What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-02-22 compared with 2021-02-18 · 215 added, 181 removed, 363 unchanged (52% of the section changed)

5 unchanged sentences

• Critical Accounting Policies

The following MD&A should be read together with Item 6.

“Selected Financial Data”, Part I, Item 1A.

The following MD&A should be read together with Part I, Item 1A.

“Risk Factors” and the accompanying Consolidated Financial Statements and Notes to Consolidated Financial Statements included in Item 8.

6 unchanged sentences

Fabrication Technology and Medical Technology.

• Fabrication Technology - a leading global supplier of consumable products and equipment for use in the cutting, joining and automated welding, as well as gas control equipment, providing a wide range of products with innovative technologies to solve challenges in a wide range of industries.

• Fabrication Technology - a leading global supplier of consumable products and equipment for use in cutting, joining and automated welding, as well as gas control equipment, providing a wide range of products with innovative technologies to solve challenges in a wide range of industries.

• Medical Technology - a leader in orthopedic solutions, providing devices, software and services spanning the full continuum of patient care, from injury prevention to joint replacement to rehabilitation.

8 unchanged sentences

Our Medical Technology segment orthopedic business enjoys sustainable secular drivers such as aging populations that require increasing levels of medical care that should contribute to reduced cyclicality of our Company.

In addition, the shift to greater outpatient surgeries at ambulatory surgical centers (ASCs) is expected to benefit our rehabilitation and recovery business as patients require proper bracing and other support during recoveries.

We have seen an acceleration of shifting to ASCs allowing for increased opportunity to sell to these centers in the future.

In addition, we expect to see benefits from the shift to greater levels of outpatient care, including surgeries at ambulatory surgical centers (ASCs), through increased selling opportunities across our product lines.

Our Fabrication Technology business mix is well balanced between sales in emerging markets and developed nations, and equipment and consumables.

3 unchanged sentences

Instead, our individual businesses monitor key competitors and customers, including to the extent possible their sales, to gauge relative performance and outlook for the future.

We face a number of challenges and opportunities, including the successful integration of acquired businesses, application and expansion of our CBS tools to improve business performance, and rationalization of assets and costs.

On March 4, 2021, we announced our plan to separate our fabrication technology and specialty medical technology businesses into two differentiated, independent, and publicly-traded companies.

The separation is intended to be structured in a tax-free manner and is targeted to be completed near the end of the first quarter of 2022.

Completion of the separation is subject to, among other things, completion of financing and other transactions on satisfactory terms, other steps necessary to qualify the separation as a tax-free transaction, receipt of other regulatory approvals and final approval from the Colfax Board of Directors.

There can be no assurance regarding the form and timing of the separation or its completion.

The announcement did not have any classification impact to our Consolidated Financial Statements or segment reporting.

We will report the fabrication technology business as discontinued operations upon the completion of the separation.

On a continuing basis, we face a number of challenges and opportunities, including the successful integration of acquired businesses, application and expansion of our CBS tools to improve business performance, and rationalization of assets and costs.

We expect strategic acquisitions to contribute to our growth.

5 unchanged sentences

The following discussion of Results of Operations addresses the comparison of the periods presented.

Our management evaluates the operating results of each of its reportable segments based upon Net sales, Segment operating income, which represents Operating income before Restructuring and other related charges and European Union Medical Devices Regulation (“MDR”) and other costs, and Adjusted EBITA as defined in the “Non-GAAP Measures” section.

Our management evaluates the operating results of each of its reportable segments based upon Net sales, Segment operating income, which represents Operating income before Pension settlement gains and losses, Restructuring and other related charges and European Union Medical Devices Regulation (“MDR”) and related costs, and strategic transaction costs, and Adjusted EBITA as defined in the “Non-GAAP Measures” section.

Items Affecting Comparability of Reported Results

The comparability of our operating results for the year ended December 31, 2021 to the comparable 2020 period is affected by the following additional significant items:

Recent Developments

The Separation

We currently report our operations through our Fabrication Technology and Medical Technology segments.

These businesses operate in distinct markets, with unique business opportunities and investment requirements.

As discussed above, on March 4, 2021, we announced the intention to separate these businesses into two differentiated, independent publicly traded companies.

The Chairman of our board of directors and co-founder of Colfax, Mitchell P.

Rales, is expected to serve on the boards of directors of both companies.

The costs incurred in conjunction with the Separation have increased our strategic

transaction costs in 2021, which is recorded withing Selling, general and administrative expense on the Consolidated Statements of Operations.

We expect that the Separation will allow each company to:

(1) optimize capital allocation for internal investment, mergers and acquisitions, and return of capital to shareholders;

(2) tailor investment to its specific business profile and strategic priorities in the most efficient manner possible;

(3) increase operating flexibility and resources to capitalize on growth opportunities in its respective markets;

and (4) improve both investor alignment with its clear value proposition and the ability for investors to value it based on its distinct strategic, operational and financial characteristics.

The Separation would also provide each company with an appropriately valued acquisition currency that could be used for larger, transformational transactions.

Please see Part I.

“Risk Factors” in this Form 10-K for further discussion of the Company’s risks relating to the Separation

Impact of COVID-19

In December 2019, a novel coronavirus disease (“COVID-19”) was first reported in China.

2 unchanged sentences

In an effort to protect the health and safety of our employees, we have taken actions to adopt social distancing policies at our locations around the world, including working from home, reducing the number of people in our sites at any one time, and suspending or restricting employee travel.

In an effort to contain COVID-19 or slow its spread, governments around the world enacted measures in 2020, including periodically closing businesses not deemed “essential,” isolating residents to their homes, limiting access to healthcare, curtailing activities including sporting events, and practicing social distancing.

We implemented a broad range of temporary actions to mitigate the effects of lower sales levels including temporarily reducing salaries, furloughing and laying-off employees, significantly curtailing discretionary expenses, re-phasing of capital expenditures, reducing supplier purchase levels and / or prices, adjusting working capital practices and other measures.

As reflected in the discussions that follow, the pandemic and actions taken in response to it have had a variety of impacts on our results of operations during 2020.

The most severe financial impact occurred in the second quarter, resulting in 31.8% lower sales than the second quarter of 2019.

Sales began to recover in the latter part of the second quarter and through the third and fourth quarters.

Third quarter sales improved to a 4.8% decrease as compared to the third quarter of 2019 while fourth quarter sales decreased 3.9% as compared to the fourth quarter of 2019 on an equivalent sales-per-day basis and another 2.9% due to fewer selling days in 2020.

The surge in COVID-19 cases in the fourth quarter contributed to certain jurisdictions putting further restrictions into place.

We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including national and local public health authorities, and may take additional actions based on their recommendations.

Our precautions were initially reduced in 2021 as restrictions were eased, however we have increased these efforts as variants have become more prevalent and in response to local directives.

In an effort to contain COVID-19 or slow its spread, governments around the world have enacted measures throughout 2020 and 2021, including temporarily closing businesses not deemed “essential,” isolating residents to their homes, limiting access to healthcare, curtailing activities including sporting events, and practicing social distancing.

Increased access to vaccinations has contributed to slowing the spread of COVID-19 in certain jurisdictions, resulting in some or all restrictions being lifted in a number of jurisdictions around the world, allowing a return to more normal activity and operational levels during the first half of 2021.

However, the emergence and subsequent spread of COVID-19 variants has led to the reinstatement of certain restrictions, which slowed the pace of recovery during the second half of 2021 and the beginning of the first quarter of fiscal 2022.

During 2020, we implemented a broad range of temporary actions to mitigate the effects of lower sales levels including temporarily reducing salaries, furloughing and laying-off employees, significantly curtailing discretionary expenses, re-phasing of capital expenditures, reducing supplier purchase levels and / or prices, adjusting working capital practices and other measures.

As sales volumes improved in the second half of 2020, these measures were removed.

As reflected in the discussions that follow, the pandemic and actions taken in response to it have had a variety of impacts on our results of operations during 2020 and 2021.

In 2020, the pandemic began to impact our financial results in March, with the most severe financial impact occurring in the second quarter.

Subsequently, we observed a partial recovery in the second half of 2020.

The surge in COVID-19 cases in the fourth quarter of 2020 contributed to certain jurisdictions putting further restrictions into place, which slowed recovery in the fourth quarter of 2020, and the impact continued into the beginning of the first quarter of 2021, after which sales volumes began to normalize through the second quarter of 2021.

Recovery of sales volumes again slowed in the second half of 2021 due to increased restrictions in certain jurisdictions as a result of the growing spread of COVID-19 variants.

The most severe headwind we faced was within DJO Reconstructive product sales in the third quarter of 2021 due to delays in elective surgery procedures.

We continue to monitor the evolving situation and guidance from international and domestic authorities, including national and local public health authorities, and may take additional actions based on their recommendations.

In these circumstances, there may be developments outside our control that require us to further adjust our operations.

As such, given the dynamic nature of this situation, we cannot reasonably estimate the full impacts of COVID-19 on our financial condition, results of operations or cash flows in the future.

Given the continued dynamic nature of this situation, including the rise, prevalence and severity of variants of the virus, we cannot reasonably estimate the full impacts of COVID-19 on our financial condition, results of operations or cash flows in the future.

COVID-19 and other market dynamics have caused widespread supply chain challenges due to labor, raw material, and component shortages.

As a result, we have experienced supply constraints in our businesses, which have led to cost inflation and logistics delays.

We are taking actions in an effort to mitigate impacts to our supply chain, such as increasing certain inventory stocks to prevent product input shortfalls, however, we expect these pressures to continue.

Please see Part I.

“Risk Factors” in this Form 10-K for further discussion of the Company’s risks relating to the COVID-19 pandemic.

We complement our organic growth plans with acquisitions and other investments.

Strategic Acquisitions

We complement our organic growth plans with strategic acquisitions and other investments.

Acquisitions can significantly affect our reported results, and we report the change in our Net sales between periods both from existing and acquired businesses.

The change in Net sales due to acquisitions for the periods presented in this filing represents the incremental sales as a result of acquisitions.

On February 22, 2019, we completed the acquisition of DJO, creating a new growth platform in the higher-margin orthopedic solutions market.

The change in Net sales due to acquisitions for the year ended December 31, 2021 presented in this filing represents the incremental sales in comparison to the portion of the prior period during which we did not own the business.

During the year ended December 31, 2021, we completed one acquisition in our Fabrication Technology segment and five acquisitions in our Medical Technology segment for net cash consideration of $206.5 million and equity consideration of $285.7 million.

In the first quarter of 2021, our Medical Technology segment acquired Trilliant Surgical, a national provider of foot and ankle orthopedic implants.

In the second quarter of 2021, our Medical Technology segment acquired MedShape, Inc., a provider of innovative surgical solutions for foot and ankle surgeons using its patented superelastic nickel titanium (NiTiNOL) and shape memory polymer technologies.

These two acquisitions were completed for total consideration, net of cash received, of $204.1 million, subject to certain adjustments.

The Trilliant and MedShape acquisitions, along with the prior year acquisition of the Scandinavian Total Ankle Replacement (“STAR”) System and Finger Joint Arthroplasty Portfolio from Stryker, created a new growth product portfolio in the foot and ankle surgical market.

In the third quarter of 2021, our Medical Technology segment acquired Mathys AG Bettlach (“Mathys”), a Switzerland-based company that develops and distributes innovative products for artificial joint replacement, synthetic bone graft solutions and sports medicine, for total acquisition equity consideration of $285.7 million of Colfax Common stock.

The Mathys acquisition expands our reconstructive product portfolio with its complementary surgical solutions and broadens our Medical Technology segment reach outside the U.S.

During the year ended December 31, 2020, we completed five acquisitions in our Medical Technology segment for total consideration, net of cash received, of $67.5 million , subject to certain purchase price adjustments.

This includes the acquisition of LiteCure LLC, a U.S.

leader in high-powered laser rehab products for human and veterinary medical applications, in the fourth quarter for cash consideration of $39.6 million.

This includes the fourth quarter acquisition of LiteCure LLC, a U.S.

leader in high-powered laser rehab products for human and veterinary medical applications for net cash consideration after purchase price adjustments of $39.6 million .

Global Operations

6 unchanged sentences

Foreign Currency Fluctuations

A significant portion of our Net sales, approximately 58% for 2020, is derived from operations outside the U.S., with the majority of those sales denominated in currencies other than the U.S.

A significant portion of our Net sales, approximately 59% for 2021, are derived from operations outside the U.S., with the majority of those sales denominated in currencies other than the U.S.

Because much of our manufacturing and employee costs are outside the U.S., a significant portion of our costs are also denominated in currencies other than the U.S.

Changes in foreign exchange rates can impact our results of operations and are quantified when significant.

For the year ended December 31, 2020 compared to 2019, fluctuations in foreign currencies had unfavorable impacts on the change in Net sales of approximately 2% and affected Gross profit and Selling, general and administrative expenses by less than 2%.

For the year ended December 31, 2021 compared to 2020, fluctuations in foreign currencies increased Net sales, Gross profit, and Selling, general and administrative expenses each by approximately 1%.

Our European operations typically experience a slowdown during the July, August and December vacation seasons.

Sales in our Medical Technology segment typically peak in the fourth quarter.

However, the business impact caused by the COVID-19 pandemic may distort the effects of historical seasonality patterns.

However, the business impact caused by the COVID-19 pandemic, and more recently supply chain disruptions, have distorted and may continue to distort the effects of historical seasonality patterns.

Material Costs

1 unchanged sentence

Our largest material purchases are for components and raw materials including steel, iron, copper and aluminum.

Historically, we have been generally successful in passing raw material cost increases on to our customers.

In 2021, we have experienced increasing raw material costs due to inflation, which we have generally passed through to customers to maintain our profit but has resulted in some margin compression.

Our principal raw materials and components for our Medical Technology segment are foam ethylene vinyl acetate, copolymer for our bracing and vascular products and cobalt chromium alloy, stainless steel alloys, titanium alloy and ultra high molecular weight polyethylene for our surgical implant products.

Historically, we have been generally successful in passing raw material cost increases on to our customers in the form of higher prices.

While we seek to take actions to manage this risk, future changes in component and raw material costs may adversely impact earnings.

Input cost inflation historically has not been a material factor to our gross margin, however inflation effects have increased during 2021 and are expected to continue to remain at elevated levels for at least the near term.

In response, we have recently started enacting tactical price increases to certain market segments in line with industry trends.

As a company we seek to proactively manage this risk;

future changes in component and raw material costs may adversely impact earnings or our margins.

Sales and Cost Mix

The gross profit margins within our Fabrication Technology segment vary in relation to the relative mix of many factors, including the type of product, the location in which the product is manufactured, the end market application for which the product is designed, and the percentage of total revenue represented by consumables, which often have higher margins than equipment.

The consumables product grouping generally has less production complexity and shorter production cycles than equipment products.

Gross profit margins within our Medical Technology segment vary primarily based on the type of product and distribution channel.

Reconstructive products tend to have higher margins than the prevention and rehabilitation products.

Reconstructive products tend to have higher margins than the prevention and recovery products.

The mix of sales was as follows for the periods presented:

4 unchanged sentences

Medical Technology Segment (1) :

Prevention & Rehabilitation 70 % 71 %

Prevention & Recovery 72 % 77 %

Reconstructive 28 % 23 %

(1) The change in product mix from 2020 to 2021 within our Medical Technology segment is partially due to recent acquisitions of businesses that primarily sell reconstructive products.

Non-GAAP Measures

1 unchanged sentence

Adjusted EBITA, a non-GAAP performance measure, is included in this report because it is a key metric used by our management to assess our operating performance.

Adjusted EBITA excludes from Net income from continuing operations the effect of restructuring and other related charges, MDR and other costs, acquisition-related intangible asset amortization and other non-cash charges, strategic transaction costs, and pension settlement loss, as well as related income tax expense (benefit) and interest expense, net.

Adjusted EBITA excludes from Net income from continuing operations the effect of restructuring and other related charges, MDR and related costs, acquisition-related intangible asset amortization and other non-cash charges, strategic transaction costs, income tax expense (benefit), pension settlement gains and losses, debt extinguishment charges, and interest expense, net.

We also present Adjusted EBITA margin, which is subject to the same adjustments as Adjusted EBITA.

Further, we present Adjusted EBITA (and Adjusted EBITA margin) on a segment basis, where we exclude the impact of restructuring and other related charges, MDR and other costs, acquisition-related intangible asset amortization and other non-cash charges, and strategic transaction costs from segment operating income.

Further, we present Adjusted EBITA (and Adjusted EBITA margin) on a segment basis, where we exclude the impact of restructuring and other related charges, MDR and related costs, acquisition-related intangible asset amortization and other non-cash charges, strategic transaction costs, and pension settlement gains and losses from segment operating income.

Adjusted EBITA assists Colfax management in comparing its operating performance over time because certain items may obscure underlying business trends and make comparisons of long-term performance difficult, as they are of a nature and/or size that occur with inconsistent frequency or relate to discrete restructuring plans and other initiatives that are fundamentally different from our ongoing productivity improvements.

10 unchanged sentences

Interest expense, net 72.6 104.3

Pension settlement loss — 33.6

Pension settlement gain (11.2) —

Debt extinguishment charges 29.9 —

Restructuring and other related charges (1)

5 unchanged sentences

Adjusted EBITA margin (non-GAAP) 13.1 % 11.8 %

(1) The year ended December 31, 2019 includes $0.8 million of debt extinguishment charges in the first quarter of 2019 related to financing for the DJO acquisition.

(1) Restructuring and other related charges includes $5.2 million and $6.6 million of expense classified as Cost of sales on the Company’s Consolidated Statements of Operations for the years ended December 31, 2021 and 2020, respectively.

(3) Primarily related to costs specific to compliance with medical device reporting regulations and other requirements of the European Union Medical Device Regulation of 2017.

(4) Includes costs incurred for the acquisition of DJO.

(2) Primarily related to costs specific to compliance with medical device reporting regulations and other requirements of the European Union MDR.

These costs are classified as Selling, general and administrative expense on our Consolidated Statements of Operations.

(3) For the year ended December 31, 2021, Strategic transaction costs includes costs related to the Separation and certain transaction and integration costs related to recent acquisitions.

For the year ended December 31, 2020, Strategic transaction costs includes costs incurred for the acquisition of DJO.

(4) Includes amortization of acquired intangibles and fair value charges on acquired inventory.

10 unchanged sentences

Acquisition-related amortization and other non-cash charges 35.9 127.7 — 163.6

36.3 107.6 — 143.9

Adjusted EBITA (non-GAAP) $ 395.1 $ 184.6 $ (74.7) $ 505.1

2 unchanged sentences

(1) Restructuring and other related charges in the Medical Technology segment includes $5.2 million of expense classified as Cost of sales on the Company’s Consolidated Statements of Operations.

(2) Primarily related to costs specific to compliance with medical device reporting regulations and other requirements of the European Union Medical Device Regulation of 2017.

(3) Includes amortization of acquired intangibles and fair value charges on acquired inventory.

Year Ended December 31, 2020

4 unchanged sentences

21.6 23.4 — 45.0

MDR and other costs — 6.9 — 6.9

Segment operating income (loss) (non-GAAP) 246.0 29.1 (60.8) 214.3

Strategic transaction costs — — 2.8 2.8

— — 61.0 61.0

Acquisition-related amortization and other non-cash charges 36.3 107.6 — 143.9

35.6 102.9 — 138.5

Adjusted EBITA (non-GAAP) $ 282.3 $ 136.7 $ (58.0) $ 361.0

2 unchanged sentences

(1) Restructuring and other related charges in the Medical Technology segment includes $6.6 million of expense classified as Cost of sales on the Company’s Consolidated Statements of Operations.

(2) Strategic transaction costs in the Corporate and other segment includes costs incurred for the acquisition of DJO.

(3) Includes amortization of acquired intangibles and fair value charges on acquired inventory.

Total Company

Net sales from continuing operations decreased to $3.1 billion in 2020 from $3.3 billion in 2019.

Net sales from continuing operations increased to $3.9 billion in 2021 from $3.1 billion in 2020.

The following table presents the components of changes in our consolidated Net sales.

3 unchanged sentences

Existing businesses (1)

(389.5) (11.7) %

Acquisitions (2)

Foreign currency translation (3)

(73.8) (2.2) %

(256.7) (7.7) %

For the year ended December 31, 2021 $ 3,854.3

(1) Excludes the impact of foreign exchange rate fluctuations and acquisitions, thus providing a measure of growth due to factors such as price, product mix and volume.

(2) Represents the incremental sales from our acquisitions discussed previously, primarily driven by approximately two additional months of incremental reported sales compared to the corresponding prior year period as a result of the acquisition of DJO being completed on February 22, 2019.

(1) Excludes the impact of foreign exchange rate fluctuations and acquisitions, thus providing a measure of growth due to factors such as price and volume.

(2) Represents the incremental sales in comparison to the portion of the prior period during which we did not own the business.

(3) Represents the difference between prior year sales valued at the actual prior year foreign exchange rates and prior year sales valued at current year foreign exchange rates.

Net sales decreased in 2020 as compared to 2019, primarily due to the COVID-19 pandemic.

Our Fabrication Technology segment decreased $218.4 million and our Medical Technology segment decreased $171.1 million for existing businesses, partially offset by a $199.5 million increase from approximately two additional months of acquisition sales in our Medical Technology segment, which represents the incremental reported sales compared to the corresponding prior year period as a result of the acquisition of DJO being completed on February 22, 2019, as well as an additional $7.1 million of sales from fourth quarter acquisitions in our Medical Technology segment.

The strengthening of the U.S.

dollar relative to other currencies caused a $73.8 million negative currency translation impact.

Net sales increased during 2021 as compared to 2020 primarily due to the recovery from the COVID-related sales downturn in 2020, as well as inflation-related pricing increases, sales from acquisitions, and to a lesser extent new product sales.

Existing business sales of our Fabrication Technology segment increased $456.6 million due to strong sales volumes, inflation-related pricing increases and new product initiatives.

In our Medical Technology segment, existing business sales increased $154.3 million due to a recovery in sales volumes from the decline related to COVID-19 and expansion in the reconstructive product group from market outperformance and new product launches.

Net sales from acquisitions increased during 2021 as compared to 2020 primarily due to acquisitions in our Medical Technology segment that closed in 2021 and the fourth quarter of 2020.

The weakening of the U.S.

dollar relative to other currencies, most notably the Euro, caused a $31.0 million favorable currency translation impact.

Operating Results

17 unchanged sentences

Acquisition-related amortization and other non-cash charges $ 163.6 $ 143.9

$ 143.9 $ 138.5

Pension settlement loss $ — $ 33.6

Pension settlement gain $ (11.2) $ —

Interest expense, net $ 72.6 $ 104.3

Debt extinguishment charges $ 29.9 $ —

Income tax expense (benefit) $ 66.7 $ (6.1)

(2) Primarily related to costs specific to compliance with medical device reporting regulations and other requirements of the European Union Medical Device Regulation of 2017.

(3) Includes costs incurred for the acquisition of DJO.

(4) Includes amortization of acquired intangibles and fair value charges on acquired inventory.

2021 Compared to 2020

Gross profit decreased $113.0 million during 2020 in comparison to 2019, primarily driven by lower sales volumes that resulted from the COVID-19 pandemic and $15.3 million of unfavorable currency translation effects, partly offset by temporary mitigating cost actions, new product initiatives, and the inclusion of $113.3 million from two additional months of Medical Technology segment sales and profit.

Gross profit margins approximated the same level as 2019.

Gross margins were impacted by lower sales volume related to COVID-19, offset by two additional months of higher-margin sales of our Medical Technology segment in 2020 and temporary cost reduction actions taken in response to the pandemic.

Selling, general and administrative expense decreased $44.7 million mainly due to a $58.2 million decrease in strategic transaction costs and temporary cost reductions that peaked in the second quarter, partially offset by two additional months of results of our Medical Technology segment.

Restructuring and other related charges decreased by $28.7 million due to completing certain Medical Technology segment restructuring programs.

Interest expense, net decreased by $15.2 million, primarily attributable to lower interest rates and a lower debt balance.

The effective tax rate for Net income from continuing operations during 2020 was (10.4)%, which was lower than the 2020 U.S.

Gross profit increased $325.6 million during 2021 in comparison to 2020 due to a $151.5 million increase in our Fabrication Technology Segment and a $172.9 million increase in our Medical Technology segment.

The Gross profit increase was primarily attributable to higher sales volumes and the related improved production efficiencies compared to 2020, during which sales volumes were negatively impacted by the COVID-19 pandemic.

During 2021, Gross profit also increased due to acquisitions, new product initiatives and favorable foreign currency impacts, partially offset by increased supply chain and logistic costs in both segments.

Gross profit margin was consistent with 2020, as margin improvements in both segments were offset by the dilutive impact of inflation, net of customer price increases, in our Fabrication Technology segment, which compressed margins.

Selling, general and administrative expense increased $242.0 million primarily due to a $106.1 million increase in costs associated with acquisitions and the related integration costs from the newly acquired businesses, primarily within our Medical Technology segment, the cessation of prior year temporary cost reduction measures that were taken in response to COVID-19, and increased sales commissions from increased sales levels.

A $41.2 million increase in strategic transaction costs related to the Separation also increased Selling, general and administrative expense during 2021.

Restructuring and other related charges decreased by $12.1 million primarily due to the completion of certain restructuring programs in our Medical Technology segment.

Additionally, during 2021, a pension settlement gain of $11.2 million was recognized when the independent trustees of a company pension plan agreed to merge that plan with another company pension plan and contribute its surplus assets.

Debt extinguishment charges of $29.9 million were recorded in the second quarter of 2021 due to an early redemption of certain senior notes.

Interest expense, net decreased by $31.7 million, primarily due to an overall reduction in debt balances during the current year as a result of the aforementioned redemption of senior notes.

The effective tax rate for Net income from continuing operations during 2021 was 40.3%, which was higher than the 2021 U.S.

federal statutory tax rate of 21% mainly due to the net impact of U.S.

tax on international operations, capital gains on current year transactions, certain non-deductible expenses, and withholding taxes.

These unfavorable impacts were partially offset by the impact of international rates and the reduction of valuation allowances on U.S.

and German net operating losses, and foreign tax credits.

The effective tax rate for 2020 was (10.4)%, which was lower than the 2020 U.S.

federal statutory tax rate of 21% mainly due to the net impact of U.S.

tax credits, a benefit from U.S.

state tax losses, a discrete tax benefit associated with the filing of timely elected changes to U.S.

Federal tax returns to credit rather than to deduct foreign taxes and release of valuation allowance on U.S.

state tax losses, a discrete tax benefit associated with the filing of timely elected change to U.S.

Federal tax returns to credit rather than to deduct foreign taxes and reduction of valuation allowance on U.S.

federal net operating losses.

1 unchanged sentence

tax on international operations, withholding taxes, and certain non-deductible expenses.

The effective tax rate for 2019 was 62.6%, which was higher than the 2019 U.S.

federal statutory tax rate of 21% mainly due to taxation of foreign earnings, non-deductible transaction costs and unfavorable changes to the realization of deferred tax assets.

These unfavorable adjustments were partially offset by lower effective tax rates of foreign jurisdictions, U.S.

R&D and foreign tax credits, and the realization of deferred tax assets that previously had valuation allowances.

Net income from continuing operations increased in 2020 compared to 2019, largely due to decreases in strategic transaction and restructuring costs and the pension settlement loss incurred during 2019.

These were offset by a decrease in Gross profit from COVID-19 impacts, mitigated by the reductions in Selling, general and administrative expense from our temporary cost reduction programs.

Net income margin from continuing operations increased by 150 basis points for the same reasons that Net income from continuing operations increased.

The lower Adjusted EBITA was driven by COVID-19 impacts, partially offset by the inclusion of two additional months of results of our Medical Technology segment in 2020 and the reductions in Selling, general and administrative expense from our temporary cost reduction programs.

Adjusted EBITA margin decreased by 250 basis points for largely the same reasons.

Net income from continuing operations increased in 2021 compared to 2020, largely due to the strong recovery from the prior year COVID-related sales downturn.

The sales-related benefits from this recovery in 2021 were partially offset by increases in expenses attributable to the cessation of aforementioned temporary cost reductions implemented during 2020 in reaction to COVID-driven sales reductions, higher income tax expense, as well as increased supply chain and logistic costs.

During 2021, we also incurred debt extinguishment charges, increased strategic transaction costs related to the Separation, and higher sales commissions related to greater sales, partially offset by a pension settlement gain.

Net income margin from continuing operations increased by 50 basis points due to the aforementioned factors.

Adjusted EBITA increased primarily due to the improved sales volumes and new product initiatives, partially offset by the aforementioned supply chain and logistic costs and sales commission increases, and the cessation of the aforementioned temporary cost reductions.

Adjusted EBITA margin increased for the same reasons, partially offset by inflation-related pricing increases in our Fabrication Technology segment, as well as recent acquisitions in our Medical Technology segment which were dilutive to the margin, but are expected to be accretive in future years.

Business Segments

7 unchanged sentences

ESAB also offers a range of digital software and solutions to help its customers increase their productivity, remotely monitor their welding operations and digitize their documentation.

Products are sold into a wide range of end markets, including infrastructure, wind power, marine, medical / life sciences, pipelines, mobile/off-highway equipment, oil, gas, and mining.

Products are sold into a wide range of end markets, including general industry, construction, infrastructure, transportation, energy, renewable energy, and medical & life sciences.

The following table summarizes selected financial data for our Fabrication Technology segment:

5 unchanged sentences

Selling, general and administrative expense $ 479.7 $ 438.5

Segment operating income $ 246.0 $ 302.6

Segment operating income margin 12.6 % 13.5 %

Segment operating income (non-GAAP) $ 356.3 $ 246.0

Segment operating income margin (non-GAAP) 14.7 % 12.6 %

Adjusted EBITA (non-GAAP) $ 395.1 $ 282.3

2 unchanged sentences

Restructuring and other related charges $ 19.0 $ 21.6

Strategic transaction costs $ 2.9 $ —

Acquisition-related amortization and other non-cash charges $ 35.9 $ 36.3

Pension settlement loss $ — $ 33.6

Net sales in our Fabrication Technology segment decreased $296.9 million during 2020 compared to 2019 due to lower sales volumes related to COVID-19 and a $78.6 million unfavorable foreign currency translation impact.

Despite the $113.7 million decrease in Gross profit due to lower sales, Gross profit margin was substantially maintained at the prior year level due to temporary cost reductions and restructuring benefits.

Selling, general and administrative expense decreased in the period due to benefits from restructuring initiatives and temporary cost reduction programs.

Lower sales levels related to COVID-19 resulted in a decline in Segment operating income, Adjusted EBITA, and related margins over the same period.

Net sales in our Fabrication Technology segment increased $478.0 million during 2021 compared to 2020 due to the strong recovery from the COVID-19 effects that impacted 2020, as well as new product initiatives, inflation-related pricing increases, and a $19.3 million favorable foreign currency translation impact.

Gross profit increased $151.5 million in 2021 as a result of improved sales volumes and production efficiencies, while Gross profit margin decreased 70 basis points due to the impact of inflation-related pricing and cost increases, which compressed the margin.

Selling, general and administrative expense increased in the period primarily due to the cessation of temporary cost reductions implemented in 2020, partially offset by benefits from restructuring initiatives.

Segment operating income and Adjusted EBITA increased in 2021 compared to 2020 due to the improved sales volumes, partially offset by increased Selling, general and administrative costs.

The related margins increased for the same reasons, partially offset by the aforementioned impact from inflation-related pricing and cost increases over the same period.

Medical Technology

We develop, manufacture and distribute high-quality medical devices and services across the continuum of patient care from injury prevention to joint replacement to rehabilitation after surgery, injury or from degenerative disease, enabling people to regain or maintain their natural motion.

Our products are used by orthopedic specialists, spine surgeons, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers and other healthcare professionals.

Our products are used by orthopedic specialists, surgeons, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers and other healthcare professionals.

Our products primarily include orthopedic braces, rehabilitation devices, footwear, surgical implants, and bone growth stimulators.

The following table summarizes the selected financial data for our Medical Technology segment:

Year Ended December 31, 2020 From February 22, 2019 to December 31, 2019

Year Ended December 31,

(Dollars in millions)

3 unchanged sentences

Selling, general and administrative expense $ 737.7 $ 589.3

Segment operating income $ 29.1 $ 96.2

Segment operating income margin 2.6 % 8.9 %

Segment operating income (non-GAAP) $ 53.1 $ 29.1

Segment operating income margin (non-GAAP) 3.7 % 2.6 %

Adjusted EBITA (non-GAAP) $ 184.6 $ 136.7

4 unchanged sentences

MDR and other costs $ 7.9 $ 6.9

Strategic transaction costs $ 3.8 $ —

Acquisition-related amortization and other non-cash charges $ 127.7 $ 107.6

(1) Restructuring and other related charges includes $6.6 million and $8.5 million of expense classified as Cost of sales on the Company’s

Consolidated Statements of Operations for the years ended December 31, 2020 and 2019, respectively.

Net sales increased for our Medical Technology segment during 2020 compared with 2019 due to $199.5 million from approximately two additional months of acquisition-related sales in 2020, partially offset by a decrease in sales volume related to COVID-19.

Gross profit was consistent with 2019 and benefited early in the year from an additional two months of sales in 2020 and a $15.2 million decrease in inventory fair value charges.

These gross profit increases were offset by COVID-19 volume declines as well as higher freight costs and production inefficiencies related to COVID-19.

Gross profit margin declined primarily as a result of COVID-19 effects on sales volumes and supply chain inefficiencies.

Selling, general and administrative expense also increased $72.8 million due to including two additional months of activity in results, partially offset by temporary expense reductions.

Segment operating income, Adjusted EBITA, and related margins all declined as a result of the aforementioned factors.

Restructuring and other related charges decreased by $27.3 million due to completing certain projects.

Net sales increased for our Medical Technology segment during 2021 compared with 2020 due to a recovery in sales volumes from the COVID-19-related declines during 2020, as well as continued expansion in the reconstructive product group from market outperformance and new product launches, acquisition-related sales growth of $139.5 million and a favorable foreign currency translation impact of $11.7 million.

After a surge of COVID-19 cases in the fourth quarter of 2020, which negatively impacted sales volumes early in 2021, sales volumes began normalizing late in the first quarter and through the second quarter of 2021.

However, as a result of the increase in cases of COVID-19 variants during the second half of 2021, recovery slowed during this period, primarily due to a deceleration in elective surgical procedure volumes.

Gross profit and Gross profit margins increased during 2021 compared to the prior year due to improved sales volumes and acquisition-related growth, partially offset by increased supply chain and logistic costs.

Selling, general and administrative expense also increased primarily due to the additional costs from newly-acquired businesses and related integration costs, the cessation of temporary employee cost reductions implemented during 2020, and higher sales commissions in the current year.

Segment operating income, Adjusted EBITA, and related margins all increased as a result of the aforementioned factors.

Margin improvements were partially offset by the recent acquisitions, which were dilutive to the 2021 margins, but are expected to be accretive in future years.

Restructuring and other related charges decreased by $9.5 million due to the completion of certain projects.

Liquidity and Capital Resources

We finance our long-term capital and working capital requirements through a combination of cash flows from operating activities, various borrowings and the issuances of equity.

We expect that our primary ongoing requirements for cash will be for working capital, funding of acquisitions, capital expenditures, restructuring, asbestos-related cash outflows, and debt service and required amortization of principal.

We expect that our primary ongoing requirements for cash will be for working capital, funding of acquisitions, Separation costs, capital expenditures, restructuring, asbestos-related cash outflows, and debt service and required amortization of principal.

We believe we could raise additional funds in the form of debt or equity if it was determined to be appropriate for strategic acquisitions or other corporate purposes.

Equity Capital

On March 19, 2021, we completed the underwritten public offering of 16.1 million shares of our Common stock at a price to the public of $46.00 per share, resulting in net proceeds of $711.3 million, after deducting offering expenses and underwriters’ discount and commissions.

We used these proceeds to pay down certain of our senior notes, as discussed further below.

On February 12, 2018, our Board of Directors authorized the repurchase of up to $100 million of our Common stock from time-to-time on the open market or in privately negotiated transactions.

The Board of Directors increased the repurchase authorization by an additional $100 million on June 6, 2018, and again for an additional $100 million on July 19, 2018.

There were $200.0 million repurchases made during the year ended December 31, 2018.

There were no repurchases made in 2019 and 2020.

No stock repurchases have been made under this plan since the third quarter of 2018.

As of December 31, 2021, the remaining stock repurchase authorization provided by our Board of Directors was $100.0 million.

5 unchanged sentences

The Revolver contains a $50 million swing line loan sub-facility.

On May 1, 2020, the Company entered into an amendment to its Credit Facility (the “Amendment”).

During the third quarter of 2020, the Company made a voluntary $40 million principal payment on the Term Loan.

Refer to Note 10, “Debt” in the accompanying Notes to the Consolidated Financial Statements for more information regarding the Amendment.

Refer to Note 13, “Debt” in the accompanying Notes to the Consolidated Financial Statements for more information.

As of December 31, 2021, we are in compliance with the covenants under the Credit Facility.

As of December 31, 2020, the weighted-average interest rate of borrowings under the Credit Facility was 1.90%, excluding accretion of original issue discount and deferred financing fees, and there was $975 million available on the Revolver.

As of December 31, 2021, the weighted-average interest rate of borrowings under the Credit Facility was 1.59%, excluding accretion of original issue discount and deferred financing fees, and there was $375 million undrawn capacity available on the Revolver.

Euro Senior Notes

On April 19, 2017, we issued senior unsecured notes with an aggregate principal amount of €350 million (the “Euro Notes”).

In 2017, we issued senior unsecured notes with an aggregate principal amount of €350 million (the “Euro Notes”).

The Euro Notes are due in April 2025, have an interest rate of 3.25% and are guaranteed by certain of our domestic subsidiaries (the “Guarantees”).

The proceeds from the Euro Notes offering were used to repay borrowings under our previous credit facilities totaling €283.5 million, as well as for general corporate purposes.

The Euro Notes and the Guarantees have not been, and will not be, registered under the Securities Act of 1933, as amended (the "Securities Act"), or the securities laws of any other jurisdiction.

2022 Tangible Equity Units

On January 11, 2019, we issued $460 million in tangible equity units.

We offered 4 million of the 5.75% tangible equity units at the stated amount of $100 per unit and an option to purchase up to an additional 600,000 tangible equity units at the stated amount of $100 per unit, which was exercised in full at settlement.

2022 Tangible Equity Unit (“TEUs”)

In 2019, we issued $460 million in TEUs with a 5.75% interest rate, comprised of 4.6 million units at $100 per unit.

Total cash of $447.7 million was received upon closing, comprised of $377.8 million TEU prepaid stock purchase contracts and $69.9 million of TEU amortizing notes due January 2022.

The proceeds were used to finance a portion of the purchase price for the DJO acquisition and for general corporate purposes.

Refer to Note 14, “Equity” in the accompanying Notes to Consolidated Financial Statements for more information.

Subsequent to December 31, 2021, all of the remaining TEU prepaid stock purchase contracts were converted to shares of common stock and the final quarterly cash installment on the TEU amortizing notes was paid.

Refer to Notes 13 “Debt” and 14, “Equity” in the accompanying Notes to Consolidated Financial Statements for more information.

2024 Notes and 2026 Notes

On February 5, 2019, CFX Escrow Corporation, an unaffiliated special purpose finance entity established to issue the notes and incorporated in the State of Delaware, issued two tranches of senior notes with aggregate principal amounts of $600 million (the “2024 Notes”) and $400 million (the “2026 Notes) to finance a portion of the DJO acquisition.

The 2024 Notes are due on February 15, 2024 and have an interest rate of 6.0%.

In 2019, we issued two tranches of senior notes with aggregate principal amounts of $600 million (the “2024 Notes”) and $400 million (the “2026 Notes) to finance a portion of the DJO acquisition.

The 2024 Notes were due on February 15, 2024 and had an interest rate of 6.0%.

The 2026 Notes are due on February 15, 2026 and have an interest rate of 6.375%.

Upon closing of the acquisition, we assumed all of CFX Escrow Corporation’s obligations under the 2024 Notes and 2026 Notes.

Each tranche of notes is guaranteed by certain of our domestic subsidiaries.

The 2026 notes are guaranteed by certain of our domestic subsidiaries.

We redeemed all of the outstanding 2024 Notes and $100 million of the outstanding principal amount of our 2026 Notes on April 24, 2021.

Refer to Note 13, “Debt” in the accompanying Notes to the Consolidated Financial Statements for more information.

Other Indebtedness

4 unchanged sentences

We believe that our sources of liquidity are adequate to fund our operations for the next twelve months.

As of December 31, 2020, we had $101.1 million of Cash and cash equivalents and restricted cash, a decrease of $8.5 million from $109.6 million as of December 31, 2019.

See Note 2, "Summary of Significant Accounting Policies - Restricted Cash" for further information.

As of December 31, 2021, we had $719.4 million of Cash and cash equivalents, an increase of $618.3 million from the $101.1 million Cash and cash equivalents and restricted cash on hand as of December 31, 2020.

See Note 2, "Summary of Significant Accounting Policies - Restricted Cash" in the accompanying Notes to the Consolidated Financial Statements for further information.

The following table summarizes the change in Cash and cash equivalents during the periods indicated:

5 unchanged sentences

Acquisitions, net of cash received (223.3) (69.8)

Proceeds from sale of business, net — 1,635.9

Net cash used in investing activities (320.5) (175.1)

Proceeds from (repayments of) borrowings, net (122.9) 1,085.4

Repayments of debt, net (126.0) (122.9)

Proceeds from issuance of common stock, net 745.2 3.5

Payment for noncontrolling interest share repurchase — (93.5)

Proceeds from prepaid stock purchase contracts — 377.8

Other (12.3) (12.1)

Payment of debt extinguishment costs (24.4) —

Deferred consideration payments and other (9.9) (12.3)

Net cash provided by (used in) financing activities 584.9 (131.7)

Effect of foreign exchange rates on Cash and cash equivalents (2.2) (3.8)

Decrease in Cash and cash equivalents $ (8.6) $ (135.4)

Increase (decrease) in Cash and cash equivalents $ 618.3 $ (8.6)

Cash used in operating activities related to the discontinued operations of the divested Air and Gas Handling business for the years ended December 31, 2021 and 2020 was $9.1 million and $9.4 million, respectively.

Cash used in investing activities related to the discontinued operations of the divested Air and Gas Handling business was $27.5 million for the year ended December 31, 2019.

Cash flows from operating activities can fluctuate significantly from period to period due to changes in working capital and the timing of payments for items such as pension funding, asbestos-related costs and restructuring program funding.

As a result of previous divestitures, we also retained certain asbestos-related contingencies and insurance coverages.

Net cash received or paid for asbestos-related costs, net of insurance proceeds, including the disposition of claims, defense costs and legal expenses related to litigation against our insurers, creates variability in our operating cash flows.

We had net cash inflows of $0.3 million during 2021 and net cash outflows of $2.2 million during 2020, which were net of $32.9 million and $79.6 million of reimbursements from insurance companies on our asbestos insurance asset balances, respectively.

Changes in significant operating cash flow items are discussed below.

• Net cash received or paid for asbestos-related costs, net of insurance proceeds, including the disposition of claims, defense costs and legal expenses related to litigation against our insurers, creates variability in our operating cash

We had net cash outflows of $2.2 million and $3.2 million during 2020 and 2019, respectively.

Net cash outflows for 2020 and 2019 were net of $79.6 million and $59.8 million, respectively, of reimbursements from insurance companies on our asbestos insurance asset balances.

• Funding requirements of our defined benefit plans, including pension plans and other post-retirement benefit plans, can vary significantly from period to period due to changes in the fair value of plan assets and actuarial assumptions.

2 unchanged sentences

• During 2021 and 2020, cash paid for strategic transaction costs were $23.4 million and $5.1 million, respectively.

• Year ended December 31, 2020 results include $52.3 million of inflows from working capital due to lower sales and operational improvements.

Year ended December 31, 2019 results included a $83.1 million outflow, due to an increase in Net Sales, an estimated $40 million one-time effort to bring DJO suppliers into payment terms consistent with our normal practices, and the elimination of a DJO accounts receivable factoring program.

Payments in 2021 were primarily for costs related to the Separation.

• Year ended December 31, 2021 results include $78.5 million of outflows from working capital as a result of business recovery and growth increasing in inventory, accounts receivable and payable levels from the COVID-impacted 2020 year, as well as supply chain challenges in 2021 which have also impacted inventory levels.

Year ended December 31, 2020 results included a $52.3 million inflow from working capital due to lower sales due to COVID-19 and operational improvements.

We define working capital as Trade receivables, net and Inventories, net, both reduced by Accounts payable and customer advances and billings in excess of costs incurred.

Cash flows used in investing activities during 2020 includes $69.8 million of cash used for 5 acquisitions and three investments in our Medical Technology segment.

Cash flows used by investing activities during 2019 included $3.2 billion of cash used for acquisitions and $1.6 billion in proceeds from the sale of the Air and Gas Handling business.

Cash flows provided by financing activities in 2019 included $1.1 billion of proceeds from borrowings, net and $377.8 million of proceeds from the issuance of tangible equity units.

Cash flows used in investing activities during 2021 includes $223.3 million of cash used for five acquisitions and three investments in our Medical Technology segment.

Cash flows used by investing activities during 2020 included $69.8 million of cash used for five acquisitions and three investments in our Medical Technology segment.

Refer to Note 5 “Acquisitions” in the accompanying Notes to the Consolidated Financial Statements for more information.

Cash flows provided by financing activities in 2021 includes $126.0 million repayment of borrowings, net and $745.2 million proceeds from the issuance of common stock.

Cash flows used in financing activities in 2020 included $122.9 million repayment of borrowings, net and $3.5 million proceeds from the issuance of common stock.

Our Cash and cash equivalents as of December 31, 2021 include $42.4 million held in jurisdictions outside the U.S.

3 unchanged sentences

Contractual Obligations

The following table summarizes our future contractual obligations as of December 31, 2020.

One Year 1-3 Years 3-5 Years More Than

5 Years Total

(Dollars in millions)

Debt $ 27.1 $ 6.5 $ 1,813.2 $ 400.0 $ 2,246.8

As of December 31, 2021, the Company’s Term Loan and Revolver had principal amounts outstanding of $785 million and $600 million, respectively.

There are no required principal payments due on the Term Loan or Revolver within 12 months.

As of December 31, 2021, the Company had outstanding floating and fixed rate notes with varying maturities for an aggregate principal amount of $700.8 million, with $8.3 million payable within 12 months.

Interest Payments on Debt

93.3 183.3 150.1 30.1 456.8

As of December 31, 2021, future interest payments associated with the Term Loan and Revolver amount to $44.4 million and $33.9 million, respectively with $15.1 million and $11.6 million payable within 12 months.

Future interest payments associated with the notes total $123.5 million with $32.7 million payable within 12 months.

Variable interest payments are estimated using a static rate of 1.90%.

Operating Leases

The Company leases certain office spaces, warehouses, facilities, vehicles, and equipment.

As of December 31, 2021, the Company had fixed lease payment obligations of $214.3 million, with $45.7 million payable within 12 months.

Purchase Obligations

239.8 31.2 4.4 1.5 276.9

Total $ 402.7 $ 281.7 $ 2,000.8 $ 503.4 $ 3,188.6

(1) Variable interest payments are estimated using a static rate of 1.90%.

(2) Excludes open purchase orders for goods or services that are provided on demand, the timing of which is not certain.

As of December 31, 2021, the Company had other purchase obligations of $280.0 million, with $276.6 million payable within 12 months.

Purchase obligations herein exclude open purchase orders for goods or services that are provided on demand as the timing of which is not certain.

We have funding requirements associated with our pension and other post-retirement benefit plans as of December 31, 2021, which are estimated to be $8.6 million for the year ending December 31, 2022.

Other long-term liabilities, such as those for asbestos and other legal claims, employee benefit plan obligations, deferred income taxes and liabilities for unrecognized income tax benefits, are excluded from the above table since they are not contractually fixed as to timing and amount.

Other long-term liabilities, such as those for asbestos and other legal claims, employee benefit plan obligations, deferred income taxes and liabilities for unrecognized income tax benefits, are excluded from this disclosure since they are not contractually fixed as to timing and amount.

Off-Balance Sheet Arrangements

17 unchanged sentences

We sold our Fluid Handling business in 2017, and pursuant to the purchase agreement, we retained the asbestos-related contingencies and insurance coverages.

However, as we did not retain an interest in the ongoing operations of the business subject to the contingencies, we have classified asbestos-related activity in our Consolidated Statements of Operations as part of Income (loss) from discontinued operations, net of taxes.

See Note 4, “Discontinued Operations” for further information.

9 unchanged sentences

Accordingly, no accrual has been recorded for any costs which may be paid after the next 15 years.

Projecting future asbestos-related liability costs is subject to numerous variables that are difficult to predict, including, among others, the number of claims that might be received, the type and severity of the disease alleged by each claimant, the latency period associated with asbestos exposure, dismissal rates, costs of medical treatment, the financial resources of other companies that are co-defendants in the claims, funds available in post-bankruptcy trusts, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, including fluctuations in the timing of court actions and rulings, and the impact of potential changes in legislative or judicial standards, including potential tort reform.

Projecting future asbestos-related liability costs is subject to numerous variables that are difficult to predict, including, among others, the number of future claims that might be received, the type and severity of the disease alleged by each claimant, dismissal rates, the lag time between filing and the settlement of claims, settlement values resulting in part from uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, including fluctuations in the timing of court actions and rulings, and the impact of potential changes in legislative or judicial standards, including potential tort reform.

Furthermore, any projections with respect to these variables are subject to even greater uncertainty as the projection period lengthens.

3 unchanged sentences

While it is reasonably possible that the subsidiaries will incur costs after this period, we do not believe the reasonably possible loss or range of reasonably possible loss is estimable at the current time.

Accordingly, no accrual has been

recorded for any costs which may be paid after the next 15 years.

Defense costs associated with asbestos-related liabilities as well as costs incurred related to litigation against the subsidiaries’ insurers are expensed as incurred.

Accordingly, no accrual has been recorded for any costs which may be paid after the next 15 years.

Defense costs associated

with asbestos-related liabilities as well as costs incurred related to litigation against the subsidiaries’ insurers are expensed as incurred.

We assessed the subsidiaries’ existing insurance arrangements and agreements, estimated the applicability of insurance coverage for existing and expected future claims, analyzed publicly available information bearing on the current creditworthiness and solvency of the various insurers, and employed such insurance allocation methodologies as we believed appropriate to ascertain the probable insurance recoveries for asbestos liabilities.

5 unchanged sentences

See Note 18, “Commitments and Contingencies” in the accompanying Notes to Consolidated Financial Statements for additional information regarding our asbestos liabilities and insurance assets.

Impairment of Goodwill and Indefinite-Lived Intangible Assets

Goodwill represents the costs in excess of the fair value of net assets acquired associated with our acquisitions.

Indefinite-lived intangible assets consist of certain trade names.

Goodwill and Intangible Assets

Goodwill represents the costs in excess of the fair value of net assets acquired associated with our business acquisitions.

Our business acquisitions typically result in the recognition of goodwill, developed technology, trade name or trademark, and customer relationship intangible assets, which affect the amount of future period amortization expense and possible impairment charges that we may incur.

The fair values of acquired intangibles are determined using estimates and assumptions based on information available near the acquisition date.

Significant assumptions include the discount rates, projected net sales and operating income metrics, royalty rates and technology obsolescence rates.

These assumptions are forward looking and could be affected by future economic and market conditions.

We engage third-party valuation specialists who review the critical assumptions and calculations of the fair value of acquired intangible assets in connection with our significant acquisitions.

In connection with our acquisitions of Trilliant, MedShape, and Mathys during the year ended December 31, 2021, we recognized aggregate goodwill of approximately $187 million and identifiable intangible assets of approximately $181 million.

Refer to Notes 2, 5 and 9 to the Consolidated Financial Statements for a description of the Company’s policies relating to goodwill and intangible assets.

We evaluate the recoverability of Goodwill and indefinite-lived intangible assets annually or more frequently if an event occurs or circumstances change in the interim that would more likely than not reduce the fair value of the asset below its carrying amount.

7 unchanged sentences

The discounted cash flow models indicate the fair value of the reporting units based on the present value of the cash flows that the reporting units are expected to generate in the future.

Significant estimates in the discounted cash flow models include the weighted average cost of capital, revenue growth rates, long-term rate of growth, profitability of our business, tax rates, and working capital effects.

Significant estimates in the discounted cash flow

models include the weighted average cost of capital, revenue growth rates, long-term rate of growth, profitability of our business, tax rates, and working capital effects.

The market valuation approach indicates the fair value of the business based on a comparison against certain market information.

1 unchanged sentence

Due to the sale of the Air and Gas Handling reporting unit in 2019 and the held for sale accounting treatment, we performed a quantitative analysis for impairment in the second quarter of 2019.

Based on the purchase price and the carrying value of the net assets being sold, the Company recorded an impairment loss of $481 million in the second quarter of 2019, which is included in Income (loss) from discontinued operations, net of taxes in the Consolidated Statements of Operations.

The impairment loss included a $449 million goodwill impairment charge and a $32 million valuation allowance charge on assets

held for sale relating to the initial estimated cost to sell the business.

Based on the purchase price and the carrying value of the net assets being sold, the Company recorded an impairment loss of $481 million in the second quarter of 2019, which is included in Loss from discontinued operations, net of taxes in the Consolidated Statements of Operations.

The impairment loss included a $449 million goodwill impairment charge and a $32 million valuation allowance charge on assets held for sale relating to the initial estimated cost to sell the business.

An accumulated other comprehensive loss of approximately $350 million associated with the Air and Gas Handling business was included in the determination of the goodwill impairment charge, which is mostly attributable to the recognition of cumulative foreign currency translation effects from the long-term strengthening of the U.S.

The Air and Gas Handling business sale was completed on September 30, 2019.

Impairment charges related to the divested Air and Gas Handling business are recorded in Income (loss) from discontinued operations, net of taxes on the Consolidated Statements of Operations.

Impairment charges related to the divested Air and Gas Handling business are recorded in Loss from discontinued operations, net of taxes on the Consolidated Statements of Operations.

See Note 4, “Discontinued Operations” in the accompanying Notes to Consolidated Financial Statements for further information.

A qualitative assessment of Goodwill was performed for the Fabrication Technology reporting unit for the years ended December 31, 2019 and 2018, which indicated no impairment existed.

A qualitative assessment of Goodwill was performed for the Fabrication Technology reporting unit for the year ended December 31, 2019 which indicated no impairment existed.

Additionally, we performed a qualitative assessment of Goodwill for the Medical Technology reporting unit for the year ended December 31, 2019, which indicated no impairment existed.

Due to overall market declines as a result of the COVID-19 pandemic, management decided to forgo the qualitative assessment and performed quantitative Goodwill impairment tests for both the Fabrication Technology and Medical Technology reporting units for the year ended December 31, 2020, which indicated no impairment existed.

For the year ended December 31, 2021, management performed a qualitative assessment of Goodwill for the Fabrication Technology reporting unit and a quantitative assessment of Goodwill for the Medical Technology reporting unit, both of which indicated no impairment existed.

The carrying amount of Goodwill of the Fabrication Technology and Medical Technology reporting units for the year ended December 31, 2021 was $1.5 billion and $1.9 billion, respectively.

We determined the fair value of each reporting unit by equally weighting a discounted cash flow approach and market valuation approach.

The Fabrication Technology reporting unit quantitative impairment test resulted in a fair value that exceeded its carrying amount by approximately 50%.

The Medical Technology reporting unit had a fair value that exceeded its carrying amount by approximately 12%.

We determined the fair value of the Medical Technology reporting unit by equally weighting a discounted cash flow approach and market valuation approach, and the reporting unit’s fair value exceeded its carrying amount by approximately 22%.

Determining the fair value of a reporting unit requires the application of judgment and involves the use of significant estimates and assumptions which can be affected by changes in business climate, economic conditions, the competitive environment and other factors.

2 unchanged sentences

An increase in discount rates, a reduction in projected cash flows or a combination of the two could lead to a reduction in the estimated fair values, which may result in impairment charges that could materially affect our financial statements in any given year.

For sensitivity analysis, we estimated the fair value of the Medical Technology reporting unit if we increased the discount rate by 25 basis points or reduced the long-term revenue growth rate by 25 basis points, and the resulting excess fair value over carrying value decreased by 220 basis points and 160 basis points, respectively.

In the evaluation of indefinite-lived intangible assets for impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying value.

For sensitivity analysis, we estimated the fair value of the Medical Technology reporting unit if we reduced the long-term revenue growth rate by 25 basis points, and the resulting excess fair value over carrying value decreased by 150 basis points.

In the evaluation of indefinite-lived intangible assets for impairment, which includes certain trade names of our Fabrication Technology business, we first assess qualitative factors to determine whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying value.

If we determine that it is more likely than not for the indefinite-lived intangible asset’s fair value to be greater than its carrying value, a calculation of the fair value is not performed.

3 unchanged sentences

Significant estimates in this approach include projected revenues and royalty and discount rates for each trade name evaluated.

A qualitative assessment was performed for the Fabrication Technology segment trade names for the years ended December 31, 2019 and 2018, which indicated no impairment existed.

A qualitative assessment was performed for the Fabrication Technology segment trade names for the year ended December 31, 2019, which indicated no impairment existed.

For the year ended December 31, 2020, due to overall market declines as a result of the COVID-19 pandemic, we performed quantitative impairment tests on all indefinite-lived trade names within our Fabrication Technology segment, which indicated no impairment existed.

For the year ended December 31, 2021, management

decided to forgo the qualitative assessment and performed quantitative assessments for all the Fabrication Technology segment trade names, which indicated no impairment existed.

A sustained decline in our end-markets and geographic markets could increase the risk of impairments in future years.

4 unchanged sentences

Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion of the deferred tax asset will not be realized.

In evaluating the need for a valuation allowance, we consider various factors, including the

expected level of future taxable income and available tax planning strategies.

In evaluating the need for a valuation allowance, we consider various factors, including the expected level of future taxable income and available tax planning strategies.

If actual results differ from the assumptions made in the evaluation of our valuation allowance, we record a change in valuation allowance through income tax expense in the period such determination is made.

4 unchanged sentences

To the extent we prevail in matters for which liabilities for unrecognized tax benefits have been established or are required to pay amounts in excess of our liabilities for unrecognized tax benefits, our effective income tax rate in a given period could be materially affected.

We recognize interest and penalties related to unrecognized tax benefits in the Income tax expense (benefit) in the Consolidated Statements of Operations.

We recognize interest and penalties related to unrecognized tax benefits in the Consolidated Statements of Operations as part of Income tax expense (benefit).

Net liabilities for unrecognized income tax benefits, including accrued interest and penalties, were $61.9 million as of December 31, 2021 and are included in Other liabilities or as a reduction to deferred tax assets in the accompanying Consolidated Balance Sheet.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code which included how the U.S.

imposes income tax on multinational corporations.

Coinciding with the Tax Act enactment, the SEC issued Staff Accounting Bulletin No.

118 (“SAB 118”) to address the application of U.S.

GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act.

SAB 118 allows registrants to include a provisional amount to account for the implications of the Tax Act where a reasonable estimate can be made and requires the completion of the accounting no later than one year from the date of enactment of the Tax Act or December 22, 2018.

We filed our 2017 U.S.

income tax return in the fourth quarter of 2018, which changed our tax basis in temporary differences and Transition Tax estimated as of December 31, 2017, resulting in an adjustment to the tax provision to the re-measurement amount recorded in the financial statements.

As a result of this tax filing, we reduced our provisional amount by $10.8 million and $0.7 million for Transition Tax and the remeasurement of U.S.

deferred taxes respectively for the year ended December 31, 2018.

Revenue Recognition

We account for revenue in accordance with Topic 606, “Revenue from Contracts with Customers,” which we adopted on January 1, 2018, using the full retrospective method.

We account for revenue in accordance with Topic 606, “Revenue from Contracts with Customers”.

We recognize revenue when control of promised goods or services is transferred to the customer.

4 unchanged sentences

Any estimates are evaluated on a quarterly basis until the uncertainty is resolved.

Additionally, related to sales of our medical device products and services, we maintain provisions for estimated contractual allowances for reimbursement amounts from certain third-party payers based on negotiated contracts, historical experience for non-contracted payers, and the impact of new contract terms or modifications of existing arrangements with these customers.

Additionally, related to sales of our medical device products and services, we maintain provisions for estimated contractual allowances for reimbursement amounts from certain third-party payors based on negotiated contracts, historical experience for non-contracted payors, and the impact of new contract terms or modifications of existing arrangements with these customers.

We report these allowances as a reduction to net sales.

17 unchanged sentences

The estimate of current expected credit losses on trade receivables considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

The allowance for credit losses was $37.7 million as of December 31, 2020 compared to $36.0 million as of January 1, 2020, following the adoption of the standard.

The allowance for credit losses was $32.5 million as of December 31, 2021 compared to $37.7 million as of December 31, 2020 and $36.0 million as of January 1, 2020, following the adoption of the standard.

Recently Issued Accounting Pronouncements

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis