KADANT INC

5. Income Taxes

The components of income before provision for income taxes are as follows:

The components of the provision for income taxes are as follows:

The provision for income taxes in the accompanying consolidated statement of income differs from the provision calculated by applying the U.S. federal statutory income tax rate of 21% to income before provision for income taxes in 2025 due to the following:

(a) State taxes in Mississippi, Oregon, Wisconsin, Alabama, and California made up the majority (greater than 50 percent) of the tax effect in this category.

The provision for income taxes in the accompanying consolidated statement of income differs from the provision calculated by applying the U.S. federal statutory income tax rate of 21% to income before provision for income taxes in 2024 and 2023 due to the following:

Cash paid for income taxes, net of refunds, by jurisdiction in 2025 is as follows:

Cash paid for income taxes, net of refunds, was $42,291,000 in 2024 and $47,519,000 in 2023.

The Company's net deferred tax liability consists of the following:

Deferred tax assets and liabilities are presented in the accompanying consolidated balance sheet within other assets and deferred income taxes on a net basis by tax jurisdiction. The Company has established valuation allowances related to certain domestic and foreign deferred tax assets on deductible temporary differences, tax losses, and tax credit carryforwards. The valuation allowance at year-end 2025 was $8,739,000, consisting of $81,000 in the United States and $8,658,000 in foreign jurisdictions. The increase in the valuation allowance in 2025 of $1,169,000 is related primarily to fluctuations in foreign currency exchange rates and an increase in the valuation allowance against certain deferred tax assets in a jurisdiction where it is not more likely than not that a related tax benefit will be realized in future periods. This increase in the valuation allowance is partially offset by a decrease related to a tax rate change. Compliance with ASC 740 requires the Company to periodically evaluate the necessity of establishing or adjusting a valuation allowance for deferred tax assets depending on whether it is more likely than not that a related tax benefit will be realized in future periods. When assessing the need for a valuation allowance in a tax jurisdiction, the Company evaluates the weight of all available evidence to determine whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. As part of this evaluation, the Company considers its cumulative three-year history of earnings before income taxes, taxable income in prior carryback years, future reversals of existing taxable temporary differences, prudent and feasible tax planning strategies, and expected future results of operations. As of year-end 2025, the Company maintained a valuation allowance predominantly in certain foreign jurisdictions due to the uncertainty of future profitability in those foreign jurisdictions.

At year-end 2025, the Company had U.S. federal and state net operating loss carryforwards of $6,753,000 and $7,523,000, respectively, and foreign net operating loss carryforwards of $42,447,000. Of the U.S. federal net operating loss carryforwards, $442,000 expires in 2037 and the remainder do not expire. The state net operating loss carryforwards begin to expire in 2026 and a portion does not expire. Of the foreign net operating loss carryforwards, $3,040,000 will expire in the years 2029 through 2045, and the remainder do not expire. The Company also had a carryforward of disallowed business interest expense of $18,428,000 from its acquisition of Clyde Industries in 2025, which does not expire, and a foreign tax credit carryforward of $668,000, which begins to expire in 2034. The utilization of these tax attributes is limited to the Company's future taxable income, and certain of these tax attributes are subject to an annual limitation as a result of the acquisition of Clyde Industries, which constitutes a change of ownership as defined under Internal Revenue Service Code Section 382.

At year-end 2025, the Company had $150,894,000 of unremitted foreign earnings. The Company intends to repatriate the distributable reserves of select foreign subsidiaries back to the United States and has recognized $583,000 of tax expense on the estimated repatriation amount during 2025. Except for these select foreign subsidiaries, the Company intends to indefinitely reinvest $93,084,000 of earnings of its foreign subsidiaries in order to support the current and future capital needs of their operations, including the repayment of the Company’s foreign debt. The related foreign withholding taxes, which would be required if the Company were to remit these foreign earnings to the United States, would be $2,899,000.

The Company operates within multiple tax jurisdictions and could be subject to audit in those jurisdictions. Such audits can involve complex income tax issues, which may require an extended period of time to resolve and may cover multiple years. In management's opinion, adequate provisions for income taxes have been made for all years subject to audit.

As of year-end 2025, the Company had a liability of $14,147,000 for unrecognized tax benefits of which $6,547,000, if recognized, would reduce the effective tax rate. A reconciliation of unrecognized tax benefits is as follows:

(a)No indemnification assets were recorded in 2025 and $4,372,000 were recorded in 2024.

A portion of the unrecognized tax benefits generated in 2025 is offset by deferred tax assets in the accompanying consolidated balance sheet. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company has accrued $3,130,000 at year-end 2025 and $3,488,000 at year-end 2024 for the potential payment of interest and penalties. The interest and penalties included in the accompanying consolidated statement of income was a benefit of $412,000 in 2025 and an expense of $131,000 in 2024.

The Company is currently under audit in certain of its foreign tax jurisdictions. The Company remains subject to U.S. federal income tax examinations for the tax years 2019 through 2025, and to non-U.S. income tax examinations for the tax years 2015 through 2025. In addition, the Company remains subject to state and local income tax examinations in the United States for the tax years 2006 through 2025.

6. Long-Term Obligations

Long-term obligations are as follows:

See Note 10, Fair Value Measurements and Fair Value of Financial Instruments, for the fair value information related to the Company's long-term obligations.

Revolving Credit Facility

On September 26, 2025, the Company entered into an eighth amendment and joinder (Eighth Amendment) to its unsecured multi-currency revolving credit facility, originally dated as of March 1, 2017 (as amended and restated to date, the Credit Agreement). The Eighth Amendment, among other things, increased the Company's aggregate borrowing capacity from $400,000,000 to $750,000,000 and extended the maturity date from November 30, 2027 to September 26, 2030. In addition to the increased committed borrowing capacity, an uncommitted, unsecured incremental borrowing facility of $200,000,000 continues to be available under the Credit Agreement.

Interest on borrowings outstanding under the Credit Agreement accrues and is payable in arrears calculated at one of the following rates selected by the Company: (i) the Base Rate, as defined, plus an applicable margin of 0.25% to 1.25%, or (ii) Eurocurrency Rate, Term SOFR, Term CORRA, AUD Rate, and RFR, as applicable and defined, plus an applicable margin of 1.25% to 2.25%. The margin is determined based upon the ratio of the Company's total debt, net of unrestricted cash up to $50,000,000, to earnings before interest, taxes, depreciation, and amortization as defined in the Credit Agreement. Additionally, the Credit Agreement requires the payment of a commitment fee payable in arrears on the available committed borrowing capacity under the Credit Agreement, which ranges from 0.150% to 0.350%.

Obligations under the Credit Agreement, which includes customary events of default under such financing arrangements, may be accelerated upon the occurrence of an event of default. In addition, the Credit Agreement contains negative covenants applicable to the Company and its subsidiaries, including financial covenants requiring the Company to maintain a maximum consolidated leverage ratio of 3.75 to 1, or, if the Company elects, for the quarter during which a material acquisition occurs and for the three fiscal quarters thereafter,4.25 to 1, and limitations on making certain restricted payments (including dividends and stock repurchases).

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

At year-end 2025, the outstanding balance under the Credit Agreement was $366,707,000, which included $92,707,000 of euro-denominated borrowings. The Company had $383,175,000 of borrowing capacity available at year-end 2025, which was calculated by translating its foreign-denominated borrowings using the administrative agent's borrowing date foreign exchange rates, in addition to the $200,000,000 uncommitted, unsecured incremental borrowing facility.

The weighted average interest rate for the outstanding balance under the Credit Agreement was 4.49% as of January 3, 2026 and 5.27% as of December 28, 2024.

During 2025, the Company incurred $2,645,000 of debt issuance costs related to the Eighth Amendment. Unamortized debt issuance costs related to the Credit Agreement, included in other assets in the accompanying consolidated balance sheet, were $3,129,000 at January 3, 2026 and $993,000 at December 28, 2024 and are being amortized to interest expense using the straight-line method.

Senior Promissory Notes

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

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

Debt Compliance

At year-end 2025, the Company was in compliance with the covenants related to its debt obligations.

Finance Leases

The Company's finance leases primarily relate to contracts for vehicles. See Note 9, Leases, for further information relating to the Company's finance leases.

Other Borrowings

At year-end 2025, other borrowings consisted of $1,023,000 of debt obligations, which have maturity dates ranging from 2026 to 2031 and interest rates of up to 1.70%.

Annual Repayment Requirements

The following schedule presents the annual repayment requirements for the Company’s long-term obligations, excluding finance leases, as of year-end 2025.

7. Commitments and Contingencies

Letters of Credit and Bank Guarantees

Outstanding letters of credit and bank guarantees issued on behalf of the Company, principally relating to customer deposit guarantees and performance obligations, totaled $16,353,000 at year-end 2025. Certain of the Company's contracts require the Company to provide a standby letter of credit or bank guarantee to a customer as beneficiary, limited in amount to a negotiated percentage of the total contract value, in order to guarantee warranty and performance obligations of the Company under the contract. Typically, these standby letters of credit and bank guarantees expire without being drawn by the beneficiary.

Right of Recourse

In the ordinary course of business, the Company's Chinese subsidiaries may receive banker's acceptance drafts from customers as payment for their trade accounts receivable. The drafts are non-interest-bearing obligations of the issuing bank and generally mature withinsix months of the origination date. The Company's Chinese subsidiaries may use these banker's acceptance drafts prior to the scheduled maturity date to settle outstanding accounts payable with vendors. Banker's acceptance drafts transferred to vendors are subject to customary right of recourse provisions prior to their scheduled maturity dates. The Company had $9,556,000 at year-end 2025 and $7,952,000 at year-end 2024 of banker's acceptance drafts subject to recourse, which were transferred to vendors and had not reached their scheduled maturity dates. Historically, the banker's acceptance drafts have settled upon maturity without any claim of recourse against the Company.

Contingencies

In the ordinary course of business, the Company is, at times, required to issue limited performance guarantees, some of which do not require the issuance of letters of credit to customers in support of these guarantees, relating to its equipment and systems. The Company generally limits its liability under these guarantees to amounts typically capped at 10% or less of the value of the contract. The Company believes that it has adequate reserves for any potential liability in connection with such guarantees.

Litigation

From time to time, the Company is subject to various claims and legal proceedings covering a range of matters that arise in the ordinary course of business. Such litigation may include, but is not limited to, claims and counterclaims by and against the Company for breach of contract or warranty, canceled contracts, product liability, or bankruptcy-related claims. For legal proceedings in which a loss is probable and estimable, the Company accrues a loss based on the low end of the range of estimated loss when there is no better estimate within the range. If the Company were found to be liable for any of the claims or counterclaims against it, the Company would incur a charge against earnings for amounts in excess of legal accruals.