	115,494	$	186,131	$	186,131
Senior promissory notes	Senior promissory notes	10,000		9,721			10,000		9,773		Senior promissory notes	10,000		9,788		10,000		9,773
Other	Other	2,554		2,554			3,090		3,090		Other	2,041		2,041		3,090		3,090
		$	155,116	$	154,837		$	199,221	$	198,994		$	127,535	$	127,323	$	199,221	$	198,994

The carrying value of the Company's revolving credit facility approximates the fair value as the obligation bears variable rates of interest, which adjust frequently, based on prevailing market rates. The fair value of the senior promissory notes is primarily calculated based on quoted market rates plus an applicable margin available to the Company at the respective period end, which represent Level 2 measurements.

10. Business Segment Information

The Company has three reportable operating segments: Flow Control, Industrial Processing, and Material Handling. The Flow Control segment consists of the fluid-handling and doctoring, cleaning, & filtration product lines; the Industrial Processing segment consists of the wood processing and stock-preparation product lines; and the Material Handling segment consists of the conveying and vibratory, baling, and fiber-based product lines.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

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.~~chippers. In addition, the Company provides industrial automation and digitization solutions to process industries.

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

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


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
		July 1,		July 2,		July 1,		July 2,			September 30,		October 1,		September 30,		October 1,
(In thousands)	(In thousands)	2023		2022		2023		2022		(In thousands)	2023		2022		2023		2022
Revenue	Revenue									Revenue
Flow Control	Flow Control	$	95,729	$	85,220	$	185,250	$	171,046	Flow Control	$	90,798	$	86,880	$	276,048	$	257,926
Industrial Processing	Industrial Processing	89,967		84,402		173,509		177,487		Industrial Processing	94,220		86,085		267,729		263,572
Material Handling	Material Handling	59,357		52,027		116,052		99,596		Material Handling	59,164		51,545		175,216		151,141
		$	245,053	$	221,649	$	474,811	$	448,129		$	244,182	$	224,510	$	718,993	$	672,639

Income Before Provision for Income Taxes	Income Before Provision for Income Taxes									Income Before Provision for Income Taxes
Flow Control		$	25,821	$	22,707	$	50,010	$	44,432
Flow Control (a)										Flow Control (a)	$	24,246	$	22,874	$	74,256	$	67,306
Industrial Processing ~~(a)~~(b)	Industrial Processing ~~(a)~~(b)	16,978		15,285		32,945		53,444		Industrial Processing ~~(a)~~(b)	19,023		17,550		51,968		70,994
Material Handling ~~(b)~~(c)	Material Handling ~~(b)~~(c)	10,374		8,701		19,661		14,545		Material Handling ~~(b)~~(c)	10,345		6,945		30,006		21,490
Corporate ~~(c)~~(d)	Corporate ~~(c)~~(d)	(10,095)		(9,225)		(19,424)		(18,980)		Corporate ~~(c)~~(d)	(10,070)		(8,483)		(29,494)		(27,463)
Total operating income	Total operating income	43,078		37,468		83,192		93,441		Total operating income	43,544		38,886		126,736		132,327
Interest expense, net ~~(d)~~(e)	Interest expense, net ~~(d)~~(e)	(1,929)		(1,089)		(4,000)		(2,221)		Interest expense, net ~~(d)~~(e)	(1,669)		(1,450)		(5,669)		(3,671)
Other expense, net ~~(d)~~(e)	Other expense, net ~~(d)~~(e)	(21)		(19)		(42)		(41)		Other expense, net ~~(d)~~(e)	(20)		(19)		(62)		(60)
		$	41,128	$	36,360	$	79,150	$	91,179		$	41,855	$	37,417	$	121,005	$	128,596

Capital Expenditures	Capital Expenditures									Capital Expenditures
Flow Control	Flow Control	$	1,290	$	1,031	$	2,694	$	1,556	Flow Control	$	1,195	$	868	$	3,889	$	2,424
Industrial Processing ~~(e)~~(f)	Industrial Processing ~~(e)~~(f)	6,129		5,073		8,708		7,025		Industrial Processing ~~(e)~~(f)	7,299		4,654		16,007		11,679
Material Handling	Material Handling	1,358		843		1,820		1,227		Material Handling	350		854		2,170		2,081
Corporate	Corporate	—		—		24		7		Corporate	4		—		28		7
		$	8,777	$	6,947	$	13,246	$	9,815		$	8,848	$	6,376	$	22,094	$	16,191

(a)Includes ~~other~~restructuring and impairment costs of ~~$74,000~~$434,000 in both the three and nine months ended September 30, 2023, and $72,000 in both the three and nine months ended October 1, 2022. Includes acquisition-related expenses of $410,000 and $254,000 in the three and ~~six~~nine months ended ~~July~~October 1, ~~2023~~2022, respectively.

(b)Includes relocation costs of $535,000 and ~~$182,000~~$609,000 in the ~~six~~three and nine months ended ~~July 2, 2022.~~September 30, 2023, respectively. Includes a gain on the sale of a facility of $20,190,000, impairment costs of $182,000 (see Note 2, Gain on Sale and Other Costs, Net), and a non-cash ~~charges~~charge for the write-off of an indemnification asset of $575,000 in the ~~six~~nine months ended ~~July 2.~~October 1, 2022.

~~(b)~~(c)Includes ~~a non-cash charge for the write-off of an indemnification asset of $177,000 in the three and six months ended July 1, 2023 and~~ acquisition-related expenses of $717,000 in the ~~six~~nine months ended ~~July 2,~~October 1, 2022.

~~(c)Represents general and administrative expenses.~~

~~(d)The Company does not allocate interest and other expense, net to its segments.~~

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

(d)Represents general and administrative expenses.

(e)The Company does not allocate interest and other expense, net to its segments.

(f)Includes capital expenditures of ~~$3,108,000~~$2,476,000 and ~~$3,287,000~~$5,763,000 in the three and ~~six~~nine months ended ~~July 1,~~September 30, 2023, respectively, and ~~$3,128,000~~$2,155,000 and ~~$3,242,000~~$5,397,000 in the three and ~~six~~nine months ended ~~July 2,~~October 1, 2022, respectively, related to the China Transaction. See Note 2, Gain on Sale and Other Costs, Net.

11. Commitments and Contingencies

Right of Recourse

In the ordinary course of business, the Company's Chinese subsidiaries may receive banker's acceptance drafts from customers as payment for their trade accounts receivable. The drafts are non-interest bearing obligations of the issuing bank and generally mature within six months of the origination date. The Company's Chinese subsidiaries may use these banker's acceptance drafts prior to the scheduled maturity date to settle outstanding accounts payable with vendors. Banker's acceptance drafts transferred to vendors are subject to customary right of recourse provisions prior to their scheduled maturity dates. The Company had ~~$12,315,000~~$9,954,000 at ~~July 1,~~September 30, 2023 and $11,238,000 at December 31, 2022 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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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 and the documents we incorporate by reference in this report include forward-looking statements 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 Risk Factors included in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 ~~(the Annual~~(Annual Report) and as may be further amended and/or restated in subsequent filings with the SEC.

Overview

Company Background

We are a global supplier of technologies and engineered systems that drive Sustainable Industrial Processing. Our products and services play an integral role in enhancing efficiency, optimizing energy utilization, and maximizing productivity in process industries while helping our customers advance their sustainability initiatives with products that reduce waste or generate more yield with fewer inputs, particularly fiber, energy, and water. Producing more while consuming less is a core aspect of Sustainable Industrial Processing and a major element of the strategic focus of our business.

Our financial results are reported in three reportable operating segments: Flow Control, Industrial Processing, and Material Handling. The Flow Control segment consists of our fluid-handling and doctoring, cleaning, & filtration product lines; the Industrial Processing segment consists of our wood processing and stock-preparation product lines; and the Material Handling segment consists of our conveying and vibratory, 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.~~chippers. In addition, we provide 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. Our primary products include conveying and vibratory equipment and balers. In addition, we manufacture and sell biodegradable, absorbent granules used as carriers in agricultural applications and for oil and grease absorption.

Industry and Business Overview

Our consolidated bookings were ~~$215.2~~$209.6 million in the ~~second~~third quarter of 2023, decreasing ~~22%~~3% sequentially ~~from~~and 1% compared to the third quarter of 2022. Our bookings declined in the second and third quarters of 2023 after the record bookings in the first quarter of 2023 ~~which included several large orders in our Material Handling and Flow Control segments. Our bookings returned to a more typical level in the second quarter~~ following a general slowdown in industrial ~~activity, and we~~activity. We expect our bookings ~~for~~in the ~~remainder~~fourth quarter of ~~the year~~2023 to be consistent with the ~~second~~prior quarter as our customers assess and respond to the impact of ~~2023.~~differing market conditions around the world. We ended the ~~second~~third quarter with a strong backlog of ~~$362.8~~$323.5 million, more than half of which was attributable to our Industrial Processing segment. ~~An overview of our business by segment is as follows:~~

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An overview of our business by segment is as follows:

•Flow Control – Our Flow Control segment bookings decreased ~~16% sequentially~~2% compared to ~~record~~the third quarter of 2022 led by a decline in capital bookings. In North America, there was constrained capital spending as mills took downtime and paper and containerboard producers consolidated or moved locations to align capacity with demand. In Europe, there was continued uncertainty in the end markets we serve primarily due to elevated inflation and high interest rates. In addition, there has been a reduction in demand for paper across Europe as the supply chain focuses on reducing the volume of packaging materials used in shipments. However, many of the end markets in our Flow Control segment remain strong despite the general sluggishness in the manufacturing sector, and we expect bookings in the ~~first~~fourth quarter of 2023 led by weaker demand in Europe where inflationary pressures resulted in constrained spending. We expect a slight decrease in demand in this segment for the remainder of the year compared to the second quarter of 2023 reflecting the overall softening in industrial production, but expect our end markets to remain ~~healthy.~~stable.

•Industrial Processing – Our Industrial Processing segment bookings decreased ~~18% sequentially from~~10% compared to the ~~first~~third quarter of ~~2023~~2022 driven by weaker demand for our ~~capital equipment~~parts and consumables products. Demand for our wood processing capital equipment returned to more typical levels in the second quarter of 2023 after the record-setting pace experienced over the last two years, which was fueled by a robust U.S. housing market. Demand for our wood processing ~~parts and consumable~~ products declined ~~sequentially~~12% compared to the third quarter of 2022 largely driven by a decrease in new construction activity. While there is still a healthy level of quote activity, there has been an increase in the ~~second quarter of 2023 but remained strong. Orders for~~quote to order times. In our stock-preparation ~~capital equipment products declined sequentially~~business in the ~~second quarter of 2023, especially in Europe and China, while~~U.S., market-related downtime at our customers contributed to weaker demand for our parts and consumables ~~products remained stable during~~products. This was offset in part by increased demand for our capital equipment as mills focused on replacement and refurbishment projects critical to keeping the ~~same period. We~~mills operational. In China, there was an increase in stock-preparation capital equipment bookings driven by a large greenfield project, however, overall market conditions are sluggish as mills focus on bringing capacity online. Given the recent and anticipated capital project activity, we expect ~~steady demand~~sequentially higher bookings in ~~the~~our Industrial Processing segment ~~for~~in the ~~remainder~~fourth quarter of ~~the year, but remain cautious as to how governmental efforts to control inflation may impact this segment's end markets.~~2023.

•Material Handling – Our Material Handling segment bookings ~~decreased 35% sequentially~~increased 17% compared to the ~~record~~third quarter of 2022 ~~bookings~~led by our baling business. The growing need for efficient waste handling and packaging solutions across various industries has resulted in increased demand for our baling products. As more countries and industries prioritize waste reduction and recycling, the demand for baling equipment is expected to rise. Increased demand led by our parts and consumables products at our conveying and vibratory business in the ~~first~~third quarter of ~~2023. Our vibratory and conveying business led the sequential decline primarily due to a large~~ ~~capital equipment order valued at approximately $12 million booked in the first quarter~~ ~~for the longest conveying line in North America. Demand in our baling business also declined sequentially in both the U.S. and Europe~~2023 was due in part to new government legislation, which has positively impacted the ~~delay of capital equipment projects given the increased uncertainty in the economy.~~ Weaggregates industry. While we expect demand in ~~the~~our Material Handling segment ~~for~~to moderate in the ~~second half of 2023~~near term, we continue to ~~be steady and consistent with the second quarter of 2023.~~see growing project activity, particularly in North America.

Our global operations have been and continue to be impacted by complex market conditions fueled by inflationary pressures, geopolitical tensions, and ~~labor availability.~~softening markets. While the U.S economy has proven more resilient, growth in the European economy has slowed due to high ~~energy prices~~interest rates and ~~surging~~elevated inflation, and China's manufacturing activity has contracted. We expect our operating environment to continue to be challenging as central banks work to address inflationary pressures, which creates continued uncertainty for the remainder of ~~2023.~~2023 and into 2024. However, we believe that the fundamentals of our business remain strong, particularly given our high backlog levels, solid global operations teams, and ~~ongoing~~long-term strength ~~in the markets we serve.~~of our end markets.

For more information related to these challenges, and other factors impacting our business, please see Risk Factors included in Part I, Item 1A, of our Annual Report and subsequent filings with the SEC.

International Sales

Slightly more than half of our sales are to customers outside the United States, mainly in Europe, Asia, and 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 transaction fluctuations, we generally seek to charge our customers in the same currency in which our operating costs are incurred. Additionally, 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

The United States imposes 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 Risk Factors, included in Part I, Item 1A, of our Annual Report and subsequent filings with the SEC.

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Acquisitions

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. In recent years, we have acquired several businesses and continue to pursue acquisition opportunities.

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~~KADANT INC.~~

Results of Operations

~~Second~~Third Quarter 2023 Compared With ~~Second~~Third Quarter 2022

Revenue

The following table presents the change in revenue by segment between the ~~second~~third quarters of 2023 and 2022, and those changes excluding the effect of foreign currency translation and acquisitions which we refer to as change in organic revenue. Organic revenue excludes the effect of acquisitions for the four quarterly reporting periods following the date of the acquisition. 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 ~~second~~third quarters of 2023 and 2022 is as follows:


																	(Non-GAAP)
		Three Months Ended				Increase						Currency Translation					Change in Organic Revenue								Three Months Ended							Increase					Currency Translation					(Non-GAAP) Change in Organic Revenue
(In thousands, except percentages)	(In thousands, except percentages)	July 1, 2023		July 2, 2022				% Change								Increase	% Change		(In thousands, except percentages)			September 30, 2023			October 1, 2022				Increase		% Change					Currency Translation			Increase		% Change
Flow Control	Flow Control	$	95,729	$	85,220			$	10,509		12%			$	(247)				$	10,756			13%	Flow Control			$	90,798				$	86,880	$	3,918		5%		$	2,743				$	1,175		1%
Industrial Processing	Industrial Processing	89,967		84,402		5,565				7%		(2,323)					7,888				9%		Industrial Processing		94,220				86,085			8,135				9%	(10)					8,145				9%
Material Handling	Material Handling	59,357		52,027		7,330				14%		238					7,092				14%		Material Handling		59,164				51,545			7,619				15%	1,217					6,402				12%
Consolidated	Consolidated	$	245,053	$	221,649	$	23,404			11%		$	(2,332)				$	25,736			12%		Consolidated		$	244,182			$	224,510		$	19,672			9%	$	3,950				$	15,722			7%

Consolidated revenue increased ~~11%~~9% in the ~~second~~third quarter of 2023, including a ~~1% decrease~~2% increase from the ~~unfavorable~~favorable effect of foreign currency translation. All our operating segments contributed to the ~~12%~~7% increase in organic ~~revenue led by our Flow Control segment.~~revenue. The majority of the organic revenue increase was due to higher demand for our capital equipment ~~especially~~ at our Material Handling and Industrial Processing ~~segment's wood processing businesses~~segments and, to a lesser extent, ~~our Flow Control segment. In addition, we experienced~~ increased demand for our parts and consumables products at our ~~Material Handling segment's vibratory and conveying business and at our Flow Control~~Industrial Processing segment.

Revenue at our Flow Control segment increased ~~12%~~5% in the ~~second~~third quarter of 2023, ~~primarily due to higher~~while organic revenue increased 1%, with offsetting geographic impacts. Increased demand ~~for capital equipment, especially in North America and, to a lesser extent,~~ for our parts and consumables ~~products. The higher demand for parts and consumables occurred in all regions and was driven by the strength in the underlying packaging industry primarily~~products in North America as mills took downtime and focused on maintenance spending was partially offset by softening demand in Europe due to more challenging market conditions. Higher demand for our capital equipment in Europe, especially from our customers ~~primarily in Europe,~~ seeking to mitigate high energy prices, ~~with our products that optimize energy utilization.~~were mostly offset by weaker demand in China due to depressed market conditions resulting in longer quote to order times.

Revenue at our Industrial Processing segment increased 7%9% in the ~~second~~third quarter of 2023 ~~while organic revenue~~driven by increased ~~9%.~~demand for both our capital equipment and parts and consumable products. The ~~increase in organic revenue was primarily driven by~~ higher demand for capital equipment atoccurred primarily in our ~~wood processing businesses~~stock-preparation business due to several large projects in ~~North America. This increase~~Europe. Additionally, there was ~~offset~~increased demand for parts and consumables products in ~~part by softening demand at~~ our stock-preparation and wood processing businesses, primarily in ~~China as manufacturing activity has contracted and mills focus on installing and optimizing capital equipment purchased in prior periods.~~North America, due to maintenance requirements at many of our customers.

Revenue at our Material Handling segment increased ~~14%~~15% in the ~~second~~third quarter of 2023, ~~primarily from~~while organic revenue increased 12%. The increase in organic revenue was led by capital project activity at our conveying and vibratory business due to higher production rates. In addition, our baling business had increased demand for parts and consumables ~~products at our vibratory~~as more industries focus on waste reduction and conveying business in North America partially due to the fulfillment of orders from our backlog, which led to record parts and consumables revenue in this segment in the second quarter of 2023. Revenue also increased, but to a lesser extent, at our baling business in North America driven by the sale of our capital equipment products used to recycle packaging materials.recycling.

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Gross Profit Margin

Gross profit margin by segment in the ~~second~~third quarters of 2023 and 2022 is as follows:


		Three Months Ended		Basis Point Change			Three Months Ended		Basis Point Change
		July 1, 2023	July 2, 2022				September 30, 2023	October 1, 2022
Flow Control	Flow Control	51.4%	52.8%	(140)	bps	Flow Control	52.2%	51.6%	60	bps
Industrial Processing	Industrial Processing	39.5%	38.4%	110	bps	Industrial Processing	39.5%	39.3%	20	bps
Material Handling	Material Handling	36.8%	35.9%	90	bps	Material Handling	35.7%	32.3%	340	bps
Consolidated	Consolidated	43.5%	43.3%	20	bps	Consolidated	43.3%	42.5%	80	bps

Consolidated gross profit margin increased to ~~43.5%~~43.3% in the ~~second~~third quarter of 2023 compared with ~~43.3%~~42.5%`in the ~~second~~third quarter of 2022 due to higher margins achieved on our ~~capital equipment~~parts and consumables products, especially in our ~~Industrial Processing segment,~~Material Handling segment. This increase was partially offset by a decrease in the proportion of higher-margin parts and consumables revenue, which decreased to ~~62%~~61% compared to ~~66%~~63% in the prior year period.

Within our operating segments, gross profit margin:

•~~Decreased~~Increased to ~~51.4%~~52.2% at our Flow Control segment from ~~52.8%~~51.6% in the 2022 period primarily due to ~~a lower percentage of parts and consumables revenue compared to the prior year period and lower~~higher margins achieved on our capital equipment partially offset by a decrease in margins for our parts and consumables products.

•Increased to 39.5% at our Industrial Processing segment from ~~38.4%~~39.3% in the 2022 period due to higher margins achieved on ~~wood processing capital equipment~~parts and consumable products partially offset by a decrease in ~~the proportion of higher-margin parts and consumables revenue.~~margins achieved on our wood processing capital equipment products.

•Increased to ~~36.8%~~35.7% at our Material Handling segment from ~~35.9%~~32.3% in the 2022 period due to ~~a greater proportion of higher-margin~~increased margins on our conveying and vibratory parts and ~~consumables revenue compared to the prior year period, and higher~~consumable products partially offset by a decrease in margins achieved on our capital equipment products.

Selling, General, and Administrative Expenses

Selling, general, and administrative (SG&A) expenses by segment in the ~~second~~third quarters of 2023 and 2022 are as follows:


		Three Months Ended								Three Months Ended
(In thousands, except percentages)	(In thousands, except percentages)	July 1, 2023		July 2, 2022		Increase		% Change	(In thousands, except percentages)	September 30, 2023		October 1, 2022		Increase		% Change
Flow Control	Flow Control	$	22,200	$	20,969	$	1,231	6%	Flow Control	$	21,538	$	20,717	$	821	4%
Industrial Processing	Industrial Processing	16,677		15,614		1,063		7%	Industrial Processing	15,968		14,660		1,308		9%
Material Handling	Material Handling	11,019		9,498		1,521		16%	Material Handling	10,332		9,321		1,011		11%
Corporate	Corporate	10,094		9,238		856		9%	Corporate	10,051		8,455		1,596		19%
Consolidated	Consolidated	$	59,990	$	55,319	$	4,671	8%	Consolidated	$	57,889	$	53,153	$	4,736	9%
Consolidated as a Percentage of Revenue	Consolidated as a Percentage of Revenue	24%		25%					Consolidated as a Percentage of Revenue	24%		24%

Consolidated SG&A expenses as a percentage of revenue ~~decreased to~~was 24% in both the ~~second~~third quarters of 2023 and 2022. Consolidated SG&A expenses increased $4.7 million in the third quarter of 2023 compared ~~with 25% in~~to the ~~second~~third quarter of 2022, ~~principally due to the increase in revenue. Consolidated SG&A expenses were higher in the second quarter~~including a $1.1 million unfavorable effect of ~~2023 due to~~foreign currency translation and increased compensation expense, ~~trade show~~professional service fees, and travel-related ~~costs, and professional service fees.~~costs.

Within our operating segments, SG&A expenses:

•Increased ~~$1.2~~$0.8 million at our Flow Control segment principally due toto a $0.7 million unfavorable effect of foreign currency translation, foreign currency transaction losses, and increased ~~compensation expense,~~ travel costs. These increases were partially offset by a decrease in acquisition costs ~~and professional service fees.~~of $0.4 million.

•~~Increased~~ Increase~~$1.1~~d $1.3 million at our Industrial Processing segment due to increased compensation expense associated with existing and new personnel and ~~incremental~~higher trade show ~~and travel-related costs~~costs.

•.Increased $1.0 million at our Material Handling segment principally due ~~These increases were offset in part by~~to increased compensation expense associated with existing and new personnel and a ~~$0.4~~$0.2 million ~~favorable~~unfavorable effect of foreign currency translation.

•Increased $1.6 million at Corporate due to higher professional service fees and compensation expense.

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•~~Increased~~ ~~$1.5 million~~ ~~at our Material Handling segment principally due to~~ ~~increased compensation expense associated with existing and new personnel and a $0.2 million indemnification asset reversal related to the release of tax reserves.~~

•~~Increased~~ ~~$0.9 million~~ ~~at Corporate due to increased professional service fees and compensation expense associated with existing and new personnel~~.

Other Costs

~~Other costs~~ were $1.0 million in the third quarter of 2023 and $0.1 million in the ~~second~~third quarter of 2022 and included the following:

•Costs of $0.5 million in the third quarter of 2023 within our Industrial Processing segment were associated with the China Transaction (as defined below in the results of operations for the first ~~six~~nine months of 2023 compared with the first ~~six~~nine months of 2022) ~~included a write-down~~and related to the relocation of ~~certain fixed assets that will not be moved~~machinery and equipment and administrative offices to the new manufacturing facility.

•Restructuring and impairment costs of $0.4 million in the third quarter of 2023 within our Flow Control segment related to the consolidation of a small manufacturing operation into a larger facility in ~~China~~Germany (2023 Restructuring Plan). This charge consisted of severance costs for the termination of 10 employees, asset-write downs, and facility ~~moving~~and other closure costs. We expect annualized savings of approximately $0.7 million, primarily in cost of sales, from these restructuring actions.

•Restructuring costs of $0.1 million in the third quarter of 2022 within our Flow Control segment related to a restructuring plan we initiated in the fourth quarter of 2021 to eliminate a redundant ceramic blade manufacturing operation in France (2021 Restructuring Plan). This charge consisted of severance costs associated with the termination of two employees.

Interest Expense

Interest expense increased to ~~$2.2~~$2.1 million in the ~~second~~third quarter of 2023 from ~~$1.4~~$1.7 million in the ~~second~~third quarter of 2022 due to a higher weighted-average interest rate, partially offset by lower average debt outstanding in the ~~second~~third quarter of 2023 compared to the ~~second~~third quarter of 2022.

Provision for Income Taxes

Provision for income taxes increased to ~~$11.2~~$10.8 million in the ~~second~~third quarter of 2023 from ~~$10.0~~$9.7 million in the ~~second~~third quarter of 2022. The effective tax rate of ~~27%~~26% in the ~~second~~third quarter of 2023 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings and state ~~taxes, nondeductible expenses, and tax expense associated with Global Intangible Low-Taxed Income provisions.~~taxes. The effective tax rate of ~~27%~~26% in the ~~second~~third quarter of 2022 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, ~~state taxes,~~ nondeductible expenses, and ~~the cost of repatriating the earnings of certain foreign subsidiaries.~~state taxes.

Net Income

Net income increased to ~~$29.9~~$31.0 million in the ~~second~~third quarter of 2023 from ~~$26.4~~$27.7 million in the ~~second~~third quarter of 2022 primarily due to a ~~$5.6~~$4.7 million increase in operating income, offset in part by a ~~$0.9~~$0.4 million increase in interest expense and a ~~$1.2~~$1.1 million increase in provision for income taxes (see discussions above for further details).

First ~~Six~~Nine Months 2023 Compared With First ~~Six~~Nine Months 2022

Revenue

The following table presents changes in revenue and organic revenue by segment between the first ~~six~~nine months of 2023 and 2022. Organic revenue is a non-GAAP measure as defined above in the results of operations for the ~~second~~third quarter of 2023 compared with the ~~second~~third quarter of 2022.

Revenue by segment in the first ~~six~~nine months of 2023 and 2022 is as follows:


												(Non-GAAP)
		Six Months Ended							Currency Translation			Change in Organic Revenue						Nine Months Ended											Currency Translation			(Non-GAAP) Change in Organic Revenue
(In thousands, except percentages)	(In thousands, except percentages)	July 1, 2023		July 2, 2022		Increase (Decrease)		% Change			Increase			% Change	(In thousands, except percentages)		September 30, 2023			October 1, 2022			Increase			% Change		Currency Translation			Increase	% Change
Flow Control	Flow Control	$	185,250	$	171,046	$	14,204	8%	$	(2,802)		$	17,006		10%	Flow Control		$	276,048		$	257,926		$	18,122		7%		$	(59)		$	18,181	7%
Industrial Processing	Industrial Processing	173,509		177,487		(3,978)		(2)%	(6,146)			2,168			1%	Industrial Processing		267,729			263,572			4,157			2%		(6,156)			10,313		4%
Material Handling	Material Handling	116,052		99,596		16,456		17%	(776)			17,232			17%	Material Handling		175,216			151,141			24,075			16%		441			23,634		16%
Consolidated	Consolidated	$	474,811	$	448,129	$	26,682	6%	$	(9,724)		$	36,406		8%	Consolidated		$	718,993		$	672,639		$	46,354		7%		$	(5,774)		$	52,128	8%

Consolidated revenue in the first six months of 2023 increased 6%, including a 2% decrease from the unfavorable effect of foreign currency translation. The organic revenue increase of 8% was led by our Material Handling and Flow Control segments due to higher demand for both our parts and consumables and capital equipment products.

Revenue at our Flow Control segment increased 8% in the first six months of 2023, while organic revenue increased 10% with relatively equal contributions from our fluid-handling and doctoring, cleaning, & filtration product lines. The increase

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Consolidated revenue in the first nine months of 2023 increased 7%, including a 1% decrease from the unfavorable effect of foreign currency translation. All our operating segments contributed to the 8% increase in organic revenue with relatively equal contributions from sales of our capital equipment and parts and consumables products. The majority of the organic revenue increase was driven by higher demand in North America. In addition, modestly higher demand in Europe was offset by softening demand in China.

Revenue at our Flow Control segment increased 7% in the first nine months of 2023 primarily due to higher demand for parts and consumables and capital equipment products in North America driven by continued strength in the U.S. economy and underlying packaging ~~industry and, to a lesser extent,~~industry. While there was increased demand ~~from~~for our ~~customers, primarily~~capital equipment in Europe from customers seeking to mitigate high energy prices, ~~with~~demand for our parts and consumables products ~~that optimize energy utilization. We are more cautious about~~was modestly higher than the ~~outlook for~~2022 period reflecting the ~~remainder of the year as mills take downtime and reduce maintenance spending and customers in Europe face~~ challenging market conditions. In China, there was softening demand for our capital equipment as manufacturing activity has slowed.

Revenue at our Industrial Processing segment ~~decreased~~increased 2% in the first ~~six~~nine months of 2023, while organic revenue increased 1%4%. Organic revenue increased primarily due to higher demand for our capital equipment products at ~~both~~ our ~~stock-preparation and~~ wood processing and stock-preparation businesses in North America where the U.S. economy and housing market continued to demonstrate resiliency against inflationary pressures. This increase was largely offset by softening demand at our stock-preparation businesses in China as manufacturing activity has contracted and mills focus on installing and optimizing capital equipment purchased in prior periods. Additionally, there was increased demand for parts and consumable products in our stock-preparation business in Europe and, to a lesser extent, North America due to maintenance requirements at many of our customers.

Revenue at our Material Handling segment increased ~~17%~~16% in the first ~~six~~nine months of 2023 ~~led by~~due to higher demand for both capital equipment and parts and consumables products at our ~~vibratory~~conveying and ~~conveying~~vibratory business in North America. ~~Expansion~~This was due in part to expansion projects related to the mining of minerals that led to increased demand for our ~~aboveground and underground~~ conveying systems. ~~In addition, parts and consumables revenue at our vibratory and conveying business increased over 25% from the prior year period partially due to the fulfillment of orders from our backlog.~~ Revenue also increased, but to a lesser extent, at our baling business ~~in North America driven by the sale of~~due to higher demand for our ~~capital equipment~~ products ~~used to recycle packaging materials.~~as more industries focus on waste reduction and recycling.

Gross Profit Margin

Gross profit margin by segment in the first ~~six~~nine months of 2023 and 2022 is as follows:


		Six Months Ended		Basis Point Change			Nine Months Ended		Basis Point Change
		July 1, 2023	July 2, 2022				September 30, 2023	October 1, 2022
Flow Control	Flow Control	52.3%	52.6%	(30)	bps	Flow Control	52.3%	52.3%	0	bps
Industrial Processing	Industrial Processing	40.0%	38.5%	150	bps	Industrial Processing	39.8%	38.8%	100	bps
Material Handling	Material Handling	36.4%	36.1%	30	bps	Material Handling	36.2%	34.8%	140	bps
Consolidated	Consolidated	43.9%	43.3%	60	bps	Consolidated	43.7%	43.1%	60	bps

Consolidated gross profit margin increased to ~~43.9%~~43.7% in the first ~~six~~nine months of 2023 compared with ~~43.3%~~43.1% in the first ~~six~~nine months of 2022 due to higher margins achieved on both capital equipment and parts and consumable products, partially offset by a lower proportion of parts and consumables revenue, which decreased to ~~64%~~63% compared to ~~65%~~64% in the prior year period.

Within our operating segments, gross profit margin:

•~~Decreased to 52.3% at our Flow Control segment from 52.6% in the 2022 period primarily due to a lower proportion of parts and consumables revenue.~~

•Increased to ~~40.0%~~39.8% at our Industrial Processing segment from ~~38.5%~~38.8% in the 2022 period primarily due to higher margins achieved on our stock-preparation capital equipment ~~products.~~and parts and consumable products, partially offset by a decrease in proportion of higher-margin parts and consumables revenue.

•Increased to ~~36.4%~~36.2% at our Material Handling segment from ~~36.1%~~34.8% in the 2022 period principally due to higher margins achieved onfor our parts and consumables products. This increase was partially offset by lower margins achieved on our capital equipment products and, to a lesser extent, a decrease in proportion of higher-margin parts and consumables revenue.

~~Selling, General, and Administrative Expenses~~

~~SG&A expenses by segment in the first six months of 2023 and 2022 were as follows:~~

Six Months Ended

(In thousands, except percentages) July 1,
2023 July 2,
2022 Increase % Change
Flow Control $ 44,417 $ 43,053 $ 1,364 3%
Industrial Processing 32,975 31,983 992 3%
Material Handling 21,738 20,502 1,236 6%
Corporate 19,422 18,949 473 2%
Consolidated $ 118,552 $ 114,487 $ 4,065 4%
Consolidated as a Percentage of Revenue 25% 26%

~~Consolidated SG&A expenses as a percentage of revenue decreased to 25% in the first six months of 2023 compared with 26% in the first six months of 2022 principally due to the increase in revenue. Consolidated SG&A expenses in the first~~

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~~six~~Selling, General, and Administrative Expenses

SG&A expenses by segment in the first nine months of 2023 and 2022 were as follows:


	Nine Months Ended
(In thousands, except percentages)	September 30, 2023		October 1, 2022		Increase		% Change
Flow Control	$	65,955	$	63,770	$	2,185	3%
Industrial Processing	48,943		46,643		2,300		5%
Material Handling	32,070		29,823		2,247		8%
Corporate	29,473		27,404		2,069		8%
Consolidated	$	176,441	$	167,640	$	8,801	5%
Consolidated as a Percentage of Revenue	25%		25%

Consolidated SG&A expenses as a percentage of revenue was 25% in both the first nine months of 2023 and 2022. Consolidated SG&A expenses increased $8.8 million in the first nine months of 2023 compared to the first nine months of 2022 and included a ~~$2.1~~decrease of $1.2 million in acquisition-related costs, a $1.0 million favorable effect of foreign currency, ~~a decrease of $0.8 million in acquisition-related costs,~~ and a decrease of $0.4 million in indemnification asset reversals related to the release of tax reserves. Excluding these favorable items, consolidated SG&A expenses increased ~~$7.4~~$11.4 million, or 6%7%, primarily due to increased compensation expense and travel-related costs.

Within our operating segments, SG&A expenses:

•Increased $~~1.4~~2.2 million at our Flow Control segment primarily due toto increased compensation expense, travel costs, and ~~travel costs.~~foreign currency transaction losses. These increases were partially offset by a ~~$0.6 million favorable effect of foreign currency translation and a~~ decrease in bad debt ~~expense.~~expense and acquisition costs.

•Increased $~~1.0~~2.3 million at our Industrial Processing segment principally due to increased compensation expense associated with existing and new personnel and incremental trade show and travel-related ~~cost~~s.costs. These increases were partially offset by a ~~$1.3~~$1.2 million favorable effect of foreign currency translation and the inclusion of an indemnification asset reversal related to the release of tax reserves of $0.6 million in 2022.

•Increased $~~1.2~~2.2 million at our Material Handling segment ~~due~~due to increased compensation expense associated with existing and new personnel and, to a lesser extent, the inclusion of an indemnification asset reversal related to the release of tax reserves of $0.2 million. These increases were partially offset by a decrease of $0.7 million in acquisition-related ~~costs and a $0.2 million favorable effect of foreign currency translation.~~costs.

•Increased $~~0.5~~2.1 million at Corporate ~~due~~due to increased compensation expense and professional service ~~fees and compensation expense~~ ~~associated with existing and new personnel, partially offset by~~ ~~a decrease in incentive compensation.~~fees.

Gain on Sale and Other Costs, Net

Gain on Sale of Assets

We entered into several agreements with the local government in China to sell the existing manufacturing building and land use rights of one of our subsidiaries in China for $25.2 million and relocate to a new facility ~~(the China~~(China Transaction). The agreements became effective in the first quarter of 2022 after a 31% down payment was received, including 25% in 2021 and 6% in the first quarter of 2022, and a land use right in a new location was secured. As a result, we recognized a gain on the China Transaction of $20.2 million, or $15.1 million, net of deferred taxes of $5.0 million, in the first quarter of 2022. Our subsidiary, which is part of the Industrial Processing segment, ~~will continue~~relocated to ~~occupy its current facility until construction of~~ its new facility ~~is complete, which is expected~~ during the ~~second half~~third quarter of 2023. See Note 2, Gain on Sale and Other Costs, Net, in the accompanying condensed consolidated financial statements for further details.

Other Costs

Other ~~costs of $0.1~~Costs were $1.0 million in the first ~~six~~nine months of 2023 and $0.3 million in the first nine months of 2022 and included the following:

•Costs of $0.6 million in the first nine months of 2023 within our Industrial Processing segment were associated with the China Transaction and related to the relocation of machinery and equipment and administrative offices to the new manufacturing facility.

•Restructuring and impairment costs of $0.4 million in the first nine months of 2023 within our Flow Control segment related to the 2023 Restructuring Plan, which consisted of severance costs for the termination of 10 employees, asset-write downs, and facility and other closure costs.

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•Impairment costs of $0.2 million in the first ~~six~~nine months of 2022 within our Industrial Processing segment were associated with the China Transaction ~~included a~~and related to the write-down of certain fixed assets that ~~will~~were not be moved to the new manufacturing ~~facility~~facility. Restructuring costs of $0.1 million in ~~China and facility moving costs.~~the first nine months of 2022 within our Flow Control segment under the 2021 Restructuring Plan consisted of severance costs for the termination of two employees.

Interest Expense

Interest expense increased to ~~$4.6~~$6.7 million in the first ~~six~~nine months of 2023 from ~~$2.6~~$4.3 million in the first ~~six~~nine months of 2022 due to a higher weighted-average interest rate, partially offset by lower average debt outstanding in the first ~~six~~nine months of 2023 compared to the first ~~six~~nine months of 2022.

Provision for Income Taxes

Provision for income taxes decreased to ~~$20.9~~$31.8 million in the first ~~six~~nine months of 2023 from ~~$23.3~~$33.1 million in the first ~~six~~nine months of 2022. The effective tax rate of 26% in the first ~~six~~nine months of 2023 and 2022 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, state taxes, and nondeductible expenses. ~~The effective tax rate of 26% in the first six months of 2022 was higher than our statutory rate of 21% primarily~~ ~~due to the distribution of our worldwide earnings, nondeductible expenses, and state taxes. These increases in tax expense in the first six months of 2022 were offset in part by a decrease in tax expense related to the net excess income tax benefits from stock-based compensation arrangements.~~

Net Income

Net income decreased to ~~$58.2~~$89.2 million in the first ~~six~~nine months of 2023 from ~~$67.9~~$95.5 million in the first ~~six~~nine months of 2022 primarily due to a decrease in operating income ~~$10.2~~of $5.6 million and a ~~$2.0~~$2.4 million increase in interest expense, offset in part by a ~~$2.4~~$1.3 million decrease in provision for income taxes. Net income in the first ~~six~~nine months of 2022 included a $15.1

million after-tax gain on the sale of a building related to the China Transaction (see discussions above for further details).

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Non-GAAP Key Performance Indicators

In addition to the financial measures prepared in accordance with GAAP, we use certain non-GAAP financial measures, including organic revenue (defined as revenue excluding the effect of foreign currency translation and acquisitions), adjusted operating income, earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted EBITDA, adjusted EBITDA margin (defined as adjusted EBITDA divided by revenue), and free cash flow (defined as cash flow provided by operations less capital expenditures).

We use organic revenue in order to understand our trends and to forecast and evaluate our financial performance and compare revenue to prior periods (see discussion in Revenue above). Adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin exclude relocation costs, restructuring and impairment costs, acquisition costs, amortization expense related to acquired profit in inventory and backlog, and ~~certain gains~~other income or ~~losses.~~expense, as indicated. These items are excluded as they are not indicative of our core operating results and are not comparable to other periods, which have differing levels of incremental costs, expenditures or income, or none at all. Additionally, we use free cash flow in order to provide insight on our ability to generate cash for acquisitions and debt repayments, as well as for other investing and financing activities.

We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our core business, operating results, or future outlook. We believe that the inclusion of such measures helps investors gain an understanding of our underlying operating performance and future prospects, consistent with how management measures and forecasts our performance, especially when comparing such results to previous periods or forecasts and to the performance of our competitors. Such measures are also used by us in our financial and operating decision-making and for compensation purposes. We also believe this information is responsive to investors' requests and gives them an additional measure of our performance.

Our non-GAAP financial measures are not meant to be considered superior to or a substitute for the results of operations or cash flow prepared in accordance with GAAP. In addition, our non-GAAP financial measures have limitations associated with their use as compared to the most directly comparable GAAP measures, in that they may be different from, and therefore not comparable to, similar measures used by other companies.

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A reconciliation of adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin is as follows:


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
(In thousands, except percentages)	(In thousands, except percentages)	July 1, 2023		July 2, 2022		July 1, 2023		July 2, 2022		(In thousands, except percentages)	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
Net Income Attributable to Kadant	Net Income Attributable to Kadant	$	29,734	$	26,170	$	57,809	$	67,362	Net Income Attributable to Kadant	$	30,864	$	27,487	$	88,673	$	94,849
Net Income Attributable to Noncontrolling Interest	Net Income Attributable to Noncontrolling Interest	212		239		396		488		Net Income Attributable to Noncontrolling Interest	175		184		571		672
Provision for Income Taxes	Provision for Income Taxes	11,182		9,951		20,945		23,329		Provision for Income Taxes	10,816		9,746		31,761		33,075
Interest Expense, Net	Interest Expense, Net	1,929		1,089		4,000		2,221		Interest Expense, Net	1,669		1,450		5,669		3,671
Other Expense, Net	Other Expense, Net	21		19		42		41		Other Expense, Net	20		19		62		60
Operating Income	Operating Income	43,078		37,468		83,192		93,441		Operating Income	43,544		38,886		126,736		132,327
Gain on Sale (a)	Gain on Sale (a)	—		—		—		(20,190)		Gain on Sale (a)	—		—		—		(20,190)
Acquisition Costs	Acquisition Costs	—		—		—		76		Acquisition Costs	—		410		—		486
Indemnification Asset Reversals (b)		177		—		177		575
Other Costs		74		—		74		182
Indemnification Asset (Provision) Reversals (b)										Indemnification Asset (Provision) Reversals (b)	(50)		—		127		575
Relocation Costs										Relocation Costs	535		—		609		—
Restructuring and Impairment Costs										Restructuring and Impairment Costs	434		72		434		254
Acquired Backlog Amortization (c)	Acquired Backlog Amortization (c)	—		—		—		703		Acquired Backlog Amortization (c)	—		—		—		703
Acquired Profit in Inventory Amortization (d)	Acquired Profit in Inventory Amortization (d)	—		—		—		(218)		Acquired Profit in Inventory Amortization (d)	—		—		—		(218)
Adjusted Operating Income (non-GAAP measure)	Adjusted Operating Income (non-GAAP measure)	43,329		37,468		83,443		74,569		Adjusted Operating Income (non-GAAP measure)	44,463		39,368		127,906		113,937
Depreciation and Amortization	Depreciation and Amortization	8,237		8,486		16,683		17,228		Depreciation and Amortization	8,234		8,456		24,917		25,684
Adjusted EBITDA (non-GAAP measure)	Adjusted EBITDA (non-GAAP measure)	$	51,566	$	45,954	$	100,126	$	91,797	Adjusted EBITDA (non-GAAP measure)	$	52,697	$	47,824	$	152,823	$	139,621
Adjusted EBITDA Margin (non-GAAP measure)	Adjusted EBITDA Margin (non-GAAP measure)	21.0%		20.7%		21.1%		20.5%		Adjusted EBITDA Margin (non-GAAP measure)	21.6%		21.3%		21.3%		20.8%

(a) Represents a $20.2 million pre-tax gain on the China Transaction in our Industrial Processing segment.

(b) Represents the provision for or reversal of indemnification ~~asset reversals~~assets related to the establishment or release of tax reserves associated with uncertain tax positions.

(d) Represents income within cost of revenue associated with amortization of acquired profit in inventory.

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A reconciliation of free cash flow from cash flow provided by operating activities is as follows:


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
(In thousands)	(In thousands)	July 1, 2023		July 2, 2022		July 1, 2023		July 2, 2022		(In thousands)	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
Cash Provided by Operating Activities	Cash Provided by Operating Activities	$	22,478	$	18,797	$	59,344	$	42,565	Cash Provided by Operating Activities	$	46,967	$	24,897	$	106,311	$	67,462
Less: Capital Expenditures (a)	Less: Capital Expenditures (a)	(8,777)		(6,947)		(13,246)		(9,815)		Less: Capital Expenditures (a)	(8,848)		(6,376)		(22,094)		(16,191)
Free Cash Flow (non-GAAP measure)	Free Cash Flow (non-GAAP measure)	$	13,701	$	11,850	$	46,098	$	32,750	Free Cash Flow (non-GAAP measure)	$	38,119	$	18,521	$	84,217	$	51,271

(a) Includes ~~$3.1~~$2.5 million and ~~$3.3~~$5.8 million in the three and ~~six~~nine months ended ~~July 1,~~September 30, 2023, respectively, and ~~$3.1~~$2.2 million and ~~$3.2~~$5.4 million in the three and ~~six~~nine months ended ~~July 2,~~October 1, 2022, respectively, related to the China Transaction.

Liquidity and Capital Resources

Consolidated working capital was ~~$222.4~~$222.6 million at ~~July 1,~~September 30, 2023, compared with $201.9 million at December 31, 2022. Cash and cash equivalents were ~~$66.7~~$76.8 million at ~~July 1,~~September 30, 2023, compared with $76.4 million at December 31, 2022, which included cash and cash equivalents held by our foreign subsidiaries of ~~$62.0~~$73.0 million at ~~July 1,~~September 30, 2023 and $75.8 million at December 31, 2022.

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Cash Flows

Cash flow information in the first ~~six~~nine months of 2023 and 2022 is as follows:


		Six Months Ended					Nine Months Ended
(In thousands)	(In thousands)	July 1, 2023		July 2, 2022		(In thousands)	September 30, 2023		October 1, 2022
Net Cash Provided by Operating Activities	Net Cash Provided by Operating Activities	$	59,344	$	42,565	Net Cash Provided by Operating Activities	$	106,311	$	67,462
Net Cash Used in Investing Activities	Net Cash Used in Investing Activities	(12,902)		(7,894)		Net Cash Used in Investing Activities	(20,060)		(13,923)
Net Cash Used in Financing Activities	Net Cash Used in Financing Activities	(56,551)		(45,388)		Net Cash Used in Financing Activities	(85,671)		(62,112)
Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash	Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash	579		(5,418)		Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash	(1,252)		(10,474)
Decrease in Cash, Cash Equivalents, and Restricted Cash	Decrease in Cash, Cash Equivalents, and Restricted Cash	$	(9,530)	$	(16,135)	Decrease in Cash, Cash Equivalents, and Restricted Cash	$	(672)	$	(19,047)

Operating Activities

Cash provided by operating activities increased to ~~$59.3~~$106.3 million in the first ~~six~~nine months of 2023 from ~~$42.6~~$67.5 million in the first ~~six~~nine months of 2022 primarily due to a reduction in cash used for working capital. Our operating cash flows are primarily generated 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.

During the first ~~six~~nine months of 2023, significant cash ~~provided by income was offset in part by investments in~~outflows associated with working ~~capital. Increases in inventory used cash of $10.8 million primarily~~capital related to ~~capital equipment orders that will ship in 2023~~accounts payable and ~~early 2024.~~accounts receivable. Decreases in accounts payable used cash of ~~$9.4~~$12.9 million primarily due to the timing of payments. ~~In addition, an~~An increase in accounts receivable used cash of ~~$4.0~~$10.7 million mainly due to our revenue growth and the timing of shipments. In addition, an increase in other liabilities provided cash of $5.9 million due in part to work performed by subcontractors and outside vendors.

During the first ~~six~~nine months of 2022, significant cash ~~provided by income was offset in part by investments in~~outflows associated with working ~~capital.~~capital related to inventory and accounts receivable. Increases in inventory and accounts receivable used cash of ~~$26.8~~$54.5 million, including $33.8 million for inventory primarily related to capital equipment orders that shipped in 2022 and ~~early~~the first half of 2023. ~~In addition, an increase in accounts receivable associated with our revenue growth used cash of $12.3 million.~~ These uses of cash were offset in part by ~~$9.3~~$16.2 million of cash received from customer deposits.

Investing Activities

Cash used in investing activities was ~~$12.9~~$20.1 million in the first ~~six~~nine months of 2023, compared with ~~$7.9~~$13.9 million in the first ~~six~~nine months of 2022. Capital expenditures were ~~$13.2~~$22.1 million in the first ~~six~~nine months of 2023 and ~~$9.8~~$16.2 million in the first ~~six~~nine months of 2022, including capital expenditures associated with the construction of our new manufacturing facility in China of ~~$3.3~~$5.8 million in the first ~~six~~nine months of 2023 and ~~$3.2~~$5.4 million in the first ~~six months of 2022. In addition, we received $1.9 million of cash from the sale of assets in the first six~~nine months of 2022.

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Financing Activities

Cash used in financing activities was ~~$56.6~~$85.7 million in the first ~~six~~nine months of 2023, compared with ~~$45.4~~$62.1 million in the first ~~six~~nine months of 2022. Repayments of short- and long-term obligations were ~~$46.1~~$71.9 million in the first ~~six~~nine months of 2023 compared to repayments of short- and long-term obligations of ~~$51.4~~$69.5 million, partially offset by borrowings under our revolving credit facility of ~~$16.5~~$21.6 million in the first ~~six~~nine months of 2022. Cash dividends paid to stockholders were ~~$6.4~~$9.8 million in the first ~~six~~nine months of 2023 and ~~$5.9~~$9.0 million in the first ~~six~~nine months of 2022. In addition, taxes paid related to the vesting of equity awards was $3.9 million in the first ~~six~~nine months of 2023 compared to $4.6 million in the first ~~six~~nine months of 2022.

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 ~~$0.6~~$1.3 million ~~increase~~decrease in cash, cash equivalents, and restricted cash in the first ~~six~~nine months of 2023 was primarily attributable to ~~the weakening of the U.S. dollar against the euro, and to a lesser extent, the Mexican peso, and Brazilian real, partially offset by~~ the strengthening of the U.S. dollar against the Chinese ~~renminbi.~~renminbi, and to a lesser extent, the Euro and Swedish Krona.

Borrowing Capacity and Debt Obligations

Our unsecured multi-currency revolving credit facility originally entered into on March 1, 2017 (as amended and restated to date, the Credit Agreement) matures on November 30, 2027 and has a total borrowing capacity of $400 million. At ~~July 1,~~September 30, 2023, we had ~~$257.3~~$284.9 million of borrowing capacity available under our Credit Agreement, in addition to a $200 million uncommitted, unsecured incremental borrowing facility. Under our debt 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,

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must be less than 4.25. As of ~~July 1,~~September 30, 2023, our leverage ratio was ~~0.51~~0.38 and we were in compliance with our debt covenants. See Note 5, Short- and Long-Term Obligations, in the accompanying condensed consolidated financial statements for additional information regarding our debt obligations.

Additional Liquidity and Capital Resources

On May 18, 2023, our board of directors approved the repurchase of up to $50 million of our equity securities during the period from May 18, 2023 to May 18, 2024. We have not repurchased any shares of our common stock under this authorization or under our previous $50 million authorization that expired on May 19, 2023.

We paid cash dividends of ~~$6.4~~$9.8 million in the first ~~six~~nine months of 2023. On ~~May 18,~~September 7, 2023, we declared a quarterly cash dividend of $0.29 per share totaling $3.4 million that will be paid on ~~August 10,~~November 9, 2023. 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 Credit Agreement related to our consolidated leverage ratio.

We plan to make expenditures of approximately ~~$25~~$16 to ~~$27~~$18 million during the remainder of 2023 for property, plant, and equipment, including $5$2 to $3 million for our new manufacturing facility in China.

As of ~~July 1,~~September 30, 2023, we had approximately ~~$269.9~~$265.6 million of total unremitted foreign earnings. It is our intent to indefinitely reinvest ~~$223.8~~$224.8 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments, if any. In the first ~~six~~nine months of 2023, 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 ~~$3.7~~$4.2 million.

We believe that existing cash and cash equivalents, along with future cash generated from operations, our existing borrowing capacity, and continued access to debt markets, will be sufficient to meet the capital requirements of our operations for the next 12 months and foreseeable future.

Contractual Obligations and Other Commercial Commitments

There have been no material changes to our contractual obligations and other commercial commitments during the first ~~six~~nine months of 2023 compared with those disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations under the heading Liquidity and Capital Resources in Part II, Item 7, of our Annual Report.

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 GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities,

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disclosure of contingent liabilities, and the reported amounts of revenue and expenses during the reporting period. Our 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 which are significant to our consolidated financial 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 heading Application of Critical Accounting Estimates in Part II, Item 7, of our Annual Report. There have been no material changes to these critical accounting policies since the end of fiscal 2022 that warrant disclosure.

Recent Accounting Pronouncements

See Note 1, under the heading Recent Accounting Pronouncements Not Yet Adopted, in the accompanying condensed consolidated financial statements for details.

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 as disclosed in Part II, Item 7A, of our Annual Report.

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Item 4 – Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of ~~July 1,~~September 30, 2023. 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 ~~July 1,~~September 30, 2023, our Chief Executive Officer and Chief Financial Officer concluded that as of ~~July 1,~~September 30, 2023, our disclosure controls and procedures were effective at the reasonable assurance level.

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 ~~July 1,~~September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1A – Risk Factors

Careful consideration should be given to the factors discussed in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which could materially affect our business, financial condition or future results, in addition to the information set forth in this Quarterly Report on Form 10-Q.

Item 5 – Other Information

Director and Officer Trading Arrangements

None of our directors or officers adopted or terminated a Rule 10b5-1 trading arrangement or adopted or terminated a non-Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K) during the quarter ended ~~July 1,~~September 30, 2023.

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Item 6 – Exhibits


Exhibit Number
						Description of Exhibit


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

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

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

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

101.SCH						Inline XBRL Taxonomy Extension Schema Document.

101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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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.


			KADANT INC.

Date: ~~August 9,~~November 8, 2023			/s/ Michael J. McKenney
			Michael J. McKenney
			Executive Vice President and Chief Financial Officer
			(Principal Financial Officer)

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	Three Months Ended July 1, 2023
(In thousands, except share and per share amounts)	Common Stock			Capital in Excess of Par Value		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Items		Noncontrolling Interest		Total Stockholders' Equity
	Shares	Amount						Shares	Amount
Balance at April 1, 2023	14,624,159	$	146	$	117,547	$	685,325	2,920,678	$	(71,569)	$	(49,085)	$	1,941	$	684,305
Net income	—	—		—		29,734		—	—		—		212		29,946
Dividend declared – Common Stock, $0.29 per share	—	—		—		(3,395)		—	—		—		—		(3,395)
Activity under stock plans	—	—		2,570		—		(2,417)	60		—		—		2,630

Other comprehensive items	—	—		—		—		—	—		(462)		1		(461)
Balance at July 1, 2023	14,624,159	$	146	$	120,117	$	711,664	2,918,261	$	(71,509)	$	(49,547)	$	2,154	$	713,025

	Six Months Ended July 1, 2023
(In thousands, except share and per share amounts)	Common Stock			Capital in Excess of Par Value		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Items		Noncontrolling Interest		Total Stockholders' Equity
	Shares	Amount						Shares	Amount
Balance at December 31, 2022	14,624,159	$	146	$	119,924	$	660,644	2,949,997	$	(72,287)	$	(54,578)	$	1,722	$	655,571
Net income	—	—		—		57,809		—	—		—		396		58,205
Dividends declared – Common Stock, $0.58 per share	—	—		—		(6,789)		—	—		—		—		(6,789)
Activity under stock plans	—	—		193		—		(31,736)	778		—		—		971



Other comprehensive items	—	—		—		—		—	—		5,031		36		5,067
Balance at July 1, 2023	14,624,159	$	146	$	120,117	$	711,664	2,918,261	$	(71,509)	$	(49,547)	$	2,154	$	713,025