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.

The interim condensed consolidated financial statements and related notes presented have been prepared by the Company, are unaudited, and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the Company's financial position at July 1, 2023, its results of operations, comprehensive income, and stockholders' equity for the three- and six-month periods ended July 1, 2023 and July 2, 2022 and its cash flows for the six-month periods ended July 1, 2023 and July 2, 2023. Interim results are not necessarily indicative of results for a full year or for any other interim period.

The condensed consolidated balance sheet presented as of December 31, 2022 has been derived from the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the Annual Report). The condensed consolidated financial statements and related notes are presented as permitted by the rules and regulations of the Securities and Exchange Commission (SEC) for Form 10-Q and do not contain certain information included in the annual consolidated financial statements and related notes of the Company. The condensed consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and related notes included in the Annual Report.

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

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

Supplemental Cash Flow Information


	Six Months Ended
(In thousands)	July 1, 2023		July 2, 2022
Cash Paid for Interest	$	4,443	$	2,408
Cash Paid for Income Taxes, Net of Refunds	$	23,792	$	19,167

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

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


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

The Company's restricted cash generally serves as collateral for bank guarantees associated with providing assurance to customers that the Company will fulfill certain customer obligations entered into in the normal course of business and for certain banker's acceptance drafts issued to vendors. The majority of the bank guarantees will expire over the next twelve months.

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


(In thousands)	July 1, 2023		July 2, 2022		December 31, 2022		January 1, 2022
Cash and cash equivalents	$	66,725	$	76,540	$	76,371	$	91,186
Restricted cash	3,470		1,486		3,354		2,975
Total Cash, Cash Equivalents, and Restricted Cash	$	70,195	$	78,026	$	79,725	$	94,161

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


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

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

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


	Six Months Ended
(In thousands)	July 1, 2023		July 2, 2022
Balance at Beginning of Year	$	7,283	$	7,298
Provision charged to expense	3,154		2,657
Usage	(2,335)		(2,548)

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

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


	Three Months Ended				Six Months Ended
	July 1,		July 2,		July 1,		July 2,
(In thousands)	2023		2022		2023		2022
Point in Time	$	222,235	$	198,249	$	426,474	$	401,560
Over Time	22,818		23,400		48,337		46,569
	$	245,053	$	221,649	$	474,811	$	448,129

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.


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

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

The Company recognized revenue of $20,212,000 in the second quarter of 2023 and $13,424,000 in the second quarter of 2022, and $47,228,000 in the first six months of 2023 and $47,901,000 in the first six months of 2022 that was included in the contract liabilities balance at the beginning of 2023 and 2022, respectively. The majority of the Company's contracts for capital equipment have an original expected duration of one year or less. Certain capital equipment contracts require longer lead times and could take up to 24 months to complete. For contracts with an original expected duration of over one year, the aggregate amount of the transaction price allocated to the remaining unsatisfied or partially unsatisfied performance obligations

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