Item 1. Business
Item 1. Business
General
Founded in 1904, ESAB Corporation is a world leader in connected fabrication technology and gas control solutions. We provide our partners with advanced equipment, consumables, gas control equipment, robotics and digital solutions. Our rich history of innovative products and workflow solutions and our business system, ESAB Business Excellence (“EBX”), allows us to realize our purpose of Shaping the world we imagine. Our products are utilized to solve challenges in a wide range of industries, including cutting, joining and automated welding. Products are marketed under several brand names, most notably ESAB, which we believe is well known in the international welding industry. ESAB’s comprehensive range of welding consumables includes electrodes, cored and solid wires, and fluxes using a wide range of specialty and other materials, and cutting consumables includes electrodes, nozzles, shields and tips. ESAB’s equipment ranges from portable welding machines to large customized automated cutting and welding systems. ESAB also offers a range of software and digital solutions to help its customers increase their productivity, remotely monitor their welding operations and digitize their documentation. Products are sold into a wide range of global end markets, including general industry, infrastructure, renewable energy, medical and life sciences, transportation, construction and energy. Our sales channels include both independent distributors and direct salespeople who, depending on geography and end market, sell our products to our end users. ESAB Corporation is based in North Bethesda, Maryland and employs approximately 9,000 associates and serves customers in approximately 150 countries.
ESAB Corporation is a Delaware corporation and was incorporated in 2021 for the purpose of holding the fabrication technology business of Colfax in connection with the separation of ESAB from Colfax. On December 29, 2021, in anticipation of the Distribution (as defined below), certain subsidiaries of Colfax were transferred into the ownership of ESAB in a common-control transaction. We completed the Separation on April 4, 2022 and became an independent, publicly-traded company, listed on the New York Stock Exchange. The Separation was effected through a pro-rata distribution of 90% of the then outstanding shares of common stock of ESAB Corporation to the holders of common stock of the Former Parent (the “Distribution”). Upon completion of the Distribution, Colfax changed its name to Enovis and continued to hold 10% of the outstanding common stock of ESAB. In November 2022, Enovis sold a total of 6.0 million shares of the Company’s common stock as part of a secondary offering. After the secondary offering, Enovis no longer owned any of the Company’s outstanding common stock.
We believe our company, which competes in an estimated $30 billion market, is one of the prominent industry players with a substantial position in every major market in the world, combining global scale with regional agility to maximize growth and profits. We define our addressable market as established equipment products and new products in automation, software and services, and estimate its size based on public data from peer companies, customer surveys, and market analysis conducted by our sales function. Approximately 50% of our 2022 revenues were derived from developing markets, which we define as South America, Eastern Europe, India, Asia, Australia and the Middle East, and which are expected to grow at greater than twice the rate of more mature markets in North America and Europe based on publicly available economic data from sources such as IHS Markit and the International Monetary Fund. Our gas control business is also well-positioned in attractive markets like healthcare and life sciences.
Acquisitions are a core part of our strategy and are used to strengthen our company and accelerate growth. Acquisitions follow our disciplined process to ensure strategic alignment, rapid integration and attractive long-term financial returns. During the year ended December 31, 2022, we completed two acquisitions and we expect to complete more acquisitions in the following years. See Note 5, “Acquisitions” in Item 8 of this Form 10-K for further information.
The Company
The Company has been built through a series of acquisitions, as well as organic growth. We seek to build an enduring premier global enterprise by applyi ng EBX, our business management system to continuously improve our Company and pursue growth in revenues and improvements in profit and cash flow.
EBX is integral to our operations. EBX is our culture and includes our values, a comprehensive set of tools, and repeatable, teachable processes that we use to drive continuous improvement and create superior value for our customers, stockholders and associates. We believe that our management team’s access to, and experience in, the application of the EBX methodology is one of our primary competitive strengths. We have used EBX to accelerate our growth and improve business performance.
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Industry Overview
Our products and services are marketed worldwide, and the markets we serve are fragmented and competitive. Because we compete in selected niches of these markets and due to the diversity of our products and services, no single company competes directly with us across all our markets. We encounter a wide variety of competitors that differ by product line, including well-established regional competitors, competitors with greater specialization in particular markets, as well as larger competitors. The markets that we compete in are also served by Lincoln Electric and the welding business within Illinois Tool Works, Inc. Our customer base is broadly diversified across many sectors of the economy, and we believe customers place a premium on quality, reliability, availability, design and application engineering support. We believe the principal elements of competition in
our served markets are the technical ability to meet customer specifications, product quality and reliability, brand names, price, application expertise and engineering capabilities, timely delivery and strong aftermarket support. We believe that we are a leading competitor in each of our markets.
We continue to actively monitor the effects of COVID-19, including the rise, prevalence and severity of variants of the virus, the related government regulations, and the impacts on our results and operations. The pandemic and actions taken in response to it have had a variety of impacts on our results of operations including sales levels, and together with other market dynamics has contributed to inflation and widespread supply chain challenges; including labor, raw materials, and component shortages. For additional information on the risks of COVID-19 to our operations refer to Item 1A. “Risk Factors — Risks Related to Our Business — The effects of the COVID-19 pandemic have adversely impacted, and may in the future adversely impact, our results of operations, financial condition, and overall financial performance.”
Reportable Segments
We conduct our 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. We serve a global customer base across multiple markets through a combination of direct sales and third-party distribution channels. Our customer base is highly diversified in the industrial end markets.
The following discussions of International Operations , Research and Development, Intellectual Property, Raw Materials, Seasonality, Working Capital, Regulatory Environment, Human Capital Management, and Company Information and Access to SEC Reports include information that is common to both of our reportable segments, unless indicated otherwise.
International Operations
Our products and services are available worldwide. We believe this geographic diversity allows us to draw on the skills of a global workforce, provides stability to our operations, allows us to drive economies of scale, provides revenue streams that may offset economic trends in individual economies, and offers an opportunity to access new markets for products. In addition, we believe that our exposure to developing economies will provide additional opportunities for growth in the future.
Our principal markets as a whole outside the United States are Europe, Asia, South America, and the Middle East. Our international operations subject us to certain risks. See Item 1A. “Risk Factors — Risks Related to Our Business”. The majority of our sales are derived from international operations. We are subject to specific risks associated with international operations.
Research and Development
Our research and development focus on innovation; developing new products, software and services, as well as the enhancement of existing products with the latest technology and updated designs; creating new applications for existing products; lowering the cost of manufacturing our existing products; and, redesigning existing product lines to increase efficiency, improve durability, enhance performance and usability.
Research and development expens e was $36.0 million, $39.7 million and $34.8 million for the years ended December 31, 2022, 2021 and 2020, respectively . These amounts do not include development and application engineering costs incurred in conjunction with fulfilling customer orders and executing customer projects, nor do they include costs related to securing third party product rights. We expect to continue making significant expenditures for research and development to maintain and improve our competitive positions.
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Intellectual Property
We rely on a combination of intellectual property rights, including patents, trademarks, copyrights, trade secrets and contractual provisions to protect our intellectual property both in the United States and around the world for our business. Although we highlight recent additions to our patent portfolio as part of our marketing efforts, we do not consider any one patent or trademark or any group thereof essential to our business as a whole or to any of our business operations. We also rely on proprietary product knowledge and manufacturing processes in our operations. We do not rely solely on our patents and other intellectual property rights to maintain our competitive position. We believe that the development and marketing of new products and improvement of existing ones is, and will continue to be, more important to our competitive position than relying solely on existing products and intellectual property.
Raw Materials
We obtain raw materials, component parts and supplies from a variety of global sources, generally each from more than one supplier. Our principal raw materials and components for our business are steel, iron, copper and aluminum. We believe that our sources of raw materials are adequate for our needs for the foreseeable future and the loss of any one supplier would not have a material adverse effect on our business or results of operations.
Seasonality
Our European operations typically experience a slowdown during the July, August and December vacation seasons for our business. However, the business impact caused by the COVID-19 pandemic, as well as general economic conditions, may distort the effects of historical seasonality patterns and impact future seasonal variations.
Working Capital
We maintain an adequate level of working capital to support our business needs. There are no unusual industry practices or requirements related to working capital items.
Regulatory Environment
We face extensive government regulation both within and outside the United States relating to the development, manufacture, marketing, sale and distribution of our products, software and services. The following sections describe certain significant regulations that we are subject to. These are not the only regulations that our businesses must comply with. For a description of risks related to the regulations that our businesses are subject to, please refer to “Risk Factors—Risks Related to Our Business.”
So me of our gas control pro ducts are related to medical device products and are subject to extensive regulation by the United States Food and Drug Administration (the “FDA”), EU Medical Device Regulation (the “EU MDR”), and numerous other federal, state, and foreign governmental authorities. These regulations include significant new requirements for medical devices, including enhanced requirements for clini cal evidence and documentation, increased focus on device identification and traceability, and additional post-market surveillance and diligence. The process of obtaining regulatory approvals to market these products can be costly and time consuming, and approvals might not be granted for future products on a timely basis, if at all. Additionally, modifications to our existing products may require new regulatory approvals and we may be required to cease marketing or to recall any modified product until we obtain clearance or approval.
Environmental Laws and Regulation s
Our operations and properties are subject to laws and regulations relating to environmental protection, including those governing air emissions, water discharges and waste management, and workplace health and safety.
Our Quality, Environmental, and Occupational Health & Safety (“QEHS”) Management Systems apply to all of ESAB’s operations, activities, people, and units globally. We have achieved external certification of our QEHS Management Systems to the ISO 9001, ISO 14001 and ISO 45001 standards for the majority of ESAB’s operations, activities, people, and units globally.
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We maintain an Environment, Health & Safety Policy to ensure compliance with all applicable laws and regulations and promote safety and environmental protection as core business values. We are committed to continual improvement of our environment, health and safety management system through assessments, actionable planning and implementation of best practices. We establish objectives and appropriate targets for significant environmental aspects of our business operations and activities including, but not limited to, the reduction of energy and water consumed, and waste minimization.
For a discussion of risks related to compliance with environmental and health and safety laws and risks related to past or future releases of, or exposures to, hazardous substances, please refer to “Risk Factors—Risks Related to Business.”
Export/Import Compliance
We are required to comply with various U.S. export/import control and economic sanctions laws, including:
• the International Traffic in Arms Regulations administered by the U.S. Department of State, Directorate of Defense Trade Controls, which, among other things, imposes license requirements on the export from the United States of defense articles and defense services (which are items specifically designed or adapted for a military application and/or listed on the United States Munitions List);
• the Export Administration Regulations administered by the U.S. Department of Commerce, Bureau of Industry and Security, which, among other things, impose licensing requirements on the export or re-export of certain dual-use goods, technology and software (which are items that potentially have both commercial and military applications);
• the regulations administered by the U.S. Department of Treasury, Office of Foreign Assets Control, which implement economic sanctions imposed against designated countries, governments and persons based on United States foreign policy and national security considerations; and
• the import regulatory activities of the U.S. Customs and Border Protection.
Other nations’ governments have implemented similar export and import control regulations, which may affect our operations or transactions subject to their jurisdictions. For a discussion of risks related to export/import control and economic sanctions laws, please refer to “Risk Factors—Risks Related to Litigation and Regulatory Compliance—We have done and may continue to do business in countries subject to U.S. sanctions and embargoes. Failure to comply with various sanction and embargo laws may result in enforcement or other regulatory actions” and “Risk Factors—Risks Related to Litigation and Regulatory Compliance—If we fail to comply with export control regulations, we could be subject to substantial fines or other sanctions, which could have a material adverse effect on our business, financial condition and results of operations.”
Human Capital Management
Employee Profile
As of December 31, 2022, we employed approximately 9,000 persons, of whom approximately 1,200 were employed in the United States and approximately 7,800 were employed outside of the United States.
Talent Development
In our effort to enable our purpose, “Shaping the World We Imagine”, we strive to find extraordinary people and support them across their entire associate lifecycle, so they stay engaged in building, growing and sustaining the company. As a result, we’re committed to a “Talent First” strategy which starts with our associates’ health and safety. Our talent strategy is also about attracting great talent, elevating the associate experience, retaining our workforce, and building the leadership bench strength needed for our future growth and success.
Employee Safety
The safety and well-being of ESAB's colleagues around the world has been, and always will be, a top priority. Guided by the Company's Environment, Health & Safety Policy, ESAB strives every day to foster a proactive safety culture. The Company is committed to continual improvement of its environment, health and safety management system through assessments, actionable planning and implementation of best practices.
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Compensation and Benefits
As a global employer, the Company is committed to providing market-competitive compensation and benefits to attract and retain great talent across its global footprint. Specific compensation and benefits vary worldwide and are based on regional practices.
Diversity and Inclusion
As a world leader for welding, cutting, fabrication, and gas control technology solutions, ESAB is dedicated to creating an inclusive, welcoming culture in which every voice is valued. To advance this commitment, we have developed our Diversity, Equity and Inclusion Strategy. Our strategy is about embracing diversity & inclusion in our everyday actions while empowering and elevating others, leading inclusively, learning about celebrating our differences and ensuring every voice is valued.
Labor Relations
Approximately 18% o f our U.S. associates are covered by collective bargaining agreements with U.S. trade unions. In addition, approximately 37% of our non-U.S. associates are represented by foreign trade unions and work councils in Europe, Asia, Central and South America, Canada, Africa and Australia, which could subject us to arrangements very similar to collective bargaining agreements. We have not experienced any work stoppages or strikes that have had a material adverse impact on operations. We consider our relations with our associates to be good.
Company Information and Access to SEC Reports
We were organized as a Delaware corporation in 2021. Our principal executive offices are located at 909 Rose Avenue, 8th Floor, North Bethesda, MD 20852, and our main telephone number at that address is (301) 323-9099. Our corporate website address is www.esabcorporation.com.
We make available, free of charge through our website at https://investors.esabcorporation.com/overview , our annual and quarterly reports on Form 10-K and Form 10-Q (including related filings in XBRL format), current reports on Form 8-K and any amendments to those reports as soon as practicable after filing or furnishing the material to the SEC. You may also request a copy of these filings, at no cost, by writing or telephoning us at: Investor Relations, ESAB Corporation, 909 Rose Avenue, 8th Floor, Bethesda, MD 20852, telephone (301) 323-9099. Information contained on our website is not incorporated by reference in this report. Additionally, the SEC maintains an Internet site that contains our reports, proxy statements and other information that we electronically file with, or furnish to, the SEC at www.sec.gov.
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