KADANT INC 10-Q

Item 1 – Financial Statements KADANT INC. Condensed Consolidated Balance Sheet (Unaudited) September 30, 2023 December 31, 2022 (In thousands, except share and per share amounts) Assets Current Assets: Cash and cash equivalents $ 76,793 $ 76,371 Restricted cash 2,260 3,354 Accounts receivable, net of allowances of $ 4,024 and $ 3,595 140,075 130,297 Inventories 164,346 163,672 Contract assets 12,113 14,898 Other current assets 40,535 26,818 Total Current Assets 436,122 415,410 Property, Plant, and Equipment, net of accumulated depreciation of $ 128,416 and $ 121,442 128,738 118,855 Other Assets 43,893 54,516 Intangible Assets, Net 161,034 175,645 Goodwill 384,317 385,455 Total Assets $ 1,154,104 $ 1,149,881 Liabilities and Stockholders' Equity Current Liabilities: Short-term obligations and current maturities of long-term obligations (Note 5) $ 3,116 $ 3,821 Accounts payable 44,286 58,060 Accrued payroll and employee benefits 37,226 35,672 Customer deposits 67,090 64,361 Advanced billings 10,498 7,966 Other current liabilities 51,348 43,581 Total Current Liabilities 213,564 213,461 Long-Term Obligations (Note 5) 126,123 197,340 Long-Term Deferred Income Taxes 37,805 38,745 Other Long-Term Liabilities 42,695 44,764 Commitments and Contingencies (Note 11) Stockholders' Equity: Preferred stock, $ .01 par value, 5,000,000 shares authorized; none issued — — Common stock, $ .01 par value, 150,000,000 shares authorized; 14,624,159 shares issued 146 146 Capital in excess of par value 122,444 119,924 Retained earnings 739,133 660,644 Treasury stock at cost, 2,917,063 and 2,949,997 shares ( 71,480 ) ( 72,287 ) Accumulated other comprehensive items (Note 7) ( 58,591 ) ( 54,578 ) Total Kadant Stockholders' Equity 731,652 653,849 Noncontrolling interest 2,265 1,722 Total Stockholders' Equity 733,917 655,571 Total Liabilities and Stockholders' Equity $ 1,154,104 $ 1,149,881 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents KADANT INC. Condensed Consolidated Statement of Income (Unaudited) Three Months Ended Nine Months Ended September 30, 2023 October 1, 2022 September 30, 2023 October 1, 2022 (In thousands, except per share amounts) Revenue (Notes 1 and 10) $ 244,182 $ 224,510 $ 718,993 $ 672,639 Costs and Operating Expenses: Cost of revenue 138,456 129,154 404,671 383,034 Selling, general, and administrative expenses 57,889 53,153 176,441 167,640 Research and development expenses 3,324 3,245 10,102 9,574 Gain on sale and other costs, net (Note 2) 969 72 1,043 ( 19,936 ) 200,638 185,624 592,257 540,312 Operating Income 43,544 38,886 126,736 132,327 Interest Income 438 271 1,053 650 Interest Expense ( 2,107 ) ( 1,721 ) ( 6,722 ) ( 4,321 ) Other Expense, Net ( 20 ) ( 19 ) ( 62 ) ( 60 ) Income Before Provision for Income Taxes 41,855 37,417 121,005 128,596 Provision for Income Taxes (Note 4) 10,816 9,746 31,761 33,075 Net Income 31,039 27,671 89,244 95,521 Net Income Attributable to Noncontrolling Interest ( 175 ) ( 184 ) ( 571 ) ( 672 ) Net Income Attributable to Kadant $ 30,864 $ 27,487 $ 88,673 $ 94,849 Earnings per Share Attributable to Kadant (Note 3) Basic $ 2.64 $ 2.36 $ 7.58 $ 8.14 Diluted $ 2.63 $ 2.35 $ 7.57 $ 8.12 Weighted Average Shares (Note 3) Basic 11,706 11,662 11,697 11,651 Diluted 11,740 11,700 11,719 11,681 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents KADANT INC. Condensed Consolidated Statement of Comprehensive Income (Unaudited) Three Months Ended Nine Months Ended September 30, 2023 October 1, 2022 September 30, 2023 October 1, 2022 (In thousands) Net Income $ 31,039 $ 27,671 $ 89,244 $ 95,521 Other Comprehensive Items: Foreign currency translation adjustment ( 9,104 ) ( 22,798 ) ( 3,931 ) ( 44,446 ) Post-retirement liability adjustments, net (net of tax of $ 1 , $ 8 , $( 2 ) and $ 21 ) 5 24 ( 3 ) 64 Deferred (loss) gain on cash flow hedges (net of tax of $( 3 ), $ 27 , $( 35 ) and $ 141 ) ( 9 ) 83 ( 107 ) 506 Other comprehensive items ( 9,108 ) ( 22,691 ) ( 4,041 ) ( 43,876 ) Comprehensive Income 21,931 4,980 85,203 51,645 Comprehensive Income Attributable to Noncontrolling Interest ( 111 ) ( 73 ) ( 543 ) ( 405 ) Comprehensive Income Attributable to Kadant $ 21,820 $ 4,907 $ 84,660 $ 51,240 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents KADANT INC. Condensed Consolidated Statement of Cash Flows (Unaudited) Nine Months Ended September 30, 2023 October 1, 2022 (In thousands) Operating Activities Net income attributable to Kadant $ 88,673 $ 94,849 Net income attributable to noncontrolling interest 571 672 Net income 89,244 95,521 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 24,917 26,387 Stock-based compensation expense 7,243 6,576 Gain on sale of assets (Note 2) — ( 20,190 ) Other items, net 2,346 9,127 Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable ( 10,676 ) ( 20,700 ) Contract assets 2,465 ( 8,528 ) Inventories ( 1,461 ) ( 33,784 ) Other assets 667 ( 947 ) Accounts payable ( 12,913 ) ( 262 ) Customer deposits ( 1,463 ) 16,163 Other liabilities 5,942 ( 1,901 ) Net cash provided by operating activities 106,311 67,462 Investing Activities Acquisitions, net of cash acquired 277 138 Purchases of property, plant, and equipment ( 22,094 ) ( 16,191 ) Proceeds from sale of property, plant, and equipment 535 2,091 Other investing activities 1,222 39 Net cash used in investing activities ( 20,060 ) ( 13,923 ) Financing Activities Proceeds from issuance of short- and long-term obligations — 21,554 Repayment of short- and long-term obligations ( 71,868 ) ( 69,460 ) Tax withholding payments related to stock-based compensation ( 3,915 ) ( 4,607 ) Dividends paid ( 9,825 ) ( 8,969 ) Dividend paid to noncontrolling interest — ( 630 ) Other financing activities ( 63 ) — Net cash used in financing activities ( 85,671 ) ( 62,112 ) Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash ( 1,252 ) ( 10,474 ) Decrease in Cash, Cash Equivalents, and Restricted Cash ( 672 ) ( 19,047 ) Cash, Cash Equivalents, and Restricted Cash at Beginning of Period 79,725 94,161 Cash, Cash Equivalents, and Restricted Cash at End of Period $ 79,053 $ 75,114 See Note 1 , Nature of Operations and Summary of Significant Accounting Policies, under the heading Supplemental Cash Flow Information for further details. The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents KADANT INC. Condensed Consolidated Statement of Stockholders' Equity (Unaudited) Three Months Ended September 30, 2023 (In thousands, except share and per share amounts) Common Stock Capital in Excess of Par Value Retained Earnings Treasury Stock Accumulated Other Comprehensive Items Noncontrolling Interest Total Stockholders' Equity Shares Amount Shares Amount Balance at July 1, 2023 14,624,159 $ 146 $ 120,117 $ 711,664 2,918,261 $ ( 71,509 ) $ ( 49,547 ) $ 2,154 $ 713,025 Net income — — — 30,864 — — — 175 31,039 Dividend declared – Common Stock, $ 0.29 per share — — — ( 3,395 ) — — — — ( 3,395 ) Activity under stock plans — — 2,327 — ( 1,198 ) 29 — — 2,356 Other comprehensive items — — — — — — ( 9,044 ) ( 64 ) ( 9,108 ) Balance at September 30, 2023 14,624,159 $ 146 $ 122,444 $ 739,133 2,917,063 $ ( 71,480 ) $ ( 58,591 ) $ 2,265 $ 733,917 Nine Months Ended September 30, 2023 (In thousands, except share and per share amounts) Common Stock Capital in Excess of Par Value Retained Earnings Treasury Stock Accumulated Other Comprehensive Items Noncontrolling Interest Total Stockholders' Equity Shares Amount Shares Amount Balance at December 31, 2022 14,624,159 $ 146 $ 119,924 $ 660,644 2,949,997 $ ( 72,287 ) $ ( 54,578 ) $ 1,722 $ 655,571 Net income — — — 88,673 — — — 571 89,244 Dividends declared – Common Stock, $ 0.87 per share — — — ( 10,184 ) — — — — ( 10,184 ) Activity under stock plans — — 2,520 — ( 32,934 ) 807 — — 3,327 Other comprehensive items — — — — — — ( 4,013 ) ( 28 ) ( 4,041 ) Balance at September 30, 2023 14,624,159 $ 146 $ 122,444 $ 739,133 2,917,063 $ ( 71,480 ) $ ( 58,591 ) $ 2,265 $ 733,917 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 Table of Contents KADANT INC. Condensed Consolidated Statement of Stockholders' Equity (continued) (Unaudited) Three Months Ended October 1, 2022 (In thousands, except share and per share amounts) Common Stock Capital in Excess of Par Value Retained Earnings Treasury Stock Accumulated Other Comprehensive Items Noncontrolling Interest Total Stockholders' Equity Shares Amount Shares Amount Balance at July 2, 2022 14,624,159 $ 146 $ 114,825 $ 613,146 2,962,186 $ ( 72,586 ) $ ( 51,379 ) $ 2,012 $ 606,164 Net income — — — 27,487 — — — 184 27,671 Dividend declared – Common Stock, $ 0.26 per share — — — ( 3,032 ) — — — — ( 3,032 ) Activity under stock plans — — 1,982 — ( 1,628 ) 40 — — 2,022 Dividend paid to noncontrolling interest — — — — — — — ( 630 ) ( 630 ) Other comprehensive items — — — — — — ( 22,580 ) ( 111 ) ( 22,691 ) Balance at October 1, 2022 14,624,159 $ 146 $ 116,807 $ 637,601 2,960,558 $ ( 72,546 ) $ ( 73,959 ) $ 1,455 $ 609,504 Nine Months Ended October 1, 2022 (In thousands, except share and per share amounts) Common Stock Capital in Excess of Par Value Retained Earnings Treasury Stock Accumulated Other Comprehensive Items Noncontrolling Interest Total Stockholders' Equity Shares Amount Shares Amount Balance at January 1, 2022 14,624,159 $ 146 $ 115,888 $ 551,848 3,003,419 $ ( 73,596 ) $ ( 30,350 ) $ 1,680 $ 565,616 Net income — — — 94,849 — — — 672 95,521 Dividends declared – Common Stock, $ 0.78 per share — — — ( 9,096 ) — — — — ( 9,096 ) Activity under stock plans — — 919 — ( 42,861 ) 1,050 — — 1,969 Dividend paid to noncontrolling interest — — — — — — — ( 630 ) ( 630 ) Other comprehensive items — — — — — — ( 43,609 ) ( 267 ) ( 43,876 ) Balance at October 1, 2022 14,624,159 $ 146 $ 116,807 $ 637,601 2,960,558 $ ( 72,546 ) $ ( 73,959 ) $ 1,455 $ 609,504 The accompanying notes are an integral part of these condensed consolidated financial statements. 8 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Kadant Inc. was incorporated in Delaware in November 1991 and trades on the New York Stock Exchange under the ticker symbol "KAI." Kadant Inc. (together with its subsidiaries, the Company) is a global supplier of technologies and engineered systems that drive Sustainable Industrial Processing. Its products and services play an integral role in enhancing efficiency, optimizing energy utilization, and maximizing productivity in process industries while helping 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 the Company's three reportable operating segments: Flow Control, Industrial Processing, and Material Handling. Interim Financial Statements The interim condensed consolidated financial statements and related notes presented have been prepared by the Company, are unaudited, and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the Company's financial position at September 30, 2023, its results of operations, comprehensive income, and stockholders' equity for the three- and nine-month periods ended September 30, 2023 and October 1, 2022 and its cash flows for the nine-month periods ended September 30, 2023 and October 1, 2022. Interim results are not necessarily indicative of results for a full year or for any other interim period. The condensed consolidated balance sheet presented as of December 31, 2022 has been derived from the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (Annual Report). The condensed consolidated financial statements and related notes are presented as permitted by the rules and regulations of the Securities and Exchange Commission (SEC) for Form 10-Q and do not contain certain information included in the annual consolidated financial statements and related notes of the Company. The condensed consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and related notes included in the Annual Report. Use of Estimates and Critical Accounting Policies The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Although the Company makes every effort to ensure the accuracy of the estimates and assumptions used in the preparation of its condensed consolidated financial statements or in the application of accounting policies, if business conditions were different, or if the Company were to use different estimates and assumptions, it is possible that materially different amounts could be reported in the Company's condensed consolidated financial statements. Note 1 to the consolidated financial statements in the Annual Report describes the significant accounting estimates and policies used in preparation of the consolidated financial statements. There have been no material changes in the Company’s significant accounting policies during the nine months ended September 30, 2023. Supplemental Cash Flow Information Nine Months Ended (In thousands) September 30, 2023 October 1, 2022 Cash Paid for Interest $ 6,341 $ 3,907 Cash Paid for Income Taxes, Net of Refunds $ 34,037 $ 28,692 Non-Cash Investing Activities: Reduction in fair value of assets acquired $ ( 270 ) $ ( 1,768 ) Cash received for acquired businesses 277 138 Increase (decrease) in liabilities assumed $ 7 $ ( 1,630 ) Purchase of property with outstanding loan receivable — $ 1,397 Purchases of property, plant, and equipment in accounts payable $ 749 $ 36 9 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Nine Months Ended (In thousands) September 30, 2023 October 1, 2022 Non-Cash Financing Activities: Issuance of Company common stock upon vesting of restricted stock units $ 4,951 $ 5,295 Dividends declared but unpaid $ 3,395 $ 3,032 Restricted Cash The Company's restricted cash generally serves as collateral for bank guarantees associated with providing assurance to customers that the Company will fulfill certain customer obligations entered into in the normal course of business and for certain banker's acceptance drafts issued to vendors. The majority of the bank guarantees will expire over the next twelve months . The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company's condensed consolidated balance sheet that are shown in aggregate in the accompanying condensed consolidated statement of cash flows: (In thousands) September 30, 2023 October 1, 2022 December 31, 2022 January 1, 2022 Cash and cash equivalents $ 76,793 $ 72,936 $ 76,371 $ 91,186 Restricted cash 2,260 2,178 3,354 2,975 Total Cash, Cash Equivalents, and Restricted Cash $ 79,053 $ 75,114 $ 79,725 $ 94,161 Inventories The components of inventories are as follows: September 30, 2023 December 31, 2022 (In thousands) Raw Materials $ 67,647 $ 71,040 Work in Process 41,883 38,612 Finished Goods 54,816 54,020 $ 164,346 $ 163,672 Intangible Assets, Net Gross intangible assets were $ 342,742,000 at September 30, 2023 and $ 343,130,000 at December 31, 2022. Intangible assets are recorded at fair value at the date of acquisition. Subsequent impairment charges are reflected as a reduction in the gross balance, as applicable. Definite-lived intangible assets are stated net of accumulated amortization and currency translation in the accompanying condensed consolidated balance sheet. The Company amortizes definite-lived intangible assets over lives that have been determined based on the anticipated cash flow benefits of the intangible asset. Accumulated amortization was $ 169,804,000 at September 30, 2023 and $ 155,834,000 at December 31, 2022. 10 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Goodwill The changes in the carrying amount of goodwill by segment are as follows: (In thousands) Flow Control Industrial Processing Material Handling Total Balance at December 31, 2022 Gross balance $ 118,309 $ 209,919 $ 142,765 $ 470,993 Accumulated impairment losses — ( 85,538 ) — ( 85,538 ) Net balance 118,309 124,381 142,765 385,455 2023 Activity Acquisition adjustments — — 4 4 Currency translation ( 609 ) ( 224 ) ( 309 ) ( 1,142 ) Total 2023 activity ( 609 ) ( 224 ) ( 305 ) ( 1,138 ) Balance at September 30, 2023 Gross balance 117,700 209,695 142,460 469,855 Accumulated impairment losses — ( 85,538 ) — ( 85,538 ) Net balance $ 117,700 $ 124,157 $ 142,460 $ 384,317 Warranty Obligations The Company's contracts covering the sale of its products include warranty provisions that provide assurance to its customers that the products will comply with agreed-upon specifications during a defined period of time. The Company provides for the estimated cost of product warranties at the time of sale based on historical occurrence rates and repair costs, as well as knowledge of any specific warranty problems that indicate projected warranty costs may vary from historical patterns. The Company negotiates the terms regarding warranty coverage and length of warranty depending on the products and applications. The Company's liability for warranties is included in other current liabilities in the accompanying condensed consolidated balance sheet. The changes in the carrying amount of product warranty obligations are as follows: Nine Months Ended (In thousands) September 30, 2023 October 1, 2022 Balance at Beginning of Year $ 7,283 $ 7,298 Provision charged to expense 4,879 3,637 Usage ( 3,391 ) ( 3,361 ) Currency translation ( 90 ) ( 877 ) Balance at End of Period $ 8,681 $ 6,697 Revenue Recognition Most of the Company’s revenue relates to products and services that require minimal customization and is recognized at a point in time for each performance obligation under the contract when the customer obtains control of the goods or service. The remaining portion of the Company’s revenue is recognized over time based on an input method that compares the costs incurred to date to the total expected costs required to satisfy the performance obligation. Contracts are accounted for on an over time basis when they include products which have no alternative use and an enforceable right to payment over time. Most of the contracts recognized on an over time basis are for large capital equipment projects. These projects are highly customized for the customer and, as a result, would include a significant cost to rework in the event of cancellation. 11 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The following table presents revenue by revenue recognition method: Three Months Ended Nine Months Ended September 30, October 1, September 30, October 1, (In thousands) 2023 2022 2023 2022 Point in Time $ 216,956 $ 201,557 $ 643,430 $ 603,117 Over Time 27,226 22,953 75,563 69,522 $ 244,182 $ 224,510 $ 718,993 $ 672,639 The Company disaggregates its revenue from contracts with customers by reportable operating segment, product type and geography as this best depicts how its revenue is affected by economic factors. The following table presents the disaggregation of revenue by product type and geography: Three Months Ended Nine Months Ended September 30, October 1, September 30, October 1, (In thousands) 2023 2022 2023 2022 Revenue by Product Type: Parts and consumables $ 149,564 $ 141,857 $ 454,209 $ 433,781 Capital 94,618 82,653 264,784 238,858 $ 244,182 $ 224,510 $ 718,993 $ 672,639 Revenue by Geography (based on customer location): North America $ 133,780 $ 126,699 401,618 375,115 Europe 66,491 57,409 181,273 174,264 Asia 27,393 26,953 88,030 87,916 Rest of world 16,518 13,449 48,072 35,344 $ 244,182 $ 224,510 $ 718,993 $ 672,639 See Note 10 , Business Segment Information, for information on the disaggregation of revenue by reportable operating segment. The following table presents contract balances from contracts with customers: September 30, 2023 December 31, 2022 (In thousands) Contract Assets $ 12,113 $ 14,898 Contract Liabilities $ 83,035 $ 82,413 Contract assets represent unbilled revenue associated with revenue recognized on contracts accounted for on an over time basis, which will be billed in future periods based on the contract terms. Contract liabilities consist of short- and long-term customer deposits, advanced billings, and deferred revenue. Deferred revenue is included in other current liabilities, and long-term customer deposits are included in other long-term liabilities in the accompanying condensed consolidated balance sheet. Contract liabilities will be recognized as revenue in future periods once the revenue recognition criteria are met. The majority of the contract liabilities relate to advance payments on contracts accounted for at a point in time. These advance payments will be recognized as revenue when the Company's performance obligations have been satisfied, which typically occurs when the product has shipped and control of the asset has transferred to the customer. The Company recognized revenue of $ 9,613,000 in the third quarter of 2023 and $ 11,912,000 in the third quarter of 2022, and $ 56,841,000 in the first nine months of 2023 and $ 59,813,000 in the first nine months of 2022 that was included in the contract liabilities balance at the beginning of 2023 and 2022, respectively. The majority of the Company's contracts for capital equipment have an original expected duration of one year or less. Certain capital equipment contracts require longer lead times and could take up to 24 months to complete. For contracts with an original expected duration of over one year, the aggregate amount of the transaction price allocated to the remaining unsatisfied or partially unsatisfied performance obligations was $ 47,568,000 as of September 30, 2023. The Company will recognize revenue for these performance obligations as they are satisfied, approximately 74 % of which is expected to occur within the next twelve months and the remaining 26 % after the third quarter of 2024. 12 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Banker's Acceptance Drafts Included in Accounts Receivable The Company's Chinese subsidiaries may receive banker's acceptance drafts from customers as payment for their trade accounts receivable. The drafts are non-interest bearing obligations of the issuing bank and generally mature within six months of the origination date. The Company's Chinese subsidiaries may sell the drafts at a discount to a third-party financial institution or transfer the drafts to vendors in settlement of current accounts payable prior to the scheduled maturity date. These drafts, which totaled $ 8,558,000 at September 30, 2023 and $ 5,729,000 at December 31, 2022, are included in accounts receivable in the accompanying condensed consolidated balance sheet until the subsidiary sells the drafts to a bank and receives a discounted amount, transfers the banker's acceptance drafts in settlement of current accounts payable prior to maturity, or obtains cash payment on the scheduled maturity date. Recent Accounting Pronouncements Not Yet Adopted Business Combinations - Joint Venture Formations (Topic 805), Recognition and Initiation Measurement. In August 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2023-05, to address the diversity in practice on the accounting treatment of joint venture formations. Under this ASU, a joint venture is required to apply a new basis of accounting at its formation date by valuing the net assets contributed at fair value for both business and asset transactions. The value of the net assets in total is then allocated to individual assets and liabilities by applying Topic 805 with certain exceptions. This new guidance is effective for joint ventures with a formation date on or after January 1, 2025 and is required to be applied prospectively. Additionally, joint ventures with a formation date prior to January 1, 2025, have an option to elect to apply the guidance retrospectively, provided adequate information is available. The impact of the adoption of this ASU on the Company's consolidated financial statements will be dependent upon joint ventures formed in future periods. 2. Gain on Sale and Other Costs, Net A summary of the items included in gain on sale and other costs, net is as follows: Three Months Ended Nine Months Ended September 30, October 1, September 30, October 1, (In thousands) 2023 2022 2023 2022 Gain on Sale of Assets $ — $ — $ — $ ( 20,190 ) Relocation Costs 535 — 609 — Restructuring Costs 398 72 398 72 Impairment Costs 36 — 36 182 $ 969 $ 72 $ 1,043 $ ( 19,936 ) Gain on Sale of Assets The Company entered into several agreements with the local government in China to sell the existing manufacturing building and land use rights of one of its subsidiaries in China for $ 25,159,000 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, the Company recognized a gain on the China Transaction of $ 20,190,000 , or $ 15,143,000 net of deferred taxes of $ 5,047,000 , in the first quarter of 2022. A receivable of $ 16,082,000 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. The subsidiary, which is part of the Industrial Processing segment, relocated to its new facility during the third quarter of 2023. 13 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) A summary of the change in the outstanding receivable on the China Transaction is as follows: (In thousands) Total Balance at Inception $ 17,294 Present value discount ( 1,212 ) Receivable recorded, net 16,082 Accretion of interest income 422 Currency translation ( 1,323 ) Balance at December 31, 2022 (included in other assets) 15,181 Accretion of interest income 411 Currency translation ( 794 ) Balance at September 30, 2023 (included in other current assets) $ 14,798 Other Costs Relocation Costs As part of the China Transaction, the Company incurred costs of $ 535,000 in the third quarter of 2023 and $ 609,000 in the first nine months of 2023 related to the relocation of machinery and equipment and administrative offices to the new manufacturing facility. Restructuring and Impairment Costs The Company initiated restructuring plans within its Flow Control segment as follows: • During the third quarter of 2023, the Company initiated a restructuring plan to consolidate a small manufacturing operation into a larger facility in Germany (2023 Restructuring Plan). The Company recorded total restructuring and impairment charges of $ 434,000 in the third quarter of 2023 and first nine months of 2023, which consisted of severance costs of $ 369,000 for the termination of 10 employees, asset-write downs of $ 36,000 , and facility and other closure costs of $ 29,000 . • During the fourth quarter of 2021, the Company initiated a restructuring plan to eliminate a redundant ceramic blade manufacturing operation in France (2021 Restructuring Plan). The Company recorded additional restructuring costs of $ 72,000 in the third quarter and first nine months of 2022 related to this plan, which consisted of severance costs for the termination of two employees. A summary of the changes in accrued restructuring costs included in other current liabilities in the accompanying condensed consolidated balance sheet, which are expected to be paid in the fourth quarter of 2023 and early 2024, are as follows: (In thousands) Severance Costs Facility and Other Closure Costs Total 2021 Restructuring Plan Balance at December 31, 2022 $ 189 $ 200 $ 389 Usage ( 187 ) ( 199 ) ( 386 ) Currency translation ( 2 ) ( 1 ) ( 3 ) Balance at September 30, 2023 $ — $ — $ — 2023 Restructuring Plan Provision $ 369 $ 29 $ 398 Usage ( 23 ) — ( 23 ) Currency translation ( 10 ) ( 1 ) ( 11 ) Balance at September 30, 2023 $ 336 $ 28 $ 364 In addition, the Company recorded an impairment charge of $ 182,000 in the first nine months of 2022 for the write-down of certain fixed assets that were not moved to the new facility related to the China Transaction. 14 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 3. Earnings per Share Basic and diluted earnings per share (EPS) were calculated as follows: Three Months Ended Nine Months Ended September 30, 2023 October 1, 2022 September 30, 2023 October 1, 2022 (In thousands, except per share amounts) Net Income Attributable to Kadant $ 30,864 $ 27,487 $ 88,673 $ 94,849 Basic Weighted Average Shares 11,706 11,662 11,697 11,651 Effect of Restricted Stock Units and Employee Stock Purchase Plan Shares 34 38 22 30 Diluted Weighted Average Shares 11,740 11,700 11,719 11,681 Basic Earnings per Share $ 2.64 $ 2.36 $ 7.58 $ 8.14 Diluted Earnings per Share $ 2.63 $ 2.35 $ 7.57 $ 8.12 The effect of outstanding and unvested restricted stock units (RSUs) of the Company's common stock totaling 5,000 shares in the third quarter of 2023, 4,000 shares in the third quarter of 2022, 23,000 shares in the first nine months of 2023 and 10,000 shares in the first nine months of 2022 were not included in the computation of diluted EPS for the respective periods as the effect would have been antidilutive or, for unvested performance-based RSUs, the performance conditions had not been met as of the end of the respective reporting periods. 4. Provision for Income Taxes The provision for income taxes was $ 31,761,000 in the first nine months of 2023 and $ 33,075,000 in the first nine months of 2022. The effective tax rate of 26 % in the first nine months of 2023 and 2022 was higher than the Company's statutory rate of 21% primarily due to the distribution of the Company's worldwide earnings, state taxes, and nondeductible expenses. 5. Short- and Long-Term Obligations Short- and long-term obligations are as follows: September 30, 2023 December 31, 2022 (In thousands) Revolving Credit Facility, due 2027 $ 115,494 $ 186,131 Senior Promissory Notes, due 2023 to 2028 10,000 10,000 Finance Leases, due 2023 to 2026 1,704 1,940 Other Borrowings, due 2023 to 2028 2,041 3,090 Total 129,239 201,161 Less: Short-term Obligations and Current Maturities of Long-Term Obligations ( 3,116 ) ( 3,821 ) Long-Term Obligations $ 126,123 $ 197,340 See Note 9 , Fair Value Measurements and Fair Value of Financial Instruments, for the fair value information related to the Company's long-term obligations. Revolving Credit Facility The Company's unsecured multi-currency revolving credit facility, originally entered into on March 1, 2017 (as amended and restated to date, the Credit Agreement) matures on November 30, 2027 and has a borrowing capacity of $ 400,000,000 , in addition to an uncommitted, unsecured incremental borrowing facility of $ 200,000,000 . Interest on borrowings outstanding accrues and is payable in arrears calculated at one of the following rates selected by the Company: (i) the Base Rate, as defined, plus an applicable margin of 0 % to 1.25 %, or (ii) Eurocurrency Rate, Term SOFR (plus a 10 basis point credit spread adjustment), CDOR Rate, and RFR, as applicable and defined, plus an applicable margin of 1.0 % to 2.25 %. 15 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The margin is determined based upon the ratio of the Company's total debt, net of unrestricted cash up to $ 50,000,000 , to earnings before interest, taxes, depreciation, and amortization as defined in the Credit Agreement. Additionally, the Credit Agreement requires the payment of a commitment fee payable in arrears on the available borrowing capacity under the Credit Agreement, which ranges from 0.125 % to 0.350 %. Obligations under the Credit Agreement may be accelerated upon the occurrence of an event of default, which includes customary events of default under such financing arrangements. In addition, the Credit Agreement contains negative covenants applicable to the Company and its subsidiaries, including financial covenants requiring the Company to maintain a maximum consolidated leverage ratio of 3.75 to 1.00, or, if the Company elects, for the quarter during which a material acquisition occurs and for the three fiscal quarters thereafter, 4.25 to 1.00, and limitations on making certain restricted payments (including dividends and stock repurchases). Loans under the Credit Agreement are guaranteed by certain domestic subsidiaries of the Company. As of September 30, 2023, the outstanding balance under the Credit Agreement was $ 115,494,000 , which included $ 72,494,000 of euro-denominated borrowings. The Company had $ 284,911,000 of borrowing capacity available as of September 30, 2023, which was calculated by translating its foreign-denominated borrowings using the administrative agent's borrowing date foreign exchange rates, in addition to the $ 200,000,000 uncommitted, unsecured incremental borrowing facility. The weighted average interest rate for the outstanding balance under the Credit Agreement was 5.43 % as of September 30, 2023 and 4.33 % as of year-end 2022. See Note 8 , Derivatives, under the heading Interest Rate Swap Agreement, for information relating to the swap agreement, which matured on June 30, 2023. Senior Promissory Notes In 2018, the Company entered into an uncommitted, unsecured Multi-Currency Note Purchase and Private Shelf Agreement (Note Purchase Agreement). Simultaneous with the execution of the Note Purchase Agreement, the Company issued senior promissory notes (Initial Notes) in an aggregate principal amount of $ 10,000,000 , with a per annum interest rate of 4.90 % payable semiannually, and a maturity date of December 14, 2028. The Company is required to prepay a portion of the principal of the Initial Notes beginning on December 14, 2023 and each year thereafter, and may optionally prepay the principal on the Initial Notes, together with any prepayment premium, at any time in accordance with the Note Purchase Agreement. The obligations of the Initial Notes may be accelerated upon an event of default as defined in the Note Purchase Agreement, which includes customary events of default under such financing arrangements. The Initial Notes are pari passu with the Company’s indebtedness under the Credit Agreement, and any other senior debt of the Company, subject to certain specified exceptions, and participate in a sharing agreement with respect to the obligations of the Company and its subsidiaries under the Credit Agreement. The Initial Notes are guaranteed by certain of the Company’s domestic subsidiaries. Debt Compliance As of September 30, 2023, the Company was in compliance with the covenants related to its debt obligations. 6. Stock-Based Compensation The Company recognized stock-based compensation expense of $ 2,357,000 in the third quarter of 2023, $ 2,040,000 in the third quarter of 2022, $ 7,243,000 in the first nine months of 2023 and $ 6,576,000 in the first nine months of 2022 within selling, general, and administrative (SG&A) expenses in the accompanying condensed consolidated statement of income. The Company recognizes compensation expense 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. For time-based RSUs, compensation expense is recognized 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. For performance-based RSUs, compensation expense is recognized 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 stock-based compensation totaled approximately $ 9,716,000 at September 30, 2023, which will be recognized over a weighted average period of 1.7 years. 16 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Non-Employee Director RSUs In May 2023, the Company granted an aggregate of 4,340 RSUs to its non-employee directors with an aggregate grant date fair value of $ 849,000 , of which 50 % vested on June 1, 2023, 25 % vested on the last day of the third fiscal quarter of 2023 and the remaining 25 % are to vest on the last day of the fourth fiscal quarter of 2023. Performance-based RSUs On March 7, 2023, the Company granted performance-based RSUs to certain of its officers, which represented, in aggregate, the right to receive 21,009 shares (target RSU amount), with an aggregate grant date fair value of $ 4,528,000 . The RSUs are subject to adjustment based on the achievement of the performance measure selected for the fiscal year, which is a specified target for adjusted earnings before interest, taxes, depreciation, and amortization (target adjusted EBITDA) generated from operations for the fiscal year. The RSUs are adjusted by comparing the actual adjusted EBITDA for the performance period to the target adjusted EBITDA. Actual adjusted EBITDA between 50 % and 100 % of the target adjusted EBITDA results in an adjustment of 50 % to 100 % of the target RSU amount. Actual adjusted EBITDA between 100 % and 115 % of the target adjusted EBITDA results in an adjustment using a straight-line linear scale between 100 % and 150 % of the target RSU amount. Actual adjusted EBITDA in excess of 115 % results in an adjustment capped at 150 % of the target RSU amount. If actual adjusted EBITDA is below 50 % of the target adjusted EBITDA for the 2023 fiscal year, these performance-based RSUs will be forfeited. The Company recognizes compensation expense based on the probable number of performance-based RSUs expected to vest. Following the adjustment, the performance-based RSUs will be subject to additional time-based vesting, and will vest in three equal annual installments on March 10 of 2024, 2025, and 2026, provided that the officer is employed by the Company on the applicable vesting dates. Time-based RSUs On March 7, 2023, the Company granted time-based RSUs representing 16,528 shares to certain of its officers and employees with an aggregate grant date fair value of $ 3,562,000 . These time-based RSUs vest in three equal annual installments on March 10 of 2024, 2025, and 2026, provided that a recipient is employed by the Company on the applicable vesting dates. 7. Accumulated Other Comprehensive Items Comprehensive income combines net income and other comprehensive items, which represent certain amounts that are reported as components of stockholders' equity in the accompanying condensed consolidated balance sheet. Changes in each component of accumulated other comprehensive items (AOCI), net of tax, are as follows: (In thousands) Foreign Currency Translation Adjustment Pension and Other Post-Retirement Benefit Liability Adjustments Deferred Gain (Loss) on Cash Flow Hedges Total Balance at December 31, 2022 $ ( 54,488 ) $ ( 148 ) $ 58 $ ( 54,578 ) Other comprehensive items before reclassifications ( 3,903 ) ( 10 ) ( 8 ) ( 3,921 ) Reclassifications from AOCI — 7 ( 99 ) ( 92 ) Net current period other comprehensive items ( 3,903 ) ( 3 ) ( 107 ) ( 4,013 ) Balance at September 30, 2023 $ ( 58,391 ) $ ( 151 ) $ ( 49 ) $ ( 58,591 ) 17 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Amounts reclassified from AOCI are as follows: Three Months Ended Nine Months Ended (In thousands) September 30, 2023 October 1, 2022 September 30, 2023 October 1, 2022 Statement of Income Line Item Retirement Benefit Plans Recognized net actuarial loss $ ( 1 ) $ ( 6 ) $ ( 3 ) $ ( 19 ) Other expense, net Amortization of prior service cost ( 2 ) ( 2 ) ( 7 ) ( 7 ) Other expense, net Total expense before income taxes ( 3 ) ( 8 ) ( 10 ) ( 26 ) Income tax benefit 1 2 3 7 Provision for income taxes ( 2 ) ( 6 ) ( 7 ) ( 19 ) Cash Flow Hedges (a) Interest rate swap agreement — ( 33 ) 136 ( 227 ) Interest expense Income tax benefit (provision) — 8 ( 37 ) 55 Provision for income taxes — ( 25 ) 99 ( 172 ) Total Reclassifications $ ( 2 ) $ ( 31 ) $ 92 $ ( 191 ) (a) See Note 8 , Derivatives, for additional information. 8. Derivatives Interest Rate Swap Agreement In 2018, the Company entered into an interest rate swap agreement (2018 Swap Agreement) with Citizens Bank, N.A. to hedge its exposure to movements in USD LIBOR on its U.S. dollar-denominated debt. The 2018 Swap Agreement, which had a $ 15,000,000 notional value, matured on June 30, 2023. Prior to the maturity of the 2018 Swap Agreement, on a quarterly basis, the Company received three-month USD LIBOR, which was subject to a zero percent floor, and paid a fixed rate of interest of 3.15 % plus an applicable margin as was defined in the Credit Agreement. The Company had designated its 2018 Swap Agreement as a cash flow hedge and structured it to be 100 % effective. Unrealized gains and losses related to the fair value of the 2018 Swap Agreement were recorded to AOCI, net of tax. Forward Currency-Exchange Contracts The Company uses forward currency-exchange contracts that generally have maturities of twelve months or less to hedge exposures resulting from fluctuations in currency exchange rates. Such exposures result from assets and liabilities that are denominated in currencies other than the functional currencies of the Company's subsidiaries. Forward currency-exchange contracts that hedge forecasted accounts receivable or accounts payable are designated as cash flow hedges and unrecognized gains and losses are recorded to AOCI, net of tax. Deferred gains and losses are recognized in the statement of income in the period in which the underlying transaction occurs. The fair values of forward currency-exchange contracts that are designated as fair value hedges and forward currency-exchange contracts that are not designated as hedges are recognized currently in earnings. Gains and losses reported within SG&A expenses in the accompanying condensed consolidated statement of income associated with the Company's forward currency-exchange contracts that were not designated as hedges were not material for the three- and nine-month periods ended September 30, 2023 and October 1, 2022. 18 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The following table summarizes the fair value of derivative instruments in the accompanying condensed consolidated balance sheet: September 30, 2023 December 31, 2022 Balance Sheet Location Asset (Liability) (a) Notional Amount (b) Asset (Liability) (a) Notional Amount (In thousands) Derivatives Designated as Hedging Instruments: Derivative in an Asset Position: 2018 Swap Agreement Other Current Assets $ — $ — $ 131 $ 15,000 Derivatives in a Liability Position: Forward currency-exchange contract Other Current Liabilities $ ( 65 ) $ 430 $ ( 54 ) $ 430 Derivatives Not Designated as Hedging Instruments: Derivatives in an Asset Position: Forward currency-exchange contracts Other Current Assets $ — $ — $ 15 $ 647 Derivatives in a Liability Position: Forward currency-exchange contracts Other Current Liabilities $ ( 23 ) $ 801 $ — $ — (a) See Note 9 , Fair Value Measurements and Fair Value of Financial Instruments, for the fair value measurements relating to these financial instruments. (b) The 2023 notional amounts are indicative of the level of the Company's recurring derivative activity. The following table summarizes the activity in AOCI associated with the Company's derivative instruments designated as cash flow hedges as of and for the nine months ended September 30, 2023: (In thousands) Interest Rate Swap Agreement Forward Currency-Exchange Contract Total Unrealized Gain (Loss), Net of Tax, at December 31, 2022 $ 99 $ ( 41 ) $ 58 Gain reclassified to earnings (a) ( 99 ) — ( 99 ) Loss recognized in AOCI — ( 8 ) ( 8 ) Unrealized Loss, Net of Tax, at September 30, 2023 $ — $ ( 49 ) $ ( 49 ) (a) See Note 7 , Accumulated Other Comprehensive Items, for the income statement classification. As of September 30, 2023, the Company expects to reclassify losses of $ 49,000 from AOCI to earnings over the next twelve months based on the maturity date of the forward currency-exchange contract. 9. Fair Value Measurements and Fair Value of Financial Instruments Fair value measurement is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is established, which prioritizes the inputs used in measuring fair value into three broad levels as follows: • Level 1—Quoted prices in active markets for identical assets or liabilities. • Level 2—Inputs, other than quoted prices in active markets, that are observable either directly or indirectly. • Level 3—Unobservable inputs based on the Company's own assumptions. 19 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis: Fair Value as of September 30, 2023 (In thousands) Level 1 Level 2 Level 3 Total Assets: Money market funds and time deposits $ 7,474 $ — $ — $ 7,474 Banker's acceptance drafts (a) $ — $ 8,558 $ — $ 8,558 Liabilities: Forward currency-exchange contracts $ — $ 88 $ — $ 88 Fair Value as of December 31, 2022 (In thousands) Level 1 Level 2 Level 3 Total Assets: Money market funds and time deposits $ 8,351 $ — $ — $ 8,351 Banker's acceptance drafts (a) $ — $ 5,729 $ — $ 5,729 2018 Swap Agreement (b) $ — $ 131 $ — $ 131 Forward currency-exchange contracts $ — $ 15 $ — $ 15 Liabilities: Forward currency-exchange contract $ — $ 54 $ — $ 54 (a) Included in accounts receivable in the accompanying condensed consolidated balance sheet. (b) The 2018 Swap Agreement matured on June 30, 2023. The Company uses the market approach technique to value its financial assets and liabilities, and there were no changes in valuation techniques during the first nine months of 2023. Banker's acceptance drafts are carried at face value, which approximates their fair value due to the short-term nature of the negotiable instrument. The fair values of the forward currency-exchange contracts are based on quoted forward foreign exchange rates at the reporting date. The fair value of the 2018 Swap Agreement was based on USD LIBOR yield curves at the reporting date. The forward currency-exchange contracts and the 2018 Swap Agreement prior to its maturity were hedges of either recorded assets or liabilities or anticipated transactions and represent or represented the estimated amount the Company would receive or pay upon liquidation of the contracts. Changes in values of the underlying hedged assets and liabilities or anticipated transactions are not reflected in the table above. The carrying value and fair value of debt obligations, excluding lease obligations, are as follows: September 30, 2023 December 31, 2022 Carrying Value Fair Value Carrying Value Fair Value (In thousands) Debt Obligations: Revolving credit facility $ 115,494 $ 115,494 $ 186,131 $ 186,131 Senior promissory notes 10,000 9,788 10,000 9,773 Other 2,041 2,041 3,090 3,090 $ 127,535 $ 127,323 $ 199,221 $ 198,994 The carrying value of the Company's revolving credit facility approximates the fair value as the obligation bears variable rates of interest, which adjust frequently, based on prevailing market rates. The fair value of the senior promissory notes is primarily calculated based on quoted market rates plus an applicable margin available to the Company at the respective period end, which represent Level 2 measurements. 10. Business Segment Information The Company has three reportable operating segments: Flow Control, Industrial Processing, and Material Handling. The Flow Control segment consists of the fluid-handling and doctoring, cleaning, & filtration product lines; the Industrial Processing segment consists of the wood processing and stock-preparation product lines; and the Material Handling segment consists of the conveying and vibratory, baling, and fiber-based product lines. 20 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) A description of each segment 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. The Company's 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. The Company's primary products include stock-preparation systems and recycling equipment, chemical pulping equipment, debarkers, stranders and chippers. In addition, the Company provides 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. The Company's primary products include conveying and vibratory equipment and balers. In addition, the Company manufactures and sells biodegradable, absorbent granules used as carriers in agricultural applications and for oil and grease absorption. The following table presents financial information for the Company's reportable operating segments: Three Months Ended Nine Months Ended September 30, October 1, September 30, October 1, (In thousands) 2023 2022 2023 2022 Revenue Flow Control $ 90,798 $ 86,880 $ 276,048 $ 257,926 Industrial Processing 94,220 86,085 267,729 263,572 Material Handling 59,164 51,545 175,216 151,141 $ 244,182 $ 224,510 $ 718,993 $ 672,639 Income Before Provision for Income Taxes Flow Control (a) $ 24,246 $ 22,874 $ 74,256 $ 67,306 Industrial Processing (b) 19,023 17,550 51,968 70,994 Material Handling (c) 10,345 6,945 30,006 21,490 Corporate (d) ( 10,070 ) ( 8,483 ) ( 29,494 ) ( 27,463 ) Total operating income 43,544 38,886 126,736 132,327 Interest expense, net (e) ( 1,669 ) ( 1,450 ) ( 5,669 ) ( 3,671 ) Other expense, net (e) ( 20 ) ( 19 ) ( 62 ) ( 60 ) $ 41,855 $ 37,417 $ 121,005 $ 128,596 Capital Expenditures Flow Control $ 1,195 $ 868 $ 3,889 $ 2,424 Industrial Processing (f) 7,299 4,654 16,007 11,679 Material Handling 350 854 2,170 2,081 Corporate 4 — 28 7 $ 8,848 $ 6,376 $ 22,094 $ 16,191 (a) Includes restructuring and impairment costs of $ 434,000 in both the three and nine months ended September 30, 2023, and $ 72,000 in both the three and nine months ended October 1, 2022. Includes acquisition-related expenses of $ 410,000 and $ 254,000 in the three and nine months ended October 1, 2022, respectively. (b) Includes relocation costs of $ 535,000 and $ 609,000 in the three and nine months ended September 30, 2023, respectively. Includes a gain on the sale of a facility of $ 20,190,000 , impairment costs of $ 182,000 (see Note 2 , Gain on Sale and Other Costs, Net), and a non-cash charge for the write-off of an indemnification asset of $ 575,000 in the nine months ended October 1, 2022. (c) Includes acquisition-related expenses of $ 717,000 in the nine months ended October 1, 2022. 21 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) (d) Represents general and administrative expenses. (e) The Company does not allocate interest and other expense, net to its segments. (f) Includes capital expenditures of $ 2,476,000 and $ 5,763,000 in the three and nine months ended September 30, 2023, respectively, and $ 2,155,000 and $ 5,397,000 in the three and nine months ended October 1, 2022, respectively, related to the China Transaction. See Note 2 , Gain on Sale and Other Costs, Net. 11. Commitments and Contingencies Right of Recourse In the ordinary course of business, the Company's Chinese subsidiaries may receive banker's acceptance drafts from customers as payment for their trade accounts receivable. The drafts are non-interest bearing obligations of the issuing bank and generally mature within six months of the origination date. The Company's Chinese subsidiaries may use these banker's acceptance drafts prior to the scheduled maturity date to settle outstanding accounts payable with vendors. Banker's acceptance drafts transferred to vendors are subject to customary right of recourse provisions prior to their scheduled maturity dates. The Company had $ 9,954,000 at September 30, 2023 and $ 11,238,000 at December 31, 2022 of banker's acceptance drafts subject to recourse, which were transferred to vendors and had not reached their scheduled maturity dates. Historically, the banker's acceptance drafts have settled upon maturity without any claim of recourse against the Company. Litigation From time to time, the Company is subject to various claims and legal proceedings covering a range of matters that arise in the ordinary course of business. Such litigation may include, but is not limited to, claims and counterclaims by and against the Company for breach of contract or warranty, canceled contracts, product liability, or bankruptcy-related claims. For legal proceedings in which a loss is probable and estimable, the Company accrues a loss based on the low end of the range of estimated loss when there is no better estimate within the range. If the Company were found to be liable for any of the claims or counterclaims against it, the Company would incur a charge against earnings for amounts in excess of legal accruals. 22 Table of Contents KADANT INC.