Kadant Inc. (together with its subsidiaries, the Company) is a global supplier of high-value, critical components and engineered systems used in process industries worldwide. Its products, technologies, and services play an integral role in enhancing process efficiency, optimizing energy utilization, and maximizing productivity in resource-intensive industries.

On March 11, 2020, the World Health Organization designated the novel coronavirus (COVID-19) a global pandemic. The future impact of the COVID-19 pandemic and any resulting economic impact of the pandemic are rapidly evolving and largely unknown. It is possible that the COVID-19 pandemic, the measures taken by the governments throughout the world, and the resulting economic impact may materially and adversely affect the Company’s results of operations, cash flows and financial position. The Company is closely monitoring the impact of COVID-19 on all aspects of its business.

The interim condensed consolidated financial statements and related notes presented have been prepared by the Company, are unaudited, and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the Company's financial position at March 28, 2020 and its results of operations, comprehensive (loss) income, cash flows, and stockholders' equity for the three-month periods ended March 28, 2020 and March 30, 2019. Interim results are not necessarily indicative of results for a full year or for any other interim period.

The condensed consolidated balance sheet presented as of December 28, 2019 has been derived from the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2019. The condensed consolidated financial statements and related notes are presented as permitted by the SEC rules and regulations for Form 10-Q and do not contain certain information included in the annual consolidated financial statements and related notes of the Company. The condensed consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2019, filed with the SEC.

In the first quarter of 2020, the Company realigned its business segments into three new reportable operating segments: Flow Control, Industrial Processing, and Material Handling. The Company previously reported its financial results by combining its operating entities into three reportable operating segments: Papermaking Systems, Wood Processing Systems, and Material Handling Systems, and a separate product line, Fiber-based Products. Financial information for 2019 has been recast to conform to the new segment presentation. See Note 10, Business Segment Information, for further detail regarding the Company's segments.

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

Notes 1 and 3 to the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2019 describe the significant accounting estimates and policies used in preparation of the consolidated financial statements. There have been no material changes in the Company’s significant accounting policies during the three months ended March 28, 2020, except that the Company no longer considers its policy with respect to accounting for pension benefits to be a critical accounting policy due to the settlement of its U.S. pension plan in December 2019.



	Three Months Ended
(In thousands)	March 28, 2020		March 30, 2019
Cash Paid for Interest	$	2,212	$	2,782
Cash Paid for Income Taxes, Net of Refunds	$	4,698	$	4,679

Non-Cash Investing Activities:
Post-closing acquisition adjustment	$	—	$	1,567

Liabilities assumed of acquired business	$	—	$	29,664

Non-cash additions to property, plant, and equipment	$	128	$	193

Non-Cash Financing Activities:
Issuance of Company common stock upon vesting of restricted stock units	$	3,670	$	3,278
Dividends declared but unpaid	$	2,753	$	2,570

The Company's restricted cash serves as collateral for banker's acceptance drafts issued in China and 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 the bank guarantees will expire over the next twelve months.



(In thousands)	March 28, 2020		March 30, 2019		December 28, 2019		December 29, 2018
Cash and cash equivalents	$	60,012	$	56,478	$	66,786	$	45,830
Restricted cash	2,063		697		1,487		287
Total Cash, Cash Equivalents, and Restricted Cash	$	62,075	$	57,175	$	68,273	$	46,117



(In thousands)	Gross		Accumulated Amortization			Currency Translation			Net
March 28, 2020
Definite-Lived
Customer relationships	$	171,583	$	(55,194	)	$	(6,077	)	$	110,312
Product technology	56,011		(28,776		)	(2,096		)	25,139
Tradenames	6,527		(2,551		)	(458		)	3,518
Other	17,964		(13,416		)	(605		)	3,943
	252,085		(99,937		)	(9,236		)	142,912
Indefinite-Lived
Tradenames	24,100		—			(322		)	23,778
Acquired Intangible Assets	$	276,185	$	(99,937	)	$	(9,558	)	$	166,690

December 28, 2019
Definite-Lived
Customer relationships	$	171,583	$	(51,798	)	$	(4,141	)	$	115,644
Product technology	56,011		(27,819		)	(1,709		)	26,483
Tradenames	6,527		(2,421		)	(427		)	3,679
Other	17,964		(13,295		)	(593		)	4,076
	252,085		(95,333		)	(6,870		)	149,882
Indefinite-Lived
Tradenames	24,100		—			(86		)	24,014
Acquired Intangible Assets	$	276,185	$	(95,333	)	$	(6,956	)	$	173,896

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



(In thousands)	Flow Control			Industrial Processing			Material Handling			Total
Balance at December 28, 2019 (a)
Gross balance	$	97,680		$	207,536		$	116,325		$	421,541
Accumulated impairment losses	—			(85,509		)	—			(85,509		)
Net balance	97,680			122,027			116,325			336,032
2020 Adjustment
Currency translation	(1,552		)	(3,182		)	(301		)	(5,035		)
Total 2020 adjustment	(1,552		)	(3,182		)	(301		)	(5,035		)
Balance at March 28, 2020
Gross balance	96,128			204,354			116,024			416,506
Accumulated impairment losses	—			(85,509		)	—			(85,509		)
Net balance	$	96,128		$	118,845		$	116,024		$	330,997

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 Company's market capitalization due to a sustained decrease in its stock price.

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 overall U.S. stock market also declined significantly amid market volatility driven by the uncertainty surrounding the outbreak of COVID-19. Based on these occurrences, the Company concluded that a triggering event had occurred related to the indefinite-lived assets within its material handling reporting unit. As a result, the Company prepared a quantitative impairment analysis (Step 1) for the material handling reporting unit, which indicated that its fair value exceeded its carrying value and the indefinite-lived assets were not impaired. The Company will continue to monitor for impairment indicators throughout 2020 and will conduct an interim period impairment analysis as required.

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 negotiates the terms regarding warranty coverage and length of warranty depending on the products and applications.



	Three Months Ended
(In thousands)	March 28, 2020			March 30, 2019
Balance at Beginning of Year	$	6,467		$	5,726
Provision charged to expense	1,270			1,076
Usage	(1,365		)	(925		)
Acquisition	—			295
Currency translation	(162		)	(3		)
Balance at End of Period	$	6,210		$	6,169

The Company recognizes revenue under Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. 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 cost of revenue when revenue is recognized.

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

The 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.



	Three Months Ended
	March 28,		March 30,
(In thousands)	2020		2019
Revenue by Product Type:
Parts and Consumables	$	105,098	$	112,850
Capital	54,029		58,466
	$	159,127	$	171,316
Revenue by Geography:
North America	$	93,823	$	100,876
Europe	36,014		38,985
Asia	15,908		17,078
Rest of World	13,382		14,377
	$	159,127	$	171,316

Contract assets represent unbilled revenue associated with revenue recognized on contracts accounted for on an over time basis, which will be billed in future periods based on the contract terms. Contract liabilities consist of customer deposits, advanced billings, and deferred revenue. Deferred revenue is included in other current liabilities in the accompanying condensed consolidated balance sheet. Contract liabilities will be recognized as revenue in future periods once the revenue recognition criteria are met. The majority of the contract liabilities relate to advance payments on contracts accounted for at a point in time. These advance payments will be recognized as revenue when the Company's performance obligations have been satisfied, which typically occurs when the product has shipped and control of the asset has transferred to the customer. The Company recognized revenue of $19,708,000 in the first three months of 2020 and $19,095,000 in the first three months of 2019 that was included in the contract liabilities balance at the beginning of 2020 and 2019. The majority of the Company's contracts for capital equipment have an original expected duration of one year or less. For contracts with an original expected duration of over one year, the aggregate amount of the transaction price allocated to the remaining partially unsatisfied

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

The Company's 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 categories. 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 Company's Chinese subsidiaries may receive banker's acceptance drafts from customers as payment for their trade accounts receivable. The drafts are noninterest-bearing obligations of the issuing bank and mature within six months of the origination date. The Company's Chinese subsidiaries may sell the drafts at a discount to a third-party financial institution or transfer the drafts to vendors in settlement of current accounts payable prior to the scheduled maturity date. These drafts, which totaled $3,329,000 at March 28, 2020 and $5,230,000 at December 28, 2019, are included in accounts receivable in the accompanying condensed consolidated balance sheet until the subsidiary sells the drafts to a bank and receives a discounted amount, transfers the banker's acceptance drafts in settlement of current accounts payable prior to maturity, or obtains cash payment on the scheduled maturity date.

Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, which changes the way entities recognize impairment of financial assets measured at amortized costs, such as accounts receivable, by requiring immediate recognition of estimated credit losses expected to occur over their remaining lives. During 2018 and 2019, the FASB issued additional guidance and clarification. The Company adopted this ASU using a modified retrospective method at the beginning of fiscal 2020. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements. See Accounts Receivable and Allowance for Credit Losses in this section for further information on the Company's allowance for credit losses.

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 by the Company prospectively beginning March 12, 2020 through December 31, 2022. The Company is currently evaluating the effects that the adoption of this ASU will have on its consolidated financial statements.

Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. In December 2019, the FASB issued 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 for the Company in fiscal 2021, with early adoption permitted. The Company is currently evaluating the effects that the adoption of this ASU will have on its consolidated financial statements.