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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with the consolidated financial statements and related notes set forth in Item 8, "Financial Statements and Supplementary Data." The following discussion also contains forward-looking statements, including the outlook for our business, that involve a number of risks and uncertainties. See Part I, "Forward-Looking Statements," for a discussion of the forward-looking statements contained below and Part I, Item 1A, "Risk Factors," for a discussion of certain risks that could cause our actual results to differ materially from the results anticipated in such forward-looking statements.

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 businesses.

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. See Note 12, Business Segment and Geographical Information, in the accompanying consolidated financial statements for a description and financial information of our reportable operating segments.

Industry and Business Overview

We had record consolidated bookings of $893.2 million for 2021 as our businesses rebounded from the impact of the COVID-19 pandemic, which adversely affected our bookings and revenue for a substantial part of 2020. Our consolidated 2021 bookings included $36.9 million attributable to acquisitions and $27.0 million from a favorable foreign currency effect, and consisted of record orders for both parts and consumables products and capital equipment. See Acquisitions below for further details. We ended the year with record consolidated backlog of $309.9 million, increasing 61% from the end of 2020. An overview of our business by segment is as follows:

•Flow Control – Our Flow Control segment ended a strong year with record bookings for both parts and consumables products and capital equipment. In 2021, we acquired The Clouth Group of Companies (Clouth), which contributed $23.2 million of bookings. Orders for both parts and consumables products and capital equipment at our existing Flow Control businesses have been bolstered by growth in the industries we serve, particularly the packaging and tissue markets. Our bookings in the earlier part of 2021 were also boosted by pent-up demand from depressed levels encountered during most of 2020.

•Industrial Processing – Strong quarterly bookings, particularly in the latter half of 2021, contributed to record orders in 2021 for our Industrial Processing segment. Orders for our wood processing business products continue to be fueled by a robust U.S. housing market and high demand for lumber, oriented strand board and plywood, which has driven new capital equipment investment and high parts consumption by our customers. During the second half of 2021, maintenance requirements at many of our customers have augmented demand for our parts products, which we expect to continue into the first half of 2022. In the fourth quarter of 2021, wood processing capital equipment bookings were exceptionally strong, resulting in a backlog that will be fulfilled primarily through mid-2023. Bookings at our stock-preparation business increased 28% in 2021 largely due to a rebound in capital equipment orders compared with the depressed capital spending environment for most of 2020 and due to steady demand for our parts and consumables products. We expect the demand for our Industrial Processing segment products to moderate somewhat in 2022 compared to the record level in 2021.

•Material Handling – Our Material Handling segment also ended the year with record bookings. In August 2021, we acquired East Chicago Machine Tool Corporation (Balemaster) and certain assets of affiliated companies, which contributed $13.2 million of orders. Bookings for baling products at our European operations continue to be bolstered by improved business conditions, including the recovery of recycled commodity prices. Bookings for parts and consumables at our conveying and vibratory equipment business have rebounded from depressed 2020 levels due to the relaxation of pandemic-related restrictions and an increased demand from our mining customers, while bookings for capital equipment have moderated.

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In 2021, many of our operations were impacted by labor availability and supply chain constraints, the latter of which resulted in inflationary pressure on material costs, longer lead times, and increased freight costs, as well as customer-requested delays in shipments. We believe these challenges will generally persist into 2022. Our businesses are alleviating supply chain constraints through various measures, including advance purchases of raw materials to prevent potential manufacturing disruptions and mitigating increased material and freight costs through price adjustments, when possible.

We believe that the fundamentals of our business will remain positive, particularly given our high backlog levels, continued strong bookings, and ongoing strength in the markets we serve as we enter 2022. Despite this optimism, we expect our operating environment to continue to be challenging as a result of the factors impacting our business discussed above and the uncertainties and risks surrounding the COVID-19 pandemic.For more information on risks related to health epidemics to our business, including COVID-19, and other factors impacting our business discussed above, please see Part I, Item 1A, “Risk Factors.”

International Sales

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 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 are working to mitigate the impact of tariffs through pricing and sourcing strategies, we cannot be sure these strategies will effectively mitigate the impact of these costs. For more information on risks associated with our global operations, including tariffs, please see Part I, Item 1A, "Risk Factors."

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. We continue to pursue acquisition opportunities.

In the third quarter of 2021, we acquired Clouth for $92.9 million, net of cash acquired plus debt assumed. Clouth, which is included in our Flow Control segment, is a leading manufacturer of doctor blades and related equipment used in the production of paper, packaging, and tissue. We expect several synergies in connection with this acquisition, including deepening our presence in the growing ceramic blade market and expansion of product sales at our existing businesses by leveraging Clouth's complementary global geographic footprint. Clouth has three manufacturing facilities in Germany and one in Poland and generated revenue of approximately 40.5 million euros for the trailing twelve months ended June 30, 2021 prior to its acquisition by us.

In the third quarter of 2021, we also acquired Balemaster for $53.7 million, net of cash acquired. Balemaster, which is included in our Material Handling segment, is a leading U.S. manufacturer of horizontal balers and related equipment used primarily for recycling packaging waste at corrugated box plants and large retail and distribution centers. We expect several synergies in connection with this acquisition, including expanding our presence in the secondary material processing sector and creating new opportunities for leveraging our high-performance balers produced in Europe. Balemaster generated revenue of approximately $22.2 million for the trailing twelve months ended June 30, 2021 prior to its acquisition by us.

In the fourth quarter of 2021, we acquired a business in India, which is included in our Industrial Processing segment, for approximately $2.9 million.

In 2020, we acquired a business in Canada, which is included in our Industrial Processing segment, for approximately $6.9 million, net of cash acquired.

See Note 2, Acquisitions, in the accompanying consolidated financial statements for further details.

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Results of Operations

2021 Compared to 2020

Revenue

The following table presents changes in revenue by segment between 2021 and 2020, and those changes excluding the effect of foreign currency translation and acquisitions which we refer to as change in organic revenue. The presentation of the change in organic revenue is a non-GAAP measure. We believe this non-GAAP measure helps investors gain an understanding of our underlying operations consistent with how management measures and forecasts its performance, especially when comparing such results to prior periods. This non-GAAP measure should not be considered superior to or a substitute for the corresponding GAAP measure.

Revenue by segment in 2021 and 2020 was as follows:

(Non-GAAP)Change in Organic Revenue

Consolidated revenue in 2021 increased 24%, while consolidated organic revenue increased 15%, driven by higher demand for both parts and consumables products and capital equipment principally at our Industrial Processing and Flow Control segments as described below.

Revenue at our Flow Control segment increased 28% in 2021, while organic revenue increased 15% due to higher demand for parts and consumables products and, to a lesser extent, capital equipment at substantially all locations. Increased demand for parts and consumables products in 2021 was due in part to customer maintenance requirements, pent-up demand, and orders in the latter part of the year to mitigate potential supply chain disruptions. Conversely, revenue during most of 2020 was depressed as a result of customer downtimes, shutdowns, and visitation restrictions related to the COVID-19 pandemic. Higher capital equipment revenue in 2021 resulted from improved market conditions and pent-up demand, while revenue in 2020 was adversely impacted by customer reductions in capital spending and deferrals of equipment installations as a result of the pandemic.

Revenue at our Industrial Processing segment increased 26% in 2021, while organic revenue increased 20% due to higher demand for both capital equipment and parts and consumables products. Our wood processing business continues to experience high demand for its products, driven by near capacity mill rates resulting in increased capital investment and parts consumption. Additionally, demand for parts was augmented by maintenance requirements in the latter part of 2021 at many of our wood processing customers. Increased revenue at our stock-preparation business was led by increased demand for parts and consumables at our North American stock-preparation operation due to improved market conditions and pent-up demand coupled with a depressed 2020 period. Capital equipment revenue also increased as a result of large orders at our Chinese operation, offset in part by lower shipments at our North American and European operations due to the timing of orders and curtailed spending by our customers in 2020, which impacted revenue in the first half of 2021.

Revenue at our Material Handling segment increased 14% in 2021, while organic revenue increased 6%. Demand for our European baling products was bolstered by improved business conditions in Europe, including the recovery of recycled commodity prices. This improvement was partially offset by lower capital equipment revenue at our conveying and vibratory equipment business in 2021.

Gross Profit Margin

Gross profit margin by segment in 2021 and 2020 was as follows:

Industrial Processing 40.1% 41.3%

Consolidated Gross Profit Margin 42.9% 43.7%

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Consolidated gross profit margin declined to 42.9% in 2021 compared with 43.7% in 2020. The 2021 period included $4.3 million of amortization of acquired profit in inventory, which lowered consolidated gross profit margin by 0.5 percentage points, and lower benefits received from government employee retention assistance programs. Benefits received from these programs were $0.9 million, or 0.1 percentage points of consolidated gross profit margin, in 2021 and $3.7 million, or 0.6 percentage points of consolidated gross profit margin, in 2020.

Gross profit margin at our Flow Control segment decreased to 51.0% in 2021 compared with 52.9% in 2020 due to the inclusion of $3.1 million of amortization of acquired profit in inventory, which lowered gross profit margin in 2021 by 1.1 percentage points, and a lower gross profit margin profile for Clouth. We expect the lower gross profit margin profile for Clouth to continue to have a negative impact on our Flow Control gross profit margin in 2022.

Gross profit margin at our Industrial Processing segment decreased to 40.1% in 2021 compared with 41.3% in 2020 due principally to lower benefits received from government employee retention assistance programs. Cost of revenue included benefits received of $0.7 million in 2021 compared with $2.9 million in 2020 related to these programs. The gross profit margin was also impacted by lower-margin capital equipment revenue at our Chinese stock-preparation business offset in part by a higher margin at our wood processing business.

Gross profit margin at our Material Handling segment increased to 34.4% in 2021 compared with 33.7% in 2020 due to a higher gross profit margin profile for Balemaster and an improvement in gross profit margin for capital equipment at our existing baler business. This was offset in part by $1.2 million of amortization of acquired profit in inventory, which lowered gross profit margin by 0.7 percentage points in 2021.

Selling, General, and Administrative Expenses

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

Consolidated SG&A expenses as a percentage of revenue decreased to 27% in 2021 compared with 29% in 2020 principally due to higher revenue. Consolidated SG&A expenses increased $26.9 million as a result of the inclusion of $9.7 million of SG&A expenses from acquisitions, higher incentive compensation resulting from our improved financial performance, $5.1 million from the unfavorable effect of currency translation, and an incremental $4.0 million of acquisition-related costs. SG&A expenses included benefits received from government employee retention assistance programs of $1.4 million in 2021 and $2.2 million in 2020.

SG&A expenses at our Flow Control segment increased $13.3 million principally due to the inclusion of $7.0 million of SG&A expenses from Clouth, $3.1 million of acquisition-related costs, and $1.7 million from the unfavorable effect of foreign currency translation. The remaining increase is principally attributable to higher incentive compensation in 2021.

SG&A expenses at our Industrial Processing segment increased $3.1 million principally due to $2.7 million from the unfavorable effect of foreign currency translation.

SG&A expenses at our Material Handling segment increased $5.0 million principally due the inclusion of $2.4 million of SG&A expenses from Balemaster and an incremental $1.3 million of acquisition-related costs.

SG&A expenses at Corporate increased $5.4 million primarily due to higher incentive compensation and, to a lesser extent, increased professional service fees.

Impairments and Other Costs, Net

Impairments and other costs, net in 2021 included an impairment charge of $0.5 million related to the write down of an intangible asset and restructuring costs totaling $0.5 million for severance costs and the write down of certain assets associated with the closure of a redundant business in our Flow Control segment. Impairments and other costs, net in 2021 also included a gain on the sale of a building of $0.5 million within our Industrial Processing segment.

Impairments and other costs, net in 2020 included impairment charges of $1.9 million related to the write down of intangible assets associated with our timber-harvesting products, which are included in our Industrial Processing segment, as a result of a continued decline in revenue and operating results for this business. Impairments and other costs, net in 2020 also included restructuring costs of $1.1 million, which consisted of severance costs of $0.7 million at our Flow Control segment, $0.2 million at our Industrial Processing segment, and $0.2 million at our Material Handling segment. These restructuring costs

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represent severance associated with a restructuring plan implemented in response to the slowdown in the global economy that was largely driven by the impact of the COVID-19 pandemic.

See Note 1, Nature of Operations and Summary of Significant Accounting Policies, under the heading Impairment of Long-Lived Assets, andNote 8, Other Costs, Net in the accompanying consolidated financial statements for further details relating to the items discussed above.

Interest Expense

Interest expense decreased to $4.8 million in 2021 from $7.4 million in 2020 due to a lower weighted average interest rate and lower outstanding debt in 2021.

Provision for Income Taxes

Our provision for income taxes increased to $27.2 million in 2021 from $17.9 million in 2020 and represented 24% of pre-tax income in both periods. The effective tax rate in 2021 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 were offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements. The effective tax rate in 2020 was higher than our statutory rate of 21% primarily due to nondeductible expenses, the distribution of our worldwide earnings, and state taxes. These increases in tax expense were offset in part by a decrease in tax related to the net reversal of tax reserves associated with uncertain tax positions, the net excess income tax benefits from stock-based compensation arrangements, and a tax benefit for the partial release of a valuation allowance.

Net Income

Net income increased $29.1 million in 2021 from $55.7 million in 2020 primarily due to a $35.6 million increase in operating income and a $2.6 million decrease in interest expense, offset in part by a $9.2 million increase in provision for income taxes (see discussions above for further details).

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 impairment and restructuring costs, acquisition costs, amortization expense related to acquired profit in inventory and backlog, and certain gains or losses. 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 from net income attributable to Kadant is as follows:

Net Income Attributable to Noncontrolling Interest 838 543 496

Gain on Sale of Building (515) — —

Acquired Profit in Inventory 4,284 — 3,549

As a percentage of revenue, adjusted EBITDA margin increased 200 basis points in 2021 and 30 basis points in 2020. The 2021 increase was primarily due to organic revenue growth without a proportionate increase in operating expenses. The 2020 increase was primarily due to cost reduction efforts, including the impact of benefits received from government employee retention assistance programs, to mitigate lower revenue and an increased proportion of higher margin parts and consumables revenue.

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

Free cash flow increased to $149.6 million in 2021 from $85.3 million in 2020 primarily due to improvements in operating assets and liabilities and net income. See below for further discussion of cash provided by operating activities. Free cash flow decreased to $85.3 million in 2020 from $87.5 million in 2019 primarily due to a use of cash for working capital purposes, driven by a reduction in accounts payable as a result of reduced spending levels in 2020 for capital equipment orders.

2020 Compared to 2019

A detailed discussion of the year-over-year results of operations for 2020 compared with 2019 can be found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended January 2, 2021, filed with the SEC.

Liquidity and Capital Resources

Consolidated working capital was $162.4 million at January 1, 2022, compared with $155.1 million at January 2, 2021. Cash and cash equivalents were $91.2 million at January 1, 2022, compared with $65.7 million at January 2, 2021, which included cash and cash equivalents held by our foreign subsidiaries of $83.8 million at January 1, 2022 and $63.6 million at January 2, 2021.

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Cash Flows

Cash flow information is as follows:

Net Cash Provided by Operating Activities $ 162,420 $ 92,884

Net Cash Used in Investing Activities (154,475) (14,545)

Net Cash Provided by (Used in) Financing Activities 22,808 (84,556)

Operating Activities

Cash provided by operating activities increased to $162.4 million in 2021 from $92.9 million in 2020. Our operating cash flows primarily consist of cash received from customers, offset by cash payments for items such as inventory, employee compensation, operating leases, income taxes and interest payments on outstanding debt obligations. The increase in cash provided by operating activities in 2021 was principally driven by improvements in operating assets and liabilities and net income.

Cash provided by operating assets and liabilities was $29.3 million in 2021, including sources of cash of $27.7 million from customer deposits and $26.3 million from accounts payable, reflecting the impact of increased capital equipment order activity. Other liabilities provided cash of $19.5 million, which includes a $6.2 million deposit received for the anticipated sale of a building in China and an increase in our accrued incentive compensation, advance billings, and accrued income taxes resulting from our improved financial performance. These sources of cash were offset in part by cash used of $16.7 million for accounts receivable mostly due to revenue growth and timing of shipments, $15.0 million for other assets due in part to prepayments for raw materials and a land use right operating lease related to the relocation of our existing facility in China, and $11.2 million for a buildup of inventories for capital equipment orders and to mitigate potential supply chain issues.

Cash used for operating assets and liabilities of $8.0 million in 2020 included cash used of $15.6 million for accounts payable primarily due to reduced spending levels for capital equipment projects and $8.6 million for other liabilities due in part to a decrease in advance billings resulting from lower contract activity and a payment of $2.4 related to the settlement of a post-retirement benefit plan. These uses of cash were offset by cash provided of $13.2 million due to a reduction in unbilled revenue and accounts receivable primarily as a result of lower capital equipment revenue during 2020.

Investing Activities

Cash used in investing activities was $154.5 million in 2021 compared to $14.5 million in 2020. Cash used in investing activities included consideration paid for acquisitions, net of cash acquired, of $144.0 million in 2021 and $7.1 million in 2020. Additionally, cash used in investing activities included purchases of property, plant, and equipment of $12.8 million in 2021 and $7.6 million in 2020, reflecting depressed capital expenditures in 2020 due to the impact of the COVID-19 pandemic.

Financing Activities

Cash provided by financing activities was $22.8 million in 2021 compared with cash used in financing activities of $84.6 million in 2020. Borrowings under our revolving credit facility were $151.9 million in 2021, including $140.3 million to fund acquisitions, and $26.0 million in 2020, including $18.9 million used to prepay the outstanding principal balance on our real estate loan. Repayment of short- and long-term obligations was $115.6 million in 2021 and $99.5 million in 2020, including the $18.9 million prepayment of our real estate loan.

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 $3.2 million negative exchange rate effect in 2021 was primarily attributable to the strengthening of the U.S. dollar against the euro and the Swedish krona, offset in part by the weakening of the U.S. dollar against the Chinese renminbi. The $4.6 million positive exchange rate effect in 2020 primarily related to the weakening of the U.S. dollar against the euro and Chinese renminbi.

Borrowing Capacity and Debt Obligations

We entered into an unsecured multi-currency revolving credit facility, dated as of March 1, 2017 (as amended and restated to date, the Credit Agreement). At year-end 2021, we have a borrowing capacity available under our Credit Agreement of $149.9 million in addition to a $150 million uncommitted, unsecured incremental borrowing facility. Under our debt

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agreements, our leverage ratio must be less than 3.75 or, if we elect, for the quarter during which a material acquisition occurs and for the three fiscal quarters thereafter, must be less than 4.00. As of January 1, 2022, our leverage ratio was 1.3 and we were in compliance with our debt covenants. We expect to renew our Credit Agreement prior to its maturity date of December 14, 2023. See Note 6, Short- and Long-Term Obligations, in the accompanying consolidated financial statements for additional information regarding our debt obligations.

Additional Liquidity and Capital Resources

On May 20, 2021, our board of directors approved the repurchase of up to $20 million of our equity securities during the period from May 20, 2021 to May 20, 2022. We have not repurchased any shares of our common stock under this authorization or our previous authorization, which expired on May 13, 2021.

We paid cash dividends of $11.5 million in 2021. On November 18, 2021, we declared a quarterly cash dividend of $0.25 per share totaling $2.9 million that was paid on February 3, 2022. Future declarations of dividends are subject to our board of directors' approval and may be adjusted as business needs or market conditions change. The declaration of cash dividends is subject to our compliance with the covenant in our revolving credit facility related to our consolidated leverage ratio.

We plan to make expenditures of approximately $18.0 million during 2022 for property, plant, and equipment. In addition, one of our Chinese subsidiaries expects to build a new facility and relocate over the next two years. Capital expenditures for the new facility are estimated to be approximately $20 million, which will be offset by the proceeds received from the sale of our existing facility. See Note 15, Subsequent Event, in the accompanying consolidated financial statements for additional information regarding the anticipated relocation of our Chinese manufacturing facility.

As of January 1, 2022, we had approximately $245.1 million of total unremitted foreign earnings. It is our intent to indefinitely reinvest $223.0 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments, if any. In 2021, we recorded withholding taxes on the earnings in certain foreign subsidiaries that we plan to repatriate in the foreseeable future. The foreign withholding taxes that would be required if we were to remit the indefinitely-reinvested foreign earnings to the United States would be approximately $4.1 million.

We believe that existing cash and cash equivalents, along with 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 the foreseeable future.

Material Contractual Obligations

The following table summarizes our material contractual obligations as of January 1, 2022 and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods. Detailed information concerning these obligations can be found in Notes 6, 7, and 9 in the accompanying consolidated financial statements.

(In millions) Less than 1 Year 1-3 Years 3-5 Years After 5 Years Total

Debt Obligations:

Operating and Finance Lease Obligations 5.4 7.0 4.0 9.8 26.2

Letters of Credit and Bank Guarantees 18.5 4.4 0.6 — 23.5

(a)Excludes $1.5 million related to a net fixed price purchase option exercisable in 2022.

(b)Includes interest expense on both variable and fixed rate debt assuming no prepayments. Variable interest rates have been assumed to remain constant through the end of the term at the rates that existed as of year-end 2021.

Application of Critical Accounting Estimates

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

Critical accounting policies and estimates are defined as those that entail significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. For a discussion on the application of these estimates and other accounting policies, see Note 1, Nature of Operations and Summary of Significant

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Accounting Policies, in the accompanying consolidated financial statements. We believe that our most critical accounting policies and estimates upon which our financial position depends, and which involve the most complex or subjective decisions or assessments, are those described below.

Income Taxes

We operate in numerous countries under many legal forms and, as a result, are subject to the jurisdiction of numerous domestic and non-U.S. tax authorities, as well as to tax agreements and treaties among these governments. Determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and assumptions regarding significant future events, such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources and character of income and available tax credits. Changes in tax laws, regulations, agreements and treaties, currency-exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of current and deferred tax balances and our results of operations.

We compute our provision for income taxes using the asset and liability method, and we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for tax loss or credit carryforwards. We measure deferred tax assets and liabilities using the currently enacted tax rates that are expected to apply to taxable income in the years in which we expect to realize those deferred tax assets and liabilities. We estimate the degree to which our deferred tax assets on deductible temporary differences and tax loss or credit carryforwards will result in an income tax benefit based on the expected profitability by tax jurisdiction, and we provide a valuation allowance for these deferred tax assets if it is more likely than not that they will not be realized in the future. If it were to become more likely than not that these deferred tax assets would be realized, we would reverse the related valuation allowance. Should our actual future taxable income by tax jurisdiction vary from our estimates, additional valuation allowances or reversals thereof may be necessary. When assessing the need for a valuation allowance in a tax jurisdiction, we evaluate the weight of all available evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. As part of this evaluation, we consider our cumulative three-year history of earnings before income taxes, taxable income in prior carryback years, future reversals of existing taxable temporary differences, prudent and feasible tax planning strategies, and expected future results of operations. At year-end 2021, we continued to maintain a valuation allowance in the United States against certain of our state operating loss carryforwards due to the uncertainty of future profitability in these state jurisdictions in the United States, and we maintained valuation allowances in certain foreign jurisdictions because of the uncertainty of future profitability. Our tax valuation allowance was $9.2 million at year-end 2021.

In the ordinary course of business there are inherent uncertainties and judgements required in quantifying our income tax positions. It is our policy to provide for uncertain tax positions and the related interest and penalties based upon our assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. On a quarterly basis, we evaluate our uncertain tax positions against various factors, including changes in facts or circumstances, tax laws, or the status of audits by tax authorities. We believe that we have appropriately accounted for any liability for unrecognized tax benefits, and at year-end 2021, our liability for these unrecognized tax benefits, including an accrual for the related interest and penalties, totaled $11.4 million. To the extent we prevail in matters for which a liability for an unrecognized tax benefit is established or are required to pay amounts in excess of the liability, our effective tax rate in a given financial statement period may be affected.

We intend to repatriate the distributable reserves of select foreign subsidiaries back to the United States and, during 2021, we recorded $0.6 million of net tax expense associated with these foreign earnings that we plan to repatriate in 2022. Except for these select foreign subsidiaries, we intend to reinvest indefinitely the earnings of our international subsidiaries in order to support the current and future capital needs of their operations, including the repayment of our foreign debt.

Revenue Recognition

Approximately90% of our revenue is recognized at a point in time following the transfer of control of the goods or service to the customer, primarily relating to our products that require minimal customization for the customer. The remaining portion of our revenue is recognized on an over time basis using an input method that compares the costs incurred to date to the total expected costs required to satisfy the performance obligation. Most revenue recognized on an over time basis is for large capital products that are highly customized for the customer and, as a result, would include significant cost to rework in the event of cancellation. The over time basis of accounting requires significant judgment in determining applicable contract costs and the corresponding revenue to be recognized, which could be different if there were to be changes to the circumstances of the contract. When adjustments to revenue and costs are required, the adjustments are included in earnings in the period of the change. Judgment is also required for contracts involving variable consideration and multiple performance obligations.

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Valuation of Goodwill and Intangible Assets

We use assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination, including the determination of the fair value of intangible assets acquired, which represents a significant portion of the purchase price in many of our acquisitions. We estimate the fair value of intangible assets primarily based on projections of discounted cash flows which we expect to arise from identifiable intangible assets of acquired businesses. The determination of the allocation of the purchase price for the fair value of intangible assets acquired requires significant judgment as does the determination as to whether such intangibles are amortizable or non-amortizable and, if amortizable, the amortization period of the intangible asset.

We evaluate the recoverability of goodwill and indefinite-lived intangible assets as of the end of each fiscal year, or more frequently if events or changes in circumstances indicate that the carrying value of an asset might be impaired. Estimates of discounted future cash flows arising from intangible assets acquired require assumptions related to revenue and operating income growth rates, discount rates, and other factors. Different assumptions from those made in our analysis could materially affect projected cash flows and our evaluation of goodwill and indefinite-lived intangible assets for impairment. At year-end 2021 and 2020, we performed a qualitative impairment analysis (Step 0) for our reporting units, except for the material handling reporting unit for which we performed a quantitative impairment analysis (Step 1) at year-end 2020. Based on these analyses, we determined goodwill and indefinite-lived intangible assets were not impaired. Goodwill totaled $396.9 million and indefinite-lived intangible assets totaled $28.9 million at year-end 2021.

Definite-lived intangible assets are evaluated for impairment if events or changes in circumstances indicate that the carrying value of an asset might be impaired, such as a significant reduction in cash flows associated with the assets. Actual cash flows arising from a particular intangible asset could vary from projected cash flows which could imply different carrying values from those established at the dates of acquisition and which could result in impairment of such asset. No indicators of impairment were identified in 2021 and 2020, except for impairment charges of $0.5 million in 2021 related to the closure of a business in our Flow Control Segment and $1.9 million in 2020 associated with our timber-harvesting product line, which is included in our Industrial Processing segment. Definite-lived intangible assets were $170.4 million at year-end 2021.

A material adverse change in the business climate including a prolonged economic downturn and weakness in demand for our products could negatively affect the revenue and profitability assumptions used in our assessment of goodwill and intangible assets, which may result in impairment charges. Any future impairment charges could have a material adverse effect on our results of operations in the period in which an impairment is determined to exist.

See Note 1, Nature of Operations and Summary of Significant Accounting Policies, under the heading Impairment of Long-Lived Assets, in the accompanying consolidated financial statements for further details regarding impairment costs recorded in 2021 and 2020.

Inventories

We value our inventory at the lower of the actual cost (on a first-in, first-out; or weighted average basis) or net realizable value and include materials, labor, and manufacturing overhead. The valuation of inventory requires us to make judgments, based on currently available information, about the forecasted usage of and demand for each particular product or product line. Assumptions about future dispositions of inventory are inherently uncertain and, although we make every effort to ensure the accuracy of our forecasts of future product usage and demand, any changes in those assumptions may result in a write-down of inventory in the period in which inventory is deemed excessive or obsolete, which could adversely affect our results of operations.

Recent Accounting Pronouncements

See Note 1, Nature of Operations and Summary of Significant Accounting Policies, under the headings Recently Adopted Accounting Pronouncements and Recent Accounting Pronouncements Not Yet Adopted, in the accompanying consolidated financial statements for further details.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from changes in interest rates and foreign currency exchange rates, which could affect our future results of operations and financial condition. We manage our exposure to these risks through our regular operating and financing activities. We enter into swap agreements to hedge a portion of our exposure to variable rate long-term debt. Additionally, we use short-term forward contracts to manage certain exposures to foreign currencies. We enter into forward currency-exchange contracts to hedge firm purchase and sale commitments denominated in currencies other than our subsidiaries' functional currencies. We do not engage in extensive foreign currency hedging activities. However, when we do enter into foreign currency hedging activities, the purpose is to protect our functional currency cash flows related to these commitments from fluctuations in foreign exchange rates. Our forward currency-exchange contracts hedge transactions primarily denominated in U.S. dollars, Canadian dollars, and euros. Gains and losses arising from forward contracts are

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recognized as offsets to gains and losses resulting from the transactions being hedged. We do not hold or engage in transactions involving derivative instruments for purposes other than risk management.

Interest Rates

Our exposure to changes in interest rates relates primarily to our long-term debt. Our borrowings under the Credit Agreement of $250.3 million at year-end 2021 and $218.0 million at year-end 2020 bear variable rates of interest, which adjust frequently based on prevailing market rates. Assuming year-end borrowing levels, a 10% increase in interest rates on our variable-rate debt would have increased our annual pre-tax interest expense by an immaterial amount in 2021 and 2020. A portion of our outstanding variable-rate debt at year-end 2021 and 2020 was hedged with a swap agreement sensitive to changes in the three-month LIBOR forward curve. A 10% decrease in the three-month LIBOR forward curve would have increased our unrealized loss by immaterial amounts in both 2021 and 2020.

Currency Exchange Rates

We generally view our investment in foreign subsidiaries in a functional currency other than our reporting currency as long-term. Our investment in foreign subsidiaries is sensitive to fluctuations in foreign currency exchange rates. The functional currencies of our foreign subsidiaries are principally denominated in euros, British pounds sterling, Mexican pesos, Canadian dollars, Chinese renminbi, Brazilian reals, and Swedish krona. The effect of changes in foreign exchange rates on our net investment in foreign subsidiaries is reflected in the "accumulated other comprehensive items" component of stockholders' equity. A 10% decrease in functional currencies relative to the U.S. dollar, would have resulted in a reduction in stockholders' equity of $36.4 million at year-end 2021.

At year-end 2021, we had $78.3 million of euro-denominated borrowings outstanding. The translation of our foreign-denominated debt impacts our borrowing capacity available under our Credit Agreement, which is calculated in U.S. dollars. A 10% negative movement in the euro foreign exchange rates against the U.S. dollar would have decreased our borrowing capacity by approximately $7.8 million at year-end 2021.

The fair value of forward currency-exchange contracts is sensitive to fluctuations in foreign currency exchange rates. The fair value of forward currency-exchange contracts is the estimated amount that we would pay or receive upon termination of the contracts. A 10% adverse change in year-end 2021 foreign currency exchange rates related to our foreign currency exchange contracts would have resulted in an increase in unrealized losses of $0.1 million in 2021, which would have been largely offset by the corresponding change in the fair value of the underlying hedged items.

Item 8. Financial Statements and Supplementary Data

This data is submitted as a separate section to this report and incorporated herein by reference. See Item 15, "Exhibits and Financial Statement Schedules."

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. 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 at year-end 2021. The term "disclosure controls and procedures," as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon the evaluation of our disclosure controls and procedures at year-end 2021, our Chief Executive Officer and Chief Financial Officer concluded that at year-end 2021, our disclosure controls and procedures were effective at the reasonable assurance level.

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Management's Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rules 13a-15(f) and 15d-15(f). Our management assessed the effectiveness of our internal control over financial reporting at year-end 2021. In making this assessment, our management used the criteria set forth in "Internal Control—Integrated Framework (2013)" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, management believes that at year-end 2021 our internal control over financial reporting was effective based on the criteria issued by COSO.

In the third quarter of 2021, we acquired Clouth and Balemaster. Our audited consolidated financial statements include the results of Clouth and Balemaster since their dates of acquisition, including total assets of $174.5 million and total revenue of $32.3 million as of and for the fiscal year ended January 1, 2022, but management's assessment does not include an assessment of the internal control over financial reporting of the Clouth and Balemaster businesses.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our independent registered public accountants, KPMG LLP, have issued an audit report on our internal control over financial reporting, which is included herein on pages F-2 and F-3 and incorporated into this Item 9A by reference.

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 January 1, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

Not applicable.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Not applicable.

PART III

Item 10. Directors, Executive Officers, and Corporate Governance

Information about our Directors

This information will be included under the heading "Election of Directors" in our 2022 proxy statement for our 2022 Annual Meeting of Shareholders and is incorporated in this report by reference, except for the information concerning executive officers, which is included under the heading "Information about our Executive Officers" in Item 1 of Part I of this report.

Section 16(a) Beneficial Ownership Reporting Compliance

The information required under Item 405 of Regulation S-K will be included under the heading "Stock Ownership–Delinquent Section 16(a) Reports" in our 2022 proxy statement and is incorporated in this report by reference.

Corporate Governance

The information required under Items 406 and 407 of Regulation S-K will be included under the heading "Corporate Governance" in our 2022 proxy statement and is incorporated in this report by reference.

Item 11. Executive Compensation

This information will be included under the headings "Executive Compensation," "Corporate Governance - Compensation Committee Interlocks and Insider Participation," and "Compensation Discussion and Analysis" in our 2022 proxy statement and is incorporated in this report by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Except for the information concerning equity compensation plans, this information will be included under the heading "Stock Ownership" in our 2022 proxy statement and is incorporated in this report by reference.

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The following table provides information about the securities authorized for issuance under our equity compensation plans at year-end 2021:

Equity Compensation Plan Information

Equity compensation plans not approved by security holders — $ — —

(a)Consists of shares of our common stock issuable upon the vesting of restricted stock units and performance-based restricted stock units under the 2006 Plan.

(b)Shares of restricted stock units and performance-based restricted stock units outstanding on January 1, 2022 had a weighted average grant date fair value of $127.70.

(c)Includes an aggregate of 91,643 shares of common stock issuable under our employees' stock purchase plan in connection with current and future offering periods under the plan.

Item 13. Certain Relationships and Related Transactions, and Director Independence

This information will be included under the heading "Corporate Governance" in our 2022 proxy statement and is incorporated in this report by reference.

Item 14. Principal Accountant Fees and Services

Our independent registered public accounting firm is KPMG LLP, located in Boston, Massachusetts, auditor firm ID:185. The information required by this item will be included under the heading "Independent Registered Public Accounting Firm" in our 2022 proxy statement and is incorporated in this report by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)The following documents are filed as part of this report:

(1)Consolidated Financial Statements (see Index on Page F-1 of this report):

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheet

Consolidated Statement of Income

Consolidated Statement of Comprehensive Income

Consolidated Statement of Cash Flows

Consolidated Statement of Stockholders' Equity

Notes to Consolidated Financial Statements

(2)All schedules are omitted because they are not applicable or not required, or because the required information is shown either in the consolidated financial statements or in the notes thereto.

(3)Exhibits filed herewith or incorporated in this report by reference are set forth in the Exhibit Index beginning on page 37. This list of exhibits identifies each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report.

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(b) Exhibits

Exhibit Index

ExhibitNumber Description of Exhibit

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Exhibit Index

ExhibitNumber Description of Exhibit

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Exhibit Index

ExhibitNumber Description of Exhibit

21 Subsidiaries of the Registrant.

23 Consent of KPMG LLP, Independent Registered Public Accounting Firm.

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Exhibit Index

ExhibitNumber Description of Exhibit

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.

* Management contract or compensatory plan or arrangement.

(1) The schedules to this document have been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish copies of any of the schedules to the U.S. Securities and Exchange Commission upon request.

Item 16. Form 10-K Summary

Not applicable.

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Signatures

Pursuant to the requirements of Section 13 or 15(d) 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: March 1, 2022 By: /s/ Jeffrey L. Powell

Jeffrey L. Powell

Chief Executive Officer and President

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jeffrey L. Powell, Michael J. McKenney and Deborah S. Selwood, jointly and severally, his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on March 1, 2022.

Signature Title

By: /s/ Jeffrey L. Powell Chief Executive Officer, President and Director

Jeffrey L. Powell (Principal Executive Officer)

By: /s/ Michael J. McKenney Executive Vice President and Chief Financial Officer

Michael J. McKenney (Principal Financial Officer)

By: /s/ Deborah S. Selwood Senior Vice President and Chief Accounting Officer

Deborah S. Selwood (Principal Accounting Officer)

By: /s/ Jonathan W. Painter Director and Chairman of the Board

Jonathan W. Painter

By: /s/ John M. Albertine Director

John M. Albertine

By: /s/ Thomas C. Leonard Director

Thomas C. Leonard

By: /s/ Erin L Russell Director

Erin L. Russell

By: /s/ William P. Tully Director

William P. Tully

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Annual Report on Form 10-K

Index to Consolidated Financial Statements and Schedule

The following Consolidated Financial Statements of the Registrant and its subsidiaries are required to be included in Item 8:

Page

Report of Independent Registered Public Accounting Firm F-2

Consolidated Balance Sheet as of January 1, 2022 and January 2, 2021 F-4

Notes to Consolidated Financial Statements F-9

F-1

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Kadant Inc.:

Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of Kadant Inc. and subsidiaries (the Company) as of January 1, 2022 and January 2, 2021, the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for each of the fiscal years in the three-year period ended January 1, 2022, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of January 1, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 1, 2022 and January 2, 2021, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended January 1, 2022, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 1, 2022 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

The Company acquired The Clouth Group of Companies (Clouth) and East Chicago Machine Tool Corporation (Balemaster) during the fiscal year ended January 1, 2022, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of January 1, 2022, Clouth’s and Balemaster’s internal control over financial reporting associated with total assets of $174.5 million and total revenues of $32.3 million included in the consolidated financial statements of the Company as of and for the fiscal year ended January 1, 2022. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Clouth and Balemaster.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and

F-2

Report of Independent Registered Public Accounting Firm (continued)

expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Assessment of uncertain tax positions

As discussed in Note 1 to the consolidated financial statements, it is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. As disclosed in Note 5 to the consolidated financial statements, the Company has recognized uncertain tax positions amounting to $9,731,000 as of January 1, 2022. The Company’s tax positions are subject to audit by local taxing authorities across multiple global jurisdictions. Tax law can be complex and tax audits can take an extended period of time to resolve, and accordingly, the ultimate outcome with respect to taxes the Company may owe may differ from the amounts recognized.

We identified the assessment of uncertain tax positions as a critical audit matter. Complex auditor judgment, including specialized skills and knowledge, was required in evaluating the Company’s interpretation of, and compliance with, tax law globally and the estimate of the amount of tax benefits expected to be realized.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process to assess uncertain tax positions. This included controls related to the identification of uncertain tax positions, interpretation of tax law and its application in the liability estimation process. We involved domestic and international tax professionals with specialized skills and knowledge, who assisted in:

•assessing tax positions for compliance with applicable laws and regulations

•evaluating the Company’s uncertain tax positions by developing independent expectations of the uncertain tax positions using independent assumptions and comparing them to the Company’s estimates

•assessing the expiration of statutes of limitations with applicable laws and regulations.

/s/ KPMG LLP

We have served as the Company's auditor since 2012.

Boston, Massachusetts

March 1, 2022

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Kadant Inc. 2021 Financial Statements

Consolidated Balance Sheet

Assets

Current Assets:

Liabilities and Stockholders' Equity

Current Liabilities:

Accrued payroll and employee benefits 37,203 31,168

Commitments and Contingencies (Note 7)

Stockholders' Equity (Notes 3 and 4):

Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued — —

Accumulated other comprehensive items (Note 14) (30,350) (19,492)

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

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Kadant Inc. 2021 Financial Statements

Consolidated Statement of Income

Costs and Operating Expenses:

Net Income Attributable to Noncontrolling Interest (838) (543) (496)

Earnings per Share Attributable to Kadant (Note 13)

Weighted Average Shares (Note 13)

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

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Kadant Inc. 2021 Financial Statements

Consolidated Statement of Comprehensive Income

Other Comprehensive Items:

Comprehensive Income Attributable to Noncontrolling Interest (716) (687) (445)

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

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Kadant Inc. 2021 Financial Statements

Consolidated Statement of Cash Flows

Operating Activities

Net income attributable to noncontrolling interest 838 543 496

Provision for losses on accounts receivable 5 356 114

Gain on sale of property, plant, and equipment (375) (8) (79)

U.S. pension benefit plan settlement loss — — 5,887

Deferred income tax (benefit) provision (1,384) 142 (2,491)

Changes in assets and liabilities, net of effects of acquisitions:

Investing Activities

Purchases of property, plant, and equipment (12,771) (7,595) (9,957)

Proceeds from sale of property, plant, and equipment 1,740 145 398

Other investing activities 537 — —

Financing Activities

Proceeds from issuance of Company common stock 1,892 3,207 5,176

Dividend paid to noncontrolling interest (560) (525) (664)

Other financing activities — (189) (56)

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 consolidated financial statements.

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Kadant Inc. 2021 Financial Statements

Consolidated Statement of Stockholders' Equity

(In thousands, except share and per share amounts) Common Stock Treasury Stock

Shares Amount Shares Amount

Adoption of ASU No. 2016-02, Leases (Topic 842) — — — (17) — — — — (17)

Dividend paid to noncontrolling interest — — — — — — — (664) (664)

Other comprehensive items — — — — — — 1,756 (51) 1,705

Dividend paid to noncontrolling interest — — — — — — — (525) (525)

Dividend paid to noncontrolling interest — — — — — — — (560) (560)

Noncontrolling interest acquired (Note 2) — — — — — — — 367 367

Purchase of shares of noncontrolling interest (Note 2) — — — — — — — (389) (389)

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

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Kadant Inc. 2021 Financial Statements

Notes to Consolidated Financial Statements

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.

Noncontrolling Interest

One of the Company's foreign subsidiaries that manufactures fluid-handling products is part of a joint venture agreement with an Italian company in which each holds a 50% ownership interest. The agreement provides the Company's subsidiary with the option to purchase the remaining 50% interest in the joint venture.

Principles of Consolidation

The accompanying consolidated financial statements of the Company include the accounts of its wholly and majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated.

Fiscal Year

Typically, the Company's fiscal quarters and fiscal year consist of 13 and 52 weeks, respectively, ending on the Saturday closest to the end of the corresponding calendar quarter for its fiscal quarters and on the Saturday closest to December 31 for its fourth fiscal quarter and fiscal year. As a result of the difference between the fiscal and calendar periods, a 53rd week is added to the Company's fiscal year every five or six years. In a 53-week fiscal year, the Company's fourth fiscal quarter contains 14 weeks. The Company's fiscal year ended January 1, 2022 (fiscal 2021 or 2021) contained 52 weeks, its fiscal year ended January 2, 2021 (fiscal 2020 or 2020) contained 53 weeks, and its fiscal year ended December 28, 2019 (fiscal 2019 or 2019) contained 52 weeks. Each quarter of fiscal 2021, 2020 and 2019 contained 13 weeks, except the fourth quarter of 2020, which contained 14 weeks. The impact of the additional week in 2020 was not material to the Company's financial results.

Financial Statement Presentation

Certain reclassifications have been made to prior periods to conform with the current period presentation. On the consolidated statement of cash flows, the Company reclassified the change in customer deposits within operating activities from other current liabilities to a separate line item and the changes in long-term assets and liabilities from other items, net to other assets and other liabilities, respectively.

Use of Estimates and Critical Accounting Policies

The preparation of consolidated 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 consolidated 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 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 consolidated financial statements.

Critical accounting policies are defined as those that entail significant judgments and estimates, and could potentially result in materially different results under different assumptions and conditions. The Company believes that the most critical accounting policies upon which its financial position depends, and which involve the most complex or subjective decisions or assessments, concern income taxes, revenue recognition, the valuation of goodwill and intangible assets, and inventories. A discussion of the application of these and other accounting policies is included within this note.

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Kadant Inc. 2021 Financial Statements

Notes to Consolidated Financial Statements

Revenue Recognition

The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (ASC 606). Most of the Company’s revenue is recognized at a point in time for each performance obligation under the contract when the customer obtains control of the goods or service. Most of the Company’s parts and consumables products and its capital products with minimal customization are accounted for at a point in time. The Company has made a policy election to not treat the obligation to ship as a separate performance obligation under the contract and, as a result, the associated shipping costs are reflected in the cost of revenue when revenue is recognized.

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 projects. These projects are highly customized for the customer and, as a result, would include a significant cost to rework in the event of cancellation.

The following table presents revenue by revenue recognition method:

The transaction price includes estimated variable consideration where applicable. Such variable consideration relates to certain performance guarantees and rights to return the product. The Company estimates variable consideration as the most likely amount to which it expects to be entitled based on the terms of the contracts with customers and historical experience, where relevant. For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation based on the relative stand-alone selling price.

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:

Revenue by Product Type:

Revenue by Geography (based on customer location):

See Note 12, Business Segment and Geographical Information, for information on the disaggregation of revenue by reportable operating segment.

The following table presents contract balances from contracts with customers:

Contract assets in the accompanying consolidated balance sheet 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

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Notes to Consolidated Financial Statements

long-term liabilities in the accompanying 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. Contract liabilities increased at year end 2021 principally due to capital equipment orders in the Industrial Processing segment's wood processing business, which the Company expects to recognize as revenue through 2023.

The Company recognized revenue of $33,128,000 in 2021 and $30,426,000 in 2020 that was included in the contract liabilities balance at the beginning of 2021 and 2020, respectively. The majority of the Company's contracts for capital equipment have an original expected duration of one year or less. Certain capital 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 as of year-end 2021 was $37,905,000. The Company will recognize revenue for these performance obligations as they are satisfied, approximately 50% of which is expected to occur within the next twelve months and the remaining 50% after December 31, 2022.

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

The Company includes in revenue amounts invoiced for shipping and handling with the corresponding costs reflected in cost of revenue. Provisions for discounts, warranties, returns and other adjustments are provided for in the period in which the related sale was recorded. Sales taxes, value-added taxes, and certain excise taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenue.

Accounts Receivable and Allowance for Credit Losses

Accounts receivable arise from sales on credit to customers, are recorded at the invoiced amount, and do not bear interest. The Company establishes an allowance for credit losses to reduce accounts receivable to the net amount expected to be collected. The Company exercises judgment in determining its allowance for credit losses, which is based on its historical collection and write-off experience, adjusted for current macroeconomic trends and conditions, credit policies, specific customer collection issues, and accounts receivable aging. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and each customer's current creditworthiness. The Company continuously monitors collections and payments from its customers. Account balances are charged off against the allowance when the Company believes it is probable the receivable will not be recovered. In some instances, the Company utilizes letters of credit to mitigate its credit exposure.

The changes in the allowance for credit losses are as follows:

Provision charged to expense 5 356 114

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 $8,049,000 at year-end 2021 and $9,445,000 at year-end 2020, are included in accounts receivable in the accompanying 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.

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Notes to Consolidated Financial Statements

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 the 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. While the Company engages in extensive product quality programs and processes, the Company's warranty obligation is affected by product failure rates, repair costs, service delivery costs incurred in correcting a product failure, and supplier warranties on parts delivered to the Company. Should these factors or actual results differ from the Company's estimates, revisions to the estimated warranty liability would be required.

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

Balance at Beginning of Year $ 7,064 $ 6,467

Acquisitions 429 —

Leases

In accordance with ASC 842, Leases (ASC 842), the Company determines whether an arrangement is, or contains, a lease at inception. Operating lease liabilities are included in other current liabilities and other long-term liabilities and the corresponding right-of use (ROU) assets are included in other assets in the accompanying consolidated balance sheet. Classification of operating lease liabilities as either current or noncurrent is based on the expected timing of payments due under the Company’s lease obligations.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities with original contract terms greater than 12 months are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Operating leases with an original term of 12 months or less are not recorded in the accompanying consolidated balance sheet.

In determining the present value of future lease payments, the Company utilizes either the rate implicit in the lease if that rate is readily determinable or its incremental secured borrowing rate commensurate with the term of the underlying lease. Lease terms may include the effect of options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company recognizes operating lease expense for lease payments on a straight-line basis over the lease term. Variable lease costs are not included in fixed lease payments and, as a result, are excluded from the measurement of the ROU assets and lease liabilities. The Company expenses all variable lease costs as incurred, which were not material in 2021 and 2020.

As a lessee, the Company accounts for the lease and non-lease components of its real estate and equipment leases as a single lease component. For vehicle leases, the Company does not combine lease and non-lease components.

See Note 9, Leases, for additional information about the Company's lease obligations.

Income Taxes

In accordance with ASC 740, Income Taxes (ASC 740), the Company recognizes deferred income taxes based on the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities, calculated using enacted tax rates in effect for the year in which these differences are expected to reverse. A tax valuation allowance is established, as needed, to reduce deferred tax assets to the amount expected to be realized. In the period in which it becomes more likely than not that some or all of the deferred tax assets will be realized, the valuation allowance will be adjusted.

It is the Company's policy to provide for uncertain tax positions and the related interest and penalties based upon management's assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. At January 1, 2022, the Company believes that it has appropriately accounted for any liability for

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Notes to Consolidated Financial Statements

unrecognized tax benefits. To the extent the Company prevails in matters for which a liability for an unrecognized tax benefit is established, the statute of limitations expires for a tax jurisdiction year, or the Company is required to pay amounts in excess of the liability, its effective tax rate in a given financial statement period may be affected.

Earnings per Share

Basic earnings per share (EPS) is computed by dividing net income attributable to Kadant by the weighted average number of shares outstanding during the year. Diluted EPS is computed using the treasury stock method assuming the effect of all potentially dilutive securities, including stock options, restricted stock units (RSUs) and employee stock purchase plan shares.

Cash, Cash Equivalents, and Restricted Cash

At year-end 2021 and year-end 2020, cash equivalents included investments in money market funds and highly liquid short-term investments, which had maturities of three months or less at the date of purchase. The carrying amounts of cash equivalents approximate their fair values due to the short-term nature of these instruments.

The Company's restricted cash generally serves as collateral for certain banker's acceptance drafts issued to vendors and 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. The majority of these restrictions will expire over the next twelve months.

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

Total Cash, Cash Equivalents, and Restricted Cash $ 94,161 $ 66,640 $ 68,273

Supplemental Cash Flow Information

Non-Cash Investing Activities:

Non-cash additions to property, plant, and equipment $ 363 $ 1,060 $ 626

Non-Cash Financing Activities:

Issuance of Company common stock upon vesting of RSUs $ 4,108 $ 4,781 $ 4,100

Inventories

Inventories are stated at the lower of cost (on a first-in, first-out; or weighted average basis) or net realizable value and include materials, labor, and manufacturing overhead. The Company regularly reviews its quantities of inventories on hand and compares these amounts to the historical and forecasted usage of and demand for each particular product or product line. The Company records a charge to cost of revenue for excess and obsolete inventory to reduce the carrying value of inventories to net realizable value.

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Notes to Consolidated Financial Statements

The components of inventories are as follows:

Property, Plant, and Equipment

Property, plant, and equipment are stated at cost. Assets acquired as part of a business combination are initially recorded at fair value. The costs of additions and improvements are capitalized, while maintenance and repairs are charged to expense as incurred. The Company provides for depreciation and amortization primarily using the straight-line method over the estimated useful lives of the property as follows: buildings, 10 to 40 years; machinery and equipment, 2 to 10 years; and leasehold improvements, the shorter of the term of the lease or the life of the asset. For construction in progress, no provision for depreciation is made until the assets are available and ready for use.

Property, plant, and equipment consist of the following:

Machinery, Equipment, and Leasehold Improvements 136,656 120,804

Less: Accumulated Depreciation and Amortization 114,032 107,832

Depreciation and amortization expense was $13,433,000 in 2021, $12,209,000 in 2020, and $12,236,000 in 2019. See Note 9, Leases, for further details relating to assets under financing leases included in property, plant and equipment in the accompanying consolidated balance sheet.

Intangible Assets, Net

Acquired intangible assets by major asset class are as follows:

(In thousands) Gross AccumulatedAmortization CurrencyTranslation Net

Definite-Lived

Indefinite-Lived

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(In thousands) Gross AccumulatedAmortization CurrencyTranslation Net

Definite-Lived

Indefinite-Lived

Gross intangible assets include $63,228,000 for acquired intangible assets from acquisitions that occurred in 2021. See Note 2, Acquisitions, for further details.

In connection with its impairment analysis, the Company reduced its definite-lived intangible assets by $499,000 in 2021 and definite and indefinite-lived intangible assets by $1,861,000 in 2020. Additionally, the Company reclassified $1,300,000 of an indefinite-lived tradename to definite-lived in 2020. See Impairment of Long-Lived Assets under the heading Intangible Assets within this note for further details.

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 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. Definite-lived intangible assets as of year-end 2021 have a weighted average amortization period of 13 years. Amortization of definite-lived intangible assets was $20,869,000 in 2021, $19,125,000 in 2020, and $20,154,000 in 2019 and was included in selling, general, and administrative (SG&A) expenses in the accompanying consolidated statement of income. The estimated future amortization expense of definite-lived intangible assets is $20,994,000 in 2022; $18,725,000 in 2023; $17,830,000 in 2024; $15,754,000 in 2025; $15,119,000 in 2026; and $81,998,000 in the aggregate thereafter.

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the identifiable net assets of the acquired business at the date of acquisition. The Company’s acquisitions have historically been made at prices above the fair value of the acquired net assets, resulting in goodwill, due to the expectation of synergies from combining the businesses.

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Notes to Consolidated Financial Statements

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

(In thousands) Flow Control Industrial Processing Material Handling Total

Balance as of December 28, 2019

Accumulated impairment losses — (85,509) — (85,509)

Balance at January 2, 2021

Accumulated impairment losses — (85,509) — (85,509)

Balance at January 1, 2022

Accumulated impairment losses — (85,509) — (85,509)

Impairment of Long-Lived Assets

The Company evaluates the recoverability of goodwill and indefinite-lived intangible assets as of the end of each fiscal year, or more frequently if events or changes in circumstances indicate that it is more likely than not that the carrying value of an asset might be impaired. Potential impairment indicators include a significant decline in sales, earnings, or cash flows, material adverse changes in the business climate, and a significant decline in the market capitalization due to a sustained decrease in the Company's stock price.

The Company assesses its definite-lived intangible assets for impairment whenever facts and circumstances indicate that the carrying amounts may not be fully recoverable. To analyze recoverability, the Company projects undiscounted net future cash flows over the remaining lives of such assets or asset groups. If these projected cash flows were to be less than the carrying amounts, an impairment loss would be recognized, resulting in a write-down of the assets with a corresponding charge to earnings. The impairment loss would be measured based upon the difference between the carrying amounts of the assets and their fair values calculated using projected discounted cash flows.

Goodwill

At year-end 2021 and 2020, in connection with its annual impairment analysis, the Company performed a qualitative goodwill impairment assessment (Step 0) for each of its reporting units, except the material handling reporting unit in 2020 discussed below, which indicated that the fair value of each reporting unit exceeded its carrying value, and determined that the assets were not impaired. The impairment analysis included an assessment of certain qualitative factors including, but not limited to, the results of prior fair value calculations, the movement of the Company's share price and market capitalization, the reporting units' and the Company's overall financial performance, and macroeconomic and industry conditions. The Company considered the qualitative factors and weighed the evidence obtained and determined that it was not more likely than not that the fair value of any of the respective reporting unit's assets was less than its carrying amount. Although the Company believes the factors considered in the impairment analysis are reasonable, significant changes in any one of the assumptions used could have produced a different result.

In March 2020, the Company experienced a significant decrease in market capitalization due to a decline in the Company’s stock price. During that time, the U.S. stock market also declined significantly amid market volatility driven by the uncertainty surrounding the COVID-19 pandemic. Based on these occurrences, the Company concluded that a

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Notes to Consolidated Financial Statements

triggering event had occurred related to the indefinite-lived assets within its material handling reporting unit. As a result, for each reporting period in 2020, the Company prepared a quantitative impairment analysis (Step 1) for its material handling reporting unit, which indicated that its fair value exceeded its carrying value and the indefinite-lived assets were not impaired.

Goodwill by reporting unit is as follows:

Intangible Assets

At year-end 2021 and 2020, the Company performed a qualitative impairment analysis on its indefinite-lived intangible assets and determined that the assets were not impaired.

No triggering events or indicators of impairment were identified in 2021 or 2020 related to the Company's definite-lived intangible assets, except for the definite-lived intangible assets associated with its existing ceramic blade product line in France in 2021 and its timber-harvesting product line in 2020 both discussed below.

In the fourth quarter of 2021, the Company decided to exit its ceramic blade business in France, which became a redundant manufacturing operation as a result of its acquisition of The Clouth Group of Companies in the third quarter of 2021. The Company expects to cease production in June 2022 and exit the facility by the end of 2022. As a result of this decision, the Company recorded an impairment charge of $499,000 in the fourth quarter of 2021 related to its product technology intangible asset.

In the fourth quarter of 2020, due to the continued and anticipated decline in demand for the Company's timber-harvesting business' products, and following impairment charges totaling $2,336,000 in 2019 related to this business, the Company performed a quantitative analysis of the recoverability of the related intangible assets in which the income approach discounted cash flow methodology was used. As a result of this analysis, the Company determined that the fair values of the timber-harvesting product line's definite-lived intangible assets related to customer relationships, product technology and tradename were less than their carrying values, and therefore recorded additional impairment charges totaling $1,861,000 in the fourth quarter of 2020. The remaining intangible asset as of year-end 2021 for the timber-harvesting product line is $443,000.

Impairment charges for 2021, 2020 and 2019 are included in impairment and other costs, net in the accompanying consolidated statement of income.

Business Combinations

The Company's acquisitions have been accounted for using the purchase method of accounting under ASC 805, Business Combinations (ASC 805), and the results of the acquired businesses have been included in its consolidated financial statements from their respective dates of acquisition. The Company accounts for all transactions and events in which it obtains control over a business under ASC 805 by establishing the acquisition date and recognizing the fair value of all assets acquired and liabilities assumed. The Company’s acquisitions have historically been made at prices above the fair value of identifiable net assets, resulting in goodwill, due to synergies expected to be realized by combining the businesses.

While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business acquisition date, the estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the purchase price allocation period, which is generally one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. For changes in the valuation of intangible assets between the preliminary and final purchase price allocation, the related amortization is adjusted in the period it occurs. Subsequent to the purchase price allocation period, any adjustment to assets acquired or liabilities assumed is included in operating results in the period in which the adjustment is determined.Acquisition transaction costs are recorded as incurred inSG&A expenses in the accompanying consolidated statement of income and were $3,655,000 in 2021, $485,000 in 2020, and $843,000 in 2019.

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Notes to Consolidated Financial Statements

Foreign Currency Translation and Transactions

All assets and liabilities of the Company's foreign subsidiaries are translated at fiscal year-end exchange rates, and revenue and expenses are translated at average exchange rates for each quarter in accordance with ASC 830, Foreign Currency Matters. Resulting translation adjustments are reflected in the "accumulated other comprehensive items" (AOCI) component of stockholders' equity (see Note 14, Accumulated Other Comprehensive Items). Foreign currency transaction gains and losses are included in the accompanying consolidated statement of income and are not material in the three years presented.

Stock-Based Compensation

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. Compensation expense related to any modified stock-based awards is based on the fair value for those awards as of the modification date with any remaining incremental compensation expense recognized ratably over the remaining requisite service period.

Derivatives

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

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

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2019-12, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and by clarifying and amending existing guidance, including the recognition of franchise tax, the treatment of a step up in the tax basis of goodwill, and the timing for recognition of enacted changes in tax laws or rates in the interim period annual effective tax rate computation. This new guidance is effective in fiscal 2021, and the transition requirements are primarily prospective. The Company adopted this ASU prospectively at the beginning of fiscal 2021 and its adoption did not have an impact on the consolidated financial statements.

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Notes to Consolidated Financial Statements

Recent Accounting Pronouncements Not Yet Adopted

Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In March 2020, the FASB issued ASU No. 2020-04, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of reference rates, such as the London Interbank Offered Rate (LIBOR), if certain criteria are met. Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date. The guidance in this ASU is applicable to the Company's existing contracts and hedging relationships that reference LIBOR and may be adopted prospectively through December 31, 2022. The Company is currently evaluating the effects that the adoption of this ASU will have on its consolidated financial statements.

Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. In October 2021, the FASB issued ASU 2021-08, which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this ASU will generally result in the Company recognizing contract assets and contract liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date rather than at fair value. This new guidance is effective on a prospective basis in fiscal 2023, with early adoption permitted. The Company is currently evaluating the effect that the adoption of this ASU will have on its consolidated financial statements, which will be dependent on the contract assets and liabilities acquired in future business combinations.

2. Acquisitions

2021

In the third quarter of 2021, the Company acquired all partnership interests and shares in The Clouth Group of Companies (Clouth), for $92,864,000, net of cash acquired plus debt assumed. The majority of the Clouth companies were acquired on July 19, 2021 and the acquisition of the last legal entity occurred on August 10, 2021, which the Company accounted for as a noncontrolling interest during the period from July 19, 2021 to August 10, 2021. The Company funded the purchase price with euro-denominated borrowings under its revolving credit facility and existing cash. Clouth, which is included in the Company's Flow Control segment, is a leading manufacturer of doctor blades and related equipment used in the production of paper, packaging, and tissue. The Company expects several synergies in connection with this acquisition, including deepening its presence in the growing ceramic blade market and expansion of sales at its existing businesses by leveraging Clouth's complementary global geographic footprint. Clouth has three manufacturing facilities in Germany and one in Poland. Goodwill from the Clouth acquisition was $25,806,000, of which $6,836,000 is expected to be deductible for tax purposes over 15 years. In addition, intangible assets acquired were $34,467,000, of which $5,326,000 is expected to be deductible for tax purposes over 15 years. The Company recorded revenue of $23,221,000 and an operating loss of $4,068,000 for Clouth from the date of acquisition, including amortization expense of $3,481,000 associated with acquired profit in inventory and backlog and $2,710,000 of acquisition transaction costs.

On August 23, 2021, the Company acquired all the outstanding equity securities in East Chicago Machine Tool Corporation (Balemaster) and certain assets of affiliated companies for $53,747,000, net of cash acquired. Balemaster, which is included in the Company's Material Handling segment, is a leading U.S. manufacturer of horizontal balers and related equipment used primarily for recycling packaging waste at corrugated box plants and large retail and distribution centers. The Company funded the purchase price with borrowings under its revolving credit facility. The Company expects several synergies in connection with the acquisition, including expansion of its presence in the secondary material processing market and creation of new opportunities for leveraging its high-performance balers produced in Europe. Goodwill from the Balemaster acquisition was $26,836,000, none of which is deductible for tax purposes. In addition, intangible assets acquired were $28,060,000, none of which is deductible for tax purposes. The Company recorded revenue of $9,038,000 and operating loss of $641,000 for Balemaster from the date of acquisition, including amortization expense of $2,042,000 associated with acquired profit in inventory and backlog and $782,000 of acquisition transaction costs.

In the fourth quarter of 2021, the Company acquired the assets of a business in India, which is included in its Industrial Processing segment, for approximately $2,882,000.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed and the purchase price for Clouth and the Company's other acquisitions in 2021. The final purchase accounting and purchase price allocations remain subject to change as the Company continues to refine its preliminary valuation of certain acquired assets

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Notes to Consolidated Financial Statements

and liabilities assumed and the valuation of acquired intangibles, which may result in adjustments to the assets and liabilities, including goodwill. Measurement period adjustments in 2021 did not have a material effect on the Company's consolidated balance sheet or statement of income.

(In thousands) Clouth Other Total

Net Assets Acquired:

Definite-Lived Intangible Assets

Indefinite-Lived Intangible Assets —

Purchase Price:

The weighted-average amortization period for Clouth's definite-lived intangible assets is 19 years, including weighted-average amortization periods of 24 years for customer relationships and 10 years for product technology. The weighted-average amortization period for the Company's other acquisitions' definite-lived intangible assets is 16 years, including weighted-average amortization periods of 17 years for customer relationships, 13 years for product technology, and 16 years for tradenames.

Unaudited Supplemental Pro Forma Information

The following unaudited pro forma information provides the effect of the Company's 2021 acquisition of Clouth as if it had occurred at the beginning of 2020:

(In thousands, except per share amounts) January 1,2022 January 2,2021

Net Income Attributable to Kadant $ 90,184 $ 55,760

Earnings per Share Attributable to Kadant

The historical consolidated financial information of the Company and Clouth has been adjusted in the pro forma information above to give effect to pro forma events that are (i) directly attributable to the acquisition and related financing arrangements, (ii) expected to have a continuing impact on the Company, and (iii) factually supportable.

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Notes to Consolidated Financial Statements

Pro forma results include the following non-recurring pro forma adjustments:

•Pre-tax charge to cost of revenue of $3,082,000 in 2020 and reversal of $3,082,000 in 2021, for the sale of inventory revalued at the date of acquisition.

•Pre-tax charge to SG&A expenses of $3,109,000 in 2020 and reversal of $2,710,000 in 2021 and $399,000 in 2021, for acquisition costs and intangible asset amortization related to acquired backlog, respectively.

•Estimated tax effects related to the pro forma adjustments.

Pro forma results in 2020 include a pre-tax gain of $4,409,000 from the forgiveness of a shareholder loan at Clouth.

These pro forma results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that would have resulted had the acquisition of Clouth occurred as of the beginning of 2020, or that may result in the future.

The Company's pro forma results exclude the Company's other acquisitions in 2021 as the inclusion of those results would not have been materially different from the pro forma results presented above had the acquisitions occurred at the beginning of 2020.

2020

On June 1, 2020, the Company acquired Cogent Industrial Technologies Ltd. (Cogent), which is included in its Industrial Processing segment, for approximately $6,866,000, net of cash acquired. The Company funded the acquisition through borrowings under its revolving credit facility. Intangible assets acquired primarily relate to customer relationships with a fair value of $3,350,000. Cogent, based in British Columbia, Canada, is an industrial automation and controls solution provider that offers expertise in process technology integration, industrial automation and controls, industrial safety, project management, and operational performance management systems.

On May 28, 2020, the Company also acquired certain intellectual property from a company in Austria, which is included in its Industrial Processing segment, for $416,000, of which $229,000 was paid in the second quarter of 2020 and $125,000 in the first quarter of 2021. The Company expects to pay the remaining amount no later than the first quarter of 2022. Intangible assets acquired represent product technology with a fair value of $557,000 at acquisition date.