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Employee Benefit Plans

12 Months Ended

Dec. 28, 2019

Share-based Payment Arrangement [Abstract]

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 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 409,295 shares available for grant under stock-based compensation plans at year-end 2019. 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 28, 2019		December 29, 2018		December 30, 2017
RSU Awards	$	6,616	$	6,838	$	5,621
Employee Stock Purchase Plan Awards	199		189		182
Total	$	6,815	$	7,027	$	5,803

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 RSU awards consisting of 1,858 RSUs in 2019, 2,700 RSUs in 2018 and 3,000 RSUs in 2017 to each of its incumbent 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 2019 and 2018, half of the RSUs vested on June 1 of each year and the remaining RSUs vested ratably on the last day of the third and fourth fiscal quarters of each year. The 2017 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 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, net of actual forfeitures recorded when they occur, and 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 $1,688,000 at year-end 2019, and will be recognized over a weighted average period of 1.3 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 $3,170,000 at year-end 2019, and will be recognized over a weighted average period of 1.7 years.

A summary of the activity of the Company's unvested RSUs in 2019 is as follows:



	Units (In thousands)		Weighted Average Grant- Date Fair Value
Unvested RSUs at December 29, 2018	156		$	68.57
Granted	75		$	86.50
Vested	(94	)	$	57.81
Forfeited	(2	)	$	65.02
Unvested RSUs at December 28, 2019	135		$	86.11

The weighted-average grant date fair value of RSUs granted was $86.50 in 2019, $98.12 in 2018, and $59.30 in 2017. The total fair value of shares vested was $5,452,000 in 2019, $11,932,000 in 2018, and $6,719,000 in 2017.

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 2019.

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 2019 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 29, 2018	299		$	20.86
Exercised	(225	)	$	19.75
Options Outstanding at December 28, 2019	74		$	24.28	2.3 years	$	6,002
Vested and Exercisable at December 28, 2019	74		$	24.28	2.3 years	$	6,002


(a)	The closing price per share on the last trading day prior to year-end 2019 was $105.76.

There were no stock option exercises in 2017. A summary of the Company's stock option exercises in 2019 and 2018 are as follows:



(In thousands)	December 28, 2019		December 29, 2018
Total Intrinsic Value of Options Exercised	$	16,796	$	515
Cash Received from Options Exercised	$	4,454	$	127

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 13,195 shares for 2019 (issued in 2020), 10,439 shares for 2018 (issued in 2019), and 13,156 shares for 2017 (issued in 2018) 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 $4,412,000 in 2019, $3,705,000 in 2018, and $3,327,000 in 2017. The increases in the Company's contributions to these benefit plans in 2019 and 2018 are primarily due to the acquisitions of SMH and Unaflex, respectively.

Pension and Other Post-Retirement Benefits Plans

Prior to its termination at year-end 2018, the Company sponsored a noncontributory defined benefit pension plan for eligible employees at one of its U.S. divisions and its corporate office (Retirement Plan). Funds for the Retirement Plan were contributed to a trustee to provide for current service and for any unfunded projected benefit obligation over a reasonable period. Certain of the Company’s non-U.S. subsidiaries also sponsor defined benefit pension plans covering certain employees at those subsidiaries. One of the non-U.S. pension plans also contributes funds to a trustee. 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. Prior to its termination at year-end 2018, the Company provided for a restoration plan (Restoration Plan) for certain executive officers which fully supplemented benefits lost 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.

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 reduction in AOCI and accrued pension liability in the accompanying consolidated balance sheet at year-end 2018.

In the fourth quarter of 2019, the Company settled its Retirement Plan obligation, which required adjustment based on the number of plan participants who elected to receive either a lump sum payment or an annuity, and the increased costs to purchase the annuity contracts due to changes in certain market conditions, including a decrease in long-term interest rates in 2019. As a result, the Company recognized a settlement loss of $5,887,000, which is included in other expense, net in the accompanying consolidated statement of income, and was calculated as the sum of the unrecognized actuarial loss and $3,839,000 of additional cash to be paid, less the accrued pension liability. Subsequent to year-end 2019, the Company settled its Restoration Plan obligation of $2,427,000 by paying a lump sum to its plan participants.

The Company does not plan to make any other material cash contributions to its other pension and post-retirement plans in 2020.

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 (a)						Non-U.S. Pension						Other Post-Retirement
(In thousands)	December 28, 2019			December 29, 2018			December 28, 2019			December 29, 2018			December 28, 2019			December 29, 2018
Change in Projected Benefit Obligation:
Projected benefit obligation at beginning of year	$	29,715		$	34,757		$	3,671		$	4,270		$	3,672		$	4,704
Service cost	—			699			205			173			4			213
Interest cost	1,134			1,193			121			126			149			172
Actuarial loss (gain)	4,039			(2,674		)	393			(368		)	144			(508		)
Benefits paid	(966		)	(1,589		)	(184		)	(394		)	(232		)	(157		)
Plan amendment	—			1,116			—			—			—			322
Effect of curtailment	—			(3,787		)	—			—			—			(1,075		)
Settlement payment	(33,922		)	—			—			—			—			—
Currency translation	—			—			(38		)	(136		)	5			1
Projected benefit obligation at end of year	$	—		$	29,715		$	4,168		$	3,671		$	3,742		$	3,672
Change in Plan Assets:
Fair value of plan assets at beginning of year	$	28,729		$	31,754		$	726		$	557		$	44		$	35
Actual return on plan assets	2,320			(1,436		)	58			38			4			2
Employer contributions	3,839			—			340			528			246			164
Benefits paid	(966		)	(1,589		)	(184		)	(394		)	(232		)	(157		)
Settlement payment	(33,922		)	—			—			—			—			—
Currency translation	—			—			33			(3		)	2			—
Fair value of plan assets at end of year	$	—		$	28,729		$	973		$	726		$	64		$	44
Unfunded Status	$	—		$	(986	)	$	(3,195	)	$	(2,945	)	$	(3,678	)	$	(3,628	)
Accumulated Benefit Obligation at End of Year	$	—		$	29,715		$	3,046		$	2,604		$	—		$	—

Amounts Included in the Balance Sheet:
Current liability	$	—		$	(986	)	$	(189	)	$	(58	)	$	(2,569	)	$	(144	)
Non-current liability	$	—		$	—		$	(3,006	)	$	(2,887	)	$	(1,109	)	$	(3,484	)

Amounts Included in Accumulated Other Comprehensive Items Before Tax:
Unrecognized net actuarial loss	$	—		$	(3,205	)	$	(1,034	)	$	(674	)	$	(144	)	$	(69	)
Unrecognized prior service cost	—			—			(38		)	(45		)	—			—
	$	—		$	(3,205	)	$	(1,072	)	$	(719	)	$	(144	)	$	(69	)

(a)

The actuarial loss of $4,039,000 in 2019 resulted from the settlement of the Retirement Plan obligation in which participants' lump sum elections were lower than assumed, and the cost of the liabilities for the participants' annuity contracts increased primarily due to a decline in long-term interest rates in 2019. The actuarial gain of $2,674,000 in 2018 related to an increase in the Retirement Plan's weighted average discount rate and the impact of an updated mortality table, net of a decrease due to a change in the demographic mix.



	U.S. Pension						Non-U.S. Pension						Other Post-Retirement
(In thousands)	December 28, 2019			December 29, 2018			December 28, 2019			December 29, 2018			December 28, 2019			December 29, 2018
Changes in Amounts Included in Accumulated Other Comprehensive Items Before Tax:
Net actuarial (loss) gain	$	(2,714	)	$	(48	)	$	(402	)	$	368		$	(88	)	$	508
Amortization of net actuarial loss	32			541			25			63			13			136
Amortization of prior service cost	—			—			6			6			—			86
Plan amendment	—			(1,116		)	—			—			—			(322		)
Effect of curtailment	—			3,787			—			—			—			1,075
Settlement loss	5,887			—			—			—			—			—
Curtailment loss	—			1,116			—			—			—			309
Currency translation	—			—			18			(19		)	—			2
	$	3,205		$	4,280		$	(353	)	$	418		$	(75	)	$	1,794

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 28, 2019		December 29, 2018		December 28, 2019		December 29, 2018		December 28, 2019		December 29, 2018
Discount rate	—	%	4.10	%	2.59	%	3.56	%	3.82	%	4.32	%
Rate of compensation increase	—		—	%	3.40	%	3.24	%	5.57	%	5.57	%

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 28, 2019		December 29, 2018		December 28, 2019		December 29, 2018
Projected benefit obligation	$	—	$	29,715	$	4,168	$	3,671
Fair value of plan assets	$	—	$	28,729	$	973	$	726

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 28, 2019		December 29, 2018		December 28, 2019		December 29, 2018
Accumulated benefit obligation	$	—	$	29,715	$	2,408	$	2,307
Fair value of plan assets	$	—	$	28,729	$	—	$	—

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 28, 2019			December 29, 2018			December 30, 2017			December 28, 2019			December 29, 2018			December 30, 2017			December 28, 2019			December 29, 2018			December 30, 2017
Service cost	$	—		$	699		$	685		$	205		$	173		$	148		$	4		$	213		$	175
Interest cost	1,134			1,193			1,231			121			126			114			149			172			170
Expected return on plan assets	(995		)	(1,286		)	(1,326		)	(66		)	(42		)	(25		)	(4		)	(3		)	(2		)
Amortization of net actuarial loss	32			541			442			25			63			38			13			136			83
Amortization of prior service cost	—			—			53			6			6			6			—			86			88
Settlement loss	5,887			—			—			—			—			—			57			—			—
Curtailment loss	—			1,116			—			—			—			—			—			309			—
Net Periodic Benefit Cost	$	6,058		$	2,263		$	1,085		$	291		$	326		$	281		$	219		$	913		$	514

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 28, 2019		December 29, 2018		December 30, 2017		December 28, 2019		December 29, 2018		December 30, 2017		December 28, 2019		December 29, 2018		December 30, 2017
Discount Rate	4.10	%	3.51	%	4.03	%	2.58	%	3.49	%	3.45	%	4.33	%	3.58	%	4.10	%
Expected Long-Term Return on Plan Assets	4.10	%	4.50	%	5.00	%	9.22	%	7.43	%	7.53	%	9.22	%	7.43	%	7.53	%
Rate of Compensation Increase	—	%	3.00	%	3.00	%	2.81	%	3.97	%	3.65	%	5.57	%	3.05	%	3.08	%

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 2019 and year-end 2018 by asset category are as follows:



	December 28, 2019 Fair Value Measurement
(In thousands)	Quoted Prices in Active Markets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Non-U.S. Pension Plan Assets:
Mutual funds	$	973	$	—	$	—	$	973
Total assets at fair value							$	973



	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:
Fixed income funds	$	12,852	$	—	$	—	$	12,852
Equity 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

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 2019 or 2018.

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.

Estimated Future Benefit Payments

Expected benefit payments are based on the same assumptions used to measure the Company's benefit obligation at year-end 2019. 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)	Non-U.S. Pension		Other Post-retirement
2020	$	189	$	2,569
2021	180		132
2022	143		124
2023	290		121
2024	393		108
2025-2029	2,156		444