ESAB Corp 10-Q

Item 1. Financial Statements ESAB CORPORATION CONSOLIDATED AND COMBINED CONDENSED STATEMENTS OF OPERATIONS Dollars in thousands, except per share amounts (Unaudited) Three Months Ended Nine Months Ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 Net sales $ 620,265 $ 605,968 $ 1,929,353 $ 1,803,900 Cost of sales 410,927 398,973 1,268,212 1,178,719 Gross profit 209,338 206,995 661,141 625,181 Selling, general and administrative expense 121,668 124,104 394,026 381,225 Restructuring and other related charges 6,676 4,227 16,629 10,791 Operating income 80,994 78,664 250,486 233,165 Pension settlement gain ( 3,300 ) — ( 3,300 ) ( 11,208 ) Interest expense (income) and other, net 12,165 ( 209 ) 19,516 ( 748 ) Income from continuing operations before income taxes 72,129 78,873 234,270 245,121 Income tax expense 17,836 17,441 63,629 47,043 Net income from continuing operations 54,293 61,432 170,641 198,078 Loss from discontinued operations, net of taxes ( 977 ) — ( 4,898 ) — Net income 53,316 61,432 165,743 198,078 Less: Income attributable to noncontrolling interest, net of taxes 962 818 2,703 2,399 Net income attributable to ESAB Corporation $ 52,354 $ 60,614 $ 163,040 $ 195,679 Earnings (loss) per share – basic Income from continuing operations $ 0.88 $ 1.01 $ 2.78 $ 3.26 Loss on discontinued operations $ ( 0.02 ) $ — $ ( 0.08 ) $ — Net income per share $ 0.86 $ 1.01 $ 2.70 $ 3.26 Earnings (loss) per share – diluted Income from continuing operations $ 0.88 $ 1.01 $ 2.77 $ 3.26 Loss on discontinued operations $ ( 0.02 ) $ — $ ( 0.08 ) $ — Net income per share – diluted $ 0.86 $ 1.01 $ 2.69 $ 3.26 See Notes to Consolidated and Combined Condensed Financial Statements. 2 ESAB CORPORATION CONSOLIDATED AND COMBINED CONDENSED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME Dollars in thousands (Unaudited) Three Months Ended Nine Months Ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 Net income $ 53,316 $ 61,432 $ 165,743 $ 198,078 Other comprehensive (loss) income: Foreign currency translation, net of tax expense of $ 1,630 , $ 0 , $ 2,328 and $ 1,491 ( 98,792 ) ( 35,901 ) ( 245,868 ) ( 62,493 ) Unrealized gain on derivatives designated and qualifying as cash flow hedges, net of tax expense of $ 2,895 and $ 2,895 9,960 — 9,960 — Defined benefit pension and other post-retirement plan activity, net of tax expense of $ 235 , $ 0 , $ 710 and $ 0 766 270 2,322 698 Other comprehensive loss ( 88,066 ) ( 35,631 ) ( 233,586 ) ( 61,795 ) Comprehensive (loss) income ( 34,750 ) 25,801 ( 67,843 ) 136,283 Less: comprehensive (loss) income attributable to noncontrolling interest ( 181 ) 1,048 ( 693 ) 1,707 Comprehensive (loss) income attributable to ESAB Corporation $ ( 34,569 ) $ 24,753 $ ( 67,150 ) $ 134,576 See Notes to Consolidated and Combined Condensed Financial Statements. 3 ESAB CORPORATION CONSOLIDATED AND COMBINED CONDENSED BALANCE SHEETS Dollars in thousands, except share and per share amounts (Unaudited) September 30, 2022 December 31, 2021 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 60,634 $ 41,209 Trade receivables, less allowance for credit losses of $ 23,564 and $ 23,912 359,956 383,496 Inventories, net 446,531 420,062 Prepaid expenses 53,174 51,949 Other current assets 67,701 67,357 Total current assets 987,996 964,073 Property, plant and equipment, net 265,185 286,278 Goodwill 1,399,661 1,532,993 Intangible assets, net 452,329 521,434 Lease assets - right of use 89,551 107,944 Other assets 345,181 48,540 Total assets $ 3,539,903 $ 3,461,262 LIABILITIES AND EQUITY CURRENT LIABILITIES: Accounts payable $ 320,179 $ 345,480 Accrued liabilities 290,403 251,109 Total current liabilities 610,582 596,589 Long-term debt 1,132,415 — Other liabilities 549,381 362,945 Total liabilities 2,292,378 959,534 Equity: Common stock - $ 0.001 par value - Authorized 600,000,000 , 60,076,559 and 100 shares outstanding as of September 30, 2022 and December 31, 2021, respectively 60 — Additional paid-in capital 1,857,918 — Retained earnings 101,549 — Former Parent’s investment — 2,921,623 Accumulated other comprehensive loss ( 750,342 ) ( 460,888 ) Total ESAB Corporation equity 1,209,185 2,460,735 Noncontrolling interest 38,340 40,993 Total equity 1,247,525 2,501,728 Total liabilities and equity $ 3,539,903 $ 3,461,262 See Notes to Consolidated and Combined Condensed Financial Statements. 4 ESAB CORPORATION CONSOLIDATED AND COMBINED CONDENSED STATEMENTS OF EQUITY Dollars in thousands, except share and per share amounts (Unaudited) Common Stock Additional Paid in Capital Retained Earnings Former Parent’s Investment Accumulated Other Comprehensive Loss Noncontrolling Interest Total Shares Amount 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 loss, net of tax expense of $ 579 — — — — — ( 43,895 ) ( 508 ) ( 44,403 ) Former Parent common stock-based award activity — — — — 1,728 — — 1,728 Transfers from (to) Former Parent, net — — — — 62,110 ( 59,263 ) — 2,847 Balance at April 1, 2022 — $ — $ — $ — $ 3,040,898 $ ( 564,046 ) $ 40,510 $ 2,517,362 Net income — — — 55,249 — — 775 56,024 Dividends declared ($ 0.05 per share) — — — ( 3,025 ) — — — ( 3,025 ) Other comprehensive loss, net of tax expense of $ 594 — — — — — ( 99,373 ) ( 1,745 ) ( 101,118 ) Net transfers from Former Parent, including Separation Adjustments — — — — 8,533 — — 8,533 Net consideration paid to Former Parent in connection with the Separation — — — — ( 1,200,000 ) — — ( 1,200,000 ) Issuance of common stock in connection with the Separation and reclassification of Net Investment from Former Parent 60,034,311 60 1,849,371 — ( 1,849,431 ) — — — Common stock-based award activity 9,232 — 3,627 — — — — 3,627 Balance at July 1, 2022 60,043,543 $ 60 $ 1,852,998 $ 52,224 $ — $ ( 663,419 ) $ 39,540 $ 1,281,403 Net income — — — 52,354 — — 962 53,316 Dividends declared ($ 0.05 per share) — — — ( 3,029 ) — — — ( 3,029 ) Distributions to noncontrolling owners — — — — — — ( 1,019 ) ( 1,019 ) Other comprehensive loss, net of tax expense of $ 4,760 — — — — — ( 86,923 ) ( 1,143 ) ( 88,066 ) Common stock-based award activity 33,016 — 4,920 — — — — 4,920 Balance at September 30, 2022 60,076,559 $ 60 $ 1,857,918 $ 101,549 $ — $ ( 750,342 ) $ 38,340 $ 1,247,525 See Notes to Consolidated and Combined Condensed Financial Statements. 5 ESAB CORPORATION CONSOLIDATED AND COMBINED CONDENSED STATEMENTS OF EQUITY Dollars in thousands (Unaudited) Common Stock Additional Paid in Capital Retained Earnings Former Parent’s Investment Accumulated Other Comprehensive Loss Noncontrolling Interest Total Shares Amount 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 ) Former Parent common stock-based award activity — — — — 1,586 — — 1,586 Transfers to Former Parent, net — — — — ( 55,069 ) — — ( 55,069 ) Balance at April 2, 2021 — $ — $ — $ — $ 2,903,006 $ ( 425,709 ) $ 41,649 $ 2,518,946 Net income — — — — 77,407 — 705 78,112 Other comprehensive income (loss), net of tax expense of $ 0 — — — — — 4,264 ( 610 ) 3,654 Former Parent common stock-based award activity — — — — 1,663 — — 1,663 Transfers to Former Parent, net — — — — ( 56,038 ) — — ( 56,038 ) Balance at July 2, 2021 — $ — $ — $ — $ 2,926,038 $ ( 421,445 ) $ 41,744 $ 2,546,337 Net income — — — — 60,614 — 818 61,432 Distributions to noncontrolling owners — — — — — — ( 1,496 ) ( 1,496 ) Other comprehensive (loss) income, net of tax benefit of $ 0 — — — — — ( 35,861 ) 230 ( 35,631 ) Former Parent common stock-based award activity — — — — 1,702 — — 1,702 Transfers to Former Parent, net — — — — ( 62,305 ) — — ( 62,305 ) Balance at October 1, 2021 — $ — $ — $ — $ 2,926,049 $ ( 457,306 ) $ 41,296 $ 2,510,039 See Notes to Consolidated and Combined Condensed Financial Statements. 6 ESAB CORPORATION CONSOLIDATED AND COMBINED CONDENSED STATEMENTS OF CASH FLOWS Dollars in thousands (Unaudited) Nine Months Ended September 30, 2022 October 1, 2021 Cash flows from operating activities: Net income $ 165,743 $ 198,078 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 48,699 57,305 Stock-based compensation expense 9,532 4,951 Non-cash interest expense 1,673 — Deferred income tax ( 4,725 ) ( 2,710 ) Pension settlement gain ( 3,300 ) ( 11,208 ) Changes in operating assets and liabilities: Trade receivables, net ( 7,361 ) ( 54,826 ) Inventories, net ( 54,757 ) ( 105,409 ) Accounts payable ( 10,916 ) 93,382 Other operating assets and liabilities ( 21,673 ) 12,514 Net cash provided by operating activities 122,915 192,077 Cash flows from investing activities: Purchases of property, plant and equipment ( 21,996 ) ( 18,851 ) Proceeds from sale of property, plant and equipment 4,322 1,079 Acquisition, net of cash received — ( 4,885 ) Net cash used in investing activities ( 17,674 ) ( 22,657 ) Cash flows from financing activities: Proceeds from borrowings on term credit facility 1,000,000 — Proceeds from borrowings on revolving credit facility and other 495,881 244 Repayments of borrowings on revolving credit facility ( 360,000 ) — Payment of deferred financing fees and other ( 4,904 ) — Payment of deferred consideration ( 1,500 ) — Payment of dividends ( 3,025 ) — Distributions to noncontrolling interest holders ( 1,960 ) ( 2,550 ) Consideration to Former Parent in connection with the Separation ( 1,200,000 ) — Transfers from (to) Former Parent, net 2,847 ( 173,412 ) Net cash used in financing activities ( 72,661 ) ( 175,718 ) Effect of foreign exchange rates on Cash and cash equivalents ( 13,155 ) ( 1,416 ) Increase (decrease) in Cash and cash equivalents 19,425 ( 7,714 ) Cash and cash equivalents, beginning of period 41,209 49,209 Cash and cash equivalents, end of period $ 60,634 $ 41,495 See Notes to Consolidated and Combined Condensed Financial Statements. 7 ESAB CORPORATION NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. Organization and Basis of Presentation ESAB Corporation (“ESAB” or the “Company”) is a world leader in fabrication and gas control technology, providing our partners with advanced equipment, consumables, gas control equipment, 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. Historically, these businesses had operated as part of Enovis Corporation’s (“Former Parent” or “Enovis”) Fabrication Technologies reportable segment. 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 third quarter results for 2022 and 2021 refer to the 13-week periods ended September 30, 2022 and October 1, 2021, respectively. Separation from Enovis On January 31, 2022, all remaining legal entities which were part of the Fabrication Technology segment of the Former Parent along with certain entities that were part of the Corporate segment of the Former Parent became subsidiaries of ESAB through a legal entity restructuring. This reorganization resulted in the inclusion of the following items in ESAB for the three months ending April 1, 2022: • Certain operating entities that form the historical Fabrication Technology business. • Certain entities which historically have been a part of the Former Parent’s Corporate reportable segment, including components of the Fo rm er Parent’s legal, human resources, tax and other finance functions that served the entirety of the Former Parent. • Certain entities relating to the Former Parent’s previously divested Fluid 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 13, “Commitments and Contingencies” for additional information. • 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 Former Parent to ESAB as of March 21, 2022. Refer to Note 8, “Benefit Plans” for additional information on the benefit plans transferred to ESAB. The above items, with the exception of the operating entities that form the Fabrication Technology business, were not previously included in the Company’s 2019 to 2021 historical carve-out financial statements. These historical carve-out financial statements 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 accountin g differences before and after the legal entity contributions may impact the comparability between periods in these Consolidated and Combined Condensed Financial Statements. ESAB Corporation, which was incorporated on May 19, 2021, became the new ultimate parent company for the Former Parent’s Fabrication Technology business during the three months ended April 1, 2022. On April 4, 2022 (the “Distribution Date”), Colfax Corporation (“Colfax” or the “Former Parent”) completed the spin-off of Colfax’s Fabrication Technology business and certain other corporate entities as described above, through a tax-free, pro rata distribution (the “Distribution”) of 90 % of the outstanding common stock of ESAB to Colfax stockholders (the “Separation”). To effect the Separation, each Colfax stockholder of record as of close of business on March 23, 2022 received one share of ESAB common stock for every three shares of Colfax common stock held on the record date. Upon completion of the Distribution, Colfax changed its name to Enovis Corporation and continued to hold 10 % of the outstanding common stock of ESAB. Enovis is expected to divest the 10 % retained shares in ESAB within 12 months after the Distribution Date. 8 ESAB CORPORATION NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) In connection with the Separation, on April 4, 2022, ESAB and Enovis entered into a separation and distribution agreement as well as various other related agreements (collectively the “Agreements”) that govern the Separation and the relationships between the parties going forward, including a transition services agreement, an employee matters agreement, a tax matters agreement, an intellectual property matters agreement, and license agreement for the ESAB Business Excellence System (“EBX”). In conjunction with the Separation on April 4, 2022, the Company entered into a credit agreement (the “Credit Agreement”). The Company drew down $ 1.2 billion under the Credit Agreement and used these proceeds to make payments to Enovis of $ 1.2 billion, which was used as part of the consideration for the contribution of certain assets and liabilities to the Company by Enovis in connection with the Separation. The Company entered into interest rate swap agreements and cross-currency swap agreements to manage exposures to currency exchange rates and interest rates arising from these credit facilities; refer to Note 9 “Debt” and Note 10 “Derivatives” for additional information. On May 12, 2022, ESAB declared a quarterly cash dividend of $ 0.05 per share of the Company’s common stock. The dividend of $ 3.0 million was paid to stockholders of record on July 1, 2022. On September 15, 2022 ESAB announced that the Board of Directors had declared a quarterly cash dividend of $ 0.05 per share of the Company’s common stock to stockholders of record on September 30, 2022, payable on October 14, 2022. The dividend of $ 3.0 million is included in Accrued liabilities in the Consolidated Balance Sheet at September 30, 2022. Russia and Ukraine Conflict The invasion of Ukraine by Russia and the sanctions imposed in response to this crisis have increased the level of economic and political uncertainty. On April 25, 2022, ESAB announced that the Company may be required to transition out of its 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. For the three and nine months ended September 30, 2022, Russia represented approximately 7 % and 6 % of the Company’s total revenue, and approximately $ 7 million and $ 14 million of its Net Income, respectively. Russia also has approximately 6 % of the Company’s total net assets excluding any goodwill allocation as of September 30, 2022. In case of the disposition of the Russia business, a portion of goodwill will need to be allocated and disposed of in the relative fair value attributable to the Russia business. Russia has a cumulative translation loss of approximately $ 50 million as of September 30, 2022, 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 million during the nine months ended September 30, 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. Basis of Presentation The accompanying Consolidated and Combined Condensed Financial Statements present the Company’s historical financial position, results of operations, changes in equity and cash flows in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The combined condensed financial statements for periods prior to the Separation were derived from Enovis’s consolidated financial statements and accounting records and prepared in accordance with GAAP for the preparation of carved-out combined financial statements. Through the date of the Separation, all revenues and costs as well as assets and liabilities directly associated with ESAB have been included in the combined financial statements. Prior to the Separation, the combined condensed financial statements also included allocations of certain general, administrative, sales and marketing expenses from Enovis’s corporate office and from other Enovis businesses to the Company and allocations of related assets, liabilities, and the Former Parent’s investment, as applicable. The allocations were 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 Enovis during the applicable periods. Re lated party a llocations prior to the Separation, including the method for such allocation, are discussed further in Note 15, “Related Party Transactions.” Following the Separation, the consolidated financial statements include ESAB and its wholly-owned subsidiaries and no longer include any allocations of expenses from Enovis. Accordingly: 9 ESAB CORPORATION NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) • The Consolidated Balance Sheet as of September 30, 2022, consists of the consolidated balances of ESAB, while the Combined Condensed Balance Sheet as of December 31, 2021, consists of the combined balances of the former Fabrication Technology business of Enovis. • The Consolidated and Combined Condensed Statement of Operations and Statement of Comprehensive Income for the nine months ended September 30, 2022 consist of the consolidated results of ESAB for the six months ended September 30, 2022 and the combined results of the former Fabrication Technology business of Enovis and the certain entities discussed in the “Separation from Enovis” section above for the three months ended April 1, 2022. The Combined Condensed Statement of Operations and Statement of Comprehensive Income for the three and nine months ended October 1, 2021 consist of the combined results of the former Fabrication Technology business of Enovis. • The Consolidated and Combined Condensed Statement of Changes in Equity for the nine months ended September 30, 2022 consists of the consolidated activities of ESAB for the six months ended September 30, 2022 and the combined activity of the former Fabrication Technology business of Enovis and the certain entities discussed in the “Separation from Enovis” section above for the three months ended April 1, 2022. The Combined Condensed Statements of Changes in Equity for the three and nine months ended October 1, 2021 consist of the combined activity of the former Fabrication Technology business of Enovis. • The Consolidated and Combined Condensed Statement of Cash Flows for the nine months ended September 30, 2022 consists of the consolidated activities of ESAB for the six months ended September 30, 2022 and the combined activity of ESAB and the former Fabrication Technology business of Enovis and the certain entities discussed in the “Separation from Enovis” section above for the three months ended April 1, 2022. The Combined Condensed Statement of Cash Flows for the three and nine months ended October 1, 2021 consist of the combined activity of the former Fabrication Technology business of Enovis. The Consolidated and Combined Condensed Financial Statements of ESAB for the three and nine months ended October 1, 2021 and the three months ended April 1, 2022 may not be indicative of the Company's results had it been a separate stand-alone entity throughout the periods presented, nor are the results stated herein indicative of what the Company's financial position, results of operations and cash flows may be in the future. Prior to the Separation, the Company was dependent on the Former Parent for all of its working capital and financing requirements under Enovis’s centralized approach to cash management and financing of its operations. With the exception of cash, cash equivalents and borrowings clearly associated with ESAB and related to the Separation, financing transactions relating to the Company during the period prior to the Separation were accounted for through the Former Parent’s investment account of the Company. Accordingly, none of Enovis’s cash, cash equivalents or debt at the corporate level has been assigned to the Company in these financial statements. Former Parent’s Investment, which included retained earnings, represented Enovis’s interest in the recorded net assets of the Company. All significant transactions between the Company and the Former Parent prior to the Separation have been included in the accompanying Financial Statements. Transactions with the Former Parent are reflected in the accompanying Consolidated and Combined Condensed Statements of Equity as “Transfers from Former Parent, net” and in the accompanying Consolidated and Combined Condensed Balance Sheets within “Former Parent’s investment”. The Consolidated and 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 Consolidated and Combined Condensed Financial Statements in accordance with 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 Consolidated and 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 Consolidated and Combined Condensed Statements of Operations. Research and development costs were $ 8.0 million and $ 27.1 million 10 ESAB CORPORATION NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) during the three and nine months ended September 30, 2022, respectively, a nd $ 9.1 million and $ 28.9 million d uring the three and nine months ended October 1, 2021, respectively. In addition to the factors discussed elsewhere in this Form 10-Q, the results of operations for the three and nine months ended September 30, 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 Consolidated and 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 the Consolidated and 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 Consolidated and 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 that 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 the Former Parent’s divested businesses that were not part of Former Parent’s Fabrication Technology segment. Refer to “Note 1, Organization and Basis of Presentation” for additional information. The Company has classified asbestos-related activity in its Consolidated and Combined Condensed Statements of Operations as part of Loss from discontinued operations, net of taxes. See Note 13, “Commitments and Contingencies” for further information. Cas h used in operating activities related to discontinued operations for the three and nine months ended September 30, 2022 was $ 5.6 million and $ 19.3 million, respectively. 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 Nine Months Ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 (In thousands) Equipment $ 168,633 $ 192,365 $ 547,555 $ 564,971 Consumables 451,632 413,603 1,381,798 1,238,929 Total $ 620,265 $ 605,968 $ 1,929,353 $ 1,803,900 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 September 30, 2022 is immaterial. 11 ESAB CORPORATION NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) 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 Consolidated and Combined Condensed Balance Sheets. During the three and nine months ended September 30, 2022, revenue recognized that was included in the contract liability balance at the beginning of the year w as $ 4.6 million and $ 19.0 million, res pectively. During the three and nine months ended October 1, 2021, revenue recognized that was included in the contract liability balance at the beginning of the year was $ 3.1 million and $ 19.4 million, respectively. As of September 30, 2022 and October 1, 2021 total contract liabilities were $ 22.5 million and $ 19.9 million, respectively, and were included in Accrued liabilities on the Company’s Consolidated and 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 Consolidated and Combined Condensed Balance Sheets is as follows: Nine Months Ended September 30, 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 $ 4,756 $ ( 4,633 ) $ ( 471 ) $ 23,564 4. Earnings per Share from Continuing Operations The Company has unvested share-based payment awards with a right to receive non-forfeitable dividends, which are considered participating securities. The Company allocates earnings to participating securities and computed earnings per share using the two-class method as follows: Three Months Ended Nine Months Ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 (In thousands, except share and per share data) Computation of earnings per share from continuing operations – basic: Income from continuing operations attributable to ESAB Corporation (1) $ 53,331 $ 60,614 $ 167,938 $ 195,679 Less: distributed and undistributed earnings allocated to nonvested shares ( 407 ) — ( 1,152 ) — Income from continuing operations attributable to common stockholders $ 52,924 $ 60,614 $ 166,786 $ 195,679 Weighted-average shares of Common stock outstanding – basic 60,063,553 60,034,311 60,045,306 60,034,311 Income per share from continuing operations – basic $ 0.88 $ 1.01 $ 2.78 $ 3.26 Computation of earnings per share from continuing operations – diluted: Income from continuing operations attributable to common stockholders $ 52,924 $ 60,614 $ 166,786 $ 195,679 Weighted-average shares of Common stock outstanding – diluted 60,063,553 60,034,311 60,045,306 60,034,311 Net effect of potentially dilutive securities 99,668 — 82,378 — Weighted-average shares of Common stock outstanding – dilution 60,163,221 60,034,311 60,127,684 60,034,311 Net income per share from continuing operations – diluted $ 0.88 $ 1.01 $ 2.77 $ 3.26 (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 and $ 2.7 million for the three and nine months ended September 30, 2022, respectively, and $ 0.8 million and $ 2.4 million for the three and nine months ended October 1, 2021, respectively. 12 ESAB CORPORATION NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) 5. Income Taxes During the three and nine months ended September 30, 2022, Income from continuing operations before income taxes was $ 72.1 million and $ 234.3 million, respectively , while Income tax expense was $ 17.8 million and $ 63.6 million , respectively. The effective tax rat e was 24.7 % and 27.2 % for the three and nine months ended September 30, 2022, respectively. The effective tax rates differed from the 2022 U.S. federal statutory rate of 21% primarily due to the impact of withholding taxes and non-deductible expenses. During the three and nine months ended October 1, 2021, Income from continuing operations before income taxes was $ 78.9 million and $ 245.1 million, respectively, while Income tax expense was $ 17.4 million and $ 47.0 million, respectively. The effective tax rate was 22.1 % and 19.2 % for the three and nine months ended October 1, 2021, respectively. The effective tax rates 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 nine months of 2021. Additionally, the Company’s foreign earnings in the first nine months of 2021 were taxed at lower rates than the U.S federal statutory rate. 6. Inventories, Net Inventories, net consisted of the following: September 30, 2022 December 31, 2021 (In thousands) Raw materials $ 152,316 $ 148,376 Work in process 45,099 39,595 Finished goods 286,132 268,831 483,547 456,802 LIFO reserve ( 204 ) 1,129 Less: allowance for excess, slow-moving and obsolete inventory ( 36,812 ) ( 37,869 ) $ 446,531 $ 420,062 At September 30, 2022 and December 31, 2021 , 33 % and 34 % of total inventories, respectively, were valued using the LIFO method. 7. Accrued and Other Liabilities Accrued and Other liabilities in the Consolidated and Combined Condensed Balance Sheets consisted of the following: Current Noncurrent Current Noncurrent September 30, 2022 December 31, 2021 (In thousands) Accrued taxes and deferred tax liabilities $ 57,813 $ 169,839 $ 58,920 $ 203,760 Compensation and related benefits 70,203 62,299 74,587 62,215 Asbestos liability 34,841 236,757 — — Contract liability 22,475 — 22,265 — Lease liability 20,323 72,060 23,110 88,777 Warranty liability 13,721 — 14,954 — Third-party commissions 14,964 — 16,130 — Restructuring liability 6,747 100 7,834 275 Other 49,316 8,326 33,309 7,918 $ 290,403 $ 549,381 $ 251,109 $ 362,945 13 ESAB CORPORATION NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) Accrued Warranty Liability A summary of the activity in the Company’s warranty liability included in Accrued liabilities in the Company’s Consolidated and Combined Condensed Balance Sheets is as follows: Nine Months Ended September 30, 2022 October 1, 2021 (In thousands) Warranty liability, beginning of period $ 14,954 $ 14,022 Accrued warranty expense 4,367 5,661 Changes in estimates related to pre-existing warranties 2,190 1,401 Cost of warranty service work performed ( 6,815 ) ( 5,626 ) Foreign exchange translation effect ( 975 ) ( 256 ) Warranty liability, end of period $ 13,721 $ 15,202 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 Consolidated and Combined Condensed Balance Sheets is as follows: Nine Months Ended September 30, 2022 Balance at Beginning of Period Charges Payments Foreign Currency Translation Balance at End of Period (In thousands) Restructuring and other related charges: Americas Termination benefits (1) $ 2,044 $ 1,691 $ ( 2,708 ) $ ( 7 ) $ 1,020 Facility closure costs and other (2) 50 10,022 ( 10,013 ) — 59 Subtotal 2,094 11,713 ( 12,721 ) ( 7 ) 1,079 Non-cash charges (2) ( 37 ) Segment Total 11,676 EMEA & APAC Termination benefits (1) 5,774 2,622 ( 2,879 ) ( 174 ) 5,343 Facility closure costs and other (2) 241 2,331 ( 2,131 ) ( 16 ) 425 Subtotal 6,015 4,953 ( 5,010 ) ( 190 ) 5,768 Non-cash charges (2) — Segment Total 4,953 Total $ 8,109 16,666 $ ( 17,731 ) $ ( 197 ) $ 6,847 Non-cash charges (2) ( 37 ) Total Provision $ 16,629 (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. 14 ESAB CORPORATION NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) 8. 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 Former Parent, were transferred to the Company as of March 21, 2022. As a result of the transfer, the related net plan obligations of approximate ly $ 10.6 million are included within the Company’s Consolidated Balance Sheet at September 30, 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 Former Parent at December 31, 2021. The pretax net unrecognized pension and other post-retirement benefit cost included in Accumulated other comprehensive loss at April 1, 2022 for the transferred plans was approximately $ 50 million. The net plan assets and obligations are presented within Compensation and related benefits in Note 7, “Accrued and Other Liabilities”. The Former Parent offered 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 this plan is reflected in the Company’s historical Combined Financial Statements as though it participated in a multiemployer plan with the Former Parent. As a result, a proportionate share of the cost associated with this defined benefit plan is reflected in the Company’s historical Combined Financial Statements, while any assets and liabilities associated with this defined benefit plan were retained by the Former Parent and were not recorded on the Company’s historical Combined Financial Statements, prior to the Separation. Net periodic pension benefit income related to this Former Parent-sponsored plan was allocated to the Company based on the Company’s share of total Former Parent headcount and is reflected within Interest expense (income) and other, net, in the Consolidated and Combined Condensed Statements of Operations for the three months ended April 1, 2022 and nine months ended October 1, 2021. Net periodic benefit cost of the Company’s defined benefit pension plan was $ 0.2 million and $ 0.6 million for the three and nine months ended September 30, 2022, respectively, and was $ 0.7 million and $ 1.4 million for the three and nine months ended October 1, 2021, respectively. In the nine months ended September 30, 2022, contributions of $ 0.8 million to U.S. pension plans and $ 3.5 million to foreign pension plans were made. In the three months ended September 30, 2022, the Company recognized a pension settlement gain of $ 3.3 million related to the completed buy-out of a foreign defined benefit plan by a third party. During the nine months ended October 1, 2021, the Company recognized a pension settlement gain of $ 11.2 million when the independent trustees of a Company pension plan agreed to merge that plan with another Company pension plan and contribute its surplus assets. These amounts are reflected in Pension settlement gain in the Consolidated and Combined Condensed Statements of Operations. 9. Debt Long-term debt consisted of the following: September 30, 2022 (In thousands) Term loans $ 997,415 Revolving credit facilities 135,000 Long-term debt $ 1,132,415 Term Loans and Revolving Credit Facility 15 ESAB CORPORATION NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) On April 4, 2022, the Company entered into a credit agreement (as amended and restated from time-to-time, the “Credit Agreement”) in connection with the Separation. The Credit Agreement initially consisted of the following facilities: • A $ 750 million revolving credit facility (the “Revolving Facility”) with a maturity date of April 4, 2027; • A Term A-1 loan with an initial aggregate principal amount of $ 400 million (the “Term Loan A-1 Facility”), with a maturity date of April 4, 2027; and, • A $ 600 million 364 -day senior term loan facility (the “Term Loan A-2 Facility”) with a maturity date of April 3, 2023. The Revolving Facility contains a $ 300 million letter of credit foreign currency sublimit and a $ 50 million swing line loan sub-facility. On April 4, 2022, the Company drew down $ 1.2 billion available under the credit facilities made up of (i) $ 200 million under the Revolving Facility, (ii) $ 400 million under the Term Loan A-1 Facility and (iii) $ 600 million under the Term Loan A-2 Facility. The Company used these proceeds to make payments to Enovis of $ 1.2 billion, which was used as part of the consideration for the contribution of certain assets and liabilities to the Company by Enovis in connection with the Separation. On June 28, 2022, the Company amended and restated the Credit Agreement by entering into Amendment No. 2 to Credit Agreement (“Credit Agreement Amendment”). The Credit Agreement Amendment provides for a $ 600 million term loan facility (the “Term Loan A-3 Facility” and, together with the Term Loan A-1 Facility, the “Term Facilities”, and together with the Revolving Facility, the “Facilities”) with a maturity date of April 3, 2025 to refinance the Company’s existing Term Loan A-2 Facility. Also on June 28, 2022, the Company borrowed the entire $ 600 million under Term Loan A-3 Facility to fund the repayment of the Term Loan A-2 Facility. The Company’s total borrowing capacity under the Credit Agreement remains unchanged. The draw-down and repayment related to these term facilities are presented net within the Consolidated and Combined Condensed Statements of Cash Flows. The Credit Agreement contains customary covenants limiting the ability of the Company and its subsidiaries to, among other things, incur debt or liens, merge or consolidate with others, dispose of assets, make investments or pay dividends. In addition, the Credit Agreement contains financial covenants requiring the Company to maintain (i) a maximum total leverage ratio of not more than 4.00 :1.00, with step-downs to, commencing with the fiscal quarter ending June 30, 2023, 3.75 :1.00, and commencing with the fiscal quarter ending June 30, 2024, 3.50 :1.00, and (ii) a minimum interest coverage ratio of 3.00 :1:00. The Credit Agreement contains various events of default (including failure to comply with the covenants under the Credit Agreement and related agreements) and upon an event of default the lenders may, subject to various customary cure rights, require the immediate payment of all amounts outstanding under the Term Facilities and the Revolving Facility. Certain U.S. subsidiaries of the Company have agreed to guarantee the obligations of the Company under the Credit Agreement. Loans made under the Term Facilities will bear interest, at the election of the Company, at either the base rate (as defined in the Credit Agreement) or at the term Secured Overnight Financing Rate (“SOFR”) rate plus an adjustment (as defined in the Credit Agreement), in each case, plus the applicable interest rate margin. Loans made under the Revolving Facility will bear interest, at the election of the Company, at either the base rate or, (i) in the case of loans denominated in dollars, the term SOFR rate plus an adjustment or the daily simple SOFR plus an adjustment, (ii) in the case of loans denominated in euros, the adjusted Euro Interbank Offered Rate (“EURIBOR”) rate and, (iii) in the case of loans denominated in sterling, Sterling Overnight Index Average (“SONIA”) plus an adjustment (as all such rates are defined in the Second Credit Agreement), in each case, plus the applicable interest rate margin. The applicable interest rate margin changes based upon the Company’s total leverage ratio (ranging from 1.125 % to 1.750 % or in the case of the base rate margin, 0.125 % to 0.750 %). Each swing line loan denominated in dollars will bear interest at the base rate plus the applicable interest rate margin. To manage exposures to currency exchange rates and interest rates arising in Long-term debt, the Company entered into interest rate and cross currency swap agreements during the three months ended September 30, 2022, refer to Note 10, “Derivatives” for additional information. As of September 30, 2022, the weighted-average interest rate of borrowings under the Credit Agreement was 3.82 % , including the net impact from the interest rate swaps and excluding accretion of deferred financing fees, and there was $ 615 million available on the Revolving Facility. 16 ESAB CORPORATION NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) Other Indebtedness In addition to the debt agreements discussed above, the Company also has the ability to incur $ 50 million of indebtedness pursuant to certain uncommitted credit lines, consisting of an uncommitted credit line that the Company currently has in place that the Company has used from time to time in the past for short-term working capital needs. The Company is party to letter of credit facilities with an aggregate capacity of $ 107.5 million. Total letters of credit of $ 29.4 million were outstanding as of September 30, 2022. Deferred Financing Fees In total, the Company had deferred financing fees of $ 3.9 million included in its Consolidated Balance Sheet as of September 30, 2022, which will be charged to Interest expense (income) and other, net, using the straight-line method. The costs associated with the Term Facilities will be amortized over the contractual term of the Term Facilities and the costs associated with the Revolving Facility will be amortized over the life of the Credit Agreement. Of the $ 3.9 million, $ 1.3 million of deferred financing fees relating to the Revolving Facility are included in Other assets and $ 2.6 million of deferred financing fees relating to the Term Facilities are recorded as a contra-liability within Long-term debt. 10. Derivatives The Company uses derivative instruments to manage exposures to currency exchange rates and interest rates arising in connection with Long-term debt and the normal course of business. The Company has established policies and procedures that govern the risk management of these exposures. Both at inception and on an ongoing basis, the derivative instruments that qualify for hedge accounting are assessed as to their effectiveness, when applicable. The Company is subject to the credit risk of counterparties to derivative instruments. Counterparties include a number of major banks and financial institutions. None of the concentrations of risk with an individual counterparty was considered significant as of September 30, 2022. The Company does not expect any counterparties to fail to meet their obligations. The Company records derivatives in the Consolidated and Combined Condensed Balance Sheets at fair value. Cash Flow Hedges On July 14, 2022, the Company entered into two interest rate swap agreements to manage interest rate risk exposure. The aggregate notional amount of these contracts is $ 600 million and they mature in April 2025. These interest rate swap agreements utilized by the Company effectively modify the Company’s exposure to interest rate risk by converting a portion of the Company’s floating-rate debt to a fixed rate of 3.293 %, plus a spread, thus reducing the impact of interest-rate changes on future interest expense. The applicable spread may vary between 1.125 % to 1.750 %, depending on the total leverage ratio of the Company. The spread is 1.500 % as of September 30, 2022. These agreements involve the receipt of floating-rate amounts in exchange for fixed-rate interest payments over the life of the agreement without an exchange of the underlying principal amount. The above interest rate swap agreements are designated and qualify as a cash flow hedge and as such, the gain or loss on the derivative instrument due to the change in fair value is reported as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. If a derivative is deemed to be ineffective, the change in fair value of the derivative is recognized directly in earnings. As of September 30, 2022 the cash flow hedges were perfectly effective. The cash inflows and outflows associated with the Company’s interest rate swap agreements designated as cash flow hedges are classified in cash flows from operating activities in the accompanying Consolidated and Combined Condensed Statements of Cash Flows. The Company expects a gain of $ 4.2 million, net of tax, related to interest rate swap agreements to be reclassified from AOCI to earnings over the next 12 months as the hedged transactions are realized. The expected gain to be reclassified is based on current forward rates in active markets as of September 30, 2022. 17 ESAB CORPORATION NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) The effects of designated cash flow hedges on the Company’s Consolidated and Combined Condensed Statements of Operations consisted of the following: Three Months Ended Derivative type Loss recognized in the Consolidated and Combined Condensed Statements of Operations: September 30, 2022 (In thousands) Interest rate swap agreements Interest expense (income) and other, net $ 1,045 Net Investment Hedges On July 22, 2022 the Company entered into two cross-currency swap agreements to partially hedge its net investment in its Euro-denominated subsidiaries against adverse movements in exchange rates between the U.S. Dollar and the Euro. In addition, the cross-currency swap agreements are agreements to exchange fixed-rate payments in U.S. Dollar for fixed-rate payments in Euro and are designated and qualify as a net investment hedge. These contracts have a Euro aggregate notional amount of approximately € 270 million and a U.S. Dollar aggregate notional amount of $ 275 million at September 30, 2022, and they mature in April 2025. The changes in the spot rate of these instruments are recorded in AOCI in equity, partially offsetting the foreign currency translation adjustment of the Company’s related net investment that is also recorded in AOCI. The Company uses the spot method of assessing hedge effectiveness and as such, the initial value of the hedge components excluded from the assessment of effectiveness is recognized in the Interest expense (income) and other, net line item in the Consolidated and Combined Condensed Statement of Operations under a systematic and rational method over the life of the cross-currency swap agreements. Any ineffective portions of net investment hedges are reclassified from accumulated other comprehensive income (loss) into earnings during the period of change. As of September 30, 2022 the net investment hedges were perfectly effective. The cash inflows and outflows associated with the excluded components of the Company’s cross-currency swap agreements designated as net investment hedges are classified in operating activities in the accompanying Consolidated and Combined Condensed Statements of Cash Flows. The table below shows the fair value of the derivatives recognized in the Consolidated Balance Sheet and also the effects of designated hedges on AOCI: September 30, 2022 Designated as hedging instruments: Other Assets Total gain recognized in AOCI, net of tax (In thousands) Cross currency swap agreements $ 9,578 $ 7,421 Interest rate swap agreements 12,855 9,960 Total $ 22,433 $ 17,381 Derivatives Not Designated as Hedging Instruments The Company has certain foreign currency contracts that are not designated as hedges. As of September 30, 2022 and December 31, 2021, the Company had foreign currency contracts related to purchases and sales with notional values of $ 183.1 million and $ 180.8 million, respectively. 18 ESAB CORPORATION NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) The Company recognized the following in its Consolidated and Combined Condensed Financial Statements related to its derivative instruments not designated in a hedging relationship: Three Months Ended Nine Months Ended Foreign currency contracts September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 (In thousands) Change in unrealized gains (losses) $ 279 $ ( 2,374 ) $ 469 $ ( 6,108 ) Realized loss (1) ( 740 ) ( 1,383 ) ( 17,235 ) ( 1,472 ) (1) The nine months ended September 30, 2022 includes realized losses relating to certain corporate entities contributed to ESAB Corporation which are reflected within Interest expense (income) and other, net, in the Consolidated and Combined Condensed 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 expense (income) and other, net, in the Consolidated and Combined Condensed Statements of Operations during the three months ended April 1, 2022. 11. 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: September 30, 2022 Level One Level Two Level Three Total (In thousands) Assets: Cash equivalents $ 6,633 $ — $ — $ 6,633 Foreign currency contracts - not designated as hedges (1) — 2,432 — 2,432 Cross currency swap agreements — 9,578 — 9,578 Interest rate swap agreements — 12,855 — 12,855 Deferred compensation plans — 2,189 — 2,189 $ 6,633 $ 27,054 $ — $ 33,687 Liabilities: Foreign currency contracts - not designated as hedges (2) $ — $ 2,153 $ — $ 2,153 Deferred compensation plans — 2,189 — 2,189 $ — $ 4,342 $ — $ 4,342 (1) Included within Other Current Assets in the Consolidated Balance Sheet. (2) Included within Accrued Liabilities in the Consolidated Balance Sheet. 19 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 (1) — 2,487 — 2,487 $ 8,133 $ 2,487 $ — $ 10,620 Liabilities: Foreign currency contracts - not designated as hedges (2) $ — $ 2,309 $ — $ 2,309 (1) Included within Other Current Assets in the Consolidated and Combined Condensed Balance Sheet. (2) Included within Accrued Liabilities in the Consolidated and Combined Condensed Balance Sheet. The Company measures the fair value of foreign currency contracts, cross currency swap agreements and interest rate swap agreements using Level Two inputs based on observable spot and forward rates in active markets. Additionally, the fair value of derivatives designated in hedging relationships includes a credit valuation adjustment to appropriately incorporate nonperformance risk for the Company and the respective counterparty. For the three months ended September 30, 2022, the impact of the credit valuation adjustment on the Company’s derivatives is immaterial. Refer to Note 10, “Derivatives” for additional information. There were no transfers in or out of Level One, Two or Three during the nine months ended September 30, 2022. 20 12. 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 nine months ended September 30, 2022 and October 1, 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 Gains on Net Investment Hedges Gains on Cash Flow Hedges 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 by Former 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 ) Other comprehensive income (loss) before reclassifications: Foreign currency translation adjustment ( 1,354 ) ( 98,789 ) — — ( 100,143 ) Other comprehensive income (loss) before reclassifications ( 1,354 ) ( 98,789 ) — — ( 100,143 ) Amounts reclassified from Accumulated other comprehensive loss (1) 770 — — — 770 Net current period Other comprehensive loss ( 584 ) ( 98,789 ) — — ( 99,373 ) Balance at July 1, 2022 $ ( 71,008 ) $ ( 592,411 ) $ — $ — $ ( 663,419 ) Other comprehensive income (loss) before reclassifications: Foreign currency translation adjustment 3,685 ( 108,755 ) 7,421 — ( 97,649 ) Unrealized gain on cash flow hedges — — — 9,150 9,150 Other comprehensive income (loss) before reclassifications 3,685 ( 108,755 ) 7,421 9,150 ( 88,499 ) Amounts reclassified from Accumulated other comprehensive loss (1)(3) 766 — — 810 1,576 Net current period Other comprehensive income (loss) 4,451 ( 108,755 ) 7,421 9,960 ( 86,923 ) Balance at September 30, 2022 $ ( 66,557 ) $ ( 701,166 ) $ 7,421 $ 9,960 $ ( 750,342 ) (1) The amounts on this line within the Net Unrecognized Pension And Other Post-Retirement Benefit Cost column are included in the computation of net periodic benefit cost. See Note 8, “Benefit Plans” for additional details. 21 (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 the Former Parent and were transferred to ESAB Corporation in anticipation of the Separation. See Note 1, “Organization and Basis of Presentation” for more information on the entities contributed from the Former Parent. (3) During the three months ended September 30, 2022, the amount on this line within the Gains on Cash Flow Hedge column, is a component of Interest expense (income) and other, net. See Note 10, “Derivatives”, for additional details. 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 ) Other comprehensive income (loss) before reclassifications: Foreign currency translation adjustment ( 126 ) 4,182 4,056 Other comprehensive income (loss) before reclassifications ( 126 ) 4,182 4,056 Amounts reclassified from Accumulated other comprehensive loss (1) 208 — 208 Net current period Other comprehensive income (loss) 82 4,182 4,264 Balance at July 2, 2021 $ ( 28,364 ) $ ( 393,081 ) $ ( 421,445 ) Other comprehensive income (loss) before reclassifications: Foreign currency translation adjustment 508 ( 36,639 ) ( 36,131 ) Other comprehensive income (loss) before reclassifications 508 ( 36,639 ) ( 36,131 ) Amounts reclassified from Accumulated other comprehensive loss (1) 270 — 270 Net current period Other comprehensive income (loss) 778 ( 36,639 ) ( 35,861 ) Balance at October 1, 2021 ( 27,586 ) ( 429,720 ) ( 457,306 ) (1) Included in the computation of net periodic benefit cost. See Note 8, “Benefit Plans” for additional details. 22 Share-Based Payments Prior to the Separation, certain employees of the Company participated in the Former Parent’s stock-based compensation plans. In connection with the Separation, the Company adopted the 2022 Omnibus Incentive Plan (the “Stock Plan”) and outstanding equity awards of the Former 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 Former Parent and ESAB common stock. For each equity award holder, the intent was to maintain the economic value of the equity awards immediately before and after the Distribution. The terms of the equity awards, such as the award period, exercisability and vesting schedule, as applicable, generally continued unchanged. Other than converted or replacement equity awards of ESAB issued in replacement of the Former Parent’s restricted stock units (“RSUs”) and stock options, the terms of the converted or replacement equity awards of ESAB (e.g., vesting date and expiration date) continued unchanged. Incremental stock-based compensation expense recorded as a result of this equity award conversion was $ 2.6 million and is being recognized over the remaining service period. Stock-based compensation expenses incurred by the Company were $ 4.2 million and $ 9.5 million during the three and nine months ended September 30, 2022, respectively, and $ 1.7 million and $ 5.0 million during the three and nine months ended October 1, 2021, respectively. 23 13. Commitments and Contingencies Asbestos Contingencies Certain entities that became subsidiaries of ESAB Corporation in connection with the Separation 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 Former 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 Former 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 while the number of cases has steadily declined. 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 Consolidated and Combined Condensed Statements of Operations. This is consistent with the Former Parent’s classification on the basis that, pursuant to the purchase agreement from the Former Parent’s Fluid Handling business divestiture, the Former Parent retained its asbestos-related contingencies and insurance coverages. However, as the Former 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 Condensed Consolidated Statements of Operations of the Former 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 Former 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. 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. The Company estimates the insurance assets for each subsidiary based upon the applicable policy language, expected recoveries and allocation methodologies, and law pertaining to the affected subsidiary’s insurance policies. Asbestos-related claims activity since December 31, 2021 is as follows: Nine Months Ended September 30, 2022 (Number of claims) Claims unresolved, beginning of period 14,559 Claims filed (1) 3,285 Claims resolved (2) ( 3,677 ) Claims unresolved, end of period 14,167 (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. 24 The Company’s Consolidated Balance Sheet included the following amounts related to asbestos-related litigation: September 30, 2022 (In thousands) Long-term asbestos insurance asset (1) $ 216,760 Long-term asbestos insurance receivable (1) 23,291 Accrued asbestos liability (2) 34,841 Long-term asbestos liability (3) 236,757 (1) Included in Other assets in the Consolidated 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 Consolidated Balance Sheet. (3) Included in Other liabilities in the Consolidated 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 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. 14. Segment Information ESAB is a world leader in fabrication and gas control technology, providing our partners with advanced equipment, consumables, gas control equipment, 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 Adjusted EBITA, which represents operating income excluding the impact of Restructuring and other related charges, acquisition-related intangible asset amortization, an d separation costs. The Com pany’s segment results were as follows: 25 Three Months Ended Nine Months Ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 (In thousands) Net sales: Americas $ 281,361 $ 260,005 $ 844,741 $ 739,793 EMEA & APAC 338,904 345,963 1,084,612 1,064,107 $ 620,265 $ 605,968 $ 1,929,353 $ 1,803,900 Adjusted EBITA (1) : Americas $ 43,200 $ 38,627 $ 128,860 $ 102,665 EMEA & APAC 53,520 54,093 169,769 169,785 $ 96,720 $ 92,720 $ 298,629 $ 272,450 (1) The following is a reconciliation of Operating income to Adjusted EBITA: Three Months Ended Nine Months Ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 (In thousands) Operating income $ 80,994 $ 78,664 $ 250,486 $ 233,165 Restructuring and other related charges 6,676 4,227 16,629 10,791 Separation costs (1) 1,834 713 8,923 819 Amortization of acquired intangibles (2) 7,216 8,934 22,523 27,130 Other (3) — 182 68 545 Adjusted EBITA $ 96,720 $ 92,720 $ 298,629 $ 272,450 (1) Includes non-recurring professional fees incurred in the planning and execution of the Separation from Enovis within the Selling, general and administrative expense line within the Consolidated and Combined Condensed Statements of Operations. (2) Included within the Selling, general and administrative expense line withing the Consolidated and Combined Condensed Statements of Operations. (3) Relates to certain items included within the Interest expense (income) and other, net line within the Consolidated and Combined Condensed Statements of Operations. 15. Related Party Transactions Related Party Agreements On April 4, 2022, in connection with the Separation, the Company entered into several agreements with Enovis that govern the Separation and provide a framework for the relationship between the parties going forward including a separation and distribution agreement, a transition services agreement, tax matters agreement, employee matters agreements, a stockholder’s and registration rights agreement, an intellectual property matters agreement and an Enovis Growth Excellence Business System (“EGX”) license agreement. The Separation and Distribution Agreement The Company entered into a separation and distribution agreement (the “Separation Agreement”) with Enovis immediately prior to the distribution of the Company’s common stock to Enovis stockholders. The Separation Agreement sets forth the Company’s agreements with Enovis regarding the principal actions to be taken in connection with the Separation. The Separation Agreement contains provisions that, among other things, relate to (i) assets, liabilities and contracts to be transferred, assumed and assigned to each of ESAB and Enovis as part of the Separation, (ii) cash distribution made to Enovis in partial consideration of the transfer of ESAB Assets to the Company in connection with the Separation, and (iii) cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of ESAB’s business with ESAB and financial responsibility for the obligations and liabilities of Enovis’s remaining business with Enovis. 26 Transition Services Agreement The transition services agreement ("TSA") sets forth the terms and conditions pursuant to which the Company and its subsidiaries and Enovis and its subsidiaries will provide to each other various services. The services to be provided include human resources, payroll, certain information technology services, treasury services and financial reporting services. The charges for the transition services generally are expected to allow the providing company to fully recover all internal and external costs and expenses it actually incurs in connection with providing the service (including a reasonable allocation of overhead) provided in the manner and at a level substantially consistent with that provided by the respective providing company immediately preceding the Distribution Date. Tax Matters Agreement The tax matters agreement governs the Company’s and Enovis’s respective rights, responsibilities and obligations after the Separation with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and certain other matters regarding taxes. Employee Matters Agreement The employee matters agreement sets forth, among other things, the allocation of assets, liabilities and responsibilities relating to employee compensation and benefit plans and programs and other related matters in connection with the Separation, including the treatment of outstanding equity and other incentive awards and certain retirement and welfare benefit obligations. Stockholders and Registration Rights Agreement The stockholders and registration rights agreement sets forth the right of the stockholders when requiring the Company to facilitate the resale of shares. Intellectual Property Matters Agreement The intellectual property matters agreement sets forth the terms and conditions pursuant to which Enovis and the Company have mutually granted certain personal, generally irrevocable, non-exclusive, worldwide, and royalty-free rights to use certain intellectual property. The Company and Enovis are able to sublicense their rights in connection with activities relating to their businesses, but not for independent use by third parties. EGX License Agreement The EGX License Agreement sets forth the terms and conditions pursuant to which Enovis has granted a royalty-free, non-exclusive, worldwide, and nontransferable license to the Company to use EGX, solely in support of its businesses. The Company will be able to sublicense such license solely to direct and indirect wholly-owned subsidiaries. In addition, each of Enovis and the Company each license to each other, improvements made by such party to EGX during the first two years of the term period of the EGX license agreement. Allocated Expenses The Company had historically operated as part of the Former Parent and not as a stand-alone company. Accordingly, the Former Parent allocated certain shared costs to the Company that are reflected as expenses in these financial statements. These amounts included, but were 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 considered the allocation methodologies used by the Former 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 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 Former Parent revenues and headcount. 27 All of the Company’s transactions with the Former Parent were considered to be financing transactions, which are presented as Transfers from (to) Former Parent, net in the accompanying Consolidated and Combined Condensed Statements of Cash Flows. The Company had no stock-based compensation plans prior to the Separation; however, certain employees of the Company participated in the Former Parent’s stock-based compensation plans, which provided for the grants of stock options an d RSUs among other types of awards. The expense associated with the Company's employees who participated in the plans of the Former Parent was allocated to the Company in the accompanying Consolidated and Combined Condensed Statements of Operations through the date of Separation. The Company’s allocated expenses from the Former Parent were $ 6.0 million for the three months ended April 1, 2022 and $ 5.0 million and $ 19.6 million for the three and nine months ended October 1, 2021, respectively. Following the Separation, the company independently incurs expenses as a stand-alone company and corporate expenses from Enovis were no longer allocated to the Company; therefore, no related amounts were reflected on the Company’s financial statements for the six months ended September 30, 2022. Refer to Note 8, “Benefit Plans,” for allocations of net periodic benefit associated with a Former Parent sponsored benefit plan for the three months ended April 1, 2022 and nine months ended October 1, 2021. 16. Subsequent Events The dividend of $ 3.0 million included in Accrued liabilities in the Consolidated Balance Sheet at September 30, 2022 was paid on October 14, 2022, to stockholders of record as of September 30, 2022. On October 14, 2022, the Company completed the acquisition of Ohio Medical, LLC, a global leader in oxygen regulators and central gas systems, for approximately $ 127 million. The Company expects an additional cash tax benefit with a net present value of $ 15 million. During the twelve months ended August 31, 2022, Ohio Medical, LLC generated over $ 45 million of sales. 28