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 I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the Annual Report) 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 business. 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 bookings of $274.5 million in the first quarter of 2023, surpassing the previous record set in the first quarter of 2022 despite inflationary pressures and a $9.2 million unfavorable effect of foreign currency translation. Strong contributions from our Material Handling and Flow Control segments led to record bookings for our parts and consumable products in the first quarter of 2023 and the second highest quarterly bookings for our capital equipment. Our backlog increased 14% sequentially to $393.0 million at the end of the first quarter of 2023, providing a robust start to 2023. An overview of our business by segment is as follows: 21 Table of Contents KADANT INC. • Flow Control – Our Flow Control segment bookings set a new quarterly record, increasing 33% sequentially and 4% compared to the prior record set in the first quarter of 2022. We experienced strong demand in Europe due to the strength in the end markets we serve as customers seek to optimize energy utilization. The first quarter of the year is historically the strongest as customers prepare for annual spring maintenance shutdowns. As a result, we expect subsequent quarterly bookings to moderate as the year progresses, but expect our end markets to remain healthy. • Industrial Processing – Our Industrial Processing segment bookings decreased 9% compared to a strong first quarter of 2022. Although bookings were softer in the first quarter of 2023, demand for both parts and capital equipment remained good. Demand for our wood processing capital equipment returned to more typical levels after the record-setting pace experienced over the last two years, which was fueled by a robust U.S. housing market and high demand for lumber, oriented strand board, and plywood. We expect activity in this product line to continue to moderate as the year progresses. Demand for our stock-preparation products remains steady and we expect this to continue throughout the year. However, as we look forward, there is uncertainty as to how governmental efforts to control inflation may impact this segment's end markets and we expect comparatively lower bookings given the high level of bookings we experienced in the first half of 2022. • Material Handling – Our Material Handling segment bookings set a new record, increasing 24% compared to the prior record set in the first quarter of 2022, led by strong demand for our vibratory and conveying equipment. Our first quarter bookings included a capital equipment order valued at approximately $12 million for the longest conveying line in North America. Growth trends in recycling led to strong demand in our baling business in both the U.S. and Europe. We expect our quarterly bookings for the remainder of 2023 to be strong, but lower than the first quarter record bookings . Our global operations have been and continue to be impacted by complex market conditions fueled by inflationary pressures, geopolitical tensions, labor availability and lingering global supply chain constraints. Although supply chain constraints have resulted in inflationary pressure on material costs, longer lead times, and increased freight costs, these constraints have recently eased. We expect our operating environment to continue to be challenging as central banks work to address inflationary pressures, which creates more uncertainty for the latter half of 2023. We believe that the fundamentals of our business remain strong, particularly given our high backlog levels, solid global operations team, and ongoing strength in the markets we serve. For more information related to these challenges, and other factors impacting our business, please see Risk Factors included in Part I, Item 1A, of our Annual Report and subsequent filings with the SEC. International Sales Slightly 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 transaction 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 Risk Factors, included in Part I, Item 1A, of our Annual Report and subsequent filings with the SEC. Acquisitions We expect that one 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. In recent years, we have acquired several businesses and continue to pursue acquisition opportunities. 22 Table of Contents KADANT INC. Results of Operations First Quarter 2023 Compared With First Quarter 2022 Revenue The following table presents the change in revenue by segment between the first quarters of 2023 and 2022, and those changes excluding the effect of foreign currency translation and acquisitions which we refer to as change in organic revenue. Organic revenue excludes the effect of acquisitions for the four quarterly reporting periods following the date of the acquisition. 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 2023 and 2022 is as follows: (Non-GAAP) Three Months Ended Increase (Decrease) Currency Translation Change in Organic Revenue (In thousands, except percentages) April 1, 2023 April 2, 2022 % Change Increase (Decrease) % Change Flow Control $ 89,521 $ 85,826 $ 3,695 4 % $ (2,555) $ 6,250 7 % Industrial Processing 83,542 93,085 (9,543) (10) % (3,823) (5,720) (6) % Material Handling 56,695 47,569 9,126 19 % (1,014) 10,140 21 % Consolidated Revenue $ 229,758 $ 226,480 $ 3,278 1 % $ (7,392) $ 10,670 5 % Consolidated revenue increased 1% in the first quarter of 2023, including a 4% decrease from the unfavorable effect of foreign currency translation. Organic revenue increased 5% due to higher demand for parts and consumables products across all segments and capital equipment at our Material Handling segment, partially offset by a decrease in demand for capital equipment at our Industrial Processing segment as described below. Revenue at our Flow Control segment increased 4% in the first quarter of 2023, while organic revenue increased 7%. The increase in organic revenue was primarily due to higher demand for parts and consumables driven by strength in the underlying packaging industry, especially in North America, and demand from our customers, especially in Europe, seeking to address high energy prices with our products that optimize energy utilization. Revenue at our Industrial Processing segment decreased 10% in the first quarter of 2023, while organic revenue decreased 6%. Organic revenue decreased principally due to softening demand for capital equipment at our wood processing businesses, primarily in North America and, to a lesser extent, at our stock-preparation businesses in China, as the pace of capacity expansion has moderated and new equipment is brought online and mills focus on installing and optimizing capital equipment purchased in prior periods. These decreases were partially offset by an increase in demand for parts and consumables products at our stock-preparation business due to maintenance requirements at many of our customers. Revenue at our Material Handling segment increased 19% in the first quarter of 2023, while organic revenue increased 21%, due to higher demand across all industries for capital equipment and, to a lesser extent, parts and consumables products at our vibratory and conveying business in North America. Also contributing to the organic revenue increase was higher demand for our baling products driven by greater market and government-backed policy demand for recycling. Gross Profit Margin Gross profit margin by segment in the first quarters of 2023 and 2022 is as follows: Three Months Ended Basis Point Change April 1, 2023 April 2, 2022 Flow Control 53.3% 52.4% 90 bps Industrial Processing 40.6% 38.6% 200 bps Material Handling 36.1% 36.4% (30) bps Consolidated 44.4% 43.4% 100 bps 23 Table of Contents KADANT INC. Consolidated gross profit margin increased to 44.4% in the first quarter of 2023 compared with 43.4%`in the first quarter of 2022 due to higher margins achieved on the mix of capital projects, especially at our Industrial Processing segment. Also contributing to the improved gross profit margin was an increase in the percentage of higher-margin parts and consumables revenue, which increased to 66% compared to 65% in the prior year period. Within our operating segments, gross profit margin: • Increased to 53.3% at our Flow Control segment from 52.4% in the 2022 period, due to higher margins achieved on our capital equipment revenue, and to a lesser extent, a higher percentage of parts and consumables product revenue compared to the prior year period. • Increased to 40.6% from 38.6% in the 2022 period at our Industrial Processing segment due to an increase in the proportion of higher-margin parts and consumables revenue and higher margins achieved on the mix of capital projects. • Decreased to 36.1% at our Material Handling segment from 36.4% in the 2022 period primarily due to a lower percentage of higher-margin parts and consumables revenue compared to the prior year period. Selling, General, and Administrative Expenses Selling, general, and administrative (SG&A) expenses by segment in the first quarters of 2023 and 2022 are as follows: Three Months Ended (In thousands, except percentages) April 1, 2023 % of Revenue April 2, 2022 % of Revenue Increase (Decrease) % Change Flow Control $ 22,217 25 % $ 22,084 26 % $ 133 1 % Industrial Processing 16,298 20 % 16,369 18 % (71) — % Material Handling 10,719 19 % 11,004 23 % (285) (3) % Corporate 9,328 N/A 9,711 N/A (383) (4) % Consolidated $ 58,562 25 % $ 59,168 26 % $ (606) (1) % Consolidated SG&A expenses as a percentage of revenue decreased to 25% in the first quarter of 2023 compared with 26% in the first quarter of 2022 principally due to the increase in revenue. Consolidated SG&A expenses were lower in the first quarter of 2023 due to the inclusion of a $1.8 million favorable effect of foreign currency translation. In the first quarter of 2022, consolidated SG&A expenses included $0.8 million in acquisition-related costs and a $0.6 indemnification asset reversal related to the release of tax reserves. Excluding these items in both periods, consolidated SG&A expenses increased $2.6 million, or 4%, due to increased compensation expense and travel-related costs. Within our operating segments, SG&A expenses: • Increased $0.1 million at our Flow Control segment principally due to increased compensation expense and travel costs. These increases were partially offset by a $0.8 million favorable effect of foreign currency translation and a decrease in bad debt expense. • Decreased $0.1 million at our Industrial Processing segment principally due to a $0.8 million favorable effect of foreign currency translation and the inclusion of an indemnification asset reversal related to the release of tax reserves of $0.6 million in 2022. These decreases were offset in part by in creased compensation expense and travel costs. • Decreased $0.3 million at our Material Handling segment principally due a $0.2 million favorable effect of foreign currency translation and the inclusion of $0.7 million in acquisition-related costs in 2022. These decreases were largely offset by increased compensation expense associated with existing and new personnel. • Decreased $0.4 million at Corporate primarily due to a decrease in incentive compensation. Gain on Sale and Other Costs, Net Gain on sale and other costs, net recognized during the first quarter of 2022 was $20.0 million and was comprised of a gain on the sale of a building of $20.2 million, net of an impairment charge of $0.2 million. See Note 2 , Gain on Sale and Other Costs, Net, in the accompanying condensed consolidated financial statements for further details. 24 Table of Contents KADANT INC. Gain on Sale of Assets We entered into several agreements with the local government in China to sell the existing manufacturing building and land use rights of one of our subsidiaries in China for $25.2 million and relocate to a new facility (China Transaction). 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 China Transaction of $20.2 million, or $15.1 million, net of deferred taxes of $5.0 million, in the first quarter of 2022. Our subsidiary, which is part of the Industrial Processing segment, will continue to occupy its current facility until construction of its new facility is complete, which is expected during the second half of 2023. Impairment Costs During the first quarter of 2022, we recognized an impairment charge of $0.2 million within our Industrial Processing segment associated with the write-down of certain fixed assets that will not be moved to the new manufacturing facility in China in connection with the China Transaction. Interest Expense Interest expense increased to $2.4 million in the first quarter of 2023 from $1.2 million in the first quarter of 2022 due to a higher weighted-average interest rate, partially offset by lower average debt outstanding in the first quarter of 2023 compared to the first quarter of 2022. Provision for Income Taxes Provision for income taxes decreased to $9.8 million in the first quarter of 2023 from $13.4 million in the first quarter of 2022. The effective tax rate of 26% in the first quarter of 2023 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, nondeductible expenses, and state taxes. These increases in tax expense in the first quarter of 2023 were offset in part by a decrease in tax expense related to the net excess income tax benefits from stock-based compensation arrangements. 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 provisions. These increases in tax expense in the first quarter of 2022 were offset in part by a decrease in tax expense related to the net excess income tax benefits from stock-based compensation arrangements and the reversal of tax reserves associated with uncertain tax positions. Net Income Net income decreased to $28.3 million in the first quarter of 2023 from $41.4 million in the first quarter of 2022 primarily due to the inclusion of a $15.1 million after-tax gain on the sale of a building in 2022 (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 25 Table of Contents KADANT INC. 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 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 1, 2023 April 2, 2022 Net Income Attributable to Kadant $ 28,075 $ 41,192 Net Income Attributable to Noncontrolling Interest 184 249 Provision for Income Taxes 9,763 13,378 Interest Expense, Net 2,071 1,132 Other Expense, Net 21 22 Operating Income 40,114 55,973 Gain on Sale (a) — (20,190) Acquisition Costs — 76 Indemnification Asset Reversal (b) — 575 Impairment Costs — 182 Acquired Backlog Amortization (c) — 703 Acquired Profit in Inventory Amortization (d) — (218) Adjusted Operating Income (non-GAAP measure) 40,114 37,101 Depreciation and Amortization 8,446 8,742 Adjusted EBITDA (non-GAAP measure) $ 48,560 $ 45,843 Adjusted EBITDA Margin (non-GAAP measure) 21.1% 20.2% (a) Represents a $20.2 million pre-tax gain on the China Transaction in our Industrial Processing segment. (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 the 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 1, 2023 April 2, 2022 Cash Provided by Operating Activities $ 36,866 $ 23,768 Less: Capital Expenditures (4,469) (2,868) Free Cash Flow (non-GAAP measure) $ 32,397 $ 20,900 Liquidity and Capital Resources Consolidated working capital was $224.3 million at April 1, 2023, compared with $201.9 million at December 31, 2022. Cash and cash equivalents were $81.2 million at April 1, 2023, compared with $76.4 million at December 31, 2022, which included cash and cash equivalents held by our foreign subsidiaries o f $70.7 million at April 1, 2023 and $75.8 million at December 31, 2022. 26 Table of Contents KADANT INC. Cash Flows Cash flow information in the first three months of 2023 and 2022 is as follows: Three Months Ended (In thousands) April 1, 2023 April 2, 2022 Net Cash Provided by Operating Activities $ 36,866 $ 23,768 Net Cash Used in Investing Activities (4,467) (1,291) Net Cash Used in Financing Activities (27,757) (27,003) Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash 1,140 (664) Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash $ 5,782 $ (5,190) Operating Activities Cash provided by operating activities increased to $36.9 million in the first quarter of 2023 from $23.8 million in the first quarter of 2022 principally driven by a reduction in cash used for working capital. 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. During the first quarter of 2023, increases in inventory used cash of $14.0 million primarily related to capital equipment orders that will ship throughout 2023. This use of cash was offset in part by $11.1 million of cash provided by customer deposits. Changes in other liabilities used cash of $4.6 million primarily related to incentive compensation payments in the first quarter of 2023. During the first quarter of 2022, increases in inventory and accounts receivable 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. Investing Activities Cash used in investing activities was $4.5 million in the first quarter of 2023, compared with $1.3 million in the first quarter of 2022. Capital expenditures were $4.5 million in the first quarter of 2023 compared to $2.9 million in the first quarter of 2022. Proceeds received from the sale of assets were $1.6 million in the first quarter of 2022. Financing Activities Cash used in financing activities was $27.8 million in the first quarter of 2023, compared with $27.0 million in the first quarter of 2022. Repayments of short- and long-term obligations were $20.8 million in the first quarter of 2023. Repayments of short- and long-term obligations were $35.1 million in the first quarter of 2022, partially offset by borrowings under our revolving credit facility of $15.5 million. Cash dividends paid to stockholders were $3.0 million in the first quarter of 2023 and $2.9 million in the first quarter of 2022. In addition, taxes paid related to the vesting of equity awards was $3.9 million in the first quarter of 2023 compared to $4.6 million in the first quarter of 2022. 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 $1.1 million increase in cash, cash equivalents, and restricted cash in the first quarter of 2023 was primarily attributable to the weakening of the U.S. dollar against the euro, and to a lesser extent, the Mexican peso and the Chinese renminbi. Borrowing Capacity and Debt Obligations On November 30, 2022, we entered into a sixth amendment to our unsecured multi-currency revolving credit facility, originally entered into on March 1, 2017 (as amended and restated to date, the Credit Agreement). Among other things, this amendment extended the maturity date to November 30, 2027, and increased the uncommitted, unsecured increm ental borrowing facility from $150 million to $200 million. We have a total borrowing capacity of $400 million under our Credit Agreement. At April 1, 2023, we had $232.8 million of borrowing capacity available under our Credit Agreement, in addition to the $200 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 27 Table of Contents KADANT INC. quarter during which a material acquisition occurs and for the three fiscal quarters thereafter, must be less than 4.25. As of April 1, 2023, our leverage ratio was 0.64 and we were in compliance with our debt covenants. See Note 5 , Short- and Long-Term Obligations, in the accompanying condensed consolidated financial statements for additional information regarding our debt obligations. Additional Liquidity and Capital Resources On May 19, 2022, our board of directors approved the repurchase of up to $50 million of our equity securities during the period from May 19, 2022 to May 19, 2023. We have not repurchased any shares of our common stock under this authorization. We paid a cash dividend of $3.0 million in the first quarter of 2023. On March 8, 2023, we declared a quarterly cash dividend of $0.29 per share totaling $3.4 million that was paid on May 10, 2023. 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 Credit Agreement related to our consolidated leverage ratio. We plan to make expenditures of approximately $28 to $30 million during the remainder of 2023 for property, plant, and equipment, including $8 to $9 million for a new manufacturing facility in China. As of April 1, 2023, we had approximately $254.0 million of total unremitted foreign earnings. It is our intent to indefinitely reinvest $208.0 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 2023, 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 $3.3 million. 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 2023 compared with those disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations under the heading Liquidity and Capital Resources in Part II, Item 7, of our Annual Report. 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 heading Application of Critical Accounting Estimates in Part II, Item 7, of our Annual Report. There have been no material changes to these critical accounting policies since the end of fiscal 2022 that warrant disclosure. 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. 28 Table of Contents KADANT INC.