Employee Benefit Plans

Stock-Based Compensation Plans

The Company maintains stock-based compensation plans primarily for its key employees and directors, although the plans permit awards to others expected to make significant contributions to the future of the Company. The plans authorize the compensation committee of the Company's board of directors (the board committee) to award a variety of stock and stock-based incentives, such as restricted stock, RSUs, nonqualified and incentive stock options, stock bonus shares, or performance-based shares. The award recipients and the terms of awards, including price, granted under these plans are determined by the board committee. Upon a change of control, as defined in the plans, all options or other awards become fully vested and all restrictions lapse. The Company had 451,441 shares available for grant under stock-based compensation plans at year-end 2018. The Company generally issues its common stock out of treasury stock, to the extent available, for share issuances related to its stock-based compensation plans.

The Company recognizes compensation cost for all stock-based awards granted to employees and directors based on the grant date estimate of fair value for those awards. The fair value of RSUs is based on the grant date price of the Company's common stock, reduced by the present value of estimated dividends foregone during the requisite service period. The fair value of stock options is based on the Black-Scholes option-pricing model.

The components of pre-tax stock-based compensation expense included in SG&A expenses in the accompanying consolidated statement of income are as follows:



(In thousands)	December 29, 2018		December 30, 2017		December 31, 2016
RSU Awards	$	6,838	$	5,621	$	4,848
Employee Stock Purchase Plan Awards	189		182		170
Stock Option Awards	—		—		51
Total	$	7,027	$	5,803	$	5,069

The Company grants RSUs to non-employee directors and certain employees. Holders of RSUs have no voting rights and are not entitled to receive cash dividends.

Non-Employee Director Restricted Stock Units

The Company granted RSUs of 2,700 in 2018, 3,000 in 2017 and 5,000 in 2016 to each of its non-employee directors. Each RSU represents the right to receive one share of the Company's common stock upon vesting. Of the RSUs granted in 2018, half of the RSUs vested on June 1, 2018 and the remaining RSUs vested ratably on the last day of the remaining two fiscal quarters of 2018. The 2017 and 2016 RSUs vested ratably on the last day of each fiscal quarter within the year.

Performance-Based Restricted Stock Units

The Company grants performance-based RSUs to certain officers of the Company. Each performance-based RSU represents the right to receive one share of the Company's common stock upon vesting. The RSUs are subject to adjustment based on the achievement of a performance measure selected for the fiscal year, which historically has been a specified target for adjusted earnings before interest, taxes, depreciation, and amortization (adjusted EBITDA) generated from continuing operations. Following the adjustment, the RSUs are subject to additional time-based vesting, and vest in three equal annual installments, provided that the officer is employed by the Company on the applicable vesting dates.

The Company recognizes compensation expense associated with performance-based RSUs ratably over the requisite service period for each separately-vesting portion of the award based on the grant date fair value, and net of actual forfeitures recorded when they occur. Compensation expense recognized is remeasured each reporting period until the total number of RSUs to be issued is known. Unrecognized compensation expense related to the unvested performance-based RSUs totaled $2,164,000 at year-end 2018, and will be recognized over a weighted average period of 1.4 years.

The performance-based RSU agreements provide for forfeiture in certain events, such as voluntary or involuntary termination of employment, and for acceleration of vesting in certain events, such as death, disability or a change in control of the Company. If death, disability, or a change in control occurs prior to the end of the performance period, the officer will receive the target RSU amount; otherwise, the officer will receive the number of deliverable RSUs based on the achievement of the performance goal, as stated in the RSU agreements.

Time-Based Restricted Stock Units

The Company grants time-based RSUs to its officers and other employees of the Company. Each time-based RSU represents the right to receive one share of the Company's common stock upon vesting. The Company recognizes compensation expense associated with these time-based RSUs ratably over the requisite service period for the entire award based on the grant date fair value, and net of actual forfeitures recorded when they occur. The time-based RSU agreement provides for forfeiture in certain events, such as voluntary or involuntary termination of employment, and for acceleration of vesting in certain events, such as death, disability, or a change in control of the Company. Unrecognized compensation expense related to the time-based RSUs totaled $2,937,000 at year-end 2018, and will be recognized over a weighted average period of 1.8 years.

A summary of the activity of the Company's unvested RSUs in 2018 is as follows:



	Units (In thousands)		Weighted Average Grant- Date Fair Value
Unvested RSUs at December 30, 2017	199		$	49.32
Granted	73		$	98.12
Vested	(116	)	$	54.11
Unvested RSUs at December 29, 2018	156		$	68.57

The weighted-average grant date fair value of RSUs granted was $98.12 in 2018, $59.30 in 2017, and $40.41 in 2016. The total fair value of shares vested was $11,932,000 in 2018, $6,719,000 in 2017, and $6,233,000 in 2016.

Stock Options

The Company has not granted stock options since 2013. Prior to 2014, the Company granted nonqualified stock options to its executive officers that vested over three years and were not exercisable until vested. All options awarded in prior periods were granted at an exercise price equal to the fair market value of the Company's common stock on the date of grant. Stock options vested in three equal annual installments beginning on the first anniversary of the grant date, provided that the recipient remained employed by the Company on the applicable vesting dates and expire on the tenth anniversary of the grant date. All outstanding stock options are fully vested. The Company recognized compensation expense associated with these stock options ratably over the requisite service period for the entire award based on the grant date fair value, net of forfeitures. There was no unrecognized compensation expense related to these stock options at year-end 2018.

The Company used the Black-Scholes option-pricing model to determine the fair value of stock options, which was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. Option-pricing models require the input of highly subjective assumptions, including expected stock price volatility. Expected stock price volatility was calculated based on a review of the Company's actual historic stock prices commensurate with the expected life of the award. The expected option life was derived based on a review of the Company's historic option holding periods, including consideration of the holding period inherent in currently vested but unexercised options. The expected annual dividend rate was calculated by dividing the Company's annual dividend by the closing stock price on the grant date. The risk-free interest rate is based on the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term of the option. The compensation expense recognized for these equity-based awards was net of estimated forfeitures. Forfeitures were estimated based on an analysis of actual option forfeitures.

A summary of the Company's stock option activity in 2018 is as follows:



(In thousands, except per share amounts)	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value (a)
Options Outstanding at December 30, 2017	307		$	20.72
Exercised	(8	)	$	15.51
Options Outstanding at December 29, 2018	299		$	20.86	2.5 years	$	18,029
Vested and Exercisable at December 29, 2018	299		$	20.86	2.5 years	$	18,029


(a)	The closing price per share on the last trading day prior to year-end 2018 was $81.12.

There were no stock option exercises in 2017. A summary of the Company's stock option exercises in 2018 and 2016 are as follows:



(In thousands)	December 29, 2018		December 31, 2016
Total Intrinsic Value of Options Exercised	$	515	$	1,341
Cash Received from Options Exercised	$	127	$	1,189

Modified Awards

On September 20, 2017, the Company entered into an executive transition agreement with its vice president, general counsel and secretary in connection with her retirement on July 1, 2018. This agreement included provisions for post-employment compensation and modifications to outstanding equity awards. The Company recognized $374,000 of post-employment compensation ratably through the retirement date. Pursuant to this agreement, all unvested RSUs vested at the retirement date. As of September 20, 2017, 4,254 RSUs were remeasured at a fair value of $93.82 per unit. The remaining compensation expense associated with the modified RSUs totaled $332,000 as of September 20, 2017, which was recognized ratably through the retirement date.

Employee Stock Purchase Plan

The Company's eligible U.S. employees may elect to participate in its employee stock purchase plan. Under the plan, shares of the Company's common stock may be purchased at a 15% discount from the fair market value at the beginning or end of the purchase period, whichever is lower. Shares purchased under the plan are subject to a one-year resale restriction and are purchased through payroll deductions of up to 10% of each participating employee's gross wages. The Company issued 10,439 shares for 2018 (issued in 2019), 13,156 shares for 2017 (issued in 2018), and 17,874 shares in 2016 of its common stock under this plan.

401(k) Savings and Other Defined Contribution Plans

The Company's U.S. subsidiaries participate in the Kadant Inc. 401(k) Retirement Savings Plan sponsored by the Company. Contributions to the plan are made by both the employee and the Company and are immediately vested. Company contributions are based upon the level of employee contributions.

Certain of the Company's subsidiaries offer other retirement plans, the majority of which are defined contribution plans. Company contributions to these plans are based on formulas determined by the Company.

For these plans, the Company contributed and charged to expense $3,705,000 in 2018, $3,327,000 in 2017, and $3,005,000 in 2016.

Pension and Other Post-Retirement Benefits Plans

The Company sponsors a noncontributory defined benefit pension plan, which is closed to new participants, for eligible employees at one of its U.S. divisions and its corporate office. Certain of the Company’s non-U.S. subsidiaries also sponsor defined benefit pension plans covering certain employees at those subsidiaries. Funds for the U.S. pension plan (Retirement Plan) and one of the non-U.S. pension plans are contributed to a trustee as necessary to provide for current service and for any unfunded projected benefit obligation over a reasonable period. The remaining non-U.S. pension plans are unfunded as permitted under their plans and applicable laws. Benefits under the Company’s pension plans are based on years of service and employee compensation.

The Company also provides other post-retirement benefits under plans in the United States and at one of its non-U.S. subsidiaries. In addition, the Company provides for a restoration plan (Restoration Plan) for certain executive officers which fully supplements benefits lost under the noncontributory defined benefit retirement plan as a consequence of applicable Internal Revenue Service limits and restores benefits for the limitation of years of service under the retirement plan.

In accordance with ASC 715, Compensation-Retirement Benefits, (ASC 715), the Company recognizes the funded status of its defined benefit pension and other post-retirement benefit plans as an asset or liability and changes in the funded status through AOCI, net of tax. The amounts in AOCI are recognized as net periodic pension cost pursuant to the Company's historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic benefit cost will be recognized as a component of AOCI, net of tax. The actuarial loss included in AOCI and expected to be recognized in net periodic benefit cost in 2019 is $65,000.

Effective at the beginning of fiscal 2018, the Company retrospectively adopted ASU No. 2017-07. See Recently Adopted Accounting Pronouncements in Note 1 for further discussion. As a result, only the service cost component of net periodic benefit cost is included in operating income. All other components are included in other expense, net in the accompanying consolidated statement of income.

In 2018, the Company's board of directors and its compensation committee approved amendments to freeze and terminate the Retirement Plan and Restoration Plan as of December 29, 2018 and, as a result, incurred a curtailment loss of $1,425,000 which was reclassified from AOCI and included in other expense, net in the accompanying consolidated statement of income in the fourth quarter of 2018. Additionally, an effect of curtailment of $4,862,000 was recognized as a reclassification from AOCI and a reduction in the accrued pension liability in the accompanying consolidated balance sheet at year-end 2018.

Procedures for plan settlement and distribution of the Retirement Plan assets will be initiated once the plan termination satisfies certain regulatory requirements, which is expected to occur in late 2019 or early 2020. At the settlement date, the Company will recognize a loss based on the difference between the unrecognized actuarial loss, unfunded benefit obligation, and any additional cash required to be paid. Participants in the Retirement Plan will have the option to receive either a lump sum payment or an annuity. Retirees will continue to receive payments pursuant to their current annuity elections. The Company will settle liabilities under the Restoration Plan by paying a lump sum to plan participants at least twelve and no more than twenty-four months following the termination date. The Company expects to settle the liabilities under the Restoration Plan in 2020. The Company has included the 2018 Retirement Plan liability in accrued payroll and employee benefits and the 2018 Restoration Plan liability in other long-term liabilities in the accompanying consolidated balance sheet.

The following table summarizes the change in benefit obligation; the change in plan assets; the unfunded status; and the amounts recognized in the accompanying consolidated balance sheet for the Company's U.S. and non-U.S. pension benefit plans and other post-retirement benefit plans. In accordance with ASU No. 2015-04, Compensation - Retirement Benefits (Topic 715), the Company elects to measure its plan assets and benefit obligations as of December 31.



	U.S. Pension						Non-U.S. Pension						Other Post-Retirement
(In thousands)	December 29, 2018			December 30, 2017			December 29, 2018			December 30, 2017			December 29, 2018			December 30, 2017
Change in Projected Benefit Obligation:
Projected benefit obligation at beginning of year	$	34,757		$	31,935		$	4,270		$	3,341		$	4,704		$	3,894
Acquisition	—			—			—			241			—			—
Service cost	699			685			173			148			213			175
Interest cost	1,193			1,231			126			114			172			170
Actuarial (gain) loss	(2,674		)	2,626			(368		)	270			(508		)	635
Benefits paid	(1,589		)	(1,720		)	(394		)	(265		)	(157		)	(175		)
Plan amendment	1,116			—			—			—			322			—
Effect of curtailment	(3,787		)	—			—			—			(1,075		)	—
Currency translation	—			—			(136		)	421			1			5
Projected benefit obligation at end of year	$	29,715		$	34,757		$	3,671		$	4,270		$	3,672		$	4,704
Change in Plan Assets:
Fair value of plan assets at beginning of year	$	31,754		$	28,985		$	557		$	426		$	35		$	28
Actual return on plan assets	(1,436		)	3,409			38			23			2			1
Employer contributions	—			1,080			528			355			164			179
Benefits paid	(1,589		)	(1,720		)	(394		)	(265		)	(157		)	(175		)
Currency translation	—			—			(3		)	18			—			2
Fair value of plan assets at end of year	$	28,729		$	31,754		$	726		$	557		$	44		$	35
Unfunded Status	$	(986	)	$	(3,003	)	$	(2,945	)	$	(3,713	)	$	(3,628	)	$	(4,669	)
Accumulated Benefit Obligation at End of Year	$	29,715		$	30,311		$	2,604		$	3,047		$	—		$	—

Amounts Included in the Balance Sheet:
Current liability	$	(986	)	$	—		$	(58	)	$	(205	)	$	(144	)	$	(173	)
Non-current liability	$	—		$	(3,003	)	$	(2,887	)	$	(3,508	)	$	(3,484	)	$	(4,496	)

Amounts Included in Accumulated Other Comprehensive Items Before Tax:
Unrecognized net actuarial loss	$	(3,205	)	$	(7,485	)	$	(674	)	$	(1,085	)	$	(69	)	$	(1,424	)
Unrecognized prior service cost	—			—			(45		)	(52		)	—			(439		)
	$	(3,205	)	$	(7,485	)	$	(719	)	$	(1,137	)	$	(69	)	$	(1,863	)



	U.S. Pension						Non-U.S. Pension						Other Post-Retirement
(In thousands)	December 29, 2018			December 30, 2017			December 29, 2018			December 30, 2017			December 29, 2018			December 30, 2017
Changes in Amounts Included in Accumulated Other Comprehensive Items Before Tax:
Net actuarial (loss) gain	$	(48	)	$	(544	)	$	368		$	(277	)	$	508		$	(634	)
Amortization of net actuarial loss	541			442			63			38			136			83
Amortization of prior service cost	—			53			6			6			86			88
Plan amendment	(1,116		)	—			—			—			(322		)	—
Effect of curtailment	3,787			—			—			—			1,075			—
Curtailment loss	1,116			—			—			—			309			—
Currency translation	—			—			(19		)	(78		)	2			(3		)
	$	4,280		$	(49	)	$	418		$	(311	)	$	1,794		$	(466	)

The weighted-average assumptions used to determine the benefit obligation are as follows:



	U.S. Pension				Non-U.S. Pension				Other Post-Retirement
	U.S. Pension				Non-U.S. Pension				Other Post-Retirement
	December 29, 2018		December 30, 2017		December 29, 2018		December 30, 2017		December 29, 2018		December 30, 2017
Discount rate	4.10	%	3.51	%	3.56	%	3.16	%	4.32	%	3.71	%
Rate of compensation increase	—		3.00	%	3.24	%	3.33	%	5.57	%	3.11	%

The discount rates for pension and other post-retirement plans are based on market yields on high-quality corporate bonds currently available and expected to be available during the period to maturity of the benefits. For pension and post-retirement plans that have been closed to new participants thereby shortening the duration, the discount rate is determined based on discounting the projected benefit streams against the Citigroup Pension discount curve.

The projected benefit obligations and fair values of plan assets for the Company's pension plans with projected benefit obligations in excess of plan assets are as follows:



	U.S. Pension				Non-U.S. Pension
	U.S. Pension				Non-U.S. Pension
(In thousands)	December 29, 2018		December 30, 2017		December 29, 2018		December 30, 2017
Pension Plans with Projected Benefit Obligations in Excess of Plan Assets:
Projected benefit obligation	$	29,715	$	34,757	$	3,671	$	4,270
Fair value of plan assets	$	28,729	$	31,754	$	726	$	557

The accumulated benefit obligations and fair values of plan assets for the Company's pension plans with accumulated benefit obligations in excess of plan assets are as follows:



	U.S. Pension				Non-U.S. Pension
	U.S. Pension				Non-U.S. Pension
(In thousands)	December 29, 2018		December 30, 2017		December 29, 2018		December 30, 2017
Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets:
Accumulated benefit obligation	$	29,715	$	—	$	2,604	$	3,047
Fair value of plan assets	$	28,729	$	—	$	726	$	557

The components of net periodic benefit cost are as follows:



	U.S. Pension									Non-U.S. Pension									Other Post-Retirement
	U.S. Pension									Non-U.S. Pension									Other Post-Retirement
(In thousands)	December 29, 2018			December 30, 2017			December 31, 2016			December 29, 2018			December 30, 2017			December 31, 2016			December 29, 2018			December 30, 2017			December 31, 2016
Service cost	$	699		$	685		$	723		$	173		$	148		$	102		$	213		$	175		$	130
Interest cost	1,193			1,231			1,273			126			114			107			172			170			156
Expected return on plan assets	(1,286		)	(1,326		)	(1,288		)	(42		)	(25		)	(25		)	(3		)	(2		)	(2		)
Amortization of net actuarial loss	541			442			498			63			38			39			136			83			50
Amortization of prior service cost	—			53			55			6			6			4			86			88			88
Settlement loss	—			—			—			—			—			—			—			—			114
Curtailment loss	1,116			—			—			—			—			—			309			—			—
Net Periodic Benefit Cost	$	2,263		$	1,085		$	1,261		$	326		$	281		$	227		$	913		$	514		$	536

The weighted-average assumptions used to determine net periodic benefit cost are as follows:



	U.S. Pension						Non-U.S. Pension						Other Post-Retirement
	U.S. Pension						Non-U.S. Pension						Other Post-Retirement
	December 29, 2018		December 30, 2017		December 31, 2016		December 29, 2018		December 30, 2017		December 31, 2016		December 29, 2018		December 30, 2017		December 31, 2016
Discount Rate	3.51	%	4.03	%	4.22	%	3.49	%	3.45	%	3.87	%	3.58	%	4.10	%	4.28	%
Expected Long-Term Return on Plan Assets	4.50	%	5.00	%	5.00	%	7.43	%	7.53	%	7.72	%	7.43	%	7.53	%	7.72	%
Rate of Compensation Increase	3.00	%	3.00	%	3.00	%	3.97	%	3.65	%	3.67	%	3.05	%	3.08	%	3.05	%

In developing the overall expected long-term return on plan assets assumption, a building block approach was used in which rates of return in excess of inflation were considered separately for equity securities, debt securities, and other assets. The excess returns were weighted by the representative target allocation and added along with an appropriate rate of inflation to develop the overall expected long-term return on plan assets assumption. The Company believes this determination is consistent with ASC 715, Compensation – Retirement Benefits.

Plan Assets

The fair values of the Company's noncontributory defined benefit retirement plan assets at year-end 2018 and year-end 2017 by asset category are as follows:



	December 29, 2018 Fair Value Measurement
(In thousands)	Quoted Prices in Active Markets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Retirement Plan Assets:
Mutual funds:
Money market funds	$	12,852	$	—	$	—	$	12,852
Fixed income funds	11,581		—		—		11,581
Investments measured at NAV							4,296
Total assets at fair value							$	28,729

Non-U.S. Pension Plan Assets:
Mutual funds	$	726	$	—	$	—	$	726
Total assets at fair value							$	726



	December 30, 2017 Fair Value Measurement
(In thousands)	Quoted Prices in Active Markets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Retirement Plan Assets:
Mutual funds:
Fixed income funds	$	17,560	$	—	$	—	$	17,560
Equity funds	4,763		—		—		4,763
Investments measured at NAV							9,431
Total assets at fair value							$	31,754

Non-U.S. Pension Plan Assets:
Mutual funds	$	557	$	—	$	—	$	557
Total assets at fair value							$	557

Description of Fair Value Measurements

Level 1 – Quoted, active market prices for identical assets.

Level 2 – Observable inputs other than Level 1 prices, based on model-derived valuations in which all significant inputs are observable in active markets.

Level 3 – Unobservable inputs based on the Company's own assumptions.

The following is a description of the valuation methodologies used for assets measured at fair value. There were no changes in valuation techniques during 2018 or 2017.

Mutual funds - Investments in money market, common stock index and fixed income funds. Share prices of the funds, referred to as a fund's Net Asset Value (NAV), are calculated daily based on the closing market prices and accruals of securities in the fund's total portfolio (total value of the fund) divided by the number of fund shares currently issued and outstanding. There are no redemption restrictions.

Investments measured at NAV - Investments in common collective trusts that invest in a diversified blend of investment and non-investment grade fixed income securities and are valued at NAV provided by the fund administrator. The NAV is used as the practical expedient to estimate fair value. The NAVs of the funds are calculated monthly based on the closing market prices and accruals of securities in the fund's total portfolio (total value of the fund) divided by the number of fund shares currently issued and outstanding. Redemptions of the investments occur by contract at the respective fund's redemption date NAV.

The Company's investment policy for its U.S. noncontributory defined benefit retirement plan is to emphasize the preservation of capital. The investment policy takes into consideration the benefit obligations, including timing of distributions.

The following target asset allocation has been established for the plan:



Asset Category	Minimum		Neutral		Maximum
Money market funds	0	%	45	%	100	%
Debt Securities	0	%	55	%	100	%
Total			100	%

Debt securities are weighted to reflect a portfolio duration to that of the plan's liabilities anticipated to be paid out as annuities. The credit quality must equal or exceed high investment grade quality ("Baa" or better).

Cash Flows

Contributions

The Company does not plan to make any material cash contributions to its pension and post-retirement benefit plans in 2019 other than to fund current benefit payments, as well as fund amounts related to the settlement of the Retirement Plan, which is expected to occur in late 2019 or early 2020.

Estimated Future Benefit Payments

Expected benefit payments are based on the same assumptions used to measure the Company's benefit obligation at year-end 2018. Estimated future benefit payments during the next five years and in aggregate for the five years thereafter are as follows:



					Other Post-retirement
(In thousands)	U.S. Pension		Non-U.S. Pension		Other Post-retirement
2019	$	29,715	$	194	$	151
2020	—		142		2,871
2021	—		211		133
2022	—		312		127
2023	—		330		114
2024-2028	—		2,117		480

The estimated future benefit payments associated with the Retirement Plan are reflected in the table above in 2019. The actual settlement of the Retirement Plan's benefit obligation is dependent on the satisfaction of certain regulatory requirements, which is expected to occur in late 2019 or early 2020.