UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 2014

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________

Commission file number 1-11406

KADANT INC.
(Exact name of registrant as specified in its charter)

Delaware
 
52-1762325
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
One Technology Park Drive
 
 
Westford, Massachusetts
 
01886
(Address of Principal Executive Offices)
 
(Zip Code)

Registrant's telephone number, including area code: (978) 776-2000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x     No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
  Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨     No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 Class
 
Outstanding at April 25, 2014
Common Stock, $.01 par value
 
11,174,583

PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Statements

KADANT INC.
Condensed Consolidated Balance Sheet
(Unaudited)

Assets

 
 
March 29,
   
December 28,
 
(In thousands)
 
2014
   
2013
 
 
 
   
 
Current Assets:
 
   
 
Cash and cash equivalents
 
$
57,024
   
$
50,032
 
Restricted cash (Note 1)
   
162
     
168
 
Accounts receivable, less allowances of $2,695 and $2,689 (Note 1)
   
69,258
     
70,271
 
Inventories (Note 1)
   
61,962
     
62,805
 
Unbilled contract costs and fees
   
1,621
     
3,679
 
Other current assets
   
19,280
     
19,189
 
Assets of discontinued operation
   
137
     
144
 
Total Current Assets
   
209,444
     
206,288
 
 
               
Property, Plant, and Equipment, at Cost
   
118,290
     
117,997
 
Less: accumulated depreciation and amortization
   
74,024
     
73,112
 
 
   
44,266
     
44,885
 
 
               
Other Assets
   
10,687
     
11,230
 
 
               
Intangible Assets, Gross
   
77,690
     
78,223
 
  Less: accumulated amortization
   
31,998
     
30,373
 
 
   
45,692
     
47,850
 
 
               
Goodwill
   
134,809
     
131,915
 
 
               
Total Assets
 
$
444,898
   
$
442,168
 


 
The accompanying notes are an integral part of these condensed consolidated financial statements.
2

KADANT INC.
Condensed Consolidated Balance Sheet (continued)
(Unaudited)

Liabilities and Stockholders' Equity

 
 
March 29,
   
December 28,
 
(In thousands, except share amounts)
 
2014
   
2013
 
 
 
   
 
Current Liabilities:
 
   
 
Current maturities of long-term obligations (Note 6)
 
$
648
   
$
625
 
Accounts payable
   
26,172
     
28,388
 
Accrued payroll and employee benefits
   
17,956
     
19,116
 
Customer deposits
   
25,977
     
28,174
 
Other current liabilities
   
26,342
     
23,286
 
Liabilities of discontinued operation
   
213
     
213
 
Total Current Liabilities
   
97,308
     
99,802
 
 
               
Other Long-Term Liabilities
   
33,246
     
33,935
 
 
               
Long-Term Obligations (Note 6)
   
42,290
     
38,010
 
 
               
Commitments and Contingencies (Note 13)
   
–
     
–
 
 
               
Stockholders' Equity:
               
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued
   
–
     
–
 
Common stock, $.01 par value, 150,000,000 shares authorized; 14,624,159 shares issued
   
146
     
146
 
Capital in excess of par value
   
94,731
     
96,809
 
Retained earnings
   
251,547
     
248,170
 
Treasury stock at cost, 3,449,576 and 3,524,742 shares
   
(75,544
)
   
(76,339
)
Accumulated other comprehensive items (Note 9)
   
116
     
710
 
Total Kadant Stockholders' Equity
   
270,996
     
269,496
 
Noncontrolling interest
   
1,058
     
925
 
Total Stockholders' Equity
   
272,054
     
270,421
 
 
               
Total Liabilities and Stockholders' Equity
 
$
444,898
   
$
442,168
 
 

 
The accompanying notes are an integral part of these condensed consolidated financial statements.
3

KADANT INC.
Condensed Consolidated Statement of Income
(Unaudited)

 
 
Three Months Ended
 
 
 
March 29,
   
March 30,
 
(In thousands, except per share amounts)
 
2014
   
2013
 
 
 
   
 
Revenues
 
$
93,367
   
$
76,204
 
 
               
Costs and Operating Expenses:
               
Cost of revenues
   
51,187
     
40,178
 
Selling, general, and administrative expenses
   
32,482
     
26,950
 
Research and development expenses
   
1,749
     
1,704
 
Restructuring costs (Note 3)
   
328
     
–
 
 
   
85,746
     
68,832
 
 
               
Operating Income
   
7,621
     
7,372
 
 
               
Interest Income
   
222
     
109
 
Interest Expense
   
(306
)
   
(165
)
 
               
Income from Continuing Operations Before Provision for Income Taxes
   
7,537
     
7,316
 
Provision for Income Taxes (Note 5)
   
2,352
     
1,967
 
 
               
Income from Continuing Operations
   
5,185
     
5,349
 
Loss from Discontinued Operation (net of income tax benefit of $3 and $17 in 2014 and 2013, respectively)
   
(5
)
   
(29
)
 
               
Net Income
   
5,180
     
5,320
 
 
               
Net Income Attributable to Noncontrolling Interest
   
(127
)
   
(36
)
 
               
Net Income Attributable to Kadant
 
$
5,053
   
$
5,284
 
 
               
Amounts Attributable to Kadant:
               
Income from Continuing Operations
 
$
5,058
   
$
5,313
 
Loss from Discontinued Operation
   
(5
)
   
(29
)
Net Income Attributable to Kadant
 
$
5,053
   
$
5,284
 
 
               
Earnings per Share from Continuing Operations Attributable to Kadant (Note 4):
               
Basic
 
$
0.45
   
$
0.48
 
Diluted
 
$
0.45
   
$
0.47
 
 
               
Earnings per Share Attributable to Kadant (Note 4):
               
Basic
 
$
0.45
   
$
0.47
 
Diluted
 
$
0.45
   
$
0.47
 
 
               
Weighted Average Shares (Note 4):
               
Basic
   
11,132
     
11,163
 
Diluted
   
11,314
     
11,267
 
 
               
Cash Dividends Declared per Common Share
 
$
0.15
   
$
0.125
 



The accompanying notes are an integral part of these condensed consolidated financial statements.
4

KADANT INC.
Condensed Consolidated Statement of Comprehensive Income
(Unaudited)


 
 
Three Months Ended
 
 
 
March 29,
   
March 30,
 
(In thousands)
 
2014
   
2013
 
 
 
   
 
Net Income
 
$
5,180
   
$
5,320
 
 
               
Other Comprehensive Items:
               
Foreign Currency Translation Adjustment
   
(757
)
   
(3,108
)
Pension and Other Post-Retirement Liability Adjustments, net (net of tax provision of $43 and $77 in 2014 and 2013, respectively)
   
77
     
137
 
Deferred Gain on Hedging Instruments (net of tax provision of $49 and $29 in 2014 and 2013, respectively)
   
92
     
195
 
 
   
(588
)
   
(2,776
)
Comprehensive Income
   
4,592
     
2,544
 
Comprehensive (Income) Loss Attributable to Noncontrolling Interest
   
(133
)
   
12
 
Comprehensive Income Attributable to Kadant
 
$
4,459
   
$
2,556
 

 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
5

KADANT INC.
Condensed Consolidated Statement of Cash Flows
(Unaudited)

 
 
Three Months Ended
 
 
 
March 29,
   
March 30,
 
(In thousands)
 
2014
   
2013
 
 
 
   
 
Operating Activities:
 
   
 
Net income attributable to Kadant
 
$
5,053
   
$
5,284
 
Net income attributable to noncontrolling interest
   
127
     
36
 
Loss from discontinued operation
   
5
     
29
 
Income from continuing operations
   
5,185
     
5,349
 
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
               
Depreciation and amortization
   
3,045
     
1,953
 
Stock-based compensation expense
   
1,395
     
1,269
 
Provision (benefit) for losses on accounts receivable
   
85
     
(158
)
Gain on the sale of property, plant, and equipment
   
(96
)
   
(78
)
Other items, net
   
(197
)
   
(210
)
    Contributions to pension plan
   
(270
)
   
(270
)
Changes in current assets and liabilities, net of effects of acquisitions:
               
Accounts receivable
   
1,187
     
1,092
 
Unbilled contract costs and fees
   
2,065
     
(621
)
Inventories
   
312
     
(592
)
Other current assets
   
(813
)
   
(829
)
Accounts payable
   
(2,290
)
   
83
 
Other current liabilities
   
(3,406
)
   
(7
)
Net cash provided by continuing operations
   
6,202
     
6,981
 
Net cash provided by (used in) discontinued operation
   
1
     
(106
)
Net cash provided by operating activities
   
6,203
     
6,875
 
 
               
Investing Activities:
               
Acquisitions, net of cash acquired
   
(2,035
)
   
–
 
Purchases of property, plant, and equipment
   
(539
)
   
(1,178
)
Proceeds from sale of property, plant, and equipment
   
139
     
222
 
Other, net
   
1
     
–
 
Net cash used in continuing operations for investing activities
   
(2,434
)
   
(956
)
 
               
Financing Activities:
               
Proceeds from issuance of long-term obligations
   
5,354
     
4,500
 
Repayments of long-term obligations
   
(131
)
   
(4,750
)
Purchases of Company common stock
   
(1,918
)
   
(1,334
)
Dividends paid
   
(1,389
)
   
–
 
Proceeds from issuance of Company common stock
   
514
     
337
 
Other, net
   
683
     
303
 
Net cash provided by (used in) continuing operations for financing activities
   
3,113
     
(944
)
 
               
Exchange Rate Effect on Cash and Cash Equivalents from Continuing Operations
   
110
     
(1,126
)
 
               
Increase in Cash and Cash Equivalents from Continuing Operations
   
6,992
     
3,849
 
Cash and Cash Equivalents at Beginning of Period
   
50,032
     
54,553
 
Cash and Cash Equivalents at End of Period
 
$
57,024
   
$
58,402
 
 
               
 
 
See Note 1 for supplemental cash flow information.
The accompanying notes are an integral part of these condensed consolidated financial statements.
6

KADANT INC.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)


(In thousands, except share
 
Common
Stock
   
Capital in
Excess of Par
   
Retained
   
Treasury
Stock
   
Accumulated
Other
Comprehensive
   
Noncontrolling
   
Total
Stockholders'
 
    amounts)
 
Shares
   
Amount
   
Value
   
Earnings
   
Shares
   
Amount
   
Items
   
Interest
   
Equity
 
 
 
   
   
   
   
   
   
   
   
 
Balance at December 29, 2012
   
14,624,159
   
$
146
   
$
95,448
   
$
230,329
     
3,493,546
   
$
(74,025
)
 
$
(3,315
)
 
$
1,384
   
$
249,967
 
 
                                                                       
Net income
   
–
     
–
     
–
     
5,284
     
–
     
–
     
–
     
36
     
5,320
 
 
                                                                       
Dividend declared
   
–
     
–
     
–
     
(1,401
)
   
–
     
–
     
–
     
–
     
(1,401
)
 
                                                                       
Activity under stock plans
   
–
     
–
     
(2,535
)
   
–
     
(125,054
)
   
2,651
     
–
     
–
     
116
 
 
                                                                       
Tax benefits related to employees' and directors' stock plans
   
–
     
–
     
303
     
–
     
–
     
–
     
–
     
–
     
303
 
 
                                                                       
Purchases of Company common stock
   
–
     
–
     
–
     
–
     
50,000
     
(1,334
)
   
–
     
–
     
(1,334
)
 
                                                                       
Other comprehensive items
   
–
     
–
     
–
     
–
     
–
     
–
     
(2,728
)
   
(48
)
   
(2,776
)
 
                                                                       
Balance at March 30, 2013
   
14,624,159
   
$
146
   
$
93,216
   
$
234,212
     
3,418,492
   
$
(72,708
)
 
$
(6,043
)
 
$
1,372
   
$
250,195
 
 
                                                                       
Balance at December 28, 2013
   
14,624,159
   
$
146
   
$
96,809
   
$
248,170
     
3,524,742
   
$
(76,339
)
 
$
710
   
$
925
   
$
270,421
 
 
                                                                       
Net income
   
–
     
–
     
–
     
5,053
     
–
     
–
     
–
     
127
     
5,180
 
 
                                                                       
Dividend declared
   
–
     
–
     
–
     
(1,676
)
   
–
     
–
     
–
     
–
     
(1,676
)
 
                                                                       
Activity under stock plans
   
–
     
–
     
(2,761
)
   
–
     
(125,166
)
   
2,713
     
–
     
–
     
(48
)
 
                                                                       
Tax benefits related to employees' and directors' stock plans
   
–
     
–
     
683
     
–
     
–
     
–
     
–
     
–
     
683
 
 
                                                                       
Purchases of Company common stock
   
–
     
–
     
–
     
–
     
50,000
     
(1,918
)
   
–
     
–
     
(1,918
)
 
                                                                       
Other comprehensive items
   
–
     
–
     
–
     
–
     
–
     
–
     
(594
)
   
6
     
(588
)
 
                                                                       
Balance at March 29, 2014
   
14,624,159
   
$
146
   
$
94,731
   
$
251,547
     
3,449,576
   
$
(75,544
)
 
$
116
   
$
1,058
   
$
272,054
 

 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
 
1. Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Kadant Inc. and its subsidiaries' (collectively, "we," Kadant," "the Company," or "the Registrant") continuing operations include two reportable operating segments, Papermaking Systems and Wood Processing Systems, and a separate product line, Fiber-based Products.

Through its Papermaking Systems segment, the Company develops, manufactures, and markets a range of equipment and products primarily for the global papermaking and paper recycling and process industries. The Company's principal products in this segment include custom-engineered stock-preparation systems and equipment for the preparation of wastepaper for conversion into recycled paper; fluid-handling systems used primarily in the dryer section of the papermaking process and during the production of corrugated boxboard, metals, plastics, rubber, textiles, chemicals, and food; doctoring systems and equipment and related consumables important to the efficient operation of paper machines; and cleaning and filtration systems essential for draining, purifying, and recycling process water and cleaning paper machine fabrics and rolls.

Through its Wood Processing Systems segment, the Company designs and manufactures stranders and related equipment used in the production of oriented strand board (OSB), an engineered wood panel product used primarily in home construction. This segment also supplies debarking and wood chipping equipment used in the forest products and the pulp and paper industries.

Through its Fiber-based Products business, the Company manufactures and sells granules derived from papermaking byproducts primarily for use as agricultural carriers and for home lawn and garden applications, as well as for oil and grease absorption.

Interim Financial Statements

The interim condensed consolidated financial statements and related notes presented have been prepared by the Company, are unaudited, and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the Company's financial position at March 29, 2014 and its results of operations, comprehensive income, cash flows, and stockholders' equity for the three-month periods ended March 29, 2014 and March 30, 2013. 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, 2013 has been derived from the consolidated financial statements contained in the Company's Annual Report on Form 10-K. The condensed consolidated financial statements and related notes are presented as permitted by the Securities and Exchange Commission (SEC) rules and regulations for Form 10-Q and do not contain certain information included in the annual consolidated financial statements and related notes of the Company. The condensed consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2013, filed with the SEC.

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 in the case of the Company's fiscal quarters and on the Saturday closest to December 31 in the case of the Company's fourth fiscal quarter and fiscal year. As a result, 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 ending January 3, 2015 (fiscal 2014) contains 53 weeks and the Company's fiscal year ending December 28, 2013 (fiscal 2013) contains 52 weeks. Each quarter of fiscal 2014 and 2013 contains 13 weeks, except the fourth quarter of 2014, which will contain 14 weeks.

Critical Accounting Policies

Critical accounting policies are defined as those that entail significant judgments and estimates, and could potentially result in materially different results under different assumptions and conditions. The Company believes that the most critical accounting policies upon which its financial position depends, and which involve the most complex or subjective decisions or assessments, concern revenue recognition and accounts receivable, warranty obligations, income taxes, the valuation of goodwill and intangible assets, inventories and pension obligations. A discussion of the application of these and other accounting policies is included in Notes 1 and 3 to the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

8
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
1. Nature of Operations and Summary of Significant Accounting Policies (continued)

Supplemental Cash Flow Information

 
 
Three Months Ended
 
(In thousands)
 
March 29, 2014
   
March 30, 2013
 
 
 
   
 
Non-Cash Investing Activities:
 
   
 
Fair Value of Assets Acquired
 
$
5,610
   
$
–
 
Cash Paid for Acquired Businesses
   
(2,709
)
   
–
 
Liabilities Assumed of Acquired Businesses
 
$
2,901
   
$
–
 
 
               
Non-Cash Financing Activities:
               
Issuance of Company Common Stock
 
$
2,480
   
$
2,191
 
Dividends Declared but Unpaid
 
$
1,676
   
$
1,401
 

Restricted Cash
  As of March 29, 2014 and December 28, 2013, the Company had restricted cash of $162,000 and $168,000, respectively. This cash serves as collateral for bank guarantees primarily associated with providing assurance to customers that the Company will fulfill certain customer obligations entered into in the normal course of business. All the bank guarantees will expire by the end of 2014.

Banker's Acceptance Drafts
The Company's Chinese subsidiaries may receive banker's acceptance drafts from customers as payment for their trade accounts receivable. The banker's acceptance drafts are non-interest bearing obligations of the issuing bank and mature within six months of the origination date. The Company has the ability to 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 $6,947,000 and $10,765,000 at March 29, 2014 and December 28, 2013, respectively, are included in accounts receivable in the accompanying condensed consolidated balance sheet until the subsidiary obtains cash payment on the scheduled maturity date or upon the sale or transfer of the drafts prior to maturity.

Inventories

The components of inventories are as follows:

 
 
March 29,
   
December 28,
 
(In thousands)
 
2014
   
2013
 
 
 
   
 
Raw Materials and Supplies
 
$
21,042
   
$
20,836
 
Work in Process
   
20,980
     
21,051
 
Finished Goods
   
19,940
     
20,918
 
 
 
$
61,962
   
$
62,805
 

9
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
1.              Nature of Operations and Summary of Significant Accounting Policies (continued)

Warranty Obligations

The Company provides for the estimated cost of product warranties at the time of sale based on the actual historical occurrence rates and repair costs. The Company typically negotiates the terms regarding warranty coverage and length of warranty depending on the products and applications. While the Company engages in extensive product quality programs and processes, the Company's warranty obligation is affected by product failure rates, repair costs, service delivery costs incurred in correcting a product failure, and supplier warranties on parts delivered to the Company. Should actual product failure rates, repair costs, service delivery costs, or supplier warranties on parts differ from the Company's estimates, revisions to the estimated warranty liability would be required.

The changes in the carrying amount of accrued warranty costs included in other current liabilities in the accompanying condensed consolidated balance sheet are as follows:

 
 
Three Months Ended
 
(In thousands)
 
March 29, 2014
   
March 30, 2013
 
 
 
   
 
Balance at beginning of period
 
$
4,571
   
$
4,462
 
Provision
   
559
     
291
 
Usage
   
(697
)
   
(555
)
Currency translation
   
(9
)
   
(79
)
Balance at end of period
 
$
4,424
   
$
4,119
 

Use of Estimates

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 revenues and expenses during the reporting period.

Recent Accounting Pronouncements

Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11. Currently, GAAP does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This ASU clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This ASU applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, although early adoption is permitted. This ASU will be applied prospectively to all unrecognized tax benefits that exist at the effective date. The Company adopted this ASU in the first quarter of 2014, which did not have an impact on its consolidated financial statements.

10
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 

2. Acquisitions

On December 30, 2013, the Company acquired all the outstanding shares of a European producer of creping and coating blades for approximately $2,627,000 in cash, including $674,000 of cash acquired and $53,000 of debt assumed. An additional 1,000,000 euros, or approximately $1,377,000, of contingent consideration is due to the sellers within two years of the closing date if certain conditions are met, as defined in the purchase agreement.

This acquisition has been accounted for using the purchase method of accounting and its results have been included in the accompanying financial statements from the date of the acquisition. The Company has made a preliminary fair value assessment of the assets acquired and liabilities assumed, including identifiable intangible assets acquired of $1,800,000, which are being amortized using the straight-line method over 12 years. The excess of the acquisition purchase price over the tangible and identifiable intangible assets was recorded as goodwill and totaled $1,590,000, which is not deductible for tax purposes. The fair values are subject to adjustment upon finalization of the valuation, and therefore the current measurements of intangible assets, acquired goodwill, and assumed assets and liabilities are subject to change.

Pro forma disclosures of the results of operations are not required, as the acquisition is not considered a material business combination as outlined in FASB Accounting Standards Codification 805, "Business Combinations."

The Company recorded acquisition transaction costs of approximately $156,000 in the first three months of 2014 in selling, general, and administrative expenses in the accompanying condensed consolidated statement of income. During the first three months of 2014, the Company made a post-closing adjustment payment of $82,000 related to an acquisition completed prior to 2014.

3.              Restructuring Costs
2013 Restructuring Plan
The Company's Papermaking Systems Segment recorded net restructuring costs of $328,000 in the first three months of 2014 related to the 2013 restructuring plan, including additional facility-related costs of $339,000, net of income from a reduction in severance and associated costs of $11,000.

A summary of the changes in accrued restructuring costs included in other current liabilities in the accompanying condensed consolidated balance sheet is as follows:

(In thousands)  
 
Severance
Costs
   
Other
Costs
   
Total
Costs
 
Balance at December 28, 2013
 
$
467
   
$
–
   
$
467
 
Provision
   
(11
)
   
339
     
328
 
Usage
   
(206
)
   
(338
)
   
(544
)
Currency translation
   
6
     
(1
)
   
5
 
Balance at March 29, 2014
 
$
256
   
$
–
   
$
256
 

The Company expects to pay the remaining accrued restructuring costs by the end of 2014.
11
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 

4. Earnings per Share

Basic and diluted earnings per share are calculated as follows:

 
 
Three Months Ended
 
 
 
March 29,
   
March 30,
 
(In thousands, except per share amounts)
 
2014
   
2013
 
 
 
   
 
Amounts Attributable to Kadant:
 
   
 
Income from Continuing Operations
 
$
5,058
   
$
5,313
 
Loss from Discontinued Operation
   
(5
)
   
(29
)
Net Income
 
$
5,053
   
$
5,284
 
 
               
Basic Weighted Average Shares
   
11,132
     
11,163
 
Effect of Stock Options, Restricted Stock Units and Employee Stock Purchase Plan
   
182
     
104
 
Diluted Weighted Average Shares
   
11,314
     
11,267
 
 
               
Basic Earnings per Share:
               
Continuing Operations
 
$
0.45
   
$
0.48
 
Discontinued Operation
 
$
–
   
$
–
 
Net Income per Basic Share
 
$
0.45
   
$
0.47
 
 
               
Diluted Earnings per Share:
               
Continuing Operations
 
$
0.45
   
$
0.47
 
Discontinued Operation
 
$
–
   
$
–
 
Net Income per Diluted Share
 
$
0.45
   
$
0.47
 

Options to purchase approximately 111,000 shares of the Company's common stock for the first quarter of 2013 were not included in the computation of diluted earnings per share as the effect of their inclusion would have been anti-dilutive. Unvested restricted stock units equivalent to approximately 57,000 and 81,000 shares of common stock for the first quarters of 2014 and 2013, respectively, were not included in the computation of diluted earnings per share because either the effect of their inclusion would have been anti-dilutive, or for unvested performance-based restricted stock units, the performance conditions had not been met as of the end of the reporting period.

5. Provision for Income Taxes

The provision for income taxes was $2,352,000 and $1,967,000 in the first quarters of 2014 and 2013, respectively, and represented 31% and 27% of pre-tax income. The effective tax rate of 31% in the first quarter of 2014 was lower than the Company's statutory tax rate primarily due to the release of tax reserves that resulted from the expiration of tax statutes of limitations in jurisdictions outside the U.S. and the distribution of the Company's worldwide earnings. These tax benefits were offset in part by tax expense associated with a reduction in deferred tax assets and an increase in nondeductible expenses. The effective tax rate of 27% in the first quarter of 2013 was lower than the Company's statutory tax rate primarily due to the reduction of the 2012 U.S. tax cost of foreign earnings and a benefit from the 2012 U.S. research and development tax credit, both of which resulted from U.S. tax legislation enacted in January 2013. Also, the effective tax rate was lower due to a statutory tax rate change in the Company's overseas operations and the distribution of the Company's worldwide earnings.
12
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 

6. Long-Term Obligations

Long-term obligations are as follows:

 
 
March 29,
   
December 28,
 
(In thousands)
 
2014
   
2013
 
 
 
   
 
Revolving Credit Facility, due 2018
 
$
36,640
   
$
32,260
 
Variable Rate Term Loan, due from 2014 to 2016
   
6,250
     
6,375
 
Other
   
48
     
–
 
Total Long-Term Obligations
   
42,938
     
38,635
 
Less: Current Maturities
   
(648
)
   
(625
)
Long-Term Obligations, less Current Maturities
 
$
42,290
   
$
38,010
 

The weighted average interest rate for the Company's long-term obligations was 2.54% as of March 29, 2014.

The Company entered into a five-year unsecured revolving credit facility (2012 Credit Agreement) in the aggregate principal amount of up to $100,000,000 on August 3, 2012 and amended it on November 1, 2013. The 2012 Credit Agreement also includes an uncommitted unsecured incremental borrowing facility of up to an additional $50,000,000. The principal on any borrowings made under the 2012 Credit Agreement is due on November 1, 2018. Interest on any loans outstanding under the 2012 Credit Agreement accrues and is payable quarterly in arrears at one of the following rates selected by the Company: (i) the highest of (a) the federal funds rate plus 0.50% plus an applicable margin of 0% to 1%, (b) the prime rate, as defined, plus an applicable margin of 0% to 1% and (c) the Eurocurrency rate, as defined, plus 0.50% plus an applicable margin of 0% to 1% or (ii) the Eurocurrency rate, as defined, plus an applicable margin of 1% to 2%. The applicable margin is determined based upon the ratio of the Company's total debt to earnings before interest, taxes, depreciation, and amortization (EBITDA), as defined in the 2012 Credit Agreement. For this purpose, total debt is defined as total debt less up to $25,000,000 of unrestricted U.S. cash. There was $36,640,000 outstanding under the 2012 Credit Agreement at March 29, 2014.

The obligations of the Company under the 2012 Credit Agreement may be accelerated upon the occurrence of an event of default under the 2012 Credit Agreement, which includes customary events of default including without limitation payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy- and insolvency-related defaults, defaults relating to such matters as the Employment Retirement Income Security Act (ERISA), unsatisfied judgments, the failure to pay certain indebtedness, and a change of control default. In addition, the 2012 Credit Agreement contains negative covenants applicable to the Company and its subsidiaries including financial covenants requiring the Company to comply with a maximum consolidated leverage ratio of 3.5 to 1, a minimum consolidated interest coverage ratio of 3 to 1, and restrictions on liens, indebtedness, fundamental changes, dispositions of property, making certain restricted payments (including dividends and stock repurchases), investments, transactions with affiliates, sale and leaseback transactions, swap agreements, changing its fiscal year, arrangements affecting subsidiary distributions, entering into new lines of business, and certain actions related to the discontinued operation. As of March 29, 2014, the Company was in compliance with these covenants.

Loans under the 2012 Credit Agreement are guaranteed by certain domestic subsidiaries of the Company pursuant to a Guarantee Agreement, effective August 3, 2012.

As of March 29, 2014, the Company had $62,194,000 of borrowing capacity available under the committed portion of its 2012 Credit Agreement. The amount the Company is able to borrow under the 2012 Credit Agreement is the total borrowing capacity of $100,000,000 less any outstanding borrowings, letters of credit and multi-currency borrowings issued under the 2012 Credit Agreement.

In the first quarter of 2014, the Company assumed $53,000 of debt as part of an acquisition, of which $48,000 was outstanding at March 29, 2014.
13
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 

7. Stock-Based Compensation

Stock-based compensation expense of $1,395,000 and $1,269,000 in the first quarters of 2014 and 2013, respectively, was recognized within selling, general, and administrative expenses in the accompanying condensed consolidated statement of income. Unrecognized compensation expense related to stock-based compensation totaled approximately $8,390,000 at March 29, 2014, and will be recognized over a weighted average period of 1.9 years.

On March 5, 2014, the Company granted to executive officers of the Company performance-based restricted stock units (RSUs), which represented, in aggregate, the right to receive 56,445 shares (the target RSU amount), subject to adjustment, with a grant date fair value of $38.81 per share. The RSUs are subject to adjustment based on the achievement of the performance measure selected for the 2014 fiscal year, which is a specified target for adjusted EBITDA generated from continuing operations for the 2014 fiscal year. The RSUs are adjusted by comparing the actual adjusted EBITDA for the performance period to the target adjusted EBITDA. Actual adjusted EBITDA between 50% and 100% of the target adjusted EBITDA results in an adjustment of 50% to 100% of the RSU amount. Actual adjusted EBITDA between 100% and 115% of the target adjusted EBITDA results in an adjustment using a straight-line linear scale between 100% and 150% of the RSU amount. If actual adjusted EBITDA is below 50% of the target adjusted EBITDA for the 2014 fiscal year, all performance-based RSUs will be forfeited. In the first quarter of 2014, the Company recognized compensation expense based on the probable number of performance-based RSUs expected to vest, which was 100% of the target RSU amount. Following the adjustment, the performance-based RSUs will be subject to additional time-based vesting, and will vest in three equal annual installments on March 10 of 2015, 2016, and 2017, provided that the executive officer is employed by the Company on the applicable vesting dates. In March 2014, the Company also granted time-based RSUs representing 85,122 shares to its executive officers, employees, and non-employee directors.

8. Employee Benefit Plans

The Company sponsors a noncontributory defined benefit retirement plan for the benefit of eligible employees at its Kadant Solutions division and its corporate office (included in the table below in "Pension Benefits"). The Company also sponsors a restoration plan for the benefit of certain executive officers who also participate in the noncontributory defined benefit retirement plan (included in the table below in "Other Benefits"). In addition, employees at certain of the Company's subsidiaries participate in defined benefit retirement and post-retirement welfare benefit plans (included in the table below in "Other Benefits").

The components of the net periodic benefit cost for the pension benefits and other benefits plans are as follows:

 
 
Three Months Ended
   
Three Months Ended
 
 
 
March 29, 2014
   
March 30, 2013
 
(In thousands)
 
Pension
Benefits
   
Other
Benefits
   
Pension
Benefits
   
Other
Benefits
 
 
 
   
   
   
 
Components of Net Periodic Benefit Cost:
 
   
   
   
 
Service cost
 
$
213
   
$
69
   
$
263
   
$
53
 
Interest cost
   
321
     
72
     
301
     
70
 
Expected return on plan assets
   
(370
)
   
(12
)
   
(381
)
   
(13
)
Recognized net actuarial loss
   
79
     
9
     
151
     
21
 
Amortization of prior service cost
   
14
     
21
     
14
     
21
 
Net periodic benefit cost
 
$
257
   
$
159
   
$
348
   
$
152
 
 
                               
The weighted average assumptions used to determine net periodic benefit cost are as follows:
         
 
                               
Discount rate
   
4.79
%
   
4.23
%
   
3.89
%
   
3.92
%
Expected long-term return on plan assets
   
5.75
%
   
–
     
5.75
%
   
–
 
Rate of compensation increase
   
3.50
%
   
3.19
%
   
3.50
%
   
3.67
%

The Company made cash contributions of $270,000 to its Kadant Solutions division's noncontributory defined benefit retirement plan in the first quarter of 2014 and expects to make cash contributions of $810,000 over the remainder of 2014. For the remaining pension and post-retirement welfare benefits plans, the Company does not expect to make cash contributions other than to fund current benefit payments.

14
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 

9. Accumulated Other Comprehensive Items

Comprehensive income combines net income and other comprehensive items, which represent certain amounts that are reported as components of stockholders' equity in the accompanying condensed consolidated balance sheet, including foreign currency translation adjustments, deferred losses and unrecognized prior service cost associated with pension and other post-retirement plans, and deferred losses on hedging instruments.

Changes in each component of accumulated other comprehensive items (AOCI), net of tax, in the accompanying condensed consolidated balance sheet are as follows:

(In thousands)
 
Foreign
Currency
Translation
Adjustment
   
Unrecognized
Prior Service
Cost
   
Deferred Loss
on Pension and
Other Post-
Retirement
Plans
   
Deferred Loss
on Hedging
Instruments
   
Accumulated
Other
Comprehensive
Items
 
Balance at December 28, 2013
 
$
8,919
   
$
(657
)
 
$
(6,919
)
 
$
(633
)
 
$
710
 
Other comprehensive (loss) income before reclassifications
   
(763
)
   
–
     
(3
)
   
38
     
(728
)
Reclassifications from AOCI
   
–
     
22
     
58
     
54
     
134
 
Net current period other comprehensive  (loss) income
   
(763
)
   
22
     
55
     
92
     
(594
)
Balance at March 29, 2014
 
$
8,156
   
$
(635
)
 
$
(6,864
)
 
$
(541
)
 
$
116
 
 
                                       
Balance at December 29, 2012
 
$
8,124
   
$
(748
)
 
$
(9,645
)
 
$
(1,046
)
 
$
(3,315
)
Other comprehensive (loss) income before reclassifications
   
(3,060
)
   
2
     
–
     
(47
)
   
(3,105
)
Reclassifications from AOCI
   
–
     
22
     
113
     
242
     
377
 
Net current period other comprehensive  (loss) income
   
(3,060
)
   
24
     
113
     
195
     
(2,728
)
Balance at March 30, 2013
 
$
5,064
   
$
(724
)
 
$
(9,532
)
 
$
(851
)
 
$
(6,043
)

Amounts reclassified out of accumulated other comprehensive items are as follows:

 
 
Three Months Ended
 
 
(In thousands)
 
March 29, 2014
   
March 30, 2013
 
Statement of Income Line Item
Pension and Other Post-retirement Plans: (1)
 
   
 
    
Amortization of prior service cost
 
$
(35
)
 
$
(35
)
Selling, general, and administrative expenses
Amortization of actuarial losses
   
(88
)
   
(172
)
Selling, general, and administrative expenses
Total expense before income taxes
   
(123
)
   
(207
)
 
Income tax benefit
   
43
     
72
 
Provision for income taxes
 
   
(80
)
   
(135
)
 
Cash Flow Hedges: (2)
               
    
Interest rate swap agreements
   
(84
)
   
(106
)
Interest expense
Forward currency-exchange contracts
   
–
     
(43
)
Revenues
Total expense before income taxes
   
(84
)
   
(149
)
 
Income tax benefit (provision)
   
30
     
(93
)
Provision for income taxes
 
   
(54
)
   
(242
)
 
Total reclassifications
 
$
(134
)
 
$
(377
)
 

(1) Included in the computation of net periodic benefit costs. See Note 8 for additional information.
(2) See Note 10 for additional information.


15
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 

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

Accounting Standards Codification 815, "Derivatives and Hedging," requires that all derivatives be recognized on the 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 accumulated other comprehensive items. These deferred gains and losses are recognized 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 condensed consolidated statement of income.

Interest Rate Swaps

The Company entered into a swap agreement in 2006 (the 2006 Swap Agreement) to convert a portion of the Company's outstanding variable rate term loan from a floating to a fixed rate of interest. The swap agreement matures in 2016, has the same terms and quarterly payment dates as the corresponding debt, and reduces proportionately in line with the amortization of the debt. Under the 2006 Swap Agreement, the Company receives a three-month LIBOR rate and pays a fixed rate of interest of 5.63% plus an applicable margin. The fair value for this instrument as of March 29, 2014, is included in other long-term liabilities, with an offset to accumulated other comprehensive items (net of tax) in the accompanying condensed consolidated balance sheet. The Company has structured the interest rate swap agreement to be 100% effective and as a result, there is no current impact to earnings resulting from hedge ineffectiveness. Management believes that any credit risk associated with the outstanding swap agreement is remote based on the Company's financial position and the creditworthiness of the financial institution issuing the swap agreement.

The counterparty to the swap agreement could demand an early termination of the swap agreement if the Company is in default under the 2012 Credit Agreement, or any agreement that amends or replaces the 2012 Credit Agreement in which the counterparty is a member, and the Company is unable to cure the default. An event of default under the 2012 Credit Agreement includes customary events of default and failure to comply with financial covenants, including a maximum consolidated leverage ratio of 3.5 to 1, and a minimum consolidated interest coverage ratio of 3 to 1. As of March 29, 2014, the Company was in compliance with these covenants. The unrealized loss of $690,000 as of March 29, 2014, represents the estimated amount that the Company would pay to the counterparty in the event of an early termination.
Forward Currency-Exchange Contracts

The Company uses forward currency-exchange contracts primarily to hedge exposures resulting from fluctuations in currency exchange rates. Such exposures result primarily from portions of the Company's operations and assets and liabilities that are denominated in currencies other than the functional currencies of the businesses conducting the operations or holding the assets and liabilities. The Company typically manages its level of exposure to the risk of currency-exchange fluctuations by hedging a portion of its currency exposures anticipated over the ensuing 12-month period, using forward currency-exchange contracts that have maturities of 12 months or less.

Forward currency-exchange contracts that hedge forecasted accounts receivable or accounts payable are designated as cash flow hedges. The fair values for these instruments are included in other current assets for unrecognized gains and in other current liabilities for unrecognized losses, with an offset in accumulated other comprehensive items (net of tax). For forward currency-exchange contracts that are designated as fair value hedges, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item are recognized currently in earnings. The fair values of forward currency-exchange contracts that are not designated as hedges are recorded currently in earnings.

16
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
10. Derivatives (continued)

The Company recognized a gain of $36,000 and a loss of $2,000 in the first quarters of 2014 and 2013, respectively, included in selling, general, and administrative expenses in the accompanying condensed consolidated statement of income, associated with forward currency-exchange contracts that were not designated as hedges. Management believes that any credit risk associated with forward currency-exchange contracts is remote based on the Company's financial position and the creditworthiness of the financial institutions issuing the contracts.

The following table summarizes the fair value of the Company's derivative instruments designated and not designated as hedging instruments, the notional values of the associated derivative contracts, and the location of these instruments in the condensed consolidated balance sheet:

 
  
 
March 29, 2014
   
December 28, 2013
 
                                                             Balance Sheet
 
Asset
   
Notional
   
Asset
   
Notional
 
(In thousands)
Location
 
(Liability) (a)
   
Amount (b)
   
(Liability) (a)
   
Amount
 
Derivatives Designated as Hedging Instruments:
 
 
   
   
   
 
Derivatives in an Asset Position:
 
 
   
   
   
 
Forward currency-exchange contracts
Other Current Assets
 
$
44
   
$
840
   
$
–
   
$
–
 
Derivatives in a Liability Position:
 
                               
Forward currency-exchange contracts
Other Current Liabilities
 
$
(8
)
 
$
500
   
$
(22
)
 
$
1,340
 
Interest rate swap agreement
Other Long-Term Liabilities
 
$
(690
)
 
$
6,250
   
$
(773
)
 
$
6,375
 
 
 
                               
Derivatives Not Designated as Hedging Instruments:
 
                               
Derivatives in an Asset Position:
 
                               
Forward currency-exchange contracts
Other Current Assets
 
$
–
   
$
–
   
$
97
   
$
1,419
 
Derivatives in a Liability Position:
 
                               
Forward currency-exchange contracts
Other Current Liabilities
 
$
–
   
$
–
   
$
(1
)
 
$
288
 

(a) See Note 11 for the fair value measurements related to these financial instruments.
(b) The total notional amount is indicative of the level of the Company's derivative activity during the first three months of 2014.

The following table summarizes the activity in accumulated other comprehensive items (OCI) associated with the Company's derivative instruments designated as cash flow hedges as of and for the period ended March 29, 2014:

(In thousands)
 
Interest Rate Swap
Agreements
   
Forward Currency-
Exchange
Contracts
   
Total
 
Unrealized loss, net of tax, at December 28, 2013
 
$
(618
)
 
$
(15
)
 
$
(633
)
Loss reclassified to earnings
   
54
     
–
     
54
 
Gain recognized in OCI
   
–
     
38
     
38
 
Unrealized (loss) gain, net of tax, at March 29, 2014
 
$
(564
)
 
$
23
   
$
(541
)

As of March 29, 2014, $237,000 of the net unrealized loss included in OCI is expected to be reclassified to earnings over the next twelve months.
17
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
11. Fair Value Measurements

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

• Level 1—Quoted prices in active markets for identical assets or liabilities.
• Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
• Level 3—Unobservable inputs based on the Company's own assumptions.

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

 
 
Fair Value as of March 29, 2014
 
(In thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
 
 
   
   
   
 
Assets:
 
   
   
   
 
Money market funds and time deposits
 
$
15,665
   
$
–
   
$
–
   
$
15,665
 
Banker's acceptance drafts (a)
 
$
–
   
$
6,947
   
$
–
   
$
6,947
 
Forward currency-exchange contracts
 
$
–
   
$
44
   
$
–
   
$
44
 
 
                               
Liabilities:
                               
Forward currency-exchange contracts
 
$
–
   
$
8
   
$
–
   
$
8
 
Interest rate swap agreement
 
$
–
   
$
690
   
$
–
   
$
690
 
Contingent consideration (b)
 
$
–
   
$
–
   
$
1,377
   
$
1,377
 

 
 
Fair Value as of December 28, 2013
 
(In thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
 
 
   
   
   
 
Assets:
 
   
   
   
 
Money market funds and time deposits
 
$
17,090
   
$
–
   
$
–
   
$
17,090
 
Banker's acceptance drafts (a)
 
$
–
   
$
10,765
   
$
–
   
$
10,765
 
Forward currency-exchange contracts
 
$
–
   
$
97
   
$
–
   
$
97
 
 
                               
Liabilities:
                               
Forward currency-exchange contracts
 
$
–
   
$
23
   
$
–
   
$
23
 
Interest rate swap agreement
 
$
–
   
$
773
   
$
–
   
$
773
 

(a) Included in accounts receivable in the accompanying condensed consolidated balance sheet.
(b) Included in other current liabilities in the accompanying condensed consolidated balance sheet.

The Company uses the market approach technique to value its financial assets and liabilities, and there were no changes in valuation techniques during the first quarter of 2014. The Company's financial assets and liabilities carried at fair value include cash equivalents and derivative instruments used to hedge the Company's foreign currency and interest rate risks. The Company's cash equivalents are comprised of money market funds and bank deposits that are highly liquid and easily tradable. These investments are valued using inputs observable in active markets for identical securities. The carrying value of the banker's acceptance drafts approximates their fair value due to their short-term nature. The fair values of the Company's interest rate swap agreement are based on LIBOR yield curves at the reporting date. The fair values of the Company's forward currency-exchange contracts are based on quoted forward foreign exchange rates at the reporting date. The forward currency-exchange contracts and interest rate swap agreement are hedges of either recorded assets or liabilities or anticipated transactions. Changes in values of the underlying hedged assets and liabilities or anticipated transactions are not reflected in the table above. The Company recorded contingent consideration as part of its acquisition of a European manufacturer on December 30, 2013. The fair value of the contingent consideration is based on the present value of the estimated future cash flows.

The carrying value and fair value of the Company's long-term debt obligations are as follows:

 
 
March 29, 2014
   
December 28, 2013
 
 
 
Carrying
   
Fair
   
Carrying
   
Fair
 
(In thousands)
 
Value
   
Value
   
Value
   
Value
 
 
 
   
   
   
 
Long-term debt obligations
 
$
42,290
   
$
42,290
   
$
38,010
   
$
38,010
 

The carrying value of long-term debt obligations approximates fair value as the obligations bear variable rates of interest, which adjust quarterly based on prevailing market rates.

18
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
12. Business Segment Information

The Company has combined its operating entities into two reportable operating segments, Papermaking Systems and Wood Processing Systems, and a separate product line, Fiber-based Products. In classifying operational entities into a particular segment, the Company aggregated businesses with similar economic characteristics, products and services, production processes, customers, and methods of distribution.

 
 
Three Months Ended
 
 
 
March 29,
   
March 30,
 
(In thousands)
 
2014
   
2013
 
 
 
   
 
Revenues:
 
   
 
Papermaking Systems
 
$
78,184
   
$
72,397
 
Wood Processing Systems
   
11,273
     
–
 
Fiber-based Products
   
3,910
     
3,807
 
 
 
$
93,367
   
$
76,204
 
 
               
Income from Continuing Operations Before Provision for Income Taxes:
               
Papermaking Systems
 
$
9,410
   
$
9,944
 
Wood Processing Systems
   
1,354
     
–
 
Corporate and Fiber-based Products (a)
   
(3,143
)
   
(2,572
)
Total Operating Income
   
7,621
     
7,372
 
Interest Expense, Net
   
(84
)
   
(56
)
 
 
$
7,537
   
$
7,316
 
 
               
Capital Expenditures:
               
Papermaking Systems
 
$
517
   
$
1,172
 
Other
   
22
     
6
 
 
 
$
539
   
$
1,178
 

(a) Corporate primarily includes general and administrative expenses.

13. Contingencies and Litigation

Right of Recourse

 In the ordinary course of business, the Company's subsidiaries in China may receive banker's acceptance drafts from customers in payment of outstanding accounts receivable. These banker's acceptance drafts are non-interest bearing obligations of the issuing bank and mature within six months of the origination date. The Company's subsidiaries in China may use these banker's acceptance drafts prior to the scheduled maturity date to settle outstanding accounts payable with vendors. Banker's acceptance drafts transferred to vendors are subject to customary right of recourse provisions prior to their scheduled maturity date. As of March 29, 2014 and December 28, 2013, the Company had $3,821,000 and $5,688,000, respectively, of banker's acceptance drafts subject to customary right of recourse provisions, which were transferred to vendors and had not reached their scheduled maturity date. Historically, the banker's acceptance drafts have settled upon maturity without any claim of recourse against the Company.

General

From time to time, the Company is subject to various claims and legal proceedings covering a range of matters that arise in the ordinary course of business. Such litigation may include claims and counterclaims by and against the Company for breach of contract or warranty, canceled contracts, product liability, or bankruptcy-related claims. For legal proceedings in which a loss is probable and estimable, the Company accrues a loss based on the low end of the range of estimated loss when there is no better estimate within the range. If the Company were found to be liable for any of the claims or counterclaims against it, the Company would incur a charge against earnings for amounts in excess of legal accruals.

19
KADANT INC.
 
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q includes forward-looking statements that are not statements of historical fact, and may include statements regarding possible or assumed future results of operations. Forward-looking statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management, using information currently available to our management. When we use words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "seeks," "should," "likely," "will," "would," "may," "continue," "could," or similar expressions, we are making forward-looking statements.

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions. Our future results of operations may differ materially from those expressed in the forward-looking statements. Many of the important factors that will determine these results and values are beyond our ability to control or predict. You should not put undue reliance on any forward-looking statements. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise. For a discussion of important factors that may cause our actual results to differ materially from those suggested by the forward-looking statements, you should read carefully the section captioned "Risk Factors" in Part II, Item 1A, of this Report.

Overview

Company Background
We are a leading global supplier of equipment used in process industries, including papermaking, paper recycling, and oriented strand board (OSB), an engineered wood panel product used primarily in home construction. In addition, we manufacture granules made from papermaking byproducts. We have a large customer base that includes most of the world's major paper and OSB manufacturers. We believe our large installed base provides us with a spare parts and consumables business that yields higher margins than our capital equipment business.

Our continuing operations are comprised of two reportable operating segments: Papermaking Systems and Wood Processing Systems, and a separate product line, Fiber-based Products. Through our Papermaking Systems segment, we develop, manufacture, and market a range of equipment and products for the global papermaking, paper recycling, and process industries. Through our Wood Processing Systems segment, we design, manufacture, and market stranders and related equipment used in the production of OSB, and sell debarking and wood chipping equipment used in the forest products and the pulp and paper industries. Through our Fiber-based Products business, we manufacture and sell granules derived from pulp fiber for use as carriers for agricultural, home lawn and garden, and professional lawn, turf and ornamental applications, as well as for oil and grease absorption.

Papermaking Systems Segment
Our Papermaking Systems segment consists of the following product lines: Stock-Preparation; Fluid-Handling; and Doctoring, Cleaning, & Filtration.
 
-
Stock-Preparation: custom-engineered systems and equipment, as well as standard individual components, for pulping, de-inking, screening, cleaning, and refining primarily recycled fiber for preparation for entry into the paper machine; recausticizing and evaporation equipment and systems used in the production of virgin pulp;
 
 
-
Fluid-Handling: rotary joints, precision unions, steam and condensate systems, components, and controls used primarily in the dryer section of the papermaking process and during the production of corrugated boxboard, metals, plastics, rubber, textiles, chemicals, and food; and
 
 
-
Doctoring, Cleaning, & Filtration: doctoring systems and related consumables that continuously clean rolls to keep paper machines running efficiently; doctor blades made of a variety of materials to perform functions including cleaning, creping, web removal, flaking, and the application of coatings; profiling systems that control moisture, web curl, and gloss during paper converting; and systems and equipment used to continuously clean paper machine fabrics and rolls, drain water from pulp mixtures, form the sheet or web, and filter the process water for reuse.

In the first quarter of 2014, our Papermaking Systems segment acquired all the outstanding shares of a European producer of creping and coating blades for approximately $2.6 million in cash, including $0.7 million of cash acquired. An additional 1 million euros, or approximately $1.4 million, of contingent consideration is due to the sellers within two years of the closing date if certain conditions are met, as defined in the purchase agreement.

Wood Processing Systems Segment
Our principal wood-processing products include:
 
-
Stranders: disc and ring stranders that cut trees into strands for OSB production;
 
 
-
Rotary Debarkers: rotary debarkers that employ a combination of mechanical abrasion and log-to-log contact to efficiently remove bark from logs of all shapes and species; and
 
 
-
Chippers: disc, drum, and veneer chippers that are high quality, robust chipper systems for waste-wood and whole-log applications found in pulp woodrooms, chip plants, sawmill, and planer mill sites.
 
20
KADANT INC.
 
Overview (continued)

Fiber-based Products
We produce biodegradable, absorbent granules from papermaking byproducts for use primarily as carriers for agricultural, home lawn and garden, and professional lawn, turf and ornamental applications, as well as for oil and grease absorption.
International Sales
During the first quarters of 2014 and 2013, approximately 51% and 58%, respectively, of our sales were to customers outside the United States, principally in Europe and China. We generally seek to charge our customers in the same currency in which our operating costs are incurred. However, our financial performance and competitive position can be affected by currency exchange rate fluctuations affecting the relationship between the U.S. dollar and foreign currencies. We seek to reduce our exposure to currency fluctuations through the use of forward currency exchange contracts. We may enter into forward contracts to hedge certain firm purchase and sale commitments denominated in currencies other than our subsidiaries' functional currencies. These contracts hedge transactions principally denominated in U.S. dollars.

Application of Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed 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 condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Our actual results may differ from these estimates.

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. We believe that our most critical accounting policies, upon which our financial position depends and which involve the most complex or subjective decisions or assessments, are those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the section captioned "Application of Critical Accounting Policies and Estimates" in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended December 28, 2013, filed with the Securities and Exchange Commission (SEC). There have been no material changes to these critical accounting policies since fiscal year-end 2013 that warrant disclosure.
 
Industry and Business Outlook
Our products are primarily sold in global process industries, including papermaking, paper recycling, and OSB. Our bookings increased to $115 million in the first quarter of 2014, including $16 million from acquisitions, compared to $90 million in the first quarter of 2013. The paper industry in North America has remained relatively stable in the first quarter of 2014 with good performance in some grades, such as containerboard, while printing, writing and newsprint grades continue to decline. Operating rates in the relatively strong containerboard sector were healthy at 95% in the first quarter of 2014. Our bookings in North America were $70 million in the first quarter of 2014, up 60% sequentially and 61% compared to the first quarter of 2013. The European market is showing signs of improvement compared to prior quarters, although the outlook is tempered by the political uncertainty in the Ukraine and its potential effect on the European and Russian economies. Our bookings in Europe were $25 million in the first quarter of 2014, up 27% sequentially, but down 9% compared to the first quarter of 2013. In China, we are seeing active project activity, despite the sluggish economic environment. Our bookings in China were $9 million in the first quarter of 2014, up 5% sequentially, but down 22% compared to the first quarter of 2013. In South America, the weakness in the overall economy, particularly in Brazil, has tempered economic activity. That said, demand for containerboard and tissue in Brazil is expected to grow over the next five years. Our bookings in South America benefited from our acquisition of our Brazilian licensee in 2013, increasing to $6 million in the first quarter of 2014 compared to $3 million in the first quarter of 2013. Sequentially, our bookings in South America were down 11%.

We expect to achieve GAAP (generally accepted accounting principles) diluted earnings per share (EPS) from continuing operations of $0.66 to $0.68 in the second quarter of 2014, including $0.04 of expense associated with the amortization of acquired profit in inventory and backlog, on revenues of $104 to $106 million. For the full year, we expect revenues of $410 to $420 million, revised from our previous guidance of $405 to $415 million. We expect to achieve GAAP diluted EPS from continuing operations of $2.60 to $2.70 in 2014, which includes $0.17 of expense associated with the amortization of acquired profit in inventory and backlog.
21
KADANT INC.
 
Results of Operations

First Quarter 2014 Compared With First Quarter 2013

The following table sets forth our unaudited condensed consolidated statement of income expressed as a percentage of total revenues from continuing operations for the first fiscal quarters of 2014 and 2013. The results of operations for the fiscal quarter ended March 29, 2014 are not necessarily indicative of the results to be expected for the full fiscal year.

 
 
Three Months Ended
 
 
 
March 29,
   
March 30,
 
 
 
2014
   
2013
 
 
 
   
 
Revenues
   
100
%
   
100
%
 
               
Costs and Operating Expenses:
               
    Cost of revenues
   
55
     
53
 
    Selling, general, and administrative expenses
   
35
     
35
 
    Research and development expenses
   
2
     
2
 
    Restructuring costs
   
–
     
–
 
 
   
92
     
90
 
 
               
Operating Income
   
8
     
10
 
 
               
Interest Income
   
–
     
–
 
Interest Expense
   
–
     
–
 
 
               
Income from Continuing Operations Before Provision for Income Taxes
   
8
     
10
 
Provision for Income Taxes
   
2
     
3
 
 
               
Income from Continuing Operations
   
6
%
   
7
%

Revenues
Revenues for the first quarters of 2014 and 2013 are as follows:

 
 
Three Months Ended
 
 
 
March 29,
   
March 30,
 
(In thousands)
 
2014
   
2013
 
 
 
   
 
Revenues:
 
   
 
Papermaking Systems
 
$
78,184
   
$
72,397
 
Wood Processing Systems
   
11,273
     
–
 
Fiber-based Products
   
3,910
     
3,807
 
 
 
$
93,367
   
$
76,204
 

Papermaking Systems Segment. Revenues increased $5.8 million, or 8%, to $78.2 million in the first quarter of 2014 from $72.4 million in the first quarter of 2013 primarily due to the inclusion of $7.6 million in revenues from acquisitions and a $0.5 million increase from the favorable effects of currency translation, offset in part by a decrease in revenues in our Stock-Preparation product line, excluding acquisitions.

Wood Processing Systems Segment. Revenues of $11.3 million in the first quarter of 2014 are from our acquisition of Kadant Carmanah Design (Carmanah) in November 2013.
22
KADANT INC.
 
Results of Operations (continued)

Papermaking Systems Segment by Product Line. The following table presents revenues for our Papermaking Systems segment by product line, the changes in revenues by product line between the first quarters of 2014 and 2013, and the changes in revenues by product line between the first quarters of 2014 and 2013 excluding the effect of currency translation. The increase in revenues excluding the effect of currency translation represents the increase resulting from the conversion of first quarter of 2014 revenues in local currency into U.S. dollars at the first quarter of 2013 exchange rates, and then comparing this result to the actual revenues in the first quarter of 2013. The presentation of the changes in revenues by product line excluding the effect of currency translation is a non-GAAP measure. We believe this non-GAAP measure helps investors gain a more complete understanding of our underlying operations 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.
 
 
Three Months Ended
   
Increase
Excluding
Effect of
 
 
(In millions)
 
March 29,
2014
   
March 30,
2013
   
Increase
   
Currency
Translation
 
 
 
   
   
   
 
Papermaking Systems Product Lines:
 
   
   
   
 
Doctoring, Cleaning, & Filtration
 
$
27.0
   
$
25.9
   
$
1.1
   
$
1.0
 
Stock-Preparation
   
26.2
     
23.0
     
3.2
     
2.8
 
Fluid-Handling
   
25.0
     
23.5
     
1.5
     
1.5
 
 
 
$
78.2
   
$
72.4
   
$
5.8
   
$
5.3
 

Revenues from our Doctoring, Cleaning, & Filtration product line in the first quarter of 2014 increased $1.0 million, or 4%, excluding a $0.1 million favorable effect of currency translation, compared to the prior year period. This increase was primarily due to the inclusion of $1.9 million in revenues from acquisitions, offset in part by a decrease in demand for our capital products at our European operations. Revenues in our Stock-Preparation product line in the first quarter of 2014 increased $2.8 million, or 12%, excluding a $0.4 million favorable effect of currency translation, compared to the first quarter of 2013. This increase was primarily due to the inclusion of $5.7 million of revenues from acquisitions, offset in part by a decrease in demand for our products at our European and Chinese operations. Revenues from our Fluid-Handling product line in the first quarter of 2014 increased $1.5 million, or 6%, compared to the prior year period primarily due to increased demand for our products at our North American operations.

Gross Profit Margin
Gross profit margins for the first quarters of 2014 and 2013 are as follows:

 
 
Three Months Ended
 
 
 
March 29,
   
March 30,
 
 
 
2014
   
2013
 
 
 
   
 
Gross Profit Margin:
 
   
 
Papermaking Systems
   
47.5
%
   
46.9
%
Wood Processing Systems
   
28.3
     
–
 
Fiber-based Products
   
46.7
     
54.7
 
 
   
45.2
%
   
47.3
%
 
Papermaking Systems Segment . The gross profit margin in the Papermaking Systems segment increased to 47.5% in the first quarter of 2014 from 46.9% in the first quarter of 2013. The increase in the gross profit margin in the Papermaking Systems segment resulted from higher gross profit margins for our parts and consumables products, particularly in our Stock-Preparation product line.

Wood Processing Systems Segment. The relatively low gross profit margin of 28.3% in our Wood Processing Systems segment in the first quarter of 2014 was primarily due to the inclusion of $1.6 million of expense related to the amortization of acquired profit in inventory. We expect the acquired profit in inventory to be fully amortized by the second quarter of 2014.

Fiber-based Products. The gross profit margin in our Fiber-based Products business decreased to 46.7% in the first quarter of 2014 from 54.7% in the first quarter of 2013 primarily due to the higher cost of natural gas used in the production process.

23
KADANT INC.
 
Results of Operations (continued)
 
Operating Expenses
Selling, general, and administrative expenses as a percentage of revenues were 35% in both the first quarters of 2014 and 2013. Selling, general, and administrative expenses increased $5.5 million, or 21%, to $32.5 million in the first quarter of 2014 from $27.0 million in the first quarter of 2013 primarily due to the inclusion of $4.9 million of operating, due diligence, and other expenses from acquisitions and a $0.3 million increase from the unfavorable effects of foreign currency translation.

Total stock-based compensation expense was $1.4 million and $1.3 million in the first quarters of 2014 and 2013, respectively, and is included in selling, general, and administrative expenses in the accompanying condensed consolidated statement of income.

Research and development expenses were $1.7 million in both the first quarters of 2014 and 2013, and represented 2% of revenues in both periods.

Restructuring Costs
Restructuring costs were $0.3 million in the first quarter of 2014 due to additional costs related to our 2013 restructuring plan.

Interest Income
Interest income increased to $0.2 million in the first quarter of 2014 from $0.1 million in the first quarter of 2013 primarily due to higher average interest rates in the first quarter of 2014.

Interest Expense
Interest expense increased to $0.3 million in the first quarter of 2014 from $0.2 million in the first quarter of 2013 primarily due to higher average outstanding borrowings in the first quarter of 2014.

Provision for Income Taxes
Our provision for income taxes was $2.4 million and $2.0 million in the first quarters of 2014 and 2013, respectively, and represented 31% and 27% of pre-tax income. The effective tax rate of 31% in the first quarter of 2014 was lower than our statutory tax rate primarily due to the release of tax reserves that resulted from the expiration of tax statutes of limitations in jurisdictions outside of the U.S. and the distribution of our worldwide earnings. These tax benefits were offset in part by tax expense associated with a reduction in deferred tax assets and an increase in nondeductible expenses. The effective tax rate of 27% in the first quarter of 2013 was lower than our statutory rate primarily due to the reduction of the 2012 U.S. tax cost of foreign earnings and a benefit from the 2012 U.S. research and development tax credit, both of which resulted from U.S. tax legislation enacted in January 2013. Also, the effective tax rate was lower due to a statutory tax rate change in our overseas operations and the distribution of our worldwide earnings. We expect our effective tax rate in 2014 will increase compared to 2013, including increases related to the U.S. tax cost of foreign earnings and research and development tax credits, both due to U.S. tax legislation that expired at the end of 2013, and the reversal of valuation allowances in 2013. These increases will be partially offset by tax benefits related to the reversal of certain tax reserves and a decrease in nondeductible expenses.

Income from Continuing Operations
Income from continuing operations decreased $0.1 million to $5.2 million in the first quarter of 2014 from $5.3 million in the first quarter of 2013. This decrease was primarily due to an increase in our operating income offset by an increase in our provision for income taxes (see Revenues , Operating Expenses , and Provision for Income Taxes discussed above).

Loss from Discontinued Operation
Loss from the discontinued operation was $5 thousand and $29 thousand in the first quarter of 2014 and 2013, respectively.
Recent Accounting Pronouncements
Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. In July 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2013-11. Currently, GAAP does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This ASU clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This ASU applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, although early adoption is permitted. This ASU will be applied prospectively to all unrecognized tax benefits that exist at the effective date. We adopted this ASU in the first quarter of 2014, which did not have an impact on our consolidated financial statements.
24
KADANT INC.
 
Liquidity and Capital Resources

Consolidated working capital was $112.1 million at March 29, 2014, compared with $106.5 million at December 28, 2013. Included in working capital are cash and cash equivalents of $57.0 million and $50.0 million at March 29, 2014 and December 28, 2013, respectively. At March 29, 2014, $50.9 million of cash and cash equivalents were held by our foreign subsidiaries.

First Quarter 2014
Our operating activities provided cash of $6.2 million in the first quarter of 2014. Working capital used cash of $2.9 million in the first quarter of 2014, including $3.4 million for other current liabilities related primarily to incentive payments and $2.3 million for accounts payable. These uses of cash were offset in part by cash provided by decreases in accounts receivable and unbilled contract cost and fees of $1.2 million and $2.1 million, respectively, due to the timing of billings.

Our investing activities used cash of $2.4 million in the first quarter of 2014, including $2.0 million for acquisition consideration and $0.5 million to purchase property, plant, and equipment.

Our financing activities provided cash of $3.1 million in the first quarter of 2014. We received cash of $5.4 million in the first quarter of 2014 from borrowings under the 2012 Credit Agreement and $0.5 million from the issuance of our common stock, offset in part by $1.9 million paid to repurchase our common stock on the open market and $1.4 million of cash dividends paid to stockholders.

First Quarter 2013
Our operating activities provided cash of $6.9 million in the first quarter of 2013, primarily from our continuing operations. Working capital used cash of $0.9 million in the first quarter of 2013, including $0.8 million for other current assets, $0.6 million for inventory and $0.6 million for unbilled contract costs and fees. The increase in other current assets was primarily due to advance payments to suppliers. The increase in inventory was due to increased work in process compared to the prior year and the increase in unbilled contract costs and fees was due to the timing of billings. These uses of cash were offset in part by a decrease in accounts receivable, which provided cash of $1.1 million in the first quarter of 2013 primarily due to lower revenues in the first quarter of 2013 compared to the prior period.

Our investing activities used cash of $1.0 million in the first quarter of 2013, including $1.2 million to purchase property, plant, and equipment, offset in part by $0.2 million of proceeds from the sale of property, plant, and equipment.

Our financing activities used cash of $0.9 million in the first quarter of 2013, including $1.3 million for the repurchase of our common stock on the open market and $4.8 million for principal payments on our debt obligations. These uses of cash were offset in part by $4.5 million received from borrowings under the 2012 Credit Agreement in the first quarter of 2013.
 
Revolving Credit Facility
We entered into a five-year unsecured revolving credit facility (2012 Credit Agreement) in the aggregate principal amount of up to $100 million on August 3, 2012 and as amended on November 1, 2013. The 2012 Credit Agreement also includes an uncommitted unsecured incremental borrowing facility of up to an additional $50 million. The principal on any borrowings made under the 2012 Credit Agreement is due on November 1, 2018. Interest on any loans outstanding under the 2012 Credit Agreement accrues and is payable quarterly in arrears at one of the following rates selected by us: (i) the highest of (a) the federal funds rate plus 0.50% plus an applicable margin of 0% to 1%, (b) the prime rate, as defined, plus an applicable margin of 0% to 1%, and (c) the Eurocurrency rate, as defined, plus 0.50% plus an applicable margin of 0% to 1% or (ii) the Eurocurrency rate, as defined, plus an applicable margin of 1% to 2%. The applicable margin is determined based upon the ratio of our total debt to earnings before interest, taxes, depreciation, and amortization, as defined in the 2012 Credit Agreement. For this purpose, total debt is defined as total debt less up to $25 million of unrestricted domestic cash. There were $36.6 million of borrowings outstanding under the 2012 Credit Agreement at March 29, 2014, of which $18.8 million was repaid in April 2014.

Our obligations under the 2012 Credit Agreement may be accelerated upon the occurrence of an event of default under the 2012 Credit Agreement, which includes customary events of default including without limitation payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy- and insolvency-related defaults, defaults relating to such matters as the Employment Retirement Income Security Act (ERISA), unsatisfied judgments, the failure to pay certain indebtedness, and a change of control default. In addition, the 2012 Credit Agreement contains negative covenants applicable to us and our subsidiaries, including financial covenants requiring us to comply with a maximum consolidated leverage ratio of 3.5 to 1 and a minimum consolidated interest coverage ratio of 3 to 1, and restrictions on liens, indebtedness, fundamental changes, dispositions of property, making certain restricted payments (including dividends and stock repurchases), investments, transactions with affiliates, sale and leaseback transactions, swap agreements, changing our fiscal year, arrangements affecting subsidiary distributions, entering into new lines of business, and certain actions related to the discontinued operation. As of March 29, 2014, we were in compliance with these covenants.

Loans under the 2012 Credit Agreement are guaranteed by certain of our domestic subsidiaries pursuant to a Guarantee Agreement, effective August 3, 2012.

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Liquidity and Capital Resources (continued)
 
Commercial Real Estate Loan
On May 4, 2006, we borrowed $10 million under a promissory note (2006 Commercial Real Estate Loan). The 2006 Commercial Real Estate Loan is repayable in quarterly installments of $125 thousand over a ten-year period with the remaining principal balance of $5 million due upon maturity. As of March 29, 2014, the remaining balance on the 2006 Commercial Real Estate Loan was $6.3 million. Interest on the 2006 Commercial Real Estate Loan accrues and is payable quarterly in arrears at one of the following rates selected by us: (a) the prime rate or (b) three-month LIBOR plus a .75% margin.

Our obligations under the 2006 Commercial Real Estate Loan may be accelerated upon the occurrence of an event of default under the 2006 Commercial Real Estate Loan and the mortgage and security agreements, which includes customary events of default including without limitation payment defaults, defaults in the performance of covenants and obligations, the inaccuracy of representations or warranties, bankruptcy- and insolvency-related defaults, liens on the properties or collateral and uninsured judgments. In addition, the occurrence of an event of default under the 2012 Credit Agreement or any successor credit facility would be an event of default under the 2006 Commercial Real Estate Loan.
Interest Rate Swap Agreement
We entered into a swap agreement in 2006 (2006 Swap Agreement) to convert the 2006 Commercial Real Estate Loan from a floating to a fixed rate of interest. The 2006 Swap Agreement matures in 2016, has the same terms and quarterly payment dates as the corresponding debt, and reduces proportionately in line with the amortization of the 2006 Commercial Real Estate Loan. Under the 2006 Swap Agreement, we receive a three-month LIBOR rate and pay a fixed rate of interest of 5.63%. As of March 29, 2014, the interest rate swap agreement had an unrealized loss of $0.7 million. Our management believes that any credit risk associated with the 2006 Swap Agreement is remote based on our financial position and the creditworthiness of the financial institution issuing the swap agreement.

The counterparty to the 2006 Swap Agreement could demand an early termination of the swap agreement if we are in default under the 2012 Credit Agreement, or any agreement that amends or replaces the 2012 Credit Agreement in which the counterparty is a member, and we are unable to cure the default. An event of default under the 2012 Credit Agreement includes customary events of default and failure to comply with financial covenants, including a maximum consolidated leverage ratio of 3.5 to 1 and a minimum consolidated interest charge coverage ratio of 3 to 1. The unrealized loss of $0.7 million associated with the swap agreement as of March 29, 2014, represents the estimated amount that we would pay to the counterparty in the event of an early termination.
Additional Liquidity and Capital Resources
On November 4, 2013, our board of directors approved the repurchase by us of up to $20 million of our equity securities during the period from November 8, 2013 to November 8, 2014. Through March 29, 2014, we had repurchased 100,000 shares of our common stock for $3.8 million under this authorization.

We paid quarterly cash dividends totaling $1.4 million in the first quarter of 2014. On March 3, 2014, our board of directors approved a quarterly cash dividend of $0.15 per outstanding share of our common stock, or approximately $1.7 million, which was paid on May 7, 2014. Future declarations of dividends are subject to board of directors' approval and may be adjusted as business needs or market conditions change. The payment of cash dividends is subject to our compliance with the consolidated leverage ratio contained in our 2012 Credit Agreement.
In the first quarter of 2014, we acquired all the outstanding shares of a European producer of creping and coating blades for approximately $2.6 million in cash, including $0.7 million of cash acquired. An additional 1 million euros, or approximately $1.4 million, of contingent consideration is due to the sellers within two years of the closing date if certain conditions are met, as defined in the purchase agreement.
It is our intention to reinvest indefinitely the earnings of our international subsidiaries in order to support the current and future capital needs of their operations. Through March 29, 2014, we have not provided for U.S. income taxes on approximately $151.3 million of unremitted foreign earnings. The U.S. tax cost has not been determined due to the fact that it is not practicable to estimate at this time. The related foreign tax withholding, which would be required if we were to remit the foreign earnings to the U.S., would be approximately $2.1 million.

Although we currently have no material commitments for capital expenditures, we plan to make expenditures of approximately $8 to $9 million during the remainder of 2014 for property, plant, and equipment.

In the future, our liquidity position will be primarily affected by the level of cash flows from operations, cash paid to satisfy debt repayments, capital projects, dividends, stock repurchases, or additional acquisitions, if any. We believe that our existing resources, together with the cash available from our credit facilities and the cash we expect to generate from continuing operations, will be sufficient to meet the capital requirements of our current operations for the foreseeable future.
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Item 3 – Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk from changes in interest rates and foreign currency exchange rates has not changed materially from our exposure at year-end 2013 as disclosed in Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 28, 2013, filed with the SEC.

Item 4 – Controls and Procedures

(a)          Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 29, 2014. The term "disclosure controls and procedures," as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon the evaluation of our disclosure controls and procedures as of March 29, 2014, our Chief Executive Officer and Chief Financial Officer concluded that as of March 29, 2014, our disclosure controls and procedures were effective at the reasonable assurance level.

(b)          Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the fiscal quarter ended March 29, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1A – Risk Factors

In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, we wish to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, our actual results and could cause our actual results in 2014 and beyond to differ materially from those expressed in any forward-looking statements made by us, or on our behalf.
Our business is dependent on worldwide and local economic conditions as well as the condition of process industries.
We sell products worldwide to global process industries, primarily papermaking, paper recycling, and OSB, which can be cyclical. Generally, the financial condition of process industries corresponds to general worldwide and regional economic conditions, as well as to a number of other factors. A significant portion of our revenues are from customers based in Europe and China. Economic downturns and uncertainty in Europe, including recent uncertainties in Russia, can adversely affect our revenues and bookings in Europe. In addition, slowing economic growth rates in China can adversely affect our business. The timing for the addition of new capacity in the paper markets in China remains uncertain and is highly dependent on the markets' ability to absorb existing capacity. Uncertainties in the global and regional economic outlooks have negatively affected, and may in the future negatively affect, demand for our customers' products, and as a consequence, our products and services, especially our capital equipment systems and products, and our financial results. Also, uncertainty regarding economic conditions has caused, and may in the future cause, liquidity and credit issues for many businesses, including our customers in the pulp and paper industry as well as other process industries, and may result in their inability to fund projects, capacity expansion plans, and to some extent, routine operations and capital expenditures. These conditions have resulted, and may in the future result, in a number of structural changes in process industries, including decreased spending, mill closures, consolidations, and bankruptcies, all of which negatively affect our business, revenue, and profitability. Financial and economic turmoil affecting the worldwide economy or the banking system and financial markets, in particular, due to political or economic developments could cause the expectations for our business to differ materially in the future.
Our financial performance will be negatively impacted if there are delays in customers securing financing or our customers become unable to secure such financing, due to any number of factors including a tightening of monetary policy. Recently, financing has become a significant problem for customers in Russia, and has caused us to delay the booking of some pending orders. The inability of our customers to obtain credit may affect our ability to recognize revenue and income, particularly on large capital equipment orders from new customers for which we may require letters of credit. We may also be unable to issue letters of credit to our customers, which are required in some cases to guarantee performance, during periods of economic uncertainty.
Paper producers have been, and may in the future be, negatively affected by higher operating costs. Paper companies curtail their capital and operating spending during periods of economic uncertainty and are cautious about resuming spending as market conditions improve. As paper companies consolidate operations in response to market weakness, they frequently reduce capacity, increase downtime, defer maintenance and upgrades, and postpone or even cancel capacity addition or expansion projects. It is especially difficult to accurately forecast our revenues and earnings per share during periods of economic uncertainty.
 
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A significant portion of our international sales has, and may in the future, come from China and we operate several manufacturing facilities in China, which exposes us to political, economic, operational and other risks.
We have historically had significant revenues from China, operate significant manufacturing facilities in China, and manufacture and source equipment and components from China. As a result, we are exposed to increased risk in the event of economic slowdowns, changes in the policies of the Chinese government, political unrest, unstable economic conditions, or other developments in China or in U.S.-China relations that are adverse to trade, including enactment of protectionist legislation or trade or currency restrictions. Policies of the Chinese government to target slower economic growth to avoid inflation may negatively affect our business in China if customers are unable to expand capacity or obtain financing for expansion or improvement projects.
 Our bookings activity from China tends to be more variable than in other geographic regions, as the China pulp and paper industry historically has experienced, and in the future may experience, periods of significant capacity expansion to meet demand followed by a period of stagnant activity while overcapacity is absorbed. These cycles result in periods of significant bookings activity for our capital products and increased revenues followed by a significant decrease in bookings or potential delays in shipments and order placements by our customers as they attempt to balance supply and demand. As a consequence, our bookings and revenues in China tend to be uneven and difficult to predict. Paper companies in China have brought and are scheduled to bring online capacity additions; however, this capacity growth has been uneven and the larger paper producers have delayed, and may in the future delay, additional new capacity start-ups in reaction to softer market conditions. In general, as significant capacity additions come online and the economic growth rate slows, paper producers have deferred and could in the future defer further investments or the delivery of previously-ordered equipment until the market absorbs the new production. This has negatively affected our bookings and revenues in China in the past, and may negatively affect our bookings and revenues in China in the future.
In addition, orders from customers in China, particularly for large stock-preparation systems that have been tailored to a customer's specific requirements, have credit risks higher than we generally incur elsewhere, and some orders are subject to the receipt of financing approvals from the Chinese government or can be impacted by the availability of credit and more restrictive monetary policies. For this reason, we generally do not record signed contracts from customers in China for large stock-preparation systems as orders until we receive the down payments for such contracts. The timing of the receipt of these orders and the down payments are uncertain and there is no assurance that we will be able to recognize revenue on these contracts. Delays in the receipt of payments and letters of credit affect when revenues can be recognized on these contracts, making it difficult to accurately forecast our future financial performance. We may experience a loss if a contract is cancelled prior to the receipt of a down payment in the event we commence engineering or other work associated with the contract. We typically have inventory awaiting shipment to customers. We could incur a loss if contracts are cancelled and we cannot re-sell the equipment. In addition, we may experience a loss if the contract is cancelled, or the customer does not fulfill its obligations under the contract, prior to the receipt of a letter of credit or final payments covering the remaining balance of the contract, which could represent 80% or more of the total order.
A significant portion of our revenue in China is recognized upon shipment once we have secured final payment. In some cases, we will be unable to recognize any revenue on completed orders until after installation or acceptance of the equipment. Furthermore, customers in China often demand that deliveries of previously-ordered equipment be delayed to future periods for any number of reasons. As a result, our revenues recognized in China have varied, and will in the future vary, greatly from period to period and be difficult to predict.
Carmanah manufactures equipment used in the production of OSB and its financial performance may be adversely affected by lower levels of residential construction activity.
In November 2013, we acquired all the outstanding shares of Carmanah, a manufacturer of stranders and related equipment used in the production of OSB, an engineered wood panel product used primarily in home construction. Carmanah's customers produce OSB principally for new residential construction, home repair and remodeling activities. Carmanah's operating results correlate to a significant degree to the level of this residential construction activity, primarily in North America and to a lesser extent in Europe. Residential construction activity is influenced by a number of factors, including the supply of and demand for new and existing homes, new housing starts, unemployment rates, interest rate levels, availability of mortgage financing, mortgage foreclosure rates, seasonal and unusual weather conditions, general economic conditions and consumer confidence. In the U.S., the residential housing industry has been in a prolonged down cycle that began in 2006, although the housing market has shown signs of improvement beginning in the latter half of 2012. A significant increase in long-term interest rates, tightened lending standards, continued high unemployment rates and other factors that reduce levels of residential construction activity could have a material adverse effect on the financial performance of Carmanah, and in turn, on our consolidated financial results.
The OSB market is highly concentrated and the market for building products is highly competitive. The loss of a significant customer or our customers' reductions in capital spending or OSB production could have a material adverse effect on our financial performance.
The OSB market is highly concentrated and there are a limited number of OSB manufacturers. The loss of one or more of these customers to a competitor could adversely affect Carmanah's revenues and profitability. In addition, the market for building products is highly competitive. Competitive products with OSB include other wood panel products and substitutes for wood building products, such as nonfiber-based alternatives. For example, plastic, wood/plastic or composite materials may be used by builders as alternatives to OSB products. Changes in component prices, such as energy, chemicals, wood-based fibers, and nonfiber alternatives can change the competitive position of OSB relative to other available alternatives and could increase substitution. Our customers' OSB production can be adversely affected by lower-cost producers of other wood panel products and substitutes for wood building products. Lower demand for OSB products or a decline in the profitability of one or more of our customers could result in a reduction in spending on capital equipment or the shutdown or closure of an OSB mill, which could have a material adverse effect on the financial performance of Carmanah, and in turn, on our consolidated financial results.
Commodity or component price increases and significant shortages of commodities and component products may adversely impact our financial results or our ability to meet commitments to customers.
We use steel, stainless steel, brass, bronze, and other commodities to manufacture our products. We also use natural gas in the production of our fiber-based granular products. As a result, unanticipated increases in the prices of such commodities could increase our costs more than expected and negatively impact our business, results of operations and financial condition if we are unable to fully offset the effect of these increased costs through price increases, productivity improvements, or cost reduction programs.
We rely on suppliers to secure commodity and component products required for the manufacture of our products. A disruption in deliveries to or from suppliers or decreased availability of such components or commodities could have an adverse effect on our ability to meet our commitments to customers or increase our operating costs. We believe our sources of raw materials and component products will generally be sufficient for our needs in the foreseeable future. However, our business, results of operations or financial condition could be negatively impacted if supply is insufficient for our operations.
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We are dependent upon certain suppliers for components and raw materials.
We are dependent on two paper mills for the fiber used in the manufacture of our fiber-based granular products. From time to time we have experienced, and may in the future experience, some difficulty obtaining sufficient raw material to operate at optimal production levels. We continue to work with the mills to ensure a stable supply of raw material. To date, we have been able to meet all of our customer delivery requirements, but there can be no assurance that we will be able to meet future delivery requirements. Although we believe our relationships with the mills are good, the mills could decide not to continue to supply sufficient papermaking byproducts, or may not agree to continue to supply such products on commercially reasonable terms. If the mills were unable or unwilling to supply us sufficient fiber, we would be forced to find one or more alternative sources of supply of this raw material. We may be unable to find alternative supplies on commercially reasonable terms or could incur excessive transportation costs if an alternative supplier were found, which would increase our manufacturing costs, and might prevent prices for our products from being competitive or require closure of this business.
Our newly-acquired Carmanah business uses a single supplier for certain components used in its stranders. Carmanah has entered into a long-term agreement with the supplier and has had no difficulty to date obtaining sufficient supplies of these components. Although we believe our relationship with the supplier to be good, if the supplier were to terminate the agreement, we would be forced to find an alternative source of supply. Alternative sources of supply could be more expensive, which could have an adverse effect on our operating results.
Our business is subject to economic, currency, political, and other risks associated with international sales and operations.
During the first quarters of 2014 and 2013, approximately 51% and 58%, respectively, of our sales were to customers outside the United States, principally in Europe and China. In addition, we operate multiple manufacturing operations worldwide, including operations in China, Europe, Mexico, and Brazil. International revenues and operations are subject to a number of risks, including the following:
 
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agreements may be difficult to enforce and receivables difficult to collect through a foreign country's legal system,
 
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foreign customers may have longer payment cycles,
 
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foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs, adopt other restrictions on foreign trade, impose currency restrictions or enact other protectionist or anti-trade measures,
 
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worsening economic conditions may result in worker unrest, labor actions, and potential work stoppages,
 
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political unrest may disrupt commercial activities of ours or our customers,
 
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it may be difficult to repatriate funds, due to unfavorable domestic and foreign tax consequences or other restrictions or limitations imposed by foreign governments, and
 
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the protection of intellectual property in foreign countries may be more difficult to enforce.
Our inability to successfully identify and complete acquisitions or successfully integrate any new or previous acquisitions could have a material adverse effect on our business.
Our strategy includes the acquisition of technologies and businesses that complement or augment our existing products and services. Any such acquisition involves numerous risks that may adversely affect our future financial performance and cash flows. These risks include:
 
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competition with other prospective buyers resulting in our inability to complete an acquisition or in us paying a substantial premium over the fair value of the net assets of the acquired business,
 
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inability to obtain regulatory approvals, including antitrust approvals,
 
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difficulty in assimilating operations, technologies, products and the key employees of the acquired business,
 
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inability to maintain existing customers or to sell the products and services of the acquired business to our existing customers,
 
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inability to retain key management of the acquired business,
 
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diversion of management's attention from other business concerns,
 
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inability to improve the revenues and profitability or realize the cost savings and synergies expected of the acquisition,
 
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assumption of significant liabilities, some of which may be unknown at the time,
 
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potential future impairment of the value of goodwill and intangible assets acquired, and
 
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identification of internal control deficiencies of the acquired business.
We are required to record transaction and acquisition-related costs in the period incurred. Once completed, acquisitions may involve significant integration costs. These acquisition-related costs could be significant in a reporting period and have an adverse effect on our results of operations.
Any acquisition we complete may be made at a substantial premium over the fair value of the net identifiable assets of the acquired business. We are required to assess the realizability of goodwill and indefinite-lived intangible assets annually as well as whenever events or changes in circumstances indicate that these assets may be impaired. These events or circumstances would generally include operating losses or a significant decline in earnings associated with the acquired business or asset, and our ability to realize the value of goodwill and indefinite-lived intangible assets will depend on the future cash flows of these businesses. For example, in 2008, we recorded a $40.3 million impairment charge to write down the goodwill associated with the stock-preparation reporting unit within our Papermaking Systems segment. We may incur additional impairment charges to write down the value of our goodwill and acquired intangible assets in the future if the assets are not deemed recoverable, which could have a material adverse effect on our operating results.
It may be difficult for us to implement our strategies for improving internal growth.
Some of the markets in which we compete are mature and have lower growth rates. We pursue a number of strategies to improve our internal growth, including:
 
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strengthening our presence in selected geographic markets, including emerging markets and existing markets where we see opportunities;
 
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focusing on parts and consumables sales;
 
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using low-cost manufacturing bases, such as China and Mexico;
 
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allocating research and development funding to products with higher growth prospects;
 
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developing new applications for our technologies;
 
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combining sales and marketing operations in appropriate markets to compete more effectively;
 
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finding new markets for our products; and
 
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continuing to develop cross-selling opportunities for our products and services to take advantage of our depth of product offerings.
We may not be able to successfully implement these strategies and these strategies may not result in the expected growth of our business.
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We are exposed to fluctuations in currency exchange rates, which could adversely affect our cash flows and results of operations.
As a multinational corporation, we are exposed to fluctuations in currency exchange rates that impact our business in many ways. Although we seek to charge our customers in the same currency in which our operating costs are incurred, fluctuations in currency exchange rates may affect product demand and adversely affect the profitability in U.S. dollars of products we provide in international markets. Our subsidiaries occasionally invoice third-party customers in currencies other than their functional currency. Movements in the invoiced currency relative to the functional currency could adversely impact our cash flows and results of operations. In addition, reported revenues made in non-U.S. currencies by our subsidiaries, when translated into U.S. dollars for financial reporting purposes, fluctuate due to exchange rate movements. Any of these factors could have a material adverse impact on our business and results of operations. Furthermore, while some risks can be hedged using derivatives or other financial instruments, or may be insurable, such attempts to mitigate these risks may be costly and not always successful.
We are subject to intense competition in all our markets.
We believe that the principal competitive factors affecting the markets for our products include quality, price, service, technical expertise, and product performance and innovation. Our competitors include a number of large multinational corporations that may have substantially greater financial, marketing, and other resources than we do. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their services and products. Competitors' technologies may prove to be superior to ours. Our current products, those under development, and our ability to develop new technologies may not be sufficient to enable us to compete effectively. Competition, especially in China, has increased as new companies enter the market and existing competitors expand their product lines and manufacturing operations.
Adverse changes to the soundness of our suppliers and customers could affect our business and results of operations.
All of our businesses are exposed to risk associated with the creditworthiness of our key suppliers and customers, including pulp and paper manufacturers and other industrial customers, many of which may be adversely affected by volatile conditions in the financial markets, worldwide economic downturns, and difficult economic conditions. These conditions could result in financial instability, bankruptcy, or other adverse effects at any of our suppliers or customers. The consequences of such adverse effects could include the interruption of production at the facilities of our suppliers, the reduction, delay or cancellation of customer orders, delays in or the inability of customers to obtain financing to purchase our products or pay amounts due, and bankruptcy of customers or other creditors. Any adverse changes to the soundness of our suppliers or customers may adversely affect our cash flow, profitability, and financial condition.
Changes in our effective tax rate may impact our results of operations.
We derive a significant portion of our revenue and earnings from our international operations, and are subject to income and other taxes in the U.S. and numerous foreign jurisdictions. A number of factors may cause our effective tax rate to fluctuate, including: changes in tax rates in various jurisdictions; unanticipated changes in the amount of profit in jurisdictions with low statutory tax rates; the resolution of issues arising from tax audits with various tax authorities; changes in the valuation of our deferred tax assets and liabilities; adjustments to income taxes upon finalization of various tax returns; increases in expenses not deductible for tax purposes, including impairments of goodwill in connection with acquisitions; changes in available tax credits or our ability to utilize foreign tax credits; and changes in tax laws or the interpretation of such tax laws. Any of these factors could cause us to experience an effective tax rate significantly different from that of prior periods or current expectations, which could have an adverse effect on our results of operations or cash flows.
We may be required to reorganize our operations in response to changing conditions in the worldwide economy and the pulp and paper industry, and such actions may require significant expenditures and may not be successful.
We have undertaken various restructuring measures in the past in response to changing market conditions in the countries in which we operate and in the pulp and paper industry in general, which have affected our business. We may engage in additional cost reduction programs in the future. We may not recoup the costs of programs we have already initiated, or other programs in which we may decide to engage in the future, the costs of which may be significant. In connection with any future plant closures, delays or failures in the transition of production from existing facilities to our other facilities in other geographic regions could also adversely affect our results of operations. In addition, it is difficult to accurately forecast our financial performance in periods of economic uncertainty in a region or globally, and the efforts we have made or may make to align our cost structure may not be sufficient or able to keep pace with rapidly changing business conditions. Our profitability may decline if our restructuring efforts do not sufficiently reduce our future costs and position us to maintain or increase our sales.
  Adverse changes to the soundness of financial institutions could affect us.
We have relationships with many financial institutions, including lenders under our credit facilities and insurance underwriters, and from time to time, we execute transactions with counterparties in the financial industry, such as our interest rate swap arrangement and other hedging transactions. In addition, our subsidiaries in China often hold banker's acceptance drafts that are received from customers in the normal course of business. These drafts may be discounted or used to pay vendors prior to the scheduled maturity date or submitted to an acceptance bank for payment at the scheduled maturity date. These financial institutions or counterparties could be adversely affected by volatile conditions in the financial markets, economic downturns, and difficult economic conditions. These conditions could result in financial instability, bankruptcy, or other adverse effects at these financial institutions or counterparties. We may not be able to access credit facilities in the future, complete transactions as intended, or otherwise obtain the benefit of the arrangements we have entered into with such financial parties, which could adversely affect our business and results of operations.
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Our debt may adversely affect our cash flow and may restrict our investment opportunities.
We entered into a five year unsecured revolving credit facility (2012 Credit Agreement) in the aggregate principal amount of up to $100 million on August 3, 2012 and amended it on November 1, 2013. The 2012 Credit Agreement also includes an uncommitted unsecured incremental borrowing facility of up to an additional $50 million. We have borrowed amounts under the 2012 Credit Agreement and under other agreements to fund our operations. We may also obtain additional long-term debt and working capital lines of credit to meet future financing needs, which would have the effect of increasing our total leverage. Our indebtedness could have negative consequences, including:
 
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increasing our vulnerability to adverse economic and industry conditions,
 
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limiting our ability to obtain additional financing,
 
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limiting our ability to pay dividends on or to repurchase our capital stock,
 
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limiting our ability to complete a merger or an acquisition,
 
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limiting our ability to acquire new products and technologies through acquisitions or licensing agreements, and
 
–
limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we compete.
Our existing indebtedness bears interest at floating rates and as a result, our interest payment obligations on our indebtedness will increase if interest rates increase. As of March 29, 2014, a portion of our outstanding floating rate debt was hedged through an interest rate swap agreement entered into in 2006. The unrealized loss associated with this swap agreement was $0.7 million as of March 29, 2014. This unrealized loss represents the estimated amount for which the swap agreement could be settled. The counterparty to the swap agreement could demand an early termination of the swap agreement if we were in default under the 2012 Credit Agreement, or any agreement that amends or replaces the 2012 Credit Agreement in which the counterparty is a member, and we were unable to cure the default. If this swap agreement were to be terminated prior to the scheduled maturity date and if we were required to pay cash for the value of the swap, we would incur a loss, which would adversely affect our financial results.
Our ability to satisfy our obligations and to reduce our total debt depends on our future operating performance and on economic, financial, competitive, and other factors beyond our control. Our business may not generate sufficient cash flows to meet these obligations or to successfully execute our business strategy. The 2012 Credit Agreement includes certain financial covenants, and our failure to comply with these covenants could result in an event of default under the 2012 Credit Agreement, the swap agreement, and our other credit facilities, and would have significant negative consequences for our current operations and our future ability to fund our operations and grow our business. If we were unable to service our debt and fund our business, we could be forced to reduce or delay capital expenditures or research and development expenditures, seek additional financing or equity capital, restructure or refinance our debt, curtail or eliminate our cash dividend to stockholders, or sell assets.  
Restrictions in our 2012 Credit Agreement may limit our activities.
Our 2012 Credit Agreement contains, and future debt instruments to which we may become subject may contain, restrictive covenants that limit our ability to engage in activities that could otherwise benefit us, including restrictions on our ability and the ability of our subsidiaries to:
 
–
incur additional indebtedness,
 
–
pay dividends on, redeem, or repurchase our capital stock,
 
–
make investments,
 
–
create liens,
 
–
sell assets,
 
–
enter into transactions with affiliates, and
 
–
consolidate, merge, or transfer all or substantially all of our assets and the assets of our subsidiaries.
We are also required to meet specified financial covenants under the terms of our 2012 Credit Agreement. Our ability to comply with these financial restrictions and covenants is dependent on our future performance, which is subject to prevailing economic conditions and other factors, including factors that are beyond our control such as currency exchange rates, interest rates, changes in technology, and changes in the level of competition. Our failure to comply with any of these restrictions or covenants may result in an event of default under our 2012 Credit Agreement and other loan obligations, which could permit acceleration of the debt under those instruments and require us to repay the debt before its scheduled due date. If an event of default were to occur, we might not have sufficient funds available to make the payments required under our indebtedness. If we are unable to repay amounts owed under our debt agreements, those lenders may be entitled to foreclose on and sell the collateral that secures our borrowings under the agreements.
Furthermore, our 2012 Credit Agreement requires that any amounts borrowed under the facility be repaid by the maturity date in 2018. If we are unable to roll over the amounts borrowed into a new credit facility and we do not have sufficient cash in the United States to repay our borrowings, we may need to repatriate cash from our overseas operations to fund the repayment and we would be required to pay taxes on the repatriated amounts. Such repatriation would have an adverse effect on our effective tax rate and cash flows.
We have not independently verified the results of third-party research or confirmed assumptions or judgments on which they may be based, and the forecasted and other forward-looking information contained therein is subject to inherent uncertainties.
We refer in this report and other documents that we file with the SEC to historical, forecasted and other forward-looking information published by sources such as Resource Information Systems Inc., Forest Economic Advisors, and the U.S. Census Bureau that we believe to be reliable. However, we have not independently verified this information, and with respect to the forecasted and forward-looking information, have not independently confirmed the assumptions and judgments upon which such information is based. Forecasted and other forward-looking information is necessarily based on assumptions regarding future occurrences, events, conditions and circumstances and subjective judgments relating to various matters, and is subject to inherent uncertainties. Actual results may differ materially from the results expressed or implied by, or based upon, such forecasted and forward-looking information.
31
KADANT INC.
 
Our inability to protect our intellectual property or defend ourselves against the intellectual property claims of others could have a material adverse effect on our business. In addition, litigation to enforce our intellectual property and contractual rights or defend ourselves could result in significant litigation or licensing expense.
We seek patent and trade secret protection for significant new technologies, products, and processes because of the length of time and expense associated with bringing new products through the development process and into the marketplace. We own numerous U.S. and foreign patents, and we intend to file additional applications, as appropriate, for patents covering our products. Patents may not be issued for any pending or future patent applications owned by or licensed to us, and the claims allowed under any issued patents may not be sufficiently broad to protect our technology. Any issued patents owned by or licensed to us may be challenged, invalidated, or circumvented, and the rights under these patents may not provide us with competitive advantages. In addition, competitors may design around our technology or develop competing technologies. Intellectual property rights may also be unavailable or limited in some foreign countries, which could make it easier for competitors to capture increased market share. In addition, as our patents expire, we rely on trade secrets and proprietary know-how to protect our products. We cannot be sure the steps we have taken, or will take in the future, will be adequate to deter misappropriation of our proprietary information and intellectual property. Of particular concern are developing countries, such as China, where the laws, courts, and administrative agencies may not protect our intellectual property rights as fully as in the United States or Europe.
We seek to protect trade secrets and proprietary know-how, in part, through confidentiality and noncompetition agreements with our collaborators, employees, and consultants. These agreements may be breached, we may not have adequate remedies for any breach, and our trade secrets may otherwise become known or be independently developed by our competitors, or our competitors may otherwise gain access to our intellectual property.
We could incur substantial costs to defend ourselves in suits brought against us, including for alleged infringement of third party rights, or in suits in which we may assert our intellectual property or contractual rights against others. An unfavorable outcome of any such litigation could have a material adverse effect on our business and results of operations.
Failure of our information systems or breaches of data security could impact our business.
We operate a geographically dispersed business and rely on the electronic storage and transmission of proprietary and confidential information, including technical and financial information, among our operations, customers and suppliers. In addition, for some of our operations, we rely on information systems controlled by third parties. As part of our ongoing effort to upgrade our current information systems, we are implementing new enterprise resource planning software to manage certain of our business operations. As we implement and add functionality, problems could arise that we have not foreseen. System failures, network disruptions and breaches of data security could limit our ability to conduct business as usual, including our ability to communicate and transact business with our customers and suppliers; result in the loss or misuse of this information, the loss of business or customers, or damage to our brand or reputation; or interrupt or delay reporting our financial results. Such system failures or unauthorized access could be caused by external theft or attack, misconduct by our employees, suppliers, or competitors, or natural disasters. In addition, the cost and operational consequences of implementing further data protection measures could be significant.
Our share price fluctuates and experiences price and volume volatility.
Stock markets in general and our common stock in particular experienced significant price and volume volatility during the 2008 to 2009 economic recession and in the second half of 2011, and may experience significant price and volume volatility from time to time in the future. The market price and trading volume of our common stock may continue to be subject to significant fluctuations due not only to general stock market conditions but also to a change in sentiment in the market regarding our operations, business prospects, or future funding. Given the nature of the markets in which we participate and the volatility of orders, we may not be able to reliably predict future revenues and profitability, and unexpected changes may cause us to adjust our operations. A large proportion of our costs are fixed, due in part to our significant selling, research and development, and manufacturing costs. Thus, small declines in revenues could disproportionately affect our operating results. Other factors that could affect our share price and quarterly operating results include:
–
failure of our products to pass contractually agreed upon acceptance tests, which would delay or prohibit recognition of revenues under applicable accounting guidelines,
 
–
changes in the assumptions used for revenue recognized under the percentage-of-completion method of accounting,
 
–
fluctuations in revenues due to customer-initiated delays in product shipments,
 
–
failure of a customer, particularly in Asia, to comply with an order's contractual obligations or inability of a customer to provide financial assurances of performance,
 
–
adverse changes in demand for and market acceptance of our products,
 
–
competitive pressures resulting in lower sales prices for our products,
 
–
adverse changes in the process industries we serve,
 
–
delays or problems in our introduction of new products,
 
–
delays or problems in the manufacture of our products,
 
–
our competitors' announcements of new products, services, or technological innovations,
 
–
contractual liabilities incurred by us related to guarantees of our product performance,
 
–
increased costs of raw materials or supplies, including the cost of energy,
 
–
changes in the timing of product orders,
 
–
changes in the estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, or expenses,
 
–
the impact of acquisition accounting, including the treatment of acquisition and restructuring costs as period costs,
 
–
fluctuations in our effective tax rate,
 
–
the operating and share price performance of companies that investors consider to be comparable to us, and
 
–
changes in global financial markets and global economies and general market conditions.
 
32
KADANT INC.
 
Anti-takeover provisions in our charter documents and under Delaware law could prevent or delay transactions that our shareholders may favor.
Provisions of our charter and bylaws may discourage, delay, or prevent a merger or acquisition that our shareholders may consider favorable, including transactions in which shareholders might otherwise receive a premium for their shares. For example, these provisions:
 
–
authorize the issuance of "blank check" preferred stock without any need for action by shareholders,
 
–
provide for a classified board of directors with staggered three-year terms,
 
–
require supermajority shareholder voting to effect various amendments to our charter and bylaws,
 
–
eliminate the ability of our shareholders to call special meetings of shareholders,
 
–
prohibit shareholder action by written consent, and
 
–
establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by shareholders at shareholder meetings.
Prior to July 2011, we had a shareholder rights plan, which may have had anti-takeover effects under certain circumstances. This shareholder rights plan expired by its terms in July 2011 and was not renewed by our board of directors. However, our board of directors could adopt a new shareholder rights plan in the future that could have anti-takeover effects and might discourage, delay, or prevent a merger or acquisition that our board of directors does not believe is in our best interests and those of our shareholders, including transactions in which shareholders might otherwise receive a premium for their shares.
 
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information about purchases by us of our common stock during the first quarter of 2014:

Issuer Purchases of Equity Securities
 
 
 
 
 
 
Period
 
Total Number of Shares
Purchased (1)
   
Average Price Paid
per Share
   
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans (1)
   
Approximate Dollar
Value of Shares that
May Yet Be
Purchased
Under the Plans
 
12/29/13 – 1/31/14
   
–
     
–
     
–
   
$
18,113,497
 
2/1/14 – 2/28/14
   
–
     
–
     
–
   
$
18,113,497
 
3/1/14 – 3/29/14
   
50,000
   
$
38.35
     
50,000
   
$
16,195,995
 
Total:
   
50,000
   
$
38.35
     
50,000
         

(1)
On November 4, 2013, we announced that our board of directors approved the repurchase by us of up to $20 million of our equity securities during the period from November 8, 2013 to November 8, 2014. Repurchases may be made in public or private transactions, including under Securities Exchange Act Rule 10b-5-1 trading plans. In the first quarter of 2014, we repurchased 50,000 shares of our common stock for $1.9 million under this authorization.

Item 6 – Exhibits

See Exhibit Index on the page immediately preceding the exhibits.
33
KADANT INC.
 
SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized as of the 7th day of May, 2014.


 
KADANT INC.
 
 
 
/s/ Thomas M. O'Brien
 
Thomas M. O'Brien
 
Executive Vice President and Chief Financial Officer
 
(Principal Financial Officer)





34
KADANT INC.
 
EXHIBIT INDEX


Exhibit
 
 
Number
 
Description of Exhibit
 
 
 
10.1
 
Form of Performance-Based Restricted Stock Unit Award Agreement between the Company and its executive officers used for restricted stock unit awards on or after March 5, 2014.
 
 
 
10.2
 
Form of Time-Based Restricted Stock Unit Award Agreement between the Company and its executive officers used for restricted stock unit awards on or after March 5, 2014.
 
 
 
10.3
 
Amended and Restated 2006 Equity Incentive Plan of the Registrant effective as of March 6, 2014.
 
 
 
31.1
 
Certification of the Principal Executive Officer of the Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
 
 
 
31.2
 
Certification of the Principal Financial Officer of the Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
 
 
 
32
 
Certification of the Chief Executive Officer and the Chief Financial Officer of the Registrant Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS
 
XBRL Instance Document.*
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.*
 
 
 
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document.*
 
 
 
101.LAB
 
XBRL Taxonomy Label Linkbase Document.*
 
 
 
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document.*
 
 
 
101.DEF
 
XBRL Taxonomy Definition Linkbase Document.*

* Submitted electronically herewith.

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheet at March 29, 2014 and December 28, 2013, (ii) Condensed Consolidated Statement of Income for the three months ended March 29, 2014 and March 30, 2013, (iii) Condensed Consolidated Statement of Comprehensive Income for the three months ended March 29, 2014 and March 30, 2013, (iv) Condensed Consolidated Statement of Cash Flows for the three months ended March 29, 2014 and March 30, 2013, (v) Condensed Consolidated Statement of Stockholders' Equity for the three months ended March 29, 2014 and March 30, 2013, and (vi) Notes to Condensed Consolidated Financial Statements.
 
35
Exhibit 10.1

FORM OF PERFORMANCE-BASED RESTRICTED STOCK UNIT AWARD AGREEMENT

KADANT INC.
One Technology Park Drive
Westford, MA  01886

NOTICE OF AWARD AND AWARD AGREEMENT


[Date]

[Recipient name and address]

Dear [Recipient name]:

Pursuant to the terms and conditions of the company's [plan name], you have been granted a Restricted Stock Unit/Stock Settled for [award #] units of stock as outlined below.

Granted To:                                          [Recipient name]

Award Date:                                          [Date]

Granted:                            [# of awards]

Grant Price:                                          [Price]

Vesting Schedule:                                                        [Type]

[# on date]
[# on date]
[# on date]


By your signature below, you acknowledge receipt of this Award as of the Award Date and agree that this Award is granted under and governed by the terms and conditions of the Company's [Plan name] as amended, and the Award Agreement, which is attached and made a part of this document. You further acknowledge receipt of the copy of the Plan.


Signature:_________________________                                                                                                                                                _____________________________
[Recipient name]                                                                                                                  Date

KADANT INC.

AWARD AGREEMENT FOR
PERFORMANCE-BASED RESTRICTED STOCK UNITS
("Award Agreement")

1.
Preamble.   On the date shown on the first page of this Award Agreement ("Award Date"), the Company granted to the Recipient named on the first page (the "Recipient") restricted stock units ("RSUs") with respect to the number of shares of common stock of the Company identified on the first page of this Award Agreement ("Award Shares"), subject to the terms, conditions and restrictions set forth in this Award Agreement and the provisions of the Company's 2006 Equity Incentive Plan ("Plan"). The RSUs represent a promise by the Company to deliver the Award Shares upon vesting. Any consideration due to the Company on the issuance of Award Shares pursuant to this Award Agreement will be deemed to have been satisfied by services rendered by the Recipient to the Company during the vesting period.

2.
Restrictions on Transfer .  Unless and until the Award Shares shall have vested as provided in Section 3 below, the Recipient shall not sell, transfer, pledge, hypothecate, assign or otherwise dispose of, by operation of law or otherwise, any RSUs, or any interest therein.

3.
Vesting .

(a)
Vesting Schedule. Subject to the terms, conditions and restrictions of this Award Agreement, including the Forfeiture provisions described in Section 4 below, the Recipient shall vest in all RSUs in accordance with the schedule set forth below (the "Vesting Date"), provided that the performance measure set forth in this Section 3(b) has been met.

Vesting Schedule for Restricted Stock Units Awarded:
# of Shares                                                                                      Vesting Date
1/3 of Award Shares                                                                                      [date]
1/3 of Award Shares                                                                                      [date]
1/3 of Award Shares                                                                                      [date]

As soon as administratively practicable after the Vesting Date, but in any event within the period ending on the later to occur of the date that is 2 ½ months from the end of the (i) Recipient's tax year that includes the Vesting Date, or (ii) the Company's fiscal year that includes the Vesting Date, the Company shall cause its transfer agent to issue and deliver the Award Shares in the name of the Recipient, subject to payment of all applicable withholding taxes pursuant to Section 6 below.

(b)
Performance Measure. The Company has established as the performance measure earnings before interest, taxes, depreciation and amortization (EBITDA) generated by its continuing operations during the [year] fiscal year (beginning [date] and ending [date] (the "Measurement Period"), equal to the amount set forth in Exhibit A to this Award Agreement and as such amount may be adjusted as set forth in such Exhibit A (the "Target EBITDA"). Upon the conclusion of the Measurement Period, the Company shall calculate and determine the actual EBITDA generated by its continuing operations during the Measurement Period as determined in Exhibit A ("Actual EDITDA"). The number of Award Shares deliverable to the Recipient will be adjusted and determined by a continuous line graph based on the following data points, which graph is included as Exhibit B:

Actual EDITDA is:                                                                                      Number of Award Shares Deliverable
Less than 50% of Target EBITDA                                                                                                                  0% of Award Shares
50% of Target EBITDA                                                                                                    50% of Award Shares
100% of Target EBITDA                                                                                                    100% of Award Shares
115% or greater of Target EBITDA                                                                                                                  150% of Award Shares

In the event that the Company does not generate Actual EBITDA equal to or more than 50% of Target EBITDA, then all of the RSUs shall be automatically forfeited to the Company. The Compensation Committee of the Company's Board of Directors shall be responsible for certifying the extent to which the performance measure has been met, prior to the release of the Company's earnings for the full [year] fiscal year.

4.
Forfeiture .

(a)
Definitions .  For purposes of this Award Agreement, "Forfeiture" shall mean any forfeiture of RSUs pursuant to Section 4(b) below.  For purposes of this Award Agreement, "employ" or "employment" with the Company shall include employment with a parent or subsidiary of the Company, which controls, is controlled by, or under common control of the Company.
(b)
Termination of Employment; Death and Disability . In the event that the Recipient ceases to be employed by the Company prior to a Vesting Date for any reason or for no reason (other than upon a "Change in Control" as provided in Section 4(c) or upon death or disability meeting the requirements set forth in this Section 4(b)), with or without cause, then any of the Recipient's RSUs that have not previously vested shall be automatically and immediately forfeited and returned to the Company as of the date employment ceases. In the event of the Recipient's death or disability that occurs prior to a Vesting Date and before the last day of the Measurement Period, then 100% of the Recipient's RSUs that have not previously been forfeited or vested shall become immediately vested and no longer subject to the Forfeiture provisions in this Section 4, and the Company shall immediately deliver to the Recipient (or his or her beneficiary in the event of death), as soon as administratively feasible but no later than 30 days after the vesting thereof that number of Award Shares to the Recipient equal to the number shown on the first page of this Award Agreement without adjustment. In the event of the Recipient's death or disability that occurs prior to a Vesting Date and on or after the last day of the Measurement Period, then 100% of the Recipient's RSUs that have not previously been forfeited or vested shall become immediately vested and no longer subject to the Forfeiture provisions in this Section 4, and the Company shall immediately deliver to the Recipient (or his or her beneficiary in the event of death), as soon as administratively feasible but no later than 30 days after the vesting thereof that number of Award Shares to the Recipient equal to the number of Award Shares deliverable based on the achievement of the performance measures, as adjusted and determined in Section 3 (less any Award Shares that have been previously forfeited or vested and issued). For purposes of this Award Agreement, "disability" means that you are receiving disability benefits under the Company's Long Term Disability Coverage, as then in effect, on the date employment ceases.
(c)
Change in Control . In the event of a "Change in Control" that occurs (i) prior to the Vesting Date and before the last day of the Measurement Period and (ii) on a date on which the Recipient is employed by the Company, then 100% of the Recipient's RSUs that have not previously been forfeited shall become immediately vested and shall no longer be subject to the Forfeiture provisions in this Section 4, and the Company shall deliver as soon as administratively feasible but no later than 30 days after the Vesting Date that number of Award Shares to the Recipient equal to the number shown on the first page of this Award Agreement, without adjustment. In the event of a "Change in Control" that occurs (i) prior to the Vesting Date and on or after the last day of the Measurement Period and (ii) on a date on which the Recipient is employed by the Company, then 100% of the Recipient's RSUs that have not previously been forfeited shall become immediately vested and shall no longer be subject to the Forfeiture provisions in this Section 4, and the Company shall deliver as soon as administratively feasible but no later than 30 days after the Vesting Date that number of Award Shares to the Recipient equal to the number of Award Shares deliverable based on the achievement of the performance measures, as adjusted and determined in Section 3. A "Change in Control" shall have the same meaning for the purposes of this Award Agreement as set forth in Section 8 of the Plan, as the same may be amended from time to time.

5.
No Stockholder Rights.   Except as set forth in the Plan, neither the Recipient nor any person claiming under or through the Recipient shall be, or have any rights or privileges of, a stockholder of the Company in respect of the Award Shares issuable pursuant to the RSUs until the Award Shares are issued in the name of the Recipient. In particular, a Recipient holding an unvested Award shall have no ownership interest in the shares of Common Stock to which the Award relates until the Award Shares have vested, payment with respect to such Award has actually been made in shares of Common Stock, and the underlying shares of Common Stock have been issued.

6.
Withholding Taxes.   The Company's obligation to deliver Award Shares to the Recipient upon the vesting of the RSUs shall be subject to the satisfaction of all income tax (including federal, state, local and foreign taxes), social insurance, payroll tax, payment on account or other tax-related withholding requirements of any applicable jurisdiction, based on minimum statutory withholding rates for all tax purposes, including payroll and social security taxes ("Withholding Taxes"). In order to satisfy all Withholding Taxes due in connection with the award or vesting of the RSUs or the delivery of the Award Shares, the Recipient hereby irrevocably agrees to the following actions by the Company, at the Company's sole election:

(a) The Company may sell, or arrange for the sale of, such number of the Award Shares that the Recipient is entitled to receive on the Vesting Date, with no further action by the Recipient, as is sufficient to generate net proceeds at least equal to the value of the Withholding Taxes, and the Company shall retain such net proceeds in satisfaction of such Withholding Taxes. The Company shall remit to the Recipient in cash any portion of such net proceeds in excess of the value of such Withholding Taxes.

(b) The Company may retain such number of the Award Shares that the Recipient is otherwise entitled to receive on the Vesting Date, with no further action by the Recipient, by deducting and retaining from the number of Award Shares to which the Recipient is entitled that number of Award Shares as is equal to the value of the Withholding Taxes. The Recipient understands that the fair market value of the surrendered Award Shares will be determined in accordance with the Company's Stock Option and Equity Award Grant and Exercise Procedures as then in effect.

(c) The Recipient hereby appoints each of the Chief Financial Officer, General Counsel and the Secretary of the Company as his or her attorney in fact to sell or transfer the Recipient's Award Shares in accordance with this Section 6. The Recipient agrees to execute and deliver such documents, instruments and certificates as may reasonably be required in connection with the sale, transfer or retention of Award Shares pursuant to this Section 6, including an irrevocable order to sell shares authorizing a brokerage firm selected by the Company to sell the Recipient's Award Shares.

7.
No Compensation Deferral. Neither the Plan nor this Award Agreement is intended to provide for any deferral of compensation that would be subject to Section 409A ("Section 409A") of the U.S. Internal Revenue Code of 1986, as amended. The Company reserves the right, to the extent the Company deems necessary or advisable in its sole discretion, to unilaterally amend or modify the Plan and/or this Award Agreement to ensure that all awards (including, without limitation, the RSUs) are either exempt from or complaint with the requirements of Section 409A.

8.
Dilution and Other Adjustments . In the event a stock dividend, stock split or combination of shares, or other distribution with respect to holders of common stock other than normal cash dividends, occurs while the Award is outstanding (after the Grant Date and before the date the Award is vested), the committee appointed by the Company's Board of Directors to administer the Plan (the "Committee") shall in the manner determined in its sole discretion adjust the number of shares for which the Award may be issued to reflect such event. In the event any recapitalization, merger or consolidation involving the Company, any transaction in which the Company becomes a subsidiary of another entity, any sale or other disposition of all or a substantial portion of the assets of the Company or any similar transaction, as determined by the Committee, (any of the foregoing, a "covered transaction") occurs while the Award is outstanding, the Committee in its discretion may (i) accelerate the vesting of the Award, (ii) adjust the terms of the Award, (iii) if there is a survivor or acquiror entity, provide for the assumption of the Award by such survivor or acquiror or an affiliate thereof or for the grant of one or more replacement awards by such survivor or acquiror or an affiliate thereof, in each case on such terms as the Committee may determine, (iv) terminate the Award (provided, that if the Committee terminates the Award, it shall, in connection therewith, either (A) accelerate the vesting of the Award prior to such termination, or (B) provide for a payment to the holder of the Award of cash or other property or a combination of cash or other property in an amount reasonably determined by the Committee to approximate the value of the Award assuming it vested immediately prior to the transaction, or (C) if there is a survivor or acquiror entity, provide for the grant of one or more replacement awards pursuant to clause (iii) above), or (v) provide for none of, or any combination of, the foregoing. No fraction of a share or fractional shares shall be purchasable or deliverable under this Award Agreement.

9.
Administration.   The Compensation Committee of the Company's Board of Directors or other committee designated in the Plan, shall have the authority to manage and control the operation and administration of this Award Agreement.  Any interpretation of the Award Agreement by any of the entities specified in the preceding sentence and any decision made by any of them with respect to the Award Agreement is final and binding.

10.
Plan Definitions.   Notwithstanding anything in this Award Agreement to the contrary, the terms of this Award Agreement shall be subject to the terms of the Plan, a copy of which has already been provided to the Recipient.

11.
Recipient's Undertakings. In signing this Award Agreement and accepting the RSU, the Recipient acknowledges that:

(a)
The Plan and this Award were established voluntarily by the Company, each is discretionary in nature, and each may be modified, amended, suspended or terminated by the Company at any time, unless otherwise provided in the Plan and this Award Agreement;

(b)
The grant of RSUs is voluntary and occasional and does not create any contractual or other right to receive future awards of RSUs, or benefits in lieu of RSUs even if RSUs have been awarded repeatedly in the past or future;

(c)
All decisions with respect to future grants of RSUs, if any, will be at the sole discretion of the Company;

(d)
The Recipient's participation in the Plan and receipt and acceptance of the Award is voluntary;

(e)
RSUs are an extraordinary item that do not constitute compensation of any kind for services of any kind rendered to the Company or to the Recipient's employer, and RSUs are outside the scope of the Recipient's employment contract, if any;

(f)
RSUs are not part of normal or expected compensation or salary for any purpose, including, but not limited to, calculation of any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments and in no event should be considered as compensation for, or relating in any way to, past services for the Company or the Recipient's employer;

(g)
The future value of the underlying Award Shares is unknown and cannot be predicted with certainty;

(h)
The value of the Award Shares underlying the RSUs may increase or decrease in value during the period from the Award Date to the Vesting Date;

(i)
In consideration of the grant of RSUs, no claim or entitlement to compensation or damages arises from termination of the RSUs or diminution in value of the RSUs or Award Shares received upon vesting of RSUs resulting from termination of the Recipient's employment by the Company or the Recipient's employer (for any reason whatsoever and whether or not in breach of local labor laws) and the Recipient irrevocably releases the Company and his or her employer from any such claim that may arise; and if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Award Agreement, the Recipient shall be deemed irrevocably to have waived his or her entitlement to pursue such claim; and

(j)
Further, if the Recipient ceases to be an employee (whether or not in breach of local labor laws), the Recipient's right to receive RSUs and vest under the Award Agreement or Plan, if any, will terminate effective as of the date that the Recipient is no longer actively employed by the Company and will not be extended by any notice period mandated under local law (e.g., active employment would not include a period of "garden leave" or similar period pursuant to local law); and the Compensation Committee of the Company's Board of Directors shall have the exclusive discretion to determine when the Recipient is no longer actively employed for purposes of this Award Agreement and the Plan.

12.
Data Privacy Notice and Consent . The Recipient hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of his or her personal data as described in this paragraph, by and among, as applicable, the Recipient's employer and the Company and its subsidiaries and affiliates for, among other purposes, implementing, administering and managing the Recipient's participation in the Plan. The Recipient understands that the Company and its subsidiaries hold or will hold certain personal information about the Recipient, including the Recipient's name, home address and telephone number, date of birth, social security number or identification number, salary, nationality, job title, any shares or directorships held in the Company, details of all options or awards or any other interests in shares awarded, canceled, exercised, vested, unvested or outstanding in the Recipient's name, for the purposes of managing and administering the Plan ("Data"). The Recipient further understands that the Company and its subsidiaries will transfer Data amongst themselves as necessary for employment purposes, including implementation, administration and management of the Recipient's participation in the Plan, and that the Company and any of its subsidiaries may each further transfer Data to a broker or other stock plan service provider or other third parties assisting the Company with the processing of Data. The Recipient understands that these third parties may be located in the United States, and that the third party's country may have different data privacy laws and protections than in the Recipient's country. The Recipient authorizes them to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes described in this Section, including any requisite transfer to a broker or other stock plan service provider or other third party as may be required for the administration of the Plan and the subsequent holding of Award Shares on the Recipient's behalf. The Recipient understands that he or she may, at any time, request access to the Data, request any necessary amendments to it or refuse or withdraw the consents herein, in any case without cost, by contacting in writing the Company's Stock Option Manager at the Company's headquarters address. The Recipient understands, however, that withdrawal of consent may affect the Recipient's ability to participate in or realize the benefits of the Plan and this Award Agreement. For more information on the consequences of refusal to consent or withdrawal of consent, the Recipient understands that he or she may contact the Company's Stock Option Manager.

13.
Miscellaneous .

(a)
No Rights to Employment . The Recipient acknowledges and agrees that the vesting of the RSUs pursuant to this Award Agreement is earned only in accordance with the terms hereof. The Recipient further acknowledges and agrees that the transactions contemplated hereunder and the vesting schedule set forth herein do not constitute an express or implied promise of continued engagement as an employee for the vesting period, for any period, or at all.

(b)
Unfunded Rights . The right of the Recipient to receive Award Shares pursuant to this Award Agreement is an unfunded and unsecured obligation of the Company. The Receipient shall have no rights under this Award Agreement other than those of an unsecured general creditor of the Company.

(c)
Severability . The invalidity or unenforceability of any provision of this Award Agreement shall not affect the validity or enforceability of any other provision of this Award Agreement, and each other provision of this Award Agreement shall be severable and enforceable to the extent permitted by law.

(d)
Waiver . Any provision for the benefit of the Company contained in this Award Agreement may be waived, either generally or in any particular instance, by the Compensation Committee of the Board of Directors of the Company.

(e)
Binding Effect . This Award Agreement shall be binding upon and inure to the benefit of the Company and the Recipient and their respective heirs, executors, administrators, legal representatives, successors and assigns, subject to the restrictions on transfer set forth in this Award Agreement.

(f)
Language . The English version of this Award Agreement, the Plan and any other document delivered pursuant to either the Award Agreement or the Plan, will control over any translated version of any such document in the event such translated version is different from the English version.

(g)
Entire Agreement . This Award Agreement and the Plan constitute the entire agreement between the parties, and supercedes all prior agreements and understandings, relating to the subject matter of this Award Agreement.

(h)
Governing Law . This Award Agreement shall be construed, interpreted and enforced in accordance with the internal laws of the State of Delaware without regard to any applicable conflicts of laws.

(i)
Amendment .   This Award Agreement may be amended only by written agreement between the Recipient and the Company, without the consent of any other person.
EXHIBIT A

TO PERFORMANCE-BASED RESTRICTED STOCK UNIT AWARD AGREEMENT



The Target EBITDA for the Company's continuing operations for the [year] fiscal year (beginning [year] and ending [year]) (the "Measurement Period") is $[amount].


Target EBITDA shall be adjusted to exclude the following items occurring during the measurement period:
·
Results from the date of sale related to any operation that was sold during the Measurement Period

For purposes of this Agreement, Actual EBITDA generated during the Measurement Period by the Company's continuing operations shall be calculated as follows:

(1)
Operating Income from continuing operations
(2)
Operating Income shall be adjusted to exclude the effects of the following items:
·
Depreciation and amortization expense
·
Restructuring costs or other expense (income) which is presented on a separate line item in the Company's income statement as included in its earnings release and SEC filings
·
Non-cash compensation expense from equity compensation
·
Results from any operations acquired during the Measurement Period
(3)
The result shall be Actual EBITDA



EXHIBIT B

TO PERFORMANCE-BASED RESTRICTED STOCK UNIT AWARD AGREEMENT




Exhibit 10.2

FORM OF TIME-BASED RESTRICTED STOCK UNIT AWARD AGREEMENT

KADANT INC.
One Technology Park Drive
Westford, MA  01886

NOTICE OF AWARD AND AWARD AGREEMENT


[Date]

[Recipient name and address]

Dear [Recipient name]:

Pursuant to the terms and conditions of the company's [plan name], you have been granted a Restricted Stock Unit/Stock Settled for [award #] units of stock as outlined below.

Granted To:                                          [Recipient name]

Award Date:                                          [Date]

Granted:                            [# of awards]

Grant Price:                                          [Price]

Vesting Schedule:                                                        [Type]

[# on date]
[# on date]
[# on date]


By your signature below, you acknowledge receipt of this Award as of the Award Date and agree that this Award is granted under and governed by the terms and conditions of the Company's [Plan name] as amended, and the Award Agreement, which is attached and made a part of this document. You further acknowledge receipt of the copy of the Plan.


Signature:_________________________                                                                                                                                                _____________________________
[Recipient name]                                                                                                                  Date

KADANT INC.

AWARD AGREEMENT FOR
TIME-BASED RESTRICTED STOCK UNITS
("Award Agreement")

1.
Preamble.   On the effective date shown on the first page of this Award Agreement ("Award Date"), the Company granted to the Recipient named on the first page (the "Recipient") restricted stock units ("RSUs") with respect to the number of shares of common stock of the Company identified on the first page of this Award Agreement ("Award Shares"), subject to the terms, conditions and restrictions set forth in this Award Agreement and the provisions of the Company's Amended and Restated Equity Incentive Plan, as amended from time to time ("Plan"). The RSUs represent a promise by the Company to deliver the Award Shares upon vesting. Any consideration due to the Company on the issuance of Award Shares pursuant to this Award Agreement will be deemed to have been satisfied by services rendered by the Recipient to the Company during the vesting period.

2.
Restrictions on Transfer .  Unless and until the Award Shares shall have vested as provided in Section 3 below, the Recipient shall not sell, transfer, pledge, hypothecate, assign or otherwise dispose of, by operation of law or otherwise, any RSUs, or any interest therein.

3.
Vesting Date .  Subject to the terms, conditions and restrictions of this Award Agreement, including the Forfeiture provisions described in Section 4 below, the Recipient shall vest in all RSUs in accordance with the schedule set forth below (a "Vesting Date):

Vesting Schedule for Restricted Stock Units Awarded:
# of Shares                                                                                      Vesting Date
1/3 of Award Shares                                                                                      [date]
1/3 of Award Shares                                                                                      [date]
Balance of Award Shares                                                                                      [date]

As soon as administratively practicable after the Vesting Date, but in any event within the period ending on the later to occur of the date that is 2 ½ months from the end of the (i) Recipient's tax year that includes the Vesting Date, or (ii) the Company's fiscal year that includes the Vesting Date, the Company shall cause its transfer agent to issue and deliver the Award Shares in the name of the Recipient, subject to payment of all applicable withholding taxes pursuant to Section 6 below.

4.
Forfeiture .

(a)
Definitions .  For purposes of this Award Agreement, "Forfeiture" shall mean any forfeiture of RSUs pursuant to Section 4(b) below.  For purposes of this Award Agreement, "employ" or "employment" with the Company shall include employment with a parent or subsidiary of the Company, which controls, is controlled by, or under common control of the Company.

(b)
Termination of Employment; Death and Disability . In the event that the Recipient ceases to be employed by the Company prior to a Vesting Date for any reason or for no reason (except for death or disability meeting the requirements set forth in this Section 4(b)), with or without cause, then any of the Recipient's RSUs that have not previously vested shall be automatically and immediately forfeited and returned to the Company as of the date employment ceases. In the event of the Recipient's death or disability that occurs prior to a Vesting Date and prior to the Recipient ceasing to be employed by the Company, then 100% of the Recipient's RSUs that have not previously been forfeited or vested shall become immediately vested and no longer subject to the Forfeiture provisions in this Section 4, and the Company shall immediately deliver to the Recipient (or his or her beneficiary in the event of death), the vested Award Shares (less any Award Shares that have been previously forfeited or vested and issued) as soon as administratively feasible but no later than 30 days after the vesting thereof. For purposes of this Award Agreement, "disability" means that you are receiving disability benefits under the Company's Long Term Disability Coverage, as then in effect, on the date employment ceases."

(c) Change in Control . In the event of a "Change in Control" that occurs prior to a Vesting Date and on a date on which the Recipient is employed by the Company, then 100% of the Recipient's RSUs that have not previously been forfeited or vested shall become immediately vested and no longer be subject to the Forfeiture provisions in this Section 4, and the Company shall immediately deliver as soon as administratively feasible but no later than 30 days after the vesting date the Award Shares to the Recipient, as shown on the first page of this Award Agreement, less any Award Shares that have been previously forfeited or vested and issued. A "Change in Control" shall have the same meaning for the purposes of this Award Agreement as set forth in Section 9 of the Plan, as the same may be amended from time to time.

5.
No Stockholder Rights.   Except as set forth in the Plan, neither the Recipient nor any person claiming under or through the Recipient shall be, or have any rights or privileges of, a stockholder of the Company in respect of the Award Shares issuable pursuant to the RSUs until the Award Shares are issued in the name of the Recipient. In particular, a Recipient holding an unvested Award shall have no ownership interest in the shares of Common Stock to which the Award relates until the Award Shares have vested, payment with respect to such Award has actually been made in shares of Common Stock, and the underlying shares of Common Stock have been issued.

6.
Withholding Taxes.   The Company's obligation to deliver Award Shares to the Recipient upon the vesting of the RSUs shall be subject to the satisfaction of all income tax (including federal, state, local and foreign taxes), social insurance, payroll tax, payment on account or other tax-related withholding requirements of any applicable jurisdiction, based on minimum statutory withholding rates for all tax purposes, including payroll and social security taxes ("Withholding Taxes"). In order to satisfy all Withholding Taxes due in connection with the award or vesting of the RSUs or the delivery of the Award Shares, the Recipient hereby irrevocably agrees to the following actions by the Company, at the Company's sole election:

(a) The Company may sell, or arrange for the sale of, such number of the Award Shares that the Recipient is entitled to receive on the Vesting Date, with no further action by the Recipient, as is sufficient to generate net proceeds at least equal to the value of the Withholding Taxes, and the Company shall retain such net proceeds in satisfaction of such Withholding Taxes. The Company shall remit to the Recipient in cash any portion of such net proceeds in excess of the value of such Withholding Taxes.

(b) The Company may retain such number of the Award Shares that the Recipient is otherwise entitled to receive on the Vesting Date, with no further action by the Recipient, by deducting and retaining from the number of Award Shares to which the Recipient is entitled that number of Award Shares as is equal to the value of the Withholding Taxes. The Recipient understands that the fair market value of the surrendered Award Shares will be determined in accordance with the Company's Stock Option and Equity Award Grant and Exercise Procedures as then in effect.

(c) The Recipient hereby appoints each of the Chief Financial Officer, General Counsel and the Secretary of the Company as his or her attorney in fact to sell or transfer the Recipient's Award Shares in accordance with this Section 6. The Recipient agrees to execute and deliver such documents, instruments and certificates as may reasonably be required in connection with the sale, transfer or retention of Award Shares pursuant to this Section 6, including an irrevocable order to sell shares authorizing a brokerage firm selected by the Company to sell the Recipient's Award Shares.

7.
No Compensation Deferral. Neither the Plan nor this Award Agreement is intended to provide for any deferral of compensation that would be subject to Section 409A ("Section 409A") of the U.S. Internal Revenue Code of 1986, as amended. Notwithstanding the provisions of Section 12 (i), the Company reserves the right, to the extent the Company deems necessary or advisable in its sole discretion, to unilaterally amend or modify the Plan and/or this Award Agreement to ensure that all awards (including, without limitation, the RSUs) are either exempt from or compliant with the requirements of Section 409A.

8.
Administration.   The Compensation Committee of the Company's Board of Directors or other committee designated in the Plan, shall have the authority to manage and control the operation and administration of this Award Agreement.  Any interpretation of the Award Agreement by any of the entities specified in the preceding sentence and any decision made by any of them with respect to the Award Agreement is final and binding.

9.
Plan Definitions.   Notwithstanding anything in this Award Agreement to the contrary, the terms of this Award Agreement shall be subject to the terms of the Plan, a copy of which has already been provided to the Recipient.

10.
Recipient's Undertakings. In signing this Award Agreement and accepting the RSU, the Recipient acknowledges that:

(a)
The Plan and this Award were established voluntarily by the Company, each is discretionary in nature, and each may be modified, amended, suspended or terminated by the Company at any time, unless otherwise provided in the Plan and this Award Agreement;

(b)
The grant of RSUs is voluntary and occasional and does not create any contractual or other right to receive future awards of RSUs, or benefits in lieu of RSUs even if RSUs have been awarded repeatedly in the past or future;

(c)
All decisions with respect to future grants of RSUs, if any, will be at the sole discretion of the Company;

(d)
The Recipient's participation in the Plan and receipt and acceptance of the Award is voluntary;

(e)
RSUs are an extraordinary item that do not constitute compensation of any kind for services of any kind rendered to the Company or to the Recipient's employer, and RSUs are outside the scope of the Recipient's employment contract, if any;

(f)
RSUs are not part of normal or expected compensation or salary for any purpose, including, but not limited to, calculation of any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments and in no event should be considered as compensation for, or relating in any way to, past services for the Company or the Recipient's employer;

(g)
The future value of the underlying Award Shares is unknown and cannot be predicted with certainty;

(h)
The value of the Award Shares underlying the RSUs may increase or decrease in value during the period from the Award Date to the Vesting Date;

(i)
In consideration of the grant of RSUs, no claim or entitlement to compensation or damages arises from termination of the RSUs or diminution in value of the RSUs or Award Shares received upon vesting of RSUs resulting from termination of the Recipient's employment by the Company or the Recipient's employer (for any reason whatsoever and whether or not in breach of local labor laws) and the Recipient irrevocably releases the Company and his or her employer from any such claim that may arise; and if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Award Agreement, the Recipient shall be deemed irrevocably to have waived his or her entitlement to pursue such claim; and

(j)
Further, if the Recipient ceases to be an employee (whether or not in breach of local labor laws), the Recipient's right to receive RSUs and vest under the Award Agreement or Plan, if any, will terminate effective as of the date that the Recipient is no longer actively employed by the Company and will not be extended by any notice period mandated under local law (e.g., active employment would not include a period of "garden leave" or similar period pursuant to local law); and the Compensation Committee of the Company's Board of Directors shall have the exclusive discretion to determine when the Recipient is no longer actively employed for purposes of this Award Agreement and the Plan.

11. Data Privacy Notice and Consent . The Recipient hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of his or her personal data as described in this paragraph, by and among, as applicable, the Recipient's employer and the Company and its subsidiaries and affiliates for, among other purposes, implementing, administering and managing the Recipient's participation in the Plan. The Recipient understands that the Company and its subsidiaries hold or will hold certain personal information about the Recipient, including the Recipient's name, home address and telephone number, date of birth, social security number or identification number, salary, nationality, job title, any shares or directorships held in the Company, details of all options or awards or any other interests in shares awarded, canceled, exercised, vested, unvested or outstanding in the Recipient's name, for the purposes of managing and administering the Plan ("Data"). The Recipient further understands that the Company and its subsidiaries will transfer Data amongst themselves as necessary for employment purposes, including implementation, administration and management of the Recipient's participation in the Plan, and that the Company and any of its subsidiaries may each further transfer Data to a broker or other stock plan service provider or other third parties assisting the Company with the processing of Data. The Recipient understands that these third parties may be located in the United States, and that the third party's country may have different data privacy laws and protections than in the Recipient's country. The Recipient authorizes them to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes described in this Section, including any requisite transfer to a broker or other stock plan service provider or other third party as may be required for the administration of the Plan and the subsequent holding of Award Shares on the Recipient's behalf. The Recipient understands that he or she may, at any time, request access to the Data, request any necessary amendments to it or refuse or withdraw the consents herein, in any case without cost, by contacting in writing the Company's General Counsel at the Company's headquarters address. The Recipient understands, however, that withdrawal of consent may affect the Recipient's ability to participate in or realize the benefits of the Plan and this Award Agreement. For more information on the consequences of refusal to consent or withdrawal of consent, the Recipient understands that he or she may contact the Company's General Counsel.

12. Miscellaneous .

(a)
No Rights to Employment . The Recipient acknowledges and agrees that the vesting of the RSUs pursuant to this Award Agreement is earned only in accordance with the terms hereof. The Recipient further acknowledges and agrees that the transactions contemplated hereunder and the vesting schedule set forth herein do not constitute an express or implied promise of continued engagement as an employee for the vesting period, for any period, or at all.

(b)
Unfunded Rights . The right of the Recipient to receive Award Shares pursuant to this Award Agreement is an unfunded and unsecured obligation of the Company. The Recipient shall have no rights under this Award Agreement other than those of an unsecured general creditor of the Company.

(c)
Severability . The invalidity or unenforceability of any provision of this Award Agreement shall not affect the validity or enforceability of any other provision of this Award Agreement, and each other provision of this Award Agreement shall be severable and enforceable to the extent permitted by law.

(d)
Waiver . Any provision for the benefit of the Company contained in this Award Agreement may be waived, either generally or in any particular instance, by the Compensation Committee of the Board of Directors of the Company.

(e)
Binding Effect . This Award Agreement shall be binding upon and inure to the benefit of the Company and the Recipient and their respective heirs, executors, administrators, legal representatives, successors and assigns, subject to the restrictions on transfer set forth in this Award Agreement.

(f)
Language . The English version of this Award Agreement, the Plan and any other document delivered pursuant to either the Award Agreement or the Plan, will control over any translated version of any such document in the event such translated version is different from the English version.

(g)
Entire Agreement . This Award Agreement and the Plan constitute the entire agreement between the parties, and supersedes all prior agreements and understandings, relating to the subject matter of this Award Agreement.

(h)
Governing Law . This Award Agreement shall be construed, interpreted and enforced in accordance with the internal laws of the State of Delaware without regard to any applicable conflicts of laws.

(i)
Amendment .   This Award Agreement may be amended only by written agreement between the Recipient and the Company, without the consent of any other person.

TB RSU AGREEMENT - EO 2013 FORM 10-K EXHIBIT

Exhibit 10.3

KADANT INC.
AMENDED AND RESTATED
2006 EQUITY INCENTIVE PLAN

(As amended by the board of directors on March 6, 2014 and pending stockholder approval of such amendments at the annual meeting to be held on May 20, 2014)

1.              Purpose

The purpose of this 2006 Equity Incentive Plan (the "Plan") of Kadant Inc. (the "Company") is to advance the interests of the Company and its stockholders by enhancing the Company's ability to attract, retain and motivate persons (such as employees, officers and directors of, and consultants to, the Company and its subsidiaries) who are expected to make significant contributions to the future growth and success of the Company and its subsidiaries.  The Plan is intended to accomplish these goals by enabling the Company to offer such persons equity ownership opportunities or performance-based stock incentives in the Company, or any combination thereof ("Awards"), that are intended to align their interests with those of the Company's stockholders and to encourage them to continue in the service of the Company and to pursue the long-term growth, profitability and financial success of the Company.

2 .              Administration

The Plan will be administered by the Board of Directors of the Company (the "Board").  The Board shall have full power to interpret and administer the Plan, including full authority to:
·
prescribe, amend and rescind rules and regulations relating to the Plan and Awards,
·
select the persons to whom Awards will be granted ("Participants"),
·
determine the type and amount of Awards to be granted to Participants (including any combination of Awards),
·
determine the terms and conditions of Awards granted under the Plan (including terms and conditions relating to events of merger, consolidation, dissolution and liquidation, change in control, vesting, forfeiture, restrictions, dividends and interest, if any, on deferred amounts),
·
waive compliance by a Participant with any obligation to be performed by him or her under an Award,
·
waive any term or condition of an Award, cancel an existing Award in whole or in part with the consent of a Participant,
·
grant replacement Awards,
·
accelerate the vesting or lapse of any restrictions of any Award,
·
correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any Award, and
·
adopt the form of instruments evidencing Awards under the Plan and change such forms from time to time.
Any interpretation by the Board of the terms and provisions of the Plan or any Award thereunder and the administration thereof, and all action taken by the Board, shall be final, binding and conclusive on all parties and any person claiming under or through any party.  No director shall be liable for any action or determination made in good faith.

The Board may, to the full extent permitted by law, delegate any or all of its responsibilities under the Plan to a committee (the "Committee") appointed by the Board and consisting of independent members of the Board.  All references in the Plan to the "Board" shall mean the Board or a Committee of the Board to the extent that the Board's powers or authority under the Plan have been delegated to such Committee.

3 .              Effective Date

The Plan was adopted by the Board on March 7, 2006 and approved by the Company's stockholders on May 25, 2006.  No Awards may be under the Plan after May 20, 2024 1 .

4 .              Shares Available for Awards

4.1              Authorized Number of Shares

Subject to adjustment as provided in Section 9.6, the total number of shares of common stock of the Company, par value $.01 per share (the "Common Stock"), reserved and available for distribution under the Plan shall be   1,755,000 shares 2 .  Such shares may consist, in whole or in part, of authorized and unissued shares or treasury shares.

4.2              Share Counting

The following rules shall apply in determining the number of shares of Common Stock remaining available for issuance under the Plan:
·
shares of Common Stock covered by Awards of stock appreciation rights shall be counted against the number of shares available for the grant of Awards under the Plan; provided that Awards of stock appreciation rights that may be settled in cash only shall not be so counted;
·
if any Award of shares of Common Stock expires or terminates without having been exercised in full, is forfeited or is otherwise terminated, surrendered or cancelled in whole or in part (including as a result of shares of Common Stock subject to such Award being repurchased by the Company pursuant to the terms of any Award, the unused shares of Common Stock covered by such Award shall be available again for the future grant of Awards under the Plan, subject, however, in the case of Incentive Stock Options (as hereinafter defined), to any applicable limitations under the Internal Revenue Code of 1986, as amended (the "Code");
·
if any Award results in Common Stock not being issued (including as a result of an stock appreciation right that could be settled either in cash or in stock and was actually settled in cash), the unused shares of Common Stock covered by such Award shall be available again for the future grant of Awards under the Plan, subject, however, in the case of Incentive Stock Options (as hereinafter defined), to any limitations under the Code;
·
Shares of Common Stock tendered to the Company by a Participant to purchase shares of Common Stock upon the exercise of an Award or to satisfy tax withholding obligations (including shares retained from the Award creating the tax obligation), the number of shares tendered shall be added to the number of shares of Common Stock available for the future grant of Awards under the Plan; and
·
Any shares of Common Stock underlying Awards granted in assumption of, or in substitution for, outstanding awards previously granted by a company acquired by the Company or any of its subsidiaries or affiliates or with which the Company or any of its subsidiaries or affiliates combines, shall not, unless required by law or regulation, count against the number of shares of Common Stock available for the future grant of Awards under the Plan.

4.3              Participant Limitation

Subject to adjustment as provided in Section 9.6, the maximum number of shares of Common Stock permitted to be granted under any Award or combination of Awards to a single Participant during any one calendar year shall be 500,000 shares of Common Stock.

5 .              Eligibility

All of the employees, officers and directors of, and consultants to, the Company and its subsidiaries, or other persons are eligible to receive Awards under the Plan.  The Board, or other appropriate committee or person to the extent permitted pursuant to the last two sentences of Section 2, shall from time to time select from among such eligible persons those who will receive Awards under the Plan.

6.              Types of Awards

The Board may offer Awards under the Plan in any form of equity-based interest, equity-based incentive or performance-based stock incentive in Common Stock of the Company or any combination thereof.  The type, terms and conditions and restrictions of an Award shall be determined by the Board at the time such Award is made to a Participant. An Award shall be made at the time specified by the Board, shall be subject to such conditions or restrictions as may be imposed by the Board and shall conform to the general rules applicable under the Plan as well as any special rules then applicable under federal tax laws or regulations or the federal securities laws relating to the type of Award granted.

Without limiting the foregoing, Awards may take the following forms and shall be subject to the following rules and conditions:




1 The plan will expire on May 25, 2016 unless the extension of the plan term to May 20, 2024 is approved by the stockholders at the annual meeting to be held on May 20, 2014.
2 Includes 900,000 shares approved by the board on March 7, 2006 and approved by stockholders on May 25, 2006; an additional 330,000 shares approved by the board on March 10, 2011and approved by stockholders on May 25, 2011; and an additional 525,000 shares approved by the board on March 6, 2014 and pending approval by the stockholders at the annual meeting to be held on May 20, 2014.
B-
6.1              Options

An option is an Award that entitles the holder on exercise thereof to purchase Common Stock at a specified exercise price.  Options granted under the Plan may be either incentive stock options ("incentive stock options") that meet the requirements of Section 422 of the Code, or options that are not intended to meet the requirements of Section 422 of the Code ("nonstatutory options").

6.1.1              Option Price .  The price at which Common Stock may be purchased upon exercise of an option shall be determined by the Board, provided however , the exercise price shall not be less than 100% of the fair market value per share of Common Stock as determined by (or in a manner approved by) the Board as of the date of grant.

6.1.2              Option Grants .  The granting of an option shall take place at the time specified by the Board.  Options shall be evidenced by written option agreements.  Such agreements shall conform to the requirements of the Plan, and may contain such other provisions (including but not limited to vesting and forfeiture provisions, acceleration, change in control, protection in the event of merger, consolidations, dissolutions and liquidations) as the Board shall deem advisable.  Option agreements shall expressly state whether an option grant is intended to qualify as an incentive stock option or nonstatutory option.

6.1.3              Option Period .  An option will become exercisable at such time or times (which may be immediately or in such installments as the Board shall determine) and on such terms and conditions as the Board shall specify.  The option agreements shall specify the terms and conditions applicable in the event of an option holder's termination of employment during the option's term. No option may be granted for a term in excess of 10 years.

Any exercise of an option must be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by (1) any additional documents required by the Board and (2) payment in full in accordance with Section 6.1.4 for the number of shares for which the option is exercised.

6.1.4              Payment of Exercise Price.   Stock purchased on exercise of an option shall be paid for as follows:  (1) in cash or by check (subject to such guidelines as the Company may establish for this purpose), bank draft or money order payable to the order of the Company or (2) if so permitted by the instrument evidencing the option (or in the case of a nonstatutory option, by the Board at or after grant of the option), (i) through the delivery of shares of Common Stock that have been outstanding for at least six months (or such other minimum length of time the Board expressly approves) and that have a fair market value (determined in accordance with procedures prescribed by the Board) equal to the exercise price, (ii) by delivery of a promissory note of the option holder to the Company, payable on such terms as are specified by the Board, (iii) by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the exercise price, (iv) by any combination of the foregoing permissible forms of payment or (v) such other lawful consideration as the Board may determine.

6.1.5              Limitation on Repricing .  Unless approved by the Company's stockholders, (i) no outstanding option granted under the Plan may be amended to provide an exercise price per share that is lower than the current exercise price per share of such outstanding option (other than adjustments pursuant to Section 9.6) and (ii) no outstanding option granted under the Plan may be cancelled, exchanged, bought out, replaced or surrendered in exchange for cash, other Awards, or options with an exercise price that is less than the current exercise price per share of such outstanding option (other than adjustments pursuant to Section 9.6).

6.1.6              Special Rules for Incentive Stock Options .   Each provision of the Plan and each option agreement evidencing an incentive stock option shall be construed so that each incentive stock option shall be an incentive stock option as defined in Section 422 of the Code or any statutory provision that may replace such Section, and any provisions thereof that cannot be so construed shall be disregarded.  Instruments evidencing incentive stock options shall contain such provisions as are required under applicable provisions of the Code.  Incentive stock options may be granted only to employees of the Company and its subsidiaries.

6.2              Stock Appreciation Rights

A stock appreciation right ("SAR") is an Award entitling the recipient, upon exercise, to receive an amount in cash or Common Stock or a combination thereof (in such form to be determined by the Board) determined in whole or in part by reference to appreciation after the date of grant in the fair market value of a share of Common Stock.  The terms of SARs shall be determined by the Board in its discretion. SARs may be granted in tandem with, or separately from, Options granted under the Plan. No SAR may be granted for a term in excess of 10 years.

6.2.1              Tandem Awards. Participants may be granted a tandem SAR, consisting of SARs granted with an underlying option, exercisable upon such terms and conditions as the Board shall establish, provided that the tandem SAR will have the same exercise price and maximum term of the underlying option. Tandem SARs shall provide that the Participant may elect between the exercise of the underlying option for shares of Common Stock or the surrender of the option in exchange for a distribution from the Company in an amount equal to the excess of (a) the fair market value (on the option surrender date) of the number of shares in which the Participant is at the time vested under the surrendered option (or surrendered portion thereof) over (b) the aggregate exercise price payable for such vested shares. No option surrender shall be effective unless it is approved by the Board, either at the time of the actual option surrender or at any earlier time. If the option surrender is approved, then the distribution to the Participant may be made in shares valued at fair market value (on the option surrender date), in cash, or party in shares and partly in cash, as the Board shall deem appropriate. If the surrender of an option is not approved by the Board, then the Participant shall retain whatever rights he or she had under the surrendered option (or surrendered portion thereof) on the option surrender date and may exercise such rights in accordance with the terms of the option Award.

6.2.2              Stand-alone SARs. Participants may be granted a SAR not expressly granted in tandem with an option. The stand-alone SAR shall cover a specified number of shares of Common Stock and will become exercisable at such time or times and on such conditions as the Board may specify in the SAR Award. Upon exercise of a stand-alone SAR, a Participant shall be entitled to receive a distribution from the Company in an amount equal to the excess of (a) the fair market value (on the exercise date) of the number of shares underlying the exercised right over (b) the aggregate base price in effect for those shares. The number of shares underlying each stand-alone SAR and the base price in effect for those shares shall be determined by the Board at the time the stand-alone SAR is granted, provided however, that the base price per share may not be less than the fair market value per underlying share on the date of grant. The distribution to the Participant with respect to an exercised stand-alone SAR may be made in shares valued at fair market value on the exercise date, in cash, or party in shares and partly in cash, as the Board shall deem appropriate.

6.2.3              Limitation on Repricing . Unless approved by the Company's stockholders, (i) no outstanding SAR granted under the Plan may be amended to decrease the exercise price or base price applicable to such SAR (other than adjustments pursuant to Section 9.6) and (ii) no outstanding SAR granted under the Plan may be cancelled, exchanged, bought-out, replaced or surrendered in exchange for cash, other Awards, or SARs with an exercise price or base price that is less than the current exercise price or base price per share applicable to such SAR (other than adjustments pursuant to Section 9.6)..

6.3              Restricted Stock and Restricted Stock Units

An Award of restricted stock entitles the recipient thereof to acquire shares of Common Stock upon payment of the purchase price, if any, subject to restrictions specified in the instrument evidencing the Award. A restricted stock unit is an Award of a contractual right to receive, at a future date, shares or an amount based on the fair market value of a share of Common Stock, subject to restrictions specified in the instrument evidencing the Award.

6.3.1              Restricted Stock Awards .  Awards of restricted stock and restricted stock units shall be evidenced by written agreements.  Such agreements shall conform to the requirements of the Plan, and may contain such other provisions (including restriction and forfeiture provisions, restrictions based upon the achievement of specific performance goals, change in control, protection in the event of mergers, consolidations, dissolutions and liquidations) as the Board shall deem advisable. Restricted stock units awarded to a Participant may be settled in shares valued at fair market value on the settlement date, in cash, or partly in shares or partly in cash, as the Board shall deem appropriate.

6.3.2              Restrictions .  Until the restrictions specified in a restricted stock agreement shall lapse, restricted stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of, and upon certain conditions specified in the restricted stock agreement, must be resold to the Company for the price, if any, specified in such agreement.  The restrictions shall lapse at such time or times, and on such conditions, as the Board may specify.  The Board may at any time accelerate the time at which the restrictions on all or any part of the shares shall lapse.

6.3.3                            Vesting .  Awards of restricted stock or restricted stock units that vest based on the passage of time alone shall vest ratably not less than each of the first three anniversaries of the date of grant (1/3 on the first anniversary, an additional 1/3 on the second anniversary and 100% on the third anniversary). This vesting provision shall not apply to Awards that vest based on performance goals determined by the Board (including performance-based compensation Awards under Section 6.4). In addition, the Board may grant up to a maximum of 250,000 shares of Common Stock with vesting provisions that vary from the first sentence of this Section 6.3.3.

6.3.4              Rights as a Stockholder.   A Participant holding an unvested Award of restricted stock units, including those subject to performance goals, shall have no ownership interest in the shares of Common Stock to which the restricted stock units relate until the shares have vested, payment with respect to such restricted stock units is actually made in shares of Common Stock and the underlying shares have been issued. A Participant who acquires shares upon vesting of restricted stock will have all of the rights of a Stockholder with respect to such shares including the right to receive dividends and to vote such shares. Dividends and other property payable to a Participant shall be distributed only if and when the restrictions imposed on the applicable restricted stock lapse. Unless the Board otherwise determines, certificates evidencing shares of restricted stock will remain in the possession of the Company until such shares are free of all restrictions under the Plan.

6.3.5              Purchase Price .  The purchase price of shares of restricted stock shall be determined by the Board, in its sole discretion.

6.3.6              Other Awards Settled With Restricted Stock .  The Board may provide that any or all of the Common Stock delivered pursuant to an Award will be restricted stock.

6.4              Performance-Based Compensation

6.4.1              Performance Awards .  A performance Award entitles the recipient to receive, without payment, an amount, in cash or Common Stock or a combination thereof (such form to be determined by the Board), following the attainment of performance goals.  Performance goals may be related to personal performance, corporate performance, departmental performance or any other category of performance deemed by the Board to be important to the success of the Company.  The Board will determine the performance goals, the period or periods during which performance is to be measured and all other terms and conditions applicable to the Award.

6.4.2              Section 162(m) Performance-Based Awards .  The Board may delegate the administration and grant of Awards to a Committee approved by the Board, the members of which all are "outside directors" as defined by Section 162(m) (the "Section 162(m) Committee"), for the purpose of granting Awards that satisfy all the requirements for "performance-based compensation" within the meaning of Section 162(m)(4)(C) of the Code ("Performance-based Compensation"). If the Section 162(m) Committee determines, at the time a restricted stock Award or other stock-based Award is granted to a Participant, that such Participant is, or is likely to be as of the end of the tax year in which the Company would claim a tax deduction in connection with such Award, a "Covered Employee" (as defined in Section 162(m)), then the Section 162(m) Committee may provide that this Section 6.4.2 is applicable to such Award. The Section 162(m) Committee may be the same as the Compensation Committee, if the members of the Compensation Committee meet the criteria for the Section 162(m) Committee.

6.4.2.1                            Performance Measures . Awards subject to this Section shall provide that the lapsing of restriction and the distribution of cash or shares pursuant to the Award, as applicable, shall be subject to the achievement of one or more objective performance goals established by the Section 162(m) Committee, which shall be based on attainment of specified levels of one or any combination of the following, which may be absolute in their terms or measured against or in relationship to other companies comparably, similarly or otherwise situated, (collectively "Performance Measures"): (a) earnings per share, (b) return on average equity or average assets in relation to a peer group of companies designated by the Section 162(m) Committee, (c) earnings, (d) earnings growth, (e) earnings per share growth, (f) earnings before interest, taxes and amortization ("EBITA"), (g) earnings before interest, taxes, depreciation and amortization ("EBITDA"), (h) operating income, (i) operating margins, (j) division income, (k) revenues, (l) expenses, (m) stock price, (n) market share, (o) return on sales, assets, equity or investment, (p) achievement of balance sheet or income statement objectives, (q) net cash provided from continuing operations, (r) stock price appreciation, (s) total shareholder return, (t) strategic initiatives, (u) cost control, (v) net operating profit after tax, (w) pre-tax or after-tax income, (x) cash flow, (y) net income, and (z) financial ratios contained in the Company's debt instruments. To the extent not inconsistent under Section 162(m), the measurement of Performance Measures may exclude or be adjusted to reflect any one or more of (i) extraordinary items or other unusual or non-recurring items, (ii) discontinued operations, (iii) gains or losses on the dispositions of discontinued operations, (iv) cumulative effects of changes in accounting principles, (v) the writedown of any asset and (vi) charges for restructuring and rationalization programs. The Performance Measures may be particular to a Participant, or the department, branch, line of business, subsidiary or other unit in which the Participant works and may cover such period as may be specified by the Section 162(m) Committee. Performance Measures will be set by the Section 162(m) Committee within the time period prescribed by, and shall otherwise comply with the requirements of, Section 162(m).

6.4.2.2                            Adjustment of Performance Measures . With respect to Awards that are intended to be subject to this Section 6.4.2, the Section 162(m) Committee may adjust downwards, but not upwards, the cash or number of Shares payable pursuant to such Award, and the Section 162(m) Committee may not waive the achievement of the applicable performance goals except in the case of the death or disability of the Participant.

6.4.2.3 Committee Discretion . Nothing in this Section 6.4.2 is intended to limit the Board's discretion to adopt conditions or goals that relate to performance with respect to any Award that is not intended to qualify as Performance-based Compensation. In addition, the Board may, subject to the terms of the Plan, amend previously granted Award in a way that disqualifies them as Performance-based Compensation.

6.4.2.4 Change in Law . In the event that the requirements of Section 162(m) and the regulations thereunder change to permit the Section 162(m) Committee discretion to alter the Performance Measures without obtaining stockholder approval of such changes, the Section 162(m) Committee shall have sole discretion to make such changes without obtaining stockholder approval.


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6.5              Other Stock-Based Awards

The Board may grant equity-based or equity-related Awards not otherwise described herein in such amounts and subject to such terms and conditions as the Board may determine. By way of illustration and not limitation, such other stock-based Awards may (i) involve the transfer of actual shares of Common Stock, either at the time of grant or thereafter, or payment in cash or otherwise of amounts based on the value of shares of Common Stock; (ii) be subject to performance-based or service-based conditions; (iii) be in the form of phantom stock, restricted stock, restricted stock units, performance shares or other form of stock-based incentive; or (iv) be designed to comply with applicable laws of jurisdictions other than the United States.

6.6              Deferred Payments or Delivery of Shares; Limitation on Options and SARs

The Board may determine that all or a portion of any Award to a Participant, whether it is to be paid in cash, shares of Common Stock or a combination, shall be deferred or may, in its sole discretion, approve deferral elections by Participants, on such conditions, as the Board may specify.  The Board may at any time accelerate the time at which delivery of all or any part of shares of the Common Stock will take place. Notwithstanding the foregoing, deferral of option or SAR gains shall not be permitted under the Plan.

7 .              Purchase Price and Payment

Except as otherwise provided in the Plan, the purchase price of Common Stock to be acquired pursuant to an Award shall be the price determined by the Board, provided that such price shall not be less than the par value of the Common Stock.   Except as otherwise provided in the Plan, the Board may determine the method of payment of the exercise price or purchase price of an Award granted under the Plan and the form of payment.  The Board may determine that all or any part of the purchase price of Common Stock pursuant to an Award has been satisfied by past services rendered by the Participant.  The Board may agree at any time, upon request of the Participant, to defer the date on which any payment under an Award will be made.

8.              Change in Control

8.1              Impact of Event

In the event of a "Change in Control" as defined in Section 8.2, as applicable, the following provisions shall apply, unless the agreement evidencing the Award otherwise provides (by specific explicit reference to Section 8.2 below).  If a Change in Control occurs while any Awards are outstanding, then, effective upon the Change in Control, all outstanding Awards of a Participant shall be accelerated as follows: (i) each outstanding stock option, stock appreciation right or other stock-based Award granted under the Plan that was not previously exercisable and vested shall become immediately exercisable in full and vested, and will no longer be subject to a right of repurchase by the Company, and will remain exercisable throughout their entire term, (ii) each outstanding restricted stock award, restricted stock unit or other stock-based Award subject to restrictions and to the extent not fully vested, shall be deemed to be fully vested, free of restrictions and conditions and no longer subject to a right of repurchase by the Company, and (iii) the restrictions and other deferral limitations applicable to other Awards shall lapse, and such other Awards shall become free of all restrictions, limitations or conditions and become fully vested and exercisable to the full extent of the original grant.

8.2              Definition of "Change in Control"

" Change in Control " means an event or occurrence set forth in any one or more of subsections (a) through (d) below (including an event or occurrence that constitutes a Change in Control under one of such subsections but is specifically exempted from another such subsection):

(a)              the acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership of any capital stock of the Company if, after such acquisition, such Person beneficially owns (within the meaning of Rule 13d‑3 promulgated under the Exchange Act) 20% or more of either (i) the then-outstanding shares of common stock of the Company (the "Outstanding Common Stock") or (ii) the combined voting power of the then-outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Voting Securities"); provided , however , that for purposes of this subsection (a), the following acquisitions of shares of Common Stock shall not constitute a Change in Control: (i) any acquisition by the Company, (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iii) any acquisition by any corporation pursuant to a transaction which complies with clauses (i) and (ii) of subsection (c) of this definition; or

(b)              such time as the Continuing Directors (as defined below) do not constitute a majority of the Board (or, if applicable, the board of directors of a successor corporation to the Company), where the term "Continuing Director" means at any date a member of the Board (i) who was a member of the Board as of March 8, 2006 or (ii) who was nominated or elected subsequent to such date by at least a majority of the directors who were Continuing Directors at the time of such nomination or election or whose election to the Board was recommended or endorsed by at least a majority of the directors who were Continuing Directors at the time of such nomination or election; provided , however , that there shall be excluded from this clause (ii) any individual whose initial assumption of office occurred as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents, by or on behalf of a person other than the Board; or

(c)              the consummation of a merger, consolidation, reorganization, recapitalization or statutory share exchange involving the Company or a sale or other disposition of all or substantially all of the assets of the Company in one or a series of transactions (a "Business Combination"), unless, immediately following such Business Combination, each of the following two conditions is satisfied: (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Common Stock and Outstanding Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 80% of the then‑outstanding shares of common stock and the combined voting power of the then‑outstanding securities entitled to vote generally in the election of directors, respectively, of the resulting or acquiring corporation in such Business Combination (which shall include, without limitation, a corporation which as a result of such transaction owns the Company or substantially all of the Company's assets either directly or through one or more subsidiaries) (such resulting or acquiring corporation is referred to herein as the "Acquiring Corporation") in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Common Stock and Outstanding Voting Securities, respectively; and (ii) no Person (excluding the Acquiring Corporation or any employee benefit plan (or related trust) maintained or sponsored by the Company or by the Acquiring Corporation) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock of the Acquiring Corporation, or of the combined voting power of the then‑outstanding securities of such corporation entitled to vote generally in the election of directors; or

(d)              approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.

9 . General Provisions

9.1 Documentation of Awards

Awards will be evidenced by written instruments, which may differ among Participants, prescribed by the Board from time to time.  Such instruments may be in the form of agreements to be executed by both the Participant and the Company or certificates, letters or similar instruments which need not be executed by the participant but acceptance of which will evidence agreement to the terms thereof.  Such instruments shall conform to the requirements of the Plan and may contain such other provisions (including provisions relating to events of merger, consolidation, dissolution and liquidations, change in control and restrictions affecting either the agreement or the Common Stock issued thereunder), as the Board deems advisable.

9.2              Rights as a Stockholder

Except as specifically provided by the Plan or the instrument evidencing the Award, the receipt of an Award will not give a Participant rights as a Stockholder with respect to any shares covered by an Award until the date of issue of a stock certificate to the Participant for such shares.

9.3              Conditions on Delivery of Stock

The Company will not be obligated to deliver any shares of Common Stock pursuant to the Plan or to remove any restriction from shares previously delivered under the Plan (a) until all conditions of the Award have been satisfied or removed, (b) until, in the opinion of the Company's counsel, all applicable federal and state laws and regulations have been complied with, (c) if the outstanding Common Stock is at the time listed on any stock exchange, until the shares have been listed or authorized to be listed on such exchange upon official notice of issuance, and (d) until all other legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel.  If the sale of Common Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the Award, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Common Stock bear an appropriate legend restricting transfer.

If an Award is exercised by the Participant's legal representative, the Company will be under no obligation to deliver Common Stock pursuant to such exercise until the Company is satisfied as to the authority of such representative.

9.4              Tax Withholding

The Company will withhold from any cash payment made pursuant to an Award an amount sufficient to satisfy all federal, state and local withholding tax requirements (the "withholding requirements").

In the case of an Award pursuant to which Common Stock may be delivered, the Board will have the right to require that the Participant or other appropriate person remit to the Company an amount sufficient to satisfy the withholding requirements, or make other arrangements satisfactory to the Board with regard to such requirements, prior to the delivery of any Common Stock.  If and to the extent that such withholding is required, the Board may permit the Participant or such other person to elect at such time and in such manner as the Board provides to have the Company hold back from the shares to be delivered, or to deliver to the Company, Common Stock having a value calculated to satisfy the withholding requirement.

9.5              Transferability of Awards

Except as may be authorized by the Board, in its sole discretion, no Award (other than an Award in the form of an outright transfer of cash or Common Stock not subject to any restrictions) may be sold, assigned, transferred, pledged or otherwise encumbered other than by will or the laws of descent and distribution, and during a Participant's lifetime an Award requiring exercise may be exercised only by him or her (or in the event of incapacity, the person or persons properly appointed to act on his or her behalf). The Board may, in its discretion, permit or provide in an Award for the transfer of the Award by the Participant to or for the benefit of any immediate family member, family trust or family partnership established solely for the benefit of the Participant and /or an immediate family member if, with respect to such proposed transferee, the Company would be eligible to use a Form S-8 for the registration of the sale of the Common Stock subject to such Award under the Securities Act of 1933, as amended, and provided that the Company shall not be required to recognize any such transfer until such time as the Participant and such permitted transferee shall, as a condition to such transfer, deliver to the Company a written instrument in form and substance satisfactory to the Company confirming that such transferee shall be bound by all of the terms and conditions of the Award.

9.6              Adjustments in the Event of Certain Transactions

(a)  In the event of a stock dividend, stock split or combination of shares, or other distribution with respect to holders of Common Stock other than normal cash dividends, the Board will make (i) appropriate adjustments to the maximum number of shares that may be delivered under the Plan under Section 4 above and the participant limit set forth in Section 4, and (ii) appropriate adjustments to the number and kind of shares of stock or securities subject to Awards then outstanding or subsequently granted, any exercise prices relating to Awards and any other provisions of Awards affected by such change.

(b)  In the event of any recapitalization, spinoff, merger or consolidation involving the Company, any transaction in which the Company becomes a subsidiary of another entity, any sale or other disposition of all or a substantial portion of the assets of the Company or any similar transaction, as determined by the Board, the Board in its discretion may make appropriate adjustments to outstanding Awards to avoid distortion in the operation of the Plan.

9.7              Employment Rights

Neither the adoption of the Plan nor the grant of Awards will confer upon any person any right to continued employment with the Company or any subsidiary or interfere in any way with the right of the Company or subsidiary to terminate any employment relationship at any time or to increase or decrease the compensation of such person.  Except as specifically provided by the Board in any particular case, the loss of existing or potential profit in Awards granted under the Plan will not constitute an element of damages in the event of termination of an employment relationship even if the termination is in violation of an obligation of the Company to the employee.

Whether an authorized leave of absence, or absence in military or government service, shall constitute termination of employment shall be determined by the Board at the time.  For purposes of this Plan, transfer of employment between the Company and its subsidiaries shall not be deemed termination of employment.

9.8              Other Employee Benefits

The value of an Award granted to a Participant who is an employee, and the amount of any compensation deemed to be received by an employee as a result of any exercise or purchase of Common Stock pursuant to an Award or sale of shares received under the Plan, will not constitute "earnings" or "compensation" with respect to which any other employee benefits of such employee are determined, including without limitation benefits under any pension, stock ownership, stock purchase, life insurance, medical, health, disability or salary continuation plan.

9.9              Legal Holidays

If any day on or before which action under the Plan must be taken falls on a Saturday, Sunday or legal holiday, such action may be taken on the next succeeding day not a Saturday, Sunday or legal holiday.

9.10              Foreign Nationals

Without amending the Plan, Awards may be granted to persons who are foreign nationals or employed outside the United States or both, on terms and conditions different from those specified in the Plan in order to meet the applicable laws and other legal or tax requirements of the countries in which such foreign nationals reside or work, as may, in the judgment of the Board, be necessary or desirable to further the purpose of the Plan.

9.11              Governing Law

The provisions of the Plan and all Awards made hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware, without regard to any applicable conflicts of law.

9.12              Compliance with Section 409A of the Code

To the extent applicable to an Award, it is intended that this Plan and Awards made under the Plan comply with the provisions of Section 409A of the Code and applicable rules and regulations. The Plan and any Awards to which Section 409A is applicable will be administered in a manner consistent with this intent, and any provision that would cause this Plan or any Award made under the Plan to fail to satisfy Section 409A of the Code, to the extent applicable, shall have no force and effect until amended to comply with Section 409A of the Code (which amendment may be retroactive to the extent permitted by Section 409A and may be made by the Company without the consent of Participants to which Section 409A shall apply).

Except as provided in individual Award agreements initially or by amendment, if and to the extent any portion of any payment, compensation or other benefit provided to a Participant in connection with his or her employment termination is determined to constitute "nonqualified deferred compensation" within the meaning of Section 409A of the Code and the Participant is a specified employee as defined in Section 409A(a)(2)(B)(i) of the Code, as determined by the Company in accordance with its procedures, by which determination the Participant (through accepting the Award) agrees that   he or she is bound, such portion of the payment, compensation or other benefit shall not be paid before the day that is six months plus one day after the date of "separation from service" (as determined under Code Section 409A) (the " New Payment Date "), except as Code Section 409A may then permit. The aggregate of any payments that otherwise would have been paid to the Participant during the period between the date of separation from service and the New Payment Date shall be paid to the Participant in a lump sum on such New Payment Date, and any remaining payments will be paid on their original schedule.
The Company makes no representations or warranty and shall have no liability to the Participant or any other person if any provisions of or payments, compensation or other benefits under the Plan are determined to constitute nonqualified deferred compensation subject to Section 409A of the Code but do not to satisfy the conditions of that section.

10 .              Termination and Amendment

The Plan shall remain in full force and effect until terminated by the Board.  Subject to the last sentence of this Section 10, the Board may at any time or times amend the Plan or any outstanding Award for any purpose that may at the time be permitted by law, or may at any time terminate the Plan as to any further grants of Awards.  Notwithstanding the foregoing, (i) no amendment that would require stockholder approval under the rules of the New York Stock Exchange may be made effective until stockholder approval has been obtained, (ii) no amendment limiting or removing the prohibition on repricing of options shall be effective unless stockholder approval is obtained, (iii) to the extent required by Section 162(m) of the Code, no amendment applicable to an Award that is intended to comply with Section 162(m) shall be effective unless stockholder approval is obtained as required under Section 162(m) and (iv) to the extent required under Section 422 of the Code, no amendment or modification to an incentive stock option shall be effective unless stockholder approval is obtained. No amendment of the Plan or any agreement evidencing Awards under the Plan may materially adversely affect the rights of any Participant under any Award previously granted without such Participant's consent.

As amended and in effect 3/6/14
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Exhibit 31.1
CERTIFICATION
I, Jonathan W. Painter, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended March 29, 2014 of Kadant Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
 
Date: May 7, 2014
/s/ Jonathan W. Painter
 
Jonathan W. Painter
 
Chief Executive Officer

Exhibit 31.2
CERTIFICATION
I, Thomas M. O'Brien, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended March 29, 2014 of Kadant Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
 
Date: May 7, 2014
/s/ Thomas M. O'Brien
 
Thomas M. O'Brien
 
Chief Financial Officer

Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, the undersigned, Jonathan W. Painter, Chief Executive Officer, and Thomas M. O'Brien, Chief Financial Officer, of Kadant Inc., a Delaware corporation (the "Company"), do hereby certify, to our best knowledge and belief, that:
The Quarterly Report on Form 10-Q for the period ended March 29, 2014 of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in this Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
Dated: May 7, 2014
/s/ Jonathan W. Painter
 
Jonathan W. Painter
 
Chief Executive Officer
 
 
 
/s/ Thomas M. O'Brien
 
Thomas M. O'Brien
 
Chief Financial Officer

This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.