ESAB Corp 10-Q

Item 1. Financial Statements ESAB CORPORATION COMBINED CONDENSED STATEMENTS OF OPERATIONS Dollars in thousands, except per share amounts (Unaudited) Three Months Ended April 1, 2022 April 2, 2021 Net sales $ 647,911 $ 568,128 Cost of sales 423,580 368,333 Gross profit 224,331 199,795 Selling, general and administrative expense 135,413 124,419 Restructuring and other related charges 5,304 3,075 Operating income 83,614 72,301 Interest income and other, net 556 225 Income from continuing operations before income taxes 84,170 72,526 Income tax expense 25,746 13,992 Net income from continuing operations 58,424 58,534 Loss from discontinued operations, net of taxes ( 2,021 ) — Net income 56,403 58,534 Less: Income attributable to noncontrolling interest, net of taxes 966 876 Net income attributable to ESAB Corporation $ 55,437 $ 57,658 Earnings (loss) per share - basic Income from continuing operations $ 0.96 $ 0.96 Loss on discontinued operations $ ( 0.03 ) $ — Net income per share $ 0.93 $ 0.96 Earnings (loss) per share - diluted Income from continuing operations $ 0.96 $ 0.96 Loss on discontinued operations $ ( 0.03 ) $ — Net income per share - diluted $ 0.93 $ 0.96 See Notes to Combined Condensed Financial Statements. 2 ESAB CORPORATION COMBINED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME Dollars in thousands (Unaudited) Three Months Ended April 1, 2022 April 2, 2021 Net income $ 56,403 $ 58,534 Other comprehensive income (loss): Foreign currency translation, net of tax expense of $ 338 and $ 1,491 ( 45,189 ) ( 30,039 ) Amounts reclassified from Accumulated other comprehensive loss: Amortization of pension and other post-retirement net actuarial gain, net of tax expense of $ 241 and $ 0 786 221 Other comprehensive loss ( 44,403 ) ( 29,818 ) Comprehensive income 12,000 28,716 Less: comprehensive income attributable to noncontrolling interest 458 564 Comprehensive income attributable to ESAB Corporation $ 11,542 $ 28,152 See Notes to Combined Condensed Financial Statements. 3 ESAB CORPORATION COMBINED CONDENSED BALANCE SHEETS Dollars in thousands (Unaudited) April 1, 2022 December 31, 2021 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 56,631 $ 41,209 Trade receivables, less allowance for credit losses of $ 27,484 and $ 23,912 410,201 383,496 Inventories, net 462,535 420,062 Prepaid expenses 59,017 51,949 Other current assets 59,703 67,357 Total current assets 1,048,087 964,073 Property, plant and equipment, net 280,592 286,278 Goodwill 1,513,943 1,532,993 Intangible assets, net 508,523 521,434 Lease assets - right of use 107,723 107,944 Other assets 322,481 48,540 Total assets $ 3,781,349 $ 3,461,262 LIABILITIES AND EQUITY CURRENT LIABILITIES: Accounts payable $ 368,999 $ 345,480 Accrued liabilities 283,411 251,109 Total current liabilities 652,410 596,589 Other liabilities 611,577 362,945 Total liabilities 1,263,987 959,534 Parent’s Equity: Net Parent investment 3,040,898 2,921,623 Accumulated other comprehensive loss ( 564,046 ) ( 460,888 ) Total Parent’s equity 2,476,852 2,460,735 Noncontrolling interest 40,510 40,993 Total equity 2,517,362 2,501,728 Total liabilities and equity $ 3,781,349 $ 3,461,262 See Notes to Combined Condensed Financial Statements. 4 ESAB CORPORATION COMBINED CONDENSED STATEMENTS OF EQUITY Dollars in thousands (Unaudited) Net Parent Investment Accumulated Other Comprehensive Loss Noncontrolling Interest Total Balance at December 31, 2021 $ 2,921,623 $ ( 460,888 ) $ 40,993 $ 2,501,728 Net income 55,437 — 966 56,403 Distributions to noncontrolling owners — — ( 941 ) ( 941 ) Other comprehensive income, net of tax expense of $ 579 — ( 43,895 ) ( 508 ) ( 44,403 ) Common stock-based award activity 1,728 — — 1,728 Transfers from Parent, net 62,110 ( 59,263 ) — 2,847 Balance at April 1, 2022 $ 3,040,898 $ ( 564,046 ) $ 40,510 $ 2,517,362 Net Parent Investment Accumulated Other Comprehensive Loss Noncontrolling Interest Total Balance at December 31, 2020 $ 2,898,831 $ ( 396,203 ) $ 42,139 $ 2,544,767 Net income 57,658 — 876 58,534 Distributions to noncontrolling owners — — ( 1,054 ) ( 1,054 ) Other comprehensive loss, net of tax expense of $ 1,491 — ( 29,506 ) ( 312 ) ( 29,818 ) Common stock-based award activity 1,586 — — 1,586 Transfers to Parent, net ( 55,069 ) — — ( 55,069 ) Balance at April 2, 2021 $ 2,903,006 $ ( 425,709 ) $ 41,649 $ 2,518,946 See Notes to Combined Condensed Financial Statements. 5 ESAB CORPORATION COMBINED CONDENSED STATEMENTS OF CASH FLOWS Dollars in thousands (Unaudited) Three Months Ended April 1, 2022 April 2, 2021 Cash flows from operating activities: Net income $ 56,403 $ 58,534 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 16,689 18,720 Stock-based compensation expense 1,728 1,586 Deferred income tax expense (benefit) 3,509 ( 974 ) Changes in operating assets and liabilities: Trade receivables, net ( 29,833 ) ( 35,041 ) Inventories, net ( 41,925 ) ( 29,373 ) Accounts payable 11,975 55,606 Other operating assets and liabilities ( 2,457 ) ( 6,211 ) Net cash provided by operating activities 16,089 62,847 Cash flows from investing activities: Purchases of property, plant and equipment ( 5,903 ) ( 4,700 ) Proceeds from sale of property, plant and equipment 2,746 153 Acquisition, net of cash received — ( 4,859 ) Net cash used in investing activities ( 3,157 ) ( 9,406 ) Cash flows from financing activities: Repayments of short-term borrowings ( 511 ) ( 3 ) Payment of deferred consideration ( 1,500 ) — Distributions to noncontrolling interest holders ( 941 ) ( 1,054 ) Transfers from (to) Parent, net 2,847 ( 55,069 ) Net cash used in financing activities ( 105 ) ( 56,126 ) Effect of foreign exchange rates on Cash and cash equivalents 2,595 ( 1,370 ) Increase (decrease) in Cash and cash equivalents 15,422 ( 4,055 ) Cash and cash equivalents, beginning of period 41,209 49,209 Cash and cash equivalents, end of period $ 56,631 $ 45,154 See Notes to Combined Condensed Financial Statements. 6 ESAB CORPORATION NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. Organization and Basis of Presentation ESAB Corporation (“ESAB” or the “Company”) is a world leader in fabrication and specialty gas control technology, providing our partners with advanced equipment, consumables, specialty gas control, robotics, and digital solutions, which enable the everyday and extraordinary work that shapes our world. The Company’s products are utilized to solve challenges in a wide range of industries, including cutting, joining and automated welding. The Company conducts its operations through two reportable segments. These segments consist of the “Americas” which includes operations in North America and South America, and “EMEA & APAC,” which includes Europe, Middle East, India, Africa and Asia Pacific. The Company’s fiscal year ends December 31. The Company’s first three quarters end on the last business day of the 13 th week after the end of the prior quarter. As used herein, the first quarter results for 2022 and 2021 refer to the 13-week periods ended April 1, 2022 and April 2, 2021, respectively. On April 4, 2022, Colfax Corporation (“Colfax” or the “Parent”) completed the spin-off of Colfax’s Fabrication Technology business and certain other corporate entities as described below, through a tax-free, pro rata distribution (the “Distribution”) of 90 % of the outstanding common stock of ESAB to Colfax stockholders (the “Separation”). Upon completion of the Distribution, Colfax changed its name to Enovis Corporation (“Enovis”) and continued to hold 10 % of the outstanding common stock of ESAB. Refer to “Note 14. Subsequent Events” for additional information regarding the Separation. ESAB Corporation, which was incorporated on May 19, 2021, became the new ultimate parent company for Parent’s Fabrication Technology business during the three months ended April 1, 2022. The Company has historically operated as part of the Parent and not as a stand-alone company. The financial statements have been derived from the Parent’s historical accounting records and are presented on a carve-out basis for all historical periods included. All revenues and costs as well as assets and liabilities directly associated with the business activity of the Company are included as a component of the financial statements. The financial statements also include allocations of certain general and administrative expenses from the Parent’s corporate office. The allocations have been determined on a reasonable basis; however, the amounts are not necessarily representative of the amounts that would have been reflected in the financial statements had the Company been an entity that operated independently of the Parent during the applicable period. Related party cost allocations are discussed further in Note 13, “Related Party Transactions.” In addition, on March 23, 2022, the 1,000 shares of ESAB common stock then held by Colfax, representing all outstanding shares of ESAB common stock as of that date, were recapitalized into 60,034,311 shares of ESAB common stock held by Colfax. All per share amounts in the Combined Condensed Statement of Operations have been retroactively adjusted to give effect to this recapitalization. On January 31, 2022, and in anticipation of the Separation, all remaining legal entities which were part of the Fabrication Technology segment of Colfax along with certain entities that were part of the Corporate segment of Colfax became subsidiaries of ESAB through a legal entity restructuring. This reorganization resulted in the inclusion of the following items in ESAB for the period ending April 1, 2022: • Certain operating entities that form the historical Fabrication Technology business. • Certain entities which historically have been a part of Colfax's Corporate reportable segment, including components of the Colfax tax, treasury, legal, human resources and other finance functions that served the entirety of Colfax. • Certain entities relating to the Parent’s previously divested Fluid Handling and Air and Gas Handling businesses which hold certain asbestos assets, liabilities, costs and insurance recoveries related to the asbestos obligations of these legacy industrial businesses. Refer to Note 2, “Discontinued Operations” and Note 11, “Commitments and Contingencies” for additional information on our accounting for these legacy industrial businesses. • Certain pension plan assets and liabilities due to transfer of sponsorship of two U.S. defined benefit plans and a U.S. other post-retirement benefit plan from the Parent to ESAB as of March 21, 2022. Refer to Note 9, “Benefit Plans” for additional information on the benefit plans transferred to ESAB. 7 ESAB CORPORATION NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) The above items, with the exception of the operating entities that form the Fabrication Technology business, were not previously included in the Company’s 2021 historical carve-out financial statements. The carve-out financial statements for the year ended December 31, 2021 in ESAB’s Registration Statement on Form 10-12B/A filed with the SEC on March 17, 2022 (the “Form 10”), were presented on a combined basis. Such basis of accounting differences before and after the legal entity contributions in the three months ended April 1, 2022 may impact the comparability between periods in these Combined Condensed Financial Statements. The Parent utilizes a centralized approach to cash management and financing of its operations. Financing transactions relating to the Company are accounted for through the Parent investment account of the Company. Accordingly, none of the Parent’s cash, cash equivalents or debt at the corporate level has been assigned to the Company in these financial statements. Net Parent investment, which includes retained earnings, represents the Parent’s interest in the recorded net assets of the Company. All significant transactions between the Company and the Parent have been included in the accompanying Financial Statements. Transactions with the Parent are reflected in the accompanying Combined Condensed Statements of Equity as “Transfers from (to) Parent, net” and in the accompanying Combined Condensed Balance Sheets within “Net Parent investment.” The Combined Condensed Financial Statements reflect, in the opinion of management, all adjustments, which consist solely of normal recurring adjustments, necessary to present fairly the Company’s financial position and results of operations as of and for the periods indicated. Intercompany transactions and accounts are eliminated in consolidation. The Company makes certain estimates and assumptions in preparing its Combined Condensed Financial Statements in accordance with U.S. generally accepted accounting principles, or “ GAAP”. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the Combined Condensed Financial Statements and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from those estimates. In the normal course of business, the Company incurs research and development costs related to new product development which are expensed as incurred and included in Selling, general and administrative expenses on the Company’s Combined Condensed Statements of Operations. Research and development costs were $ 9.5 million during the three months ended April 1, 2022, and $ 9.5 million during the three months ended April 2, 2021. In addition to the factors discussed elsewhere in this Form 10-Q, the results of operations for the three month period ended April 1, 2022, are not necessarily indicative of the results of operations that may be achieved for the full year. Quarterly results are affected by seasonal variations in the Company’s businesses, and European operations typically experience a slowdown during the July, August and December holiday seasons. Since 2020, these historical seasonality trends have been impacted by the worldwide spread of a novel coronavirus disease (“COVID-19”). These Combined Condensed Financial Statements included in this quarterly report have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) in conformity with GAAP, for the preparation of carved-out Combined Condensed Financial Statements and are unaudited. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted. The accompanying interim Combined Condensed Financial Statements and the related notes should be read in conjunction with the Company’s Combined Financial Statements and related notes included in the Company’s Form 10. 2. Discontinued Operations The Company holds certain asbestos-related contingencies and insurance coverages from divested businesses for which it does not have an interest in the ongoing operations. The entities which hold these assets and liabilities became subsidiaries of the Company during the three months ended April 1, 2022 in connection with the Separation. These assets and liabilities were not included in the Company’s historical Combined Financial Statements for 2021 as the Company did not have legal title to these assets, nor was the Company the legal obligor of these liabilities. The 2022 amounts reflect income, expenses, assets and liabilities historically recorded within Parent corporate entities that were not part of Parent’s Fabrication Technology segment. Refer to “Note 1. Organization and Basis of Presentation” for additional information. 8 ESAB CORPORATION NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) The Company has classified asbestos-related activity in its Combined Condensed Statements of Operations as part of Loss from discontinued operations, net of taxes. See Note 11, “Commitments and Contingencies” for further information. Cash used in operating activities related to discontinued operations for the three months ended April 1, 2022 was $ 4.6 million. 3. Revenue The Company develops, manufactures and supplies consumable welding and cutting products and equipment, as well as gas control equipment. The Company provides a wide range of products with innovative technologies to solve challenges in a range of industries, including cutting, joining and automated welding. Substantially all revenue is recognized at a point in time. The Company disaggregates its revenue into the following product groups: Three Months Ended April 1, 2022 April 2, 2021 (In thousands) Equipment $ 188,348 $ 173,750 Consumables 459,563 394,378 Total $ 647,911 $ 568,128 The sales mix in the above table is relatively consistent across both reportable segments. The consumables product grouping generally has less production complexity and shorter production cycles than equipment products. Given the nature of the business, the total amount of unsatisfied performance obligations with an original contract duration of greater than one year as of April 1, 2022 is immaterial. In some circumstances, customers are billed in advance of revenue recognition, resulting in contract liabilities. As of December 31, 2021 and December 31, 2020, total contract liabilities were $ 22.3 million and $ 21.6 million, respectively, and were included in Accrued liabilities on the Combined Condensed Balance Sheets. During the three months ended April 1, 2022 and April 2, 2021, revenue recognized that was included in the contract liability balance at the beginning of the year was $ 9.1 million and $ 13.5 million, respectively. As of April 1, 2022 and April 2, 2021 total contract liabilities were $ 25.9 million and $ 24.4 million, respectively, and were included in Accrued liabilities on the Company’s Combined Condensed Balance Sheets. Allowance for Credit Losses A summary of the activity in the Company’s allowance for credit losses included within Trade receivables in the Combined Condensed Balance Sheets is as follows: Three Months Ended April 1, 2022 Balance at Beginning of Period Charged to Expense, net Write-Offs and Deductions Foreign Currency Translation Balance at End of Period (In thousands) Allowance for credit losses $ 23,912 $ 4,373 $ ( 780 ) $ ( 21 ) $ 27,484 9 ESAB CORPORATION NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) 4. Earnings per Share from Continuing Operations Earnings per share from continuing operations was computed as follows: Three Months Ended April 1, 2022 April 2, 2021 (In thousands, except share and per share data) Computation of earnings (loss) per share from continuing operations - basic and diluted: Income from continuing operations attributable to ESAB Corporation (1) $ 57,458 $ 57,658 Weighted-average shares of common stock outstanding – basic and diluted (2) 60,034,311 60,034,311 Income per share from continuing operations – basic and diluted $ 0.96 $ 0.96 (1) Net income from continuing operations attributable to ESAB Corporation for the respective periods is calculated using Net income from continuing operations, less Income attributable to noncontrolling interest, net of taxes, of $ 1.0 million for the three months ended April 1, 2022, and $ 0.9 million for the three months ended April 2, 2021. (2) The total number of shares outstanding at April 1, 2022, or 60,034,311 , is being utilized for calculation of both basic and diluted earnings per share for the three months ended April 2, 2021 and April 1, 2022. The Company was incorporated on May 19, 2021, and there were no shares outstanding as of April 2, 2021. 5. Income Taxes During the three months ended April 1, 2022, Income from continuing operations before income taxes was $ 84.2 million, while Income tax expense was $ 25.7 million. The effective tax rate w as 30.6 % fo r the three months ended April 1, 2022. The effective tax rate for the three months ended April 1, 2022 differed from the 2022 U.S. federal statutory rate of 21% primarily due to the impact of withholding taxes, taxable foreign exchange gains, and other non-deductible expenses, partially offset by lower rates on earnings in foreign jurisdictions. During the three months ended April 2, 2021, Income from continuing operations before income taxes was $ 72.5 million, while Income tax expense was $ 14.0 million. The effective tax rate was 19.3 % for the three months ended April 2, 2021. The effective tax rate for the three months ended April 2, 2021 differed from the 2021 U.S. federal statutory rate of 21% primarily due to the recognition of discrete tax benefits as a result of audit settlements that occurred in first three months of 2021. Additionally, the Company’s foreign earnings in the first three months of 2021 were taxed at lower rates than the U.S federal statutory rate. 6. Inventories, Net Inventories, net consisted of the following: April 1, 2022 December 31, 2021 (In thousands) Raw materials $ 156,341 $ 148,376 Work in process 44,418 39,595 Finished goods 302,188 268,831 502,947 456,802 LIFO reserve 797 1,129 Less: allowance for excess, slow-moving and obsolete inventory ( 41,209 ) ( 37,869 ) $ 462,535 $ 420,062 The valuation of LIFO inventories is made at the end of the year based on inventory levels and costs at that time. At April 1, 2022 and December 31, 2021, 32 % and 34 % of total inventories, respectively, were valued using the LIFO method. 10 ESAB CORPORATION NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) 7. Equity Accumulated Other Comprehensive Loss The following tables present the changes in the balances of each component of Accumulated other comprehensive loss including reclassifications out of Accumulated other comprehensive loss for the three months ended April 1, 2022 and April 2, 2021. All amounts are net of tax and noncontrolling interest, if any. Accumulated Other Comprehensive Loss Components Net Unrecognized Pension And Other Post-Retirement Benefit Cost Foreign Currency Translation Adjustment Total (In thousands) Balance at December 31, 2021 $ ( 21,196 ) $ ( 439,692 ) $ ( 460,888 ) Other comprehensive income (loss) before reclassifications: Foreign currency translation adjustment 490 ( 45,171 ) ( 44,681 ) Other comprehensive income (loss) before reclassifications: 490 ( 45,171 ) ( 44,681 ) Amounts reclassified from Accumulated other comprehensive loss (1) 786 — 786 Amounts contributed from Parent (2) ( 50,504 ) ( 8,759 ) ( 59,263 ) Net current period Other comprehensive loss ( 49,228 ) ( 53,930 ) ( 103,158 ) Balance at April 1, 2022 $ ( 70,424 ) $ ( 493,622 ) $ ( 564,046 ) (1) Included in the computation of net periodic benefit cost. See Note 9, “Benefit Plans” for additional details. (2) Includes unrecognized pension and other post-retirement costs and accumulated currency translation adjustments of certain entities which were part of the Corporate segment of Colfax and were transferred to ESAB Corporation in anticipation of the Separation. Please see Note 1, “Organization and Basis of Presentation” for more information on the entities contributed from Colfax. Accumulated Other Comprehensive Loss Components Net Unrecognized Pension And Other Post-Retirement Benefit Cost Foreign Currency Translation Adjustment Total (In thousands) Balance at December 31, 2020 $ ( 29,378 ) $ ( 366,825 ) $ ( 396,203 ) Other comprehensive income (loss) before reclassifications: Foreign currency translation adjustment 712 ( 30,438 ) ( 29,726 ) Other comprehensive income (loss) before reclassifications: 712 ( 30,438 ) ( 29,726 ) Amounts reclassified from Accumulated other comprehensive loss (1) 220 — 220 Net current period Other comprehensive income (loss) 932 ( 30,438 ) ( 29,506 ) Balance at April 2, 2021 $ ( 28,446 ) $ ( 397,263 ) $ ( 425,709 ) (1) Included in the computation of net periodic benefit cost. See Note 9, “Benefit Plans” for additional details. 11 ESAB CORPORATION NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) 8. Accrued and Other Liabilities Accrued and Other liabilities in the Combined Condensed Balance Sheets consisted of the following: Current Noncurrent Current Noncurrent April 1, 2022 December 31, 2021 (In thousands) Accrued taxes and deferred tax liabilities $ 57,969 $ 191,285 $ 58,920 $ 203,760 Compensation and related benefits 66,977 70,938 74,587 62,215 Asbestos liability 34,494 254,106 — — Contract liability 25,918 — 22,265 — Lease liability 18,909 88,814 20,467 88,777 Warranty liability 15,254 — 14,954 — Third-party commissions 13,356 — 16,130 — Restructuring liability 6,535 157 7,834 275 Other 43,999 6,277 35,952 7,918 $ 283,411 $ 611,577 $ 251,109 $ 362,945 Accrued Warranty Liability A summary of the activity in the Company’s warranty liability included in Accrued liabilities in the Company’s Combined Condensed Balance Sheets is as follows: Three Months Ended April 1, 2022 April 2, 2021 (In thousands) Warranty liability, beginning of period $ 14,954 $ 14,022 Accrued warranty expense 1,558 1,581 Changes in estimates related to pre-existing warranties 836 589 Cost of warranty service work performed ( 2,150 ) ( 2,078 ) Foreign exchange translation effect 56 ( 214 ) Warranty liability, end of period $ 15,254 $ 13,900 12 ESAB CORPORATION NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) Accrued Restructuring Liability The Company’s restructuring programs include a series of actions to reduce the structural costs of the Company. A summary of the activity in the Company’s restructuring liability included in Accrued liabilities and Other liabilities in the Combined Condensed Balance Sheets is as follows: Three Months Ended April 1, 2022 Balance at Beginning of Period Provisions Payments Foreign Currency Translation Balance at End of Period (In thousands) Restructuring and other related charges: Americas Termination benefits (1) $ 2,044 $ 719 $ ( 633 ) $ ( 2 ) $ 2,128 Facility closure costs and other (2) 50 4,353 ( 4,345 ) — 58 Subtotal 2,094 5,072 ( 4,978 ) ( 2 ) 2,186 Non-cash charges (2) 37 Segment Total 5,109 EMEA & APAC Termination benefits (1) 5,774 ( 267 ) ( 1,228 ) ( 24 ) 4,255 Facility closure costs and other (2) 241 462 ( 451 ) ( 1 ) 251 Subtotal 6,015 195 ( 1,679 ) ( 25 ) 4,506 Non-cash charges (2) — Segment Total 195 Total $ 8,109 5,267 $ ( 6,657 ) $ ( 27 ) $ 6,692 Non-cash charges (2) 37 Total Provision $ 5,304 (1) Includes severance and other termination benefits, including outplacement services. (2) Includes the cost of relocating associates, relocating equipment, lease termination expense and other costs in connection with the closure and optimization of facilities and product lines. 13 ESAB CORPORATION NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) 9. Benefit Plans The Company sponsors various defined benefit plans and other post-retirement benefits plans, including health and life insurance, for certain eligible employees or former employees. As part of the Separation, certain U.S. defined benefit and other post-retirement plans, formerly sponsored by the Parent, were transferred to the Company as of March 21, 2022. As a result of the transfer, the related net plan obligations of approximately $ 9.6 million are included within the Company’s Combined Condensed Balance Sheet at April 1, 2022. The transferred plans include a defined benefit pension plan with assets of $ 201.2 million and projected benefit liabilities of $ 200.6 million and two unfunded defined benefit and other post-retirement benefit plans with liabilities of $ 11.7 million, all of which were recorded in the financial statements of the Parent at December 31, 2021. The pretax net unrecognized pension and other post-retirement benefit cost included in Accumulated other comprehensive loss for the transferred plans is approximately $ 50.0 million. The net plan assets and obligations are presented within Compensation and related benefits in Note 8. “Accrued and Other Liabilities”. The Parent offers both funded and unfunded noncontributory defined benefit pension plans in the U.S. that are shared amongst its businesses, including the Company prior to becoming plan sponsor. The participation of the Company’s employees and retirees in these plans is reflected in the Company’s historical Combined Financial Statements as though it participated in a multiemployer plan with the Parent. As a result, a proportionate share of the cost associated with these defined benefit plans is reflected in the Company’s historical Combined Financial Statements, while any assets and liabilities associated with these defined benefit plans were retained by the Parent and were not recorded on the Company’s historical Combined Financial Statements. Prior to the Separation, certain current and former employees of the Company participated in a benefit plan previously sponsored by the Parent. Net periodic pension benefit income, related to this Parent-sponsored plan was allocated to the Company based on the Company’s share of total Parent headcount and is reflected within Interest income and other, net, in the Combined Statements of Operations for both the three months ended April 1, 2022, and April 2, 2021. Net periodic benefit cost of the Company’s defined benefit pension plan for the three months ended April 1, 2022 and April 2, 2021 was $ 0.4 million and $ 0.3 million, respectively, and is reflected within Interest income and other, net, in the Combined Statements of Operations for both the three months ended April 1, 2022, and April 2, 2021. The Company expects to contribute approximately $ 0.7 million to its U.S. pension plans and $ 3.6 million to its foreign pension plans in the remaining nine months of 2022. In the three months ended April 1, 2022, contributions of $ 0.2 million to U.S. pension plans and $ 1.2 million to foreign pension plans have been made. 14 ESAB CORPORATION NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) 10. Financial Instruments and Fair Value Measurements The carrying values of financial instruments, including Trade receivables and Accounts payable, approximate their fair values due to their short-term maturities. The estimated fair values may not represent actual values of the financial instruments that could be realized as of the balance sheet date or that will be realized in the future. A summary of the Company’s assets and liabilities that are measured at fair value for each fair value hierarchy level for the periods presented is as follows: April 1, 2022 Level One Level Two Level Three Total (In thousands) Assets: Cash equivalents $ 5,875 $ — $ — $ 5,875 Foreign currency contracts - not designated as hedges — 1,559 — 1,559 Deferred compensation plans — 2,488 — 2,488 $ 5,875 $ 4,047 $ — $ 9,922 Liabilities: Foreign currency contracts - not designated as hedges $ — $ 2,745 $ — $ 2,745 Deferred compensation plans — 2,488 — 2,488 $ — $ 5,233 $ — $ 5,233 December 31, 2021 Level One Level Two Level Three Total (In thousands) Assets: Cash equivalents $ 8,133 $ — $ — $ 8,133 Foreign currency contracts - not designated as hedges — 2,487 — 2,487 $ 8,133 $ 2,487 $ — $ 10,620 Liabilities: Foreign currency contracts - not designated as hedges $ — $ 2,309 $ — $ 2,309 There were no transfers in or out of Level One, Two or Three during the three months ended April 1, 2022. 15 ESAB CORPORATION NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) Foreign Currency Contracts As of April 1, 2022 and December 31, 2021, the Company had foreign currency contracts related to purchases and sales with notional values of $ 196.6 million and $ 180.8 million, respectively. The Company recognized the following in its Combined Condensed Financial Statements related to its derivative instruments: Three Months Ended April 1, 2022 April 2, 2021 (In thousands) Contracts Not Designated in a Hedge Relationship: Foreign Currency Contracts Change in unrealized loss $ ( 1,186 ) $ ( 1,850 ) Realized loss (1) ( 14,479 ) ( 254 ) (1) Includes realized losses relating to certain corporate entities contributed to ESAB Corporation which are reflected within Interest income and other, net, in the Combined Statements of Operations during the three months ended April 1, 2022. See Note 1, “Organization and Basis of Presentation” for additional details. These realized losses are offset by unrealized gains which are also reflected within Interest income and other, net, in the Combined Statements of Operations during the three months ended April 1, 2022 11. Commitments and Contingencies Asbestos Contingencies Certain entities that became subsidiaries of ESAB Corporation during the three months ended April 1, 2022 are the legal obligor for certain asbestos obligations including long-term asbestos insurance assets, long-term asbestos insurance receivables, accrued asbestos liabilities, long-term asbestos liabilities, asbestos indemnity expenses, asbestos-related defense costs and asbestos insurance recoveries related to the asbestos obligations from the Parent’s other legacy industrial businesses. As a result, the Company holds certain asbestos-related contingencies and insurance coverages. These subsidiaries are each one of many defendants in a large number of lawsuits that claim personal injury as a result of exposure to asbestos from products manufactured or used with components that are alleged to have contained asbestos. Such components were acquired from third-party suppliers, and were not manufactured by any of the Company’s, or Parent’s, subsidiaries nor were the subsidiaries producers or direct suppliers of asbestos. The manufactured products that are alleged to have contained or used asbestos generally were provided to meet the specifications of the subsidiaries’ customers, including the U.S. Navy. The subsidiaries settle asbestos claims for amounts the Company considers reasonable given the facts and circumstances of each claim. The annual average settlement payment per asbestos claimant has fluctuated during the past several years. The Company expects such fluctuations to continue in the future based upon, among other things, the number and type of claims settled in a particular period and the jurisdictions in which such claims arise. To date, the majority of settled claims have been dismissed for no payment. The Company has classified asbestos-related activity in Loss from discontinued operations in the Combined Condensed Statements of Operations. This is consistent with the Parent’s classification on the basis that, pursuant to the purchase agreement from the Parent’s Fluid Handling business divestiture, the Parent retained its asbestos-related contingencies and insurance coverages. However, as the Parent did not retain an interest in the ongoing operations of the business subject to the contingencies, asbestos-related activity was classified as part of Loss from discontinued operations, net of taxes in the Consolidated Condensed Statements of Operations of the Parent. The Company has projected each subsidiary’s future asbestos-related liability costs with regard to pending and future unasserted claims based upon the Nicholson methodology. The Nicholson methodology is a standard approach used by experts and has been accepted by numerous courts. Consistent with the Parent, it is ESAB’s policy to record a liability for asbestos-related liability costs for the longest period of time that ESAB management can reasonably estimate. 16 ESAB CORPORATION NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) The Company believes that it can reasonably estimate the asbestos-related liability for pending and future claims that will be resolved in the next 15 years and has recorded that liability as its best estimate. While it is reasonably possible that the subsidiaries will incur costs after this period, the Company does not believe the reasonably possible loss or a range of reasonably possible losses 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 efforts to recover insurance from the subsidiaries’ insurers are expensed as incurred. Each subsidiary has separate insurance coverage acquired prior to Company ownership of each independent entity. The Company has evaluated the insurance assets for each subsidiary based upon the applicable policy language and allocation methodologies, and law pertaining to the affected subsidiary’s insurance policies. Asbestos-related claims activity since December 31, 2021 is as follows: Three Months Ended April 1, 2022 (Number of claims) Claims unresolved, beginning of period 14,559 Claims filed (1) 1,065 Claims resolved (2) ( 779 ) Claims unresolved, end of period 14,845 (1) Claims filed include all asbestos claims for which notification has been received or a file has been opened. (2) Claims resolved include all asbestos claims that have been settled, dismissed or that are in the process of being settled or dismissed based upon agreements or understandings in place with counsel for the claimants. The Company’s Combined Condensed Balance Sheet included the following amounts related to asbestos-related litigation: April 1, 2022 (In thousands) Long-term asbestos insurance asset (1) $ 229,215 Long-term asbestos insurance receivable (1) 17,002 Accrued asbestos liability (2) 34,494 Long-term asbestos liability (3) 254,106 (1) Included in Other assets in the Combined Condensed Balance Sheet. (2) Represents current accruals for probable and reasonably estimable asbestos-related liability costs that the Company believes the subsidiaries will pay, and unpaid legal costs related to defending themselves against asbestos-related liability claims and legal action against the Company’s insurers, which is included in Accrued liabilities in the Combined Condensed Balance Sheet. (3) Included in Other liabilities in the Combined Condensed Balance Sheet. Management’s analyses are based on currently known facts and assumptions. Projecting future events, such as new claims to be filed each year, the average cost of resolving each claim, coverage issues among layers of insurers, the method in which losses will be allocated to the various insurance policies, interpretation of the effect on coverage of various policy terms and limits and their interrelationships, the continuing solvency of various insurance companies, the amount of remaining insurance available, as well as the numerous uncertainties inherent in asbestos litigation could cause the actual liabilities and insurance recoveries to be higher or lower than those projected or recorded which could materially affect the Company’s financial condition, results of operations or cash flow. General Litigation The Company is involved in various pending legal proceedings arising out of the ordinary course of the Company’s business. None of these legal proceedings is expected to have a material adverse effect on the financial condition, results of operations or cash flow of the Company. With respect to these proceedings, and the litigation and claims described in the preceding paragraphs, management of the Company believes that it will either prevail, has adequate insurance coverage or has 17 ESAB CORPORATION NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) established appropriate accruals to cover potential liabilities. Legal costs related to proceedings or claims are recorded when incurred. Other costs that management estimates may be paid related to the claims are accrued when the liability is considered probable and the amount can be reasonably estimated. There can be no assurance, however, as to the ultimate outcome of any of these matters, and if all or substantially all of these legal proceedings were to be determined adverse to the Company, there could be a material adverse effect on the financial condition, results of operations or cash flow of the Company. 12. Segment Information ESAB is a world leader in fabrication and specialty gas control technology, providing our partners with advanced equipment, consumables, specialty gas control, robotics, and digital solutions, which enable the everyday and extraordinary work that shapes our world. The Company’s products are utilized to solve challenges in a wide range of industries, including cutting, joining and automated welding. The Company’s management evaluates the operating results of each of its reportable segments based upon Net sales and segment operating income, which represents Operating income before restructuring and certain other charges. The Company’s segment results were as follows: Three Months Ended April 1, 2022 April 2, 2021 (In thousands) Net sales: Americas $ 272,325 $ 226,159 EMEA & APAC 375,586 341,969 $ 647,911 $ 568,128 Segment operating income (1) : Americas $ 33,802 $ 24,766 EMEA & APAC 55,116 50,610 $ 88,918 $ 75,376 (1) The following is a reconciliation of Income from continuing operations before income taxes to segment operating income: Three Months Ended April 1, 2022 April 2, 2021 (In thousands) Income from continuing operations before income taxes $ 84,170 $ 72,526 Interest income and other, net ( 556 ) ( 225 ) Restructuring and other related charges 5,304 3,075 Segment operating income $ 88,918 $ 75,376 13. Related Party Transactions Allocated Expenses The Company has historically operated as part of the Parent and not as a stand-alone company. Accordingly, the Parent has allocated certain shared costs to the Company that are reflected as expenses in these financial statements. These amounts include, but are not limited to, items such as general management and executive oversight, compliance, human resources, procurement, and legal functions and financial management, including public company reporting, consolidated tax filings and tax planning. Management considers the allocation methodologies used by the Parent to be reasonable and to appropriately reflect the related expenses attributable to the Company for purposes of the carve-out financial statements; however, the expenses reflected in these financial statements may not be indicative of the actual expenses that would have been incurred during the periods presented if the Company had operated as a separate stand-alone entity. In addition, the expenses reflected in 18 ESAB CORPORATION NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) the financial statements may not be indicative of expenses the Company will incur in the future. Allocation methodologies utilized include the Company’s relative share of total Parent revenues and headcount. All of the Company’s transactions with the Parent are considered to be financing transactions, which are presented as Transfers from (to) Parent, net in the accompanying Combined Condensed Statements of Cash Flows. The Company had no stock-based compensation plans prior to March 31, 2022; however certain employees of the Company participated in Colfax's stock-based compensation plans, which provide for the grants of stock options and restricted stock units (“RSUs”) among other types of awards. The expense associated with the Company's employees who participated in the Colfax plans is allocated to the Company in the accompanying Combined Condensed Statements of Operations. The Company’s allocated expenses from the Parent are $ 6.0 million and $ 6.5 million for the three months ended April 1, 2022 and April 2, 2021, respectively. Refer to Note 9, “Benefit Plans,” for allocations of net periodic benefit associated with a Parent sponsored benefit plan. 14. Subsequent Events On April 4, 2022, Colfax completed the spin-off of Colfax’s Fabrication Technology business, through a pro rata distribution of 90 % of the outstanding common stock of ESAB to Colfax stockholders. To effect the Separation, Colfax distributed to its stockholders one share of ESAB common stock for every three shares of Colfax common stock held on March 22, 2022, the record date for the Distribution. Upon completion of the Distribution, Colfax changed its name to Enovis Corporation. Enovis currently plans to divest its 10 % retained share of ESAB in a tax-efficient manner no later than twelve months after the Distribution date. On April 5, 2022, ESAB began trading as an independent, publicly traded company under the stock symbol “ESAB” on the New York Stock Exchange. As of the date of Separation, the primary source of the cash on hand was cash generated from operations. As a result of the Separation, the Company no longer participates in the Parent’s cash management and financing operations. Management assesses our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. We generate substantial cash from operating activities and expect that our operating cash flow and other sources of liquidity, including our credit facilities, will be sufficient following the Distribution date to allow us to manage our capital structure over the next twelve months and continue to invest in existing businesses and consummate strategic acquisitions. In April 2022, the Company entered into a credit agreement (“Credit Agreement”) and completed the following financing transactions; • A senior revolving facility in an initial aggregate principal amount of up to $ 750 million (the “Revolving Facility”) • A senior term loan A-1 facility in an initial aggregate principal amount of up to $ 400 million (the “Term Loan A-1 Facility”) • A 364 -day senior term loan A-2 facility in an initial aggregate principal amount of up to $ 600 million (the “Term Loan A-2 Facility” and, together with the Term Loan A-1 Facility, and the Revolving Facility, the “Facilities”). The initial credit extensions under the Facilities became available to ESAB, subject to certain conditions precedent, at the time of the closing of the Distribution. The Company used the proceeds of the Facilities, in part, to fund the cash distribution to the Parent as partial consideration for the transfer of the Parent’s Fabrication Technology business to the Company and to pay fees and expenses in connection with the Separation and Distribution. The Revolving Facility will also be used to provide funds for ESAB’s ongoing working capital requirements after the Separation and for general corporate purposes. At the closing of the Distribution, ESAB incurred $ 1.2 billion of indebtedness under the Facilities and paid a dividend of $ 1.2 billion to the Parent. The indebtedness is comprised of: $ 600 million under the Term Loan A-2 Facility, $ 400 million under the Term Loan A-1 Facility and $ 200 million under the Revolving Facility. There are no required principal payments due on the Term Loan A-1 Facility or the Revolving Facility within 12 months of April 4, 2022, the effective date of the Facilities (the “Effective Date”). The Revolving Facility and the Term Loan A-1 Facility are expected to mature and be paid in full five 19 ESAB CORPORATION NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) years after the Effective Date. The Term Loan A-2 Facility is expected to mature and be paid in full 364 days after the Effective Date, or will be reduced dollar-for-dollar by the first $ 600 million of net proceeds from the incurrence or issuance of any additional permanent financing, including any issuance of senior unsecured notes. Interest rates on borrowings under the Facilities are based on prevailing market interest rates for borrowers of a similar size and credit as the Company. Interest on the Term Loan A-1 Facility and the Term Loan A-2 Facility will be payable quarterly in arrears on the last business day of March, June, September, and December of each year. Following payment of the $ 1.2 billion of outstanding financing, ESAB will have the capacity for additional indebtedness, up to $ 550 million. At time of Separation, the total rate for the Revolving Facility and Term Loan A-1 Facility is based on the one month term SOFR plus 1.5 % and the total rate for Term Loan A-2 Facility is based on the one month term SOFR plus 1.375 %. Based on market conditions, the Company continues to evaluate options to reduce floating rate debt exposure and replace it with fixed rate debt. The Facilities contain customary affirmative and negative covenants that, among other things, limit or restrict ESAB’s and/or our subsidiaries’ ability, subject to certain exceptions, to incur liens or indebtedness, to merge or engage in other fundamental changes or sell or otherwise dispose of assets, or to make dividends or distributions. The Company is required to maintain compliance with a leverage ratio and an interest coverage ratio. The Facilities contain customary events of default. Certain U.S. subsidiaries of ESAB will guarantee the obligations of the Company under the Facilities. In connection with the Separation, ESAB and the Parent entered into various agreements to effect the Separation and provide a framework for ESAB’s relationship with the Parent after the Separation, including a stockholders’ and registration rights agreement, the employee matters agreement, the tax matters agreement, the transition services agreement, the EBS (“Enovis Growth Excellence Business System”) license agreement, the intellectual property matters agreement and certain transfer documents, including the separation and distribution agreement. These agreements govern the Separation between ESAB and the Parent of the assets, employees, liabilities and obligations (including its investments, property and employee benefits and tax related assets and liabilities) of the Parent and its subsidiaries attributable to periods prior to, at and after ESAB’s Separation and will govern certain relationships between ESAB and Enovis after the Separation. As a result of the Separation, accounts held by ESAB employees in the Parent’s deferred compensation programs referencing valuation of the Parent common stock were converted into accounts in ESAB deferred compensation programs referencing valuation of ESAB common stock, and with such accounts adjusted to maintain the economic value before and after the Separation date using the relative fair market value of the Parent and ESAB common stock. In connection with the Separation, the Company adopted the 2022 Omnibus Incentive Plan (the “Stock Plan”) and outstanding equity awards of the Parent held by ESAB employees were converted into or replaced with awards of ESAB common stock under the Stock Plan based on the “concentration method,” and as adjusted to maintain the economic value before and after the distribution date using the relative fair market value of the Parent and ESAB common stock. For each equity award holder, the intent is to maintain the economic value of the equity awards before and after the Distribution. The terms of the equity awards, such as the award period, exercisability and vesting schedule, as applicable, will generally continue unchanged. Other than converted or replacement equity awards of ESAB issued in replacement of the Parent’s RSUs and stock options, the terms of the converted or replacement equity awards of ESAB (e.g., vesting date and expiration date) continued unchanged. The invasion of Ukraine by Russia and the sanctions imposed in response to this crisis have increased the level of economic and political uncertainty in Russia. On April 25, 2022, based upon continued developments within the month, ESAB announced that the Company has decided it may be required to transition out of business in Russia and are evaluating options and possible timing for this transition. ESAB continues to fulfill current contractual obligations while addressing applicable laws and regulations. In the first quarter of 2022, Russia represented approximately 6 % of the Company’s total revenue, and $ 5 million in Net income. Russia also had approximately 2 % of the Company’s total net assets as of April 1, 2022. Russia has a cumulative translation loss of approximately $ 100 million, which could be realized upon a transition. To cover credit risks related to Russian and Ukrainian operations, ESAB increased the allowance on receivables by approximately $ 4.0 million during the first quarter of 2022. The Company is closely monitoring the developments in Ukraine and Russia. Changes in laws and regulations or other factors impacting the Company’s ability to fulfill contractual obligations could have an adverse effect on the results of operations. 20