KADANT INC 10-Q

Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations When we use the terms “we,” “us,” “our,” and the “Company,” we mean Kadant Inc., a Delaware corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates. This Quarterly Report on Form 10-Q and the documents we incorporate by reference in this report include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements 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 Risk Factors included in Part II, Item 1A , of this report and Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended January 1, 2022, as filed with the Securities and Exchange Commission (SEC) and as may be further amended and/or restated in subsequent filings with the SEC. Overview Company Background We are a global supplier of technologies and engineered systems that drive Sustainable Industrial Processing. Our products and services play an integral role in enhancing efficiency, optimizing energy utilization, and maximizing productivity in process industries while helping our customers advance their sustainability initiatives with products that reduce waste or generate more yield with fewer inputs, particularly fiber, energy, and water. Producing more while consuming less is a core aspect of Sustainable Industrial Processing and a major element of the strategic focus of our operating segments. Our financial results are reported in three reportable operating segments: Flow Control, Industrial Processing, and Material Handling. The Flow Control segment consists of our fluid-handling and doctoring, cleaning, & filtration product lines; the Industrial Processing segment consists of our wood processing and stock-preparation product lines; and the Material Handling segment consists of our conveying and vibratory, baling, and fiber-based product lines. A description of each segment is as follows: • Flow Control – Custom-engineered products, systems, and technologies that control the flow of fluids used in industrial and commercial applications to keep critical processes running efficiently in the packaging, tissue, food, metals, and other industrial sectors. Our primary products include rotary sealing devices, steam systems, expansion joints, doctor systems, roll and fabric cleaning devices, and filtration and fiber recovery systems. • Industrial Processing – Equipment, machinery, and technologies used to recycle paper and paperboard and process timber for use in the packaging, tissue, wood products, and alternative fuel industries, among others. Our primary products include stock-preparation systems and recycling equipment, chemical pulping equipment, debarkers, stranders, chippers, and logging machinery. In addition, we provide industrial automation and digitization solutions to process industries. • Material Handling – Products and engineered systems used to handle bulk and discrete materials for secondary processing or transport in the aggregates, mining, food, and waste management industries, among others. Our primary products include conveying and vibratory equipment and balers. In addition, we manufacture and sell biodegradable, absorbent granules used as carriers in agricultural applications and for oil and grease absorption. Industry and Business Overview We had record consolidated bookings of $266.1 million in the first quarter of 2022, including bookings of $22.4 million attributable to our acquisitions. See Acquisitions below for further details. Our first quarter of 2022 bookings include record orders for parts and consumables products and continued strong demand for our capital equipment. We ended the first quarter of 2022 with record consolidated backlog of $348.3 million. An overview of our business by segment is as follows: 20 Table of Contents KADANT INC. • Flow Control – Our Flow Control segment had record bookings in the first quarter of 2022, increasing 32% compared to first quarter of 2021, including a 17% increase from our acquisition of The Clouth Group of Companies (Clouth). Orders for both parts and consumables products and capital equipment at our existing Flow Control businesses continue to be strong due to growth in the industries we serve. • Industrial Processing – Our Industrial Processing segment had record bookings for parts and consumables products during the first quarter of 2022 and continued strong demand for capital equipment. Orders for both capital equipment and parts and consumables products at our wood processing business were fueled by an ongoing robust U.S. housing market and high demand for lumber, oriented strand board and plywood, which continues to result in high parts consumption and drives new capital equipment investment by our customers. Maintenance requirements at many of our wood processing customers and high mill operating rates have augmented demand for our parts products. Capital bookings at our stock-preparation business were strong, especially at our operations in China, but lower compared to the record bookings levels in the second and third quarters of 2021. Orders for parts and consumables products for our stock-preparation business increased over the first quarter of 2021 and sequentially to a near record quarter due to a continued improvement in market conditions and further expansion into packaging grades. • Material Handling – Our Material Handling segment had record bookings in the first quarter of 2022, increasing 42% compared to the first quarter of 2021, including a 23% increase from our acquisition of East Chicago Machine Tool Corporation (Balemaster). Capital bookings at our conveying and vibratory business were more than double the bookings in the first quarter of 2021 due to several large orders. Bookings for baling products at our European operations continue to be bolstered by improved business conditions, including the recovery of recycled commodity prices. Many of our operations continue to be impacted by labor availability and supply chain constraints, the latter of which resulted in inflationary pressure on material costs, longer lead times, and increased freight costs. Our businesses are alleviating supply chain constraints through various measures, including advance purchases of raw materials to prevent potential manufacturing disruptions and mitigating increased material and freight costs through price adjustments, when possible. We believe that the fundamentals of our business will remain positive, particularly given our high backlog levels, continued strong bookings, and ongoing strength in the markets we serve. Despite this optimism, we expect our operating environment to continue to be challenging as a result of the factors impacting our business discussed above and the uncertainties and risks surrounding the COVID-19 pandemic, including China's zero-COVID policy. For more information related to these challenges, and other factors impacting our business, including recent geopolitical tensions, please see Risk Factors, included in Part II, Item 1A , of this report and Part I, Item 1A, included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2022. International Sales More than half of our sales are to customers outside the United States, mainly in Europe, Asia, and Canada. As a result, our financial performance can be materially affected by currency exchange rate fluctuations between the U.S. dollar and foreign currencies. To mitigate the impact of foreign currency fluctuations, we generally seek to charge our customers in the same currency in which our operating costs are incurred. Additionally, we may enter into forward currency exchange contracts to hedge certain firm purchase and sale commitments denominated in currencies other than our subsidiaries' functional currencies. We currently do not use derivative instruments to hedge our exposure to exchange rate fluctuations created by the translation into the U.S. dollar of our foreign subsidiaries' results that are in functional currencies other than the U.S. dollar. Global Trade The United States imposes tariffs on certain imports from China, which has and will continue to increase the cost of some of the equipment that we import. Although we have worked to mitigate the impact of tariffs through pricing and sourcing strategies, we cannot be sure these strategies will effectively mitigate the impact of these costs. For more information on risks associated with our global operations, including tariffs, please see Part I, Item 1A, Risk Factors, included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2022. Acquisitions We expect that a significant driver of our growth over the next several years will be the acquisition of businesses and technologies that complement or augment our existing products and services or may involve entry into a new process industry. We continue to pursue acquisition opportunities. 21 Table of Contents KADANT INC. In the third quarter of 2021, we acquired Clouth for $92.9 million, net of cash acquired plus debt assumed. Clouth, which is included in our Flow Control segment, is a leading manufacturer of doctor blades and related equipment used in the production of paper, packaging, and tissue. We expect several synergies in connection with this acquisition, including deepening our presence in the growing ceramic blade market and expansion of product sales at our existing businesses by leveraging Clouth's complementary global geographic footprint. Clouth has three manufacturing facilities in Germany and one in Poland. In the third quarter of 2021, we also acquired Balemaster for $53.5 million, net of cash acquired. Balemaster, which is included in our Material Handling segment, is a leading U.S. manufacturer of horizontal balers and related equipment used primarily for recycling packaging waste at corrugated box plants and large retail and distribution centers. We expect several synergies in connection with this acquisition, including expanding our presence in the secondary material processing sector and creating new opportunities for leveraging our high-performance balers produced in Europe. Results of Operations First Quarter 2022 Compared With First Quarter 2021 Revenue The following table presents the change in revenue by segment between the first quarters of 2022 and 2021, and those changes excluding the effect of foreign currency translation and acquisitions which we refer to as change in organic revenue. The presentation of the change in organic revenue is a non-GAAP measure. We believe this non-GAAP measure helps investors gain an understanding of our underlying operations consistent with how management measures and forecasts its performance, especially when comparing such results to prior periods. This non-GAAP measure should not be considered superior to or a substitute for the corresponding U.S. generally accepted accounting principles (GAAP) measure. Revenue by segment in the first quarters of 2022 and 2021 was as follows: (Non-GAAP) Three Months Ended Currency Translation Acquisitions Change in Organic Revenue (In thousands, except percentages) April 2, 2022 April 3, 2021 Total Increase % Change Increase % Change Flow Control $ 85,826 $ 63,754 $ 22,072 35 % $ (1,428) $ 12,273 $ 11,227 18 % Industrial Processing 93,085 69,154 23,931 35 % (1,389) 134 25,186 36 % Material Handling 47,569 39,555 8,014 20 % (1,063) 7,593 1,484 4 % Consolidated Revenue $ 226,480 $ 172,463 $ 54,017 31 % $ (3,880) $ 20,000 $ 37,897 22 % Consolidated revenue increased 31% in the first quarter of 2022, while consolidated organic revenue increased 22%, due to higher demand for parts and consumables products and capital equipment principally at our Industrial Processing and Flow Control segments as described below. Revenue at our Flow Control segment increased 35% in the first quarter of 2022, while organic revenue increased 18%. Organic revenue increased due to higher demand for our capital equipment led by our European business and for parts and consumables products at substantially all locations resulting from improved market conditions and pent-up demand. Revenue at our Industrial Processing segment increased 35% in the first quarter of 2022 due to higher demand for both capital equipment and parts and consumables products at our wood processing business. Demand for our wood processing business products was driven by high mill activity resulting in increased capital investment and higher parts consumption. Also contributing to the revenue increase was increased demand for capital equipment at our stock-preparation business at both our Chinese and European operations, offset in part by lower capital equipment revenue at our North American business due to the timing of orders. Revenue for parts and consumables products at our North American stock-preparation business also increased due to improved market conditions and focused sales initiatives. Revenue at our Material Handling segment increased 20% in the first quarter of 2022, while organic revenue increased 4% due to higher demand for capital equipment at our European baling operation due to improved business conditions. Revenue from our parts and consumables products also increased at our conveying and vibratory business due to strong demand in the aggregate and food and packaging industries. 22 Table of Contents KADANT INC. Gross Profit Margin Gross profit margin by segment in the first quarters of 2022 and 2021 was as follows: Three Months Ended Basis Point Change April 2, 2022 April 3, 2021 Flow Control 52.4% 53.3% (90) bps Industrial Processing 38.6% 40.5% (190) bps Material Handling 36.4% 34.7% 170 bps Consolidated Gross Profit Margin 43.4% 43.9% (50) bps Consolidated gross profit margin decreased to 43.4% in the first quarter of 2022 compared with 43.9% in the first quarter of 2021 due to a lower proportion of higher-margin parts and consumables revenue partially offset by a higher overall gross margin profile from our acquisitions. Within our operating segments, gross profit margin: • Decreased to 52.4% from 53.3% at our Flow Control segment principally due to a lower gross profit margin profile from our recently acquired Clouth business. • Decreased to 38.6% from 40.5% at our Industrial Processing segment due to the impact of lower-margin capital equipment revenue at our Chinese stock-preparation business and the inclusion of $0.3 million for benefits received from government employee retention assistance programs, which increased gross profit margin in the 2021 period by 0.4 percentage points. • Increased to 36.4% from 34.7% at our Material Handling segment primarily due to a higher gross profit margin profile from our recently acquired Balemaster business. Selling, General, and Administrative Expenses Selling, general, and administrative (SG&A) expenses by segment in the first quarters of 2022 and 2021 were as follows: Three Months Ended (In thousands, except percentages) April 2, 2022 % of Revenue April 3, 2021 % of Revenue Increase % Change Flow Control $ 22,084 26% $ 17,505 28% $ 4,579 26% Industrial Processing 16,369 18% 15,689 23% 680 4% Material Handling 11,004 23% 9,060 23% 1,944 21% Corporate 9,711 N/A 7,177 N/A 2,534 35% Consolidated SG&A Expenses $ 59,168 26% $ 49,431 29% $ 9,737 20% Consolidated SG&A expenses as a percentage of revenue decreased to 26% in the first quarter of 2022 compared with 29% in the first quarter of 2021 primarily due to higher revenue. Consolidated SG&A expenses increased $9.7 million du e to the inclusion of $6.1 million of SG&A expenses from acquisitions, increased compensation expense associated with existing and new personnel, and increased selling-related costs associated with improved business conditions. These increases were offset by a $0.9 million favorable effect of foreign currency translation. Within our operating segments, SG&A expenses: • Increased $4.6 million at our Flow Control segment principally due to the inclusion of $4.3 million of SG&A expenses from Clouth and increased selling-related costs. • Increased $0.7 million at our Industrial Processing segment principally due to a $0.6 million reversal of an indemnification asset related to the release of tax reserves associated with uncertain tax positions. • Increased $1.9 million at our Material Handling segment principally due to the inclusion of $1.7 million of SG&A expenses from Balemaster, $0.4 million of incremental acquisition-related costs, and increased selling-related costs. • Increased $2.5 million at Corporate primarily due to increased incentive compensation as a result of our improved financial performance. 23 Table of Contents KADANT INC. Gain on Sale and Other Expense, Net We entered into several agreements with the local government in China to sell the existing manufacturing building and land use rights at one of our subsidiaries in China for $25.2 million. The agreements became effective in the first quarter of 2022 after a 31% down payment was received, including 25% in 2021 and 6% in the first quarter of 2022, and a land use right in a new location was secured. As a result, we recognized a gain on the sale of these assets of $20.2 million, or $15.1 million, net of deferred taxes of $5.1 million, in the first quarter of 2022. A $16.1 million receivable was recognized for the present value of the remaining amount of the sale proceeds, which is due the earlier of when the government sells the property or within two years from the effective date of the agreements. Our subsidiary, which is part of our Industrial Processing segment, will continue to occupy its current facility until construction of its new facility is complete. In the first quarter of 2022, we recognized an impairment charge of $0.2 million related to the write-down of certain fixed assets that will not be moved to the new facility. Interest Expense Interest expense increased to $1.2 million in the first quarter of 2022 from $1.1 million in the first quarter of 2021. Provision for Income Taxes Our provision for income taxes increased to $13.4 million in the first quarter of 2022 from $5.6 million in the first quarter of 2021. The effective tax rate of 24% in the first quarter of 2022 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, nondeductible expenses, state taxes, and tax expense associated with the Global Intangible Low-Taxed Income (GILTI) provisions. These increases in tax expense were offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements and the reversal of tax reserves associated with uncertain tax positions. The effective tax rate of 25% in the first quarter of 2021 was higher than our statutory rate of 21% primarily due to nondeductible expenses, the distribution of our worldwide earnings, state taxes, and tax expense associated with GILTI provisions. These increases in tax expense were offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements. Net Income Net income increased to $41.4 million in the first quarter of 2022 from $16.8 million in the first quarter of 2021 primarily due to a $32.5 million increase in operating income, offset in part by a $7.8 million increase in provision for income taxes (see discussions above for further details). Non-GAAP Key Performance Indicators In addition to the financial measures prepared in accordance with GAAP, we use certain non-GAAP financial measures, including organic revenue (defined as revenue excluding the effect of foreign currency translation and acquisitions), adjusted operating income, earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted EBITDA, adjusted EBITDA margin (defined as adjusted EBITDA divided by revenue), and free cash flow (defined as cash flow provided by operations less capital expenditures). We use organic revenue in order to understand our trends and to forecast and evaluate our financial performance and compare revenue to prior periods (see discussion in Revenue above). Adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin exclude impairment costs, acquisition costs, amortization expense related to acquired profit in inventory and backlog, and certain gains or losses. These items are excluded as they are not indicative of our core operating results and are not comparable to other periods, which have differing levels of incremental costs, expenditures or income, or none at all. Additionally, we use free cash flow in order to provide insight on our ability to generate cash for acquisitions and debt repayments, as well as for other investing and financing activities. We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our core business, operating results, or future outlook. We believe that the inclusion of such measures helps investors gain an understanding of our underlying operating performance and future prospects, consistent with how management measures and forecasts our performance, especially when comparing such results to previous periods or forecasts and to the performance of our competitors. Such measures are also used by us in our financial and operating decision-making and for compensation purposes. We also believe this information is responsive to investors' requests and gives them an additional measure of our performance. Our non-GAAP financial measures are not meant to be considered superior to or a substitute for the results of operations or cash flow prepared in accordance with GAAP. In addition, our non-GAAP financial measures have limitations 24 Table of Contents KADANT INC. associated with their use as compared to the most directly comparable GAAP measures, in that they may be different from, and therefore not comparable to, similar measures used by other companies. A reconciliation of adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin is as follows: Three Months Ended (In thousands, except percentages) April 2, 2022 April 3, 2021 Net Income Attributable to Kadant $ 41,192 $ 16,561 Net Income Attributable to Noncontrolling Interest 249 235 Provision for Income Taxes 13,378 5,561 Interest Expense, Net 1,132 1,046 Other Expense, Net 22 24 Operating Income 55,973 23,427 Gain on Sale of Assets (a) (20,190) — Acquisition Costs 76 1,298 Indemnification Asset Reversal (b) 575 — Impairment Costs 182 — Acquired Backlog Amortization (c) 703 60 Acquired Profit in Inventory Amortization (d) (218) — Adjusted Operating Income (non-GAAP measure) 37,101 24,785 Depreciation and Amortization 8,742 7,626 Adjusted EBITDA (non-GAAP measure) $ 45,843 $ 32,411 Adjusted EBITDA Margin (non-GAAP measure) 20.2% 18.8% (a) Represents a gain on the sale of a facility in China in our Industrial Processing segment pursuant to a relocation plan. (b) Represents an indemnification asset reversal related to the release of tax reserves associated with uncertain tax positions. (c) Represents intangible amortization expense associated with acquired backlog. (d) Represents income within cost of revenue associated with amortization of acquired profit in inventory. A reconciliation of free cash flow from cash flow provided by operating activities is as follows: Three Months Ended (In thousands) April 2, 2022 April 3, 2021 Cash Provided by Operating Activities $ 23,768 $ 19,092 Less: Capital Expenditures (2,868) (2,259) Free Cash Flow (non-GAAP measure) $ 20,900 $ 16,833 Liquidity and Capital Resources Consolidated working capital was $174.7 million at April 2, 2022, compared with $162.4 million at January 1, 2022. Cash and cash equivalents were $86.2 million at April 2, 2022, compared with $91.2 million at January 1, 2022, which included cash and cash equivalents held by our foreign subsidiaries of $81.9 million at April 2, 2022 and $83.8 million at January 1, 2022. 25 Table of Contents KADANT INC. Cash Flows Cash flow information in the first three months of 2022 and 2021 was as follows: Three Months Ended (In thousands) April 2, 2022 April 3, 2021 Net Cash Provided by Operating Activities $ 23,768 $ 19,092 Net Cash Used in Investing Activities (1,291) (2,352) Net Cash Used in Financing Activities (27,003) (15,582) Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash (664) (1,090) (Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash $ (5,190) $ 68 Operating Activities Cash provided by operating activities increased to $23.8 million in the first quarter of 2022 from $19.1 million in the first quarter of 2021. Our operating cash flows are primarily generated from cash received from customers, offset by cash payments for items such as inventory, employee compensation, operating leases, income taxes and interest payments on outstanding debt obligations. Cash provided by income in the first quarter of 2022 was offset in part by investments in working capital. Increases in accounts receivable and inventory used cash of $18.5 million primarily to support our revenue growth. An increase in accounts payable related to raw material purchases and customer deposits provided cash of $12.2 million. Changes in other liabilities used cash of $10.1 million primarily related to incentive compensation payments in the first quarter of 2022. Cash provided by income in the first quarter of 2021 was offset in part by investments in working capital. Increases in accounts receivable and inventory used cash of $20.6 million primarily to support increased order activity. An increase in accounts payable related to raw material purchases and customer deposits provided cash of $16.5 million in the first quarter of 2021. Investing Activities Cash used in investing activities was $1.3 million in the first quarter of 2022, compared with $2.4 million in the first quarter of 2021. Capital expenditures of $2.9 million in the first quarter of 2022 were partially offset by proceeds received from the sale of assets of $1.6 million, compared with capital expenditures of $2.3 million in the first quarter of 2021. Financing Activities Cash used in financing activities was $27.0 million in the first quarter of 2022, compared with $15.6 million in the first quarter of 2021. Repayment of short- and long-term obligations was $35.1 million in the first quarter of 2022, partially offset by borrowings under our revolving credit facility of $15.5 million. Repayment of short- and long-term obligations was $19.6 million in the first quarter of 2021, partially offset by borrowings under our revolving credit facility of $10.1 million. In addition, taxes paid related to the vesting of equity awards was $4.6 million in the first quarter of 2022 compared to $3.4 million in the first quarter of 2021. Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash The exchange rate effect on cash, cash equivalents, and restricted cash represents the impact of translation of cash balances at our foreign subsidiaries. The $0.7 million reduction in cash, cash equivalents, and restricted cash in the first quarter of 2022 was primarily attributable to the strengthening of the U.S. dollar against the euro. Borrowing Capacity and Debt Obligations We entered into an unsecured multi-currency revolving credit facility, dated as of March 1, 2017 (as amended and restated to date, the Credit Agreement). As of April 2, 2022, the outstanding balance under the Credit Agreement was $229.5 million, which included $78.5 million of euro-denominated borrowings. As of April 2, 2022, we have a borrowing capacity available under the Credit Agreement of $170 million in addition to a $150 million uncommitted, unsecured incremental borrowing facility. Under our debt agreements, our leverage ratio must be less than 3.75, or, if we elect, for the quarter during which a material acquisition occurs and for the three fiscal quarters thereafter, must be less than 4.00. As of April 2, 2022, our leverage ratio was 1.16 and we were in compliance with our debt covenants. We expect to renew our Credit Agreement prior to its maturity date of December 14, 2023. See Note 5 , Short- and Long-Term Obligations, in the accompanying condensed consolidated financial statements for additional information regarding our debt obligations. 26 Table of Contents KADANT INC. Additional Liquidity and Capital Resources On May 20, 2021, our board of directors approved the repurchase of up to $20 million of our equity securities during the period from May 20, 2021 to May 20, 2022. We have not repurchased any shares of our common stock under this authorization. We paid cash dividends of $2.9 million in the first quarter of 2022. On March 9, 2022, we declared a quarterly cash dividend of $0.26 per share totaling $3.0 million that was paid on May 11, 2022. Future declarations of dividends are subject to our board of directors' approval and may be adjusted as business needs or market conditions change. The declaration of cash dividends is subject to our compliance with the covenant in our revolving credit facility related to our consolidated leverage ratio. We plan to make expenditures of approximately $15 million during the remainder of 2022 for property, plant, and equipment. In addition, one of our Chinese subsidiaries will be building a new manufacturing facility and relocating over the next two years. Capital expenditures for the new facility are estimated to be approximately $20 million, of which an estimated $12 million will be incurred in 2022. The cost of the new facility will be offset by the proceeds received from the sale of our existing facility. See Note 2 , Gain on Sale and Other Expense, Net, in the accompanying condensed consolidated financial statements for additional information regarding the relocation of our Chinese manufacturing facility. As of April 2, 2022, we had approximately $218.7 million of total unremitted foreign earnings. It is our intent to indefinitely reinvest $165.7 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments, if any. In the first quarter of 2022, we recorded withholding taxes on the earnings in certain foreign subsidiaries that we plan to repatriate in the foreseeable future. The foreign withholding taxes that would be required if we were to remit the indefinitely-reinvested foreign earnings to the United States would be approximately $3.2 million. In the future, our liquidity position will be affected by cash flows from operations, cash paid to service our debt obligations, acquisitions, capital projects, dividends, and stock repurchases. We believe that existing cash and cash equivalents, along with cash generated from operations, our existing borrowing capacity and continued access to debt markets, will be sufficient to meet the capital requirements of our operations for the next 12 months and foreseeable future. Contractual Obligations and Other Commercial Commitments There have been no material changes to our contractual obligations and other commercial commitments during the first quarter of 2022 compared with those disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended January 1, 2022. Application of Critical Accounting Policies and Estimates Management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities, and the reported amounts of revenue and expenses during the reporting period. Our critical accounting policies are defined as those that entail significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. Management evaluates its estimates on an ongoing basis based on historical experience, current economic and market conditions, and other assumptions management believes are reasonable. We believe that our most critical accounting policies which are significant to our consolidated financial statements, 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 Estimates" in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended January 1, 2022. There have been no material changes to these critical accounting policies since the end of fiscal 2021 that warrant disclosure. Recent Accounting Pronouncements See Note 1 , under the headings Recent Accounting Pronouncements Not Yet Adopted , in the accompanying condensed consolidated financial statements for details. 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 as disclosed in Part II, Item 7A, of our Annual Report on Form 10-K for the fiscal year ended January 1, 2022. 27 Table of Contents KADANT INC.