ESAB Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of ESAB Corporation (“ESAB,” the “Company,” “we,” “our,” and “us”) should be read in conjunction with the Consolidated and Combined Condensed Financial Statements and related footnotes included in Part I. Item 1. “Financial Statements” of this Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2023 (this “Form 10-Q”) and the Consolidated and Combined Financial Statements and related footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “2022 Form 10-K”). You should review the discussion titled “Special Note Regarding Forward-Looking Statements” for a discussion of forward-looking statements. Our actual results could differ materially from those discussed in the forward looking statements. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements contained in this Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q is filed with the SEC. All statements other than statements of historical fact are statements that could be deemed to be forward-looking statements, including statements regarding: the anticipated benefits of the ESAB’s separation (“the Separation”) from Enovis Corporation, formerly known as Colfax Corporation (“Enovis,” “Colfax” or “the Former Parent”); the expected financial and operating performance of, and future opportunities for, the Company following the Separation; the tax treatment of the Separation; the impact of the war in Ukraine and the resulting escalating geopolitical tensions; impact of COVID-19, including supply chain disruptions; projections of revenue, profit margins, expenses, tax provisions and tax rates, earnings or losses from operations, impact of foreign exchange rates, cash flows, pension and benefit obligations and funding requirements, synergies or other financial items; plans, strategies and objectives of our management for future operations including statements relating to potential acquisitions, compensation plans or purchase commitments; developments, performance or industry or market rankings relating to products or services; future economic conditions or performance; the outcome of outstanding claims or legal proceedings including asbestos-related liabilities and insurance coverage litigation; potential gains and recoveries of costs; assumptions underlying any of the foregoing; and any other statements that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future. Forward-looking statements may be, but not always, characterized by terminology such as “believe,” “anticipate,” “should,” “would,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy,” “targets,” “aims,” “seeks,” “sees,” and similar expressions. These statements are based on assumptions and assessments made by our management as of the filing date of this Form 10-Q in light of their experience and perception of historical trends, current conditions, expected future developments and other factors we believe to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties and actual results or outcomes could differ materially due to numerous factors, including but not limited to the following: • our ability to operate as a stand-alone public company; • our ability to achieve the intended benefits from the Separation; • the war in Ukraine and escalating geopolitical tensions as a result of Russia’s invasion of Ukraine and the related impact on energy supplies and prices; • changes in the general economy, including disruptions caused by geopolitical conflicts, as well as the cyclical nature of the markets we serve; • supply chain constraints and backlogs, including risks affecting raw material, part and component availability, labor shortages and inefficiencies, freight and logistical challenges, and inflation in raw material, part, component, freight and delivery costs and our ability to increase our prices to account for increased costs; • the impact of COVID-19, including supply chain disruptions; 25 • volatility in the commodity markets and certain commodity prices, including oil and steel; • our ability to identify, finance, acquire and successfully integrate attractive acquisition targets; • our exposure to unanticipated liabilities resulting from acquisitions; • significant movements in foreign currency exchange rates or inflation rates; • our ability and the ability of our customers to access required capital at a reasonable cost; • our ability to accurately estimate the cost of or realize savings from our restructuring programs; • the amount of, a nd our ability to estimate our asbestos-related liabilities; • the solvency of our insurers and the likelihood of their payment for asbestos-related costs; • material disruptions at any of our manufacturing facilities; • noncompliance with various laws and regulations associated with our international operations, including anti-bribery laws, export control regulations and sanctions and embargoes; • risks associated with our international operations, including risks from trade protection measures and other changes in trade relations; • risks associated with the representation of our employees by trade unions and work councils; • our exposure to product liability claims; • potential costs and liabilities associated with environmental, health and safety laws and regulations; • failure to maintain, protect and defend our intellectual property rights; • our ability to attract and retain our employees including the loss of key members of our leadership team; • restrictions in our financing arrangements that may limit our flexibility in operating our business; • impairment in the value of intangible assets; • the funding requirements or obligations of our defined benefit pension plans and other postretirement benefit plans; • new regulations and customer preferences reflecting an increased focus on environmental, social and governance issues, including new regulations related to the use of conflict minerals; • service interruptions, data corruption, cyber-based attacks or network security breaches affecting our information technology infrastructure; • risks arising from changes in technology; • the competitive environment in our industries; • changes in our tax rates, realizability of deferred tax assets, or exposure to additional income tax liabilities, including the effects of the Coronavirus Aid, Relief, and Economic Security Act; • our ability to manage and grow our business and execution of our business and growth strategies; 26 • the level of capital investment and expenditures by our customers in our strategic markets; • our financial performance; • difficulties and delays in integrating or fully realizing projected cost savings and benefits of our acquisitions; and • other risks and factors set forth under Part I. Item 1.A. “Risk Factors” in our 2022 Form 10-K. See Part I. Item 1.A. “Risk Factors” in our 2022 Form 10-K and Part II. Item 1.A “Risk Factors” in this Form 10-Q for a further discussion regarding reasons that actual results and outcomes may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Forward-looking statements speak only as of the date of the report, document, press release, webcast, call materials or other communication in which they are made. We do not assume any obligation to update or revise any forward-looking statement, whether because of new information, future events and developments or otherwise. Basis of Presentation Separation from Enovis On April 4, 2022, Colfax Corporation completed the spin-off of Colfax’s Fabrication Technology business and certain other corporate entities 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. 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. The accompanying Consolidated and Combined Condensed Financial Statements present our 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”). We utilized allocations and carve-out methodologies through April 4, 2022 to prepare our historical financial statements. The combined financial statements for the periods prior to the Separation herein are not indicative of subsequent performance, and they do not include the actual expenses that would have been incurred by us and do not reflect our results of operations, financial position and cash flows had we been a separate standalone company during the historical periods presented. For additional information, refer to “Basis of Presentation” in Note 1 “Organization and Basis of Presentation” in the accompanying Notes contained elsewhere in this Form 10-Q. Overview Please see Part I. Item 1. “Business” in our 2022 Form 10-K, for a discussion of ESAB’s objectives and methodologies for deliver ing stockholder va lue. General We are a premier narrowly diversified global leader in connected fabrication technology and gas control sol utions. Our rich history of innovative products and workflow solutions and our business management system, ESAB Business Excellence or EBX, allows us to realize our purpose of Shaping the World We Imagine TM . The Company’s products are utilized to solve challenges in a wide range of industries, including cutting, joining and automated welding. 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. Integral to our operations is EBX, our business management system. 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 27 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. Outlook We believe that we are well positioned to grow our businesses organically over the long term by enhancing our product offerings and expanding our customer base. We believe our business mix is well balanced between sales in emerging and developed markets, and equipment and consumables. We intend to continue to utilize our strong global presence and worldwide network of salespeople and distributors to capitalize on growth opportunities by selling regionally-developed and/or marketed products and solutions throughout our served markets. We believe our geographic and end market diversity helps mitigate the effects from cyclical industrial market exposures. Given this balance, management does not use indices other than general economic trends and business initiatives to predict the overall outlook for the Company. Instead, our individual businesses monitor key competitors and customers, including to the extent possible their sales, to gauge relative performance and outlook for the future. We expect strategic acquisitions to contribute to our growth. We believe that the extensive experience of our leadership team in acquiring and effectively integrating acquisition targets should enable us to capitalize on future opportunities. We believe that the recent acquisition of Therapy Equipment Limited, on January 11, 2023, is aligned with this strategic direction. Refer to Note 3 “Acquisition” in the accompanying Notes contained elsewhere in this Form 10-Q for additional information. The discussion that follows includes a comparison of our results of operations and liquidity and capital resources for the three and nine months ended September 29, 2023 and September 30, 2022. 28 Results of Operations The following discussion of Results of Operations addresses the comparison of the periods presented. Our management evaluates the operating results of each of its reportable segments based upon Net sales, Adjusted EBITDA and Core adjusted EBITDA as defined in the “Non-GAAP Measures” section. Items Affecting Comparability of Reported Results The comparability of our operating results for the three and nine months ended September 29, 2023 and September 30, 2022 is affected by the following additional significant items: COVID-19 As reflected in the discussions that follow, the COVID-19 virus and actions taken in response to it had a variety of impacts on our results of operations during 2022, including sales levels, and together with other market dynamics contributed to ongoing inflation and supply chain challenges, including labor, raw material, and component shortages. For additional information on the risks of COVID-19 to the Company’s operations, refer to the Part I. Item 1.A. “Risk Factors” section of the 2022 Form 10-K. Russia and Ukraine conflict The invasion of Ukraine by Russia and the sanctions and other actions taken by governments in response to this crisis have increased the level of economic and political uncertainty. Refer to Note 1 “Organization and Basis of Presentation” in the accompanying Notes contained elsewhere in this Form 10-Q as well as Part I. Item 1.A. “Risk Factors” section of the 2022 Form 10-K for additional information. Acquisitions We complement our organic growth with acquisitions and other investments. Acquisitions can significantly affect our reported results, and we report the change in our Net sales between periods both from existing and acquired businesses. The change in Net sales due to acquisitions for the periods presented in this filing represents the incremental sales as a result of acquisitions. During the fourth quarter of 2022, we completed the acquisitions of Ohio Medical, LLC (“Ohio Medical”), a global leader in central gas systems, and Swift-Cut Automation Limited (“Swift-Cut Limited”), a provider of light industrial automated cutting systems. For additional information on these acquisitions, refer to our 2022 Form 10-K. During the first quarter of 2023, we completed the acquisition of Therapy Equipment Limited (“Therapy Equipment”), a regional leader in oxygen regulators. For additional information on this acquisition, refer to Note 3 “Acquisition” in the accompanying Notes contained elsewhere in this Form 10-Q. Foreign Currency Fluctuations A significant portion of our Net sales, 79%, for the three and nine months ended September 29, 2023 are outside the United States, with the majority of those sales denominated in currencies other than the U.S. Dollar. Because much of our manufacturing and employee costs are outside the United States, a significant portion of our costs are also denominated in currencies other than the U.S. Dollar. Changes in foreign exchange rates can impact our results of operations and are quantified when significant. For the three months ended September 29, 2023 compared to the three months ended September 30, 2022, fluctuations in foreign currencies reduced Net sal es by 1.3% and Gross profit by 1.9% and increased Selling, general and administrative expenses by 1.2%. For the nine months ended September 29, 2023 compared to the nine months ended September 30, 2022, fluctuations in foreign currencies re duced N et sales by 1.8%, Gross profit by 2.1% and Selling, general and administrative expenses by 1.1%. 29 Seasonality Our European operations typically experience a slowdown during the July, August and December vacation seasons. Non-GAAP Measures Adjusted EBITDA is a non-GAAP performance measure that we include in this report because it is a key metric used by our management to assess our operating performance. ESAB presents this non-GAAP financial measure including and excluding Russia due to economic and political volatility caused by the Russia and Ukraine conflict, which results in enhanced investor interest in this information. Core adjusted EBITDA is a non-GAAP financial measure that excludes Russia from Adjusted EBITDA for the three and nine months ended September 29, 2023 and September 30, 2022, due to the Russia Ukraine conflict. Adjusted EBITDA excludes from Net income from continuing operations the effect of Income tax expense, Interest expense and other, net, Pension settlement gain, Restructuring and other related charges, separation costs, acquisition-amortization and other related charges and depreciation and other amortization. We also present Adjusted EBITDA margin, which is subject to the same adjustments as Adjusted EBITDA. Further, we present these non-GAAP performance measures on a segment basis, where we exclude the impact of Restructuring and other related charges, separation costs, acquisition-amortization and other related charges and depreciation and other amortization from operating income. We also present Core adjusted EBITDA and Core adjusted EBITDA margins, which are subject to the same adjustments as Adjusted EBITDA and Adjusted EBITDA margins, respectively, further removing the impact of Russia for the three and nine months ended September 29, 2023 and September 30, 2022, respectively. Adjusted EBITDA and Core adjusted EBITDA assist management in comparing our operating performance over time because certain items may obscure underlying business trends and make comparisons of long-term performance difficult, as they are of a nature and/or size that occur with inconsistent frequency or relate to unusual events or discrete restructuring plans and other initiatives that are fundamentally different from our ongoing productivity and core business. Management also believes that presenting these measures allows investors to view our performance using the same measures that we use in evaluating our financial and business performance and trends. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information calculated in accordance with U.S. GAAP. Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparable U.S. GAAP financial measures. The following tables set forth a reconciliation of Net income from continuing operations, the most directly comparable GAAP financial measure, to Adjusted EBITDA, Adjusted EBITDA margin, Core adjusted EBITDA and Core adjusted EBITDA margin by segment for the three and nine months ended September 29, 2023 and September 30, 2022. Three Months Ended September 29, 2023 Nine Months Ended September 29, 2023 Americas EMEA & APAC Total Americas EMEA & APAC Total (Dollars in millions) (1) Net income from continuing operations (GAAP) $ 60.8 $ 163.8 Income tax expense 19.8 77.8 Interest expense and other, net 20.5 58.8 Operating income (GAAP) 46.5 54.7 101.1 132.4 168.0 300.4 Adjusted to add (deduct) Restructuring and other related charges (2) 1.6 1.6 3.1 5.4 12.3 17.7 Acquisition-amortization and other related charges (3) 5.2 4.0 9.3 16.0 11.9 27.8 Depreciation and other amortization 3.9 5.0 9.0 11.1 15.5 26.6 Adjusted EBITDA (non-GAAP) $ 57.2 $ 65.3 $ 122.5 $ 164.9 $ 207.7 $ 372.6 Adjusted EBITDA attributable to Russia (non-GAAP) (4) — 4.7 4.7 — 15.7 15.7 Core adjusted EBITDA (non-GAAP) $ 57.2 $ 60.6 $ 117.8 $ 164.9 $ 192.0 $ 356.9 Adjusted EBITDA margin (non-GAAP) 18.7 % 17.4 % 18.0 % 18.2 % 17.6 % 17.9 % Core adjusted EBITDA margin (non-GAAP) (5) 18.7 % 17.9 % 18.3 % 18.2 % 18.1 % 18.1 % 30 (1) Numbers may not sum due to rounding. (2) Includes severance and other termination benefits, including outplacement services as well as the cost of relocating associates, relocating equipment, lease termination expenses, impairment of long-lived assets and other costs in connection with the closure and optimization of facilities and product lines. (3) Includes transaction expenses, amortization of intangibles, fair value charges on acquired inventories and integration expenses. (4) Adjusted EBITDA relating to Russia for the three and nine months ended September 29, 2023. (5) Net sales wer e $36.9 million and $114.4 million relating to Russia for the three and nine months ended September 29, 2023, respectively. Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022 Americas EMEA & APAC Total Americas EMEA & APAC Total (Dollars in millions) (1) Net income from continuing operations (GAAP) $ 54.3 $ 170.6 Income tax expense 17.8 63.6 Interest expense and other, net 12.2 19.6 Pension settlement gain (3.3) (3.3) Operating income (GAAP) 36.6 44.4 81.0 102.6 147.9 250.5 Adjusted to add (deduct): Restructuring and other related charges (2) 1.9 4.8 6.7 9.1 7.6 16.6 Separation costs (3)(4) 0.8 1.0 1.8 4.6 4.3 8.9 Acquisition-amortization and other related charges (5) 4.0 3.3 7.2 12.3 10.2 22.5 Depreciation and other amortization 3.2 5.1 8.3 10.1 16.1 26.2 Other (6) — — — 0.3 (0.2) 0.1 Adjusted EBITDA (non-GAAP) $ 46.4 $ 58.6 $ 105.0 $ 138.9 $ 185.9 $ 324.8 Adjusted EBITDA attributable to Russia (non-GAAP) (7) — 9.5 9.5 — 23.4 23.4 Core adjusted EBITDA (non-GAAP) $ 46.4 $ 49.2 $ 95.5 $ 138.9 $ 162.5 $ 301.4 Adjusted EBITDA margin (non-GAAP) 16.5 % 17.3 % 16.9 % 16.4 % 17.1 % 16.8 % Core adjusted EBITDA margin (non-GAAP) (8) 16.5 % 16.6 % 16.6 % 16.4 % 16.7 % 16.6 % (1) Numbers may not sum due to rounding. (2) Includes severance and other termination benefits, including outplacement services as well as the cost of relocating associates, relocating equipment, lease termination expenses, impairment of long-lived assets and other costs in connection with the closure and optimization of facilities and product lines. (3) Includes non-recurring charges and employee costs related to 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. (4) Amounts are allocated to the segments as a percentage of revenue as the costs or gain are not discrete to either segment. (5) Includes transaction expenses, amortization of intangibles, fair value charges on acquired inventories and integration expenses. (6) Relates to the adjustment for certain items included within the Interest expense and other, net line within the Consolidated and Combined Statements of Operations. (7) Adjusted EBITDA relating to Russia for the three and nine months ended September 30, 2022. (8) Net sales were $43.3 million and $113.7 million relating to Russia for the three and nine months ended September 30, 2022, respectively. Total Company Sales Net sales increased for th e three and nine months ended September 29, 2023 as compared with the three and nine months ended September 30, 2022 . 31 The following table presents the components of changes in our consolidated and combined condensed Net sales. Three Months Ended Nine Months Ended Net Sales Change % Net Sales Change % (Dollars in millions) For the three and nine months ended September 30, 2022 $ 620.3 $ 1,929.4 Components of Change: Existing businesses (organic sales growth) (1) 47.3 7.6 % 130.9 6.8 % Acquisitions (2) 21.3 3.4 % 59.7 3.1 % Foreign currency translation (3) (7.9) (1.3) % (34.5) (1.8) % Total sales growth 60.7 9.8 % 156.1 8.1 % For the three and nine months ended September 29, 2023 $ 681.0 $ 2,085.4 (1) Excludes the impact of acquisitions and foreign exchange rate fluctuations, thus providing a measure of change due to organic growth factors such as price, product mix and volume. (2) Represents the incremental sales in comparison to the portion of the prior period during which we did not own the business. (3) Represents the difference between prior year sales valued at the actual prior year foreign exchange rates and prior year sales valued at current year foreign exchange rates. Net sales from existing businesses increased $47.3 million during the three months ended September 29, 2023, compared to the prior year period, due to an increase in sales volumes of $30.1 million and customer pricing increases of $17.1 million. During th e three months ended September 29, 2023, net sales from acquisitions were attributable to Ohio Medical, Swift-Cut Limited and Therapy Equipment. Th e strengthening of the U.S. Dollar relative to other currencies caused a $7.9 million unfavorable currency translation impact dur ing the three months ended September 29, 2023. Net sales from ex isting businesses increased $130.9 million during the nine months ended September 29, 2023, compared to the prior year period, due to an increase in sales volumes of $56.0 million and customer pricing increases of $74.9 million. During the nine months ended September 29, 2023, net sales from acquisitions were attributable to Ohio Medical, Swift-Cut Limited and Therapy Equipment. Th e strengthening of the U.S. Dollar relative to other currencies caused a $34.5 million unfavorable currency translation impact dur ing the nine months ended September 29, 2023. 32 Sales excluding Russia Sales excluding Russia (“Core Sales”) inc reased for the three and nine months ended September 29, 2023 as compared with the three and nine months ended September 30, 2022. The following table presents the components of changes in our consolidated and combined condensed Net sales. Three Months Ended Nine Months Ended Core Sales (4) Change % Core Sales (4) Change % (Dollars in millions) For the three and nine months ended September 30, 2022 $ 577.0 $ 1,815.7 Components of Change: Existing businesses (core organic sales growth) (1) 38.0 6.6 % 118.8 6.5 % Acquisitions (2) 21.3 3.7 % 59.7 3.3 % Foreign currency translation (3) 7.8 1.3 % (23.1) (1.3) % Total core sales growth 67.1 11.6 % 155.3 8.6 % For the three and nine months ended September 29, 2023 $ 644.1 $ 1,971.0 (1) Excludes the impact of acquisitions and foreign exchange rate fluctuations, thus providing a measure of change due to organic growth factors such as price, product mix and volume. (2) Represents the incremental sales in comparison to the portion of the prior period during which we did not own the business. (3) Represents the difference between prior year sales valued at the actual prior year foreign exchange rates and prior year sales valued at current year foreign exchange rates. (4) Net sales relating to Russia were $36.9 million and $114.4 million for the three and nine months ended September 29, 2023, respectively, and $43.3 million and $113.7 million for the three and nine months ended September 30, 2022, respectively. Core Sales from existing businesses for ESAB increased $38.0 million during the three months ended September 29, 2023, compared to the prior year period primarily due to customer pricing increases of $14.4 million and an increase in sales volume of $23.5 million du ring the three months ended September 29, 2023. During the three months ended September 29, 2023, net sales from acquisitions were attributed to Ohio Medical, Swift-Cut Limited and Therapy Equipment. The changes in foreign exchange rates caused a $7.8 million favorable currenc y translation impact during the three months ended September 29, 2023. Core Sales from existing businesses for ESA B increased $118.8 million during the nine months ended September 29, 2023, compared to the prior year period primarily due to customer pricing increases of $72.8 million and an increase in sales volume of $46.0 million during the nine months ended September 29, 2023. During the nine months ended September 29, 2023, net sales from acquisitions were attributed to Ohio Medical, Swift-Cut Limited and Therapy Equipment. The strengthening of the U.S. Dollar relative to other currencies caused a $23.1 million unfavorable currency translation impact d uring the nine months ended September 29, 2023 . 33 Operating Results The following table summarizes our results for the comparable periods. Three Months Ended Nine Months Ended September 29, 2023 September 30, 2022 September 29, 2023 September 30, 2022 (Dollars in millions) Gross profit $ 249.7 $ 209.3 $ 761.0 $ 661.1 Gross profit margin 36.7 % 33.7 % 36.5 % 34.3 % Selling, general and administrative expense $ 145.4 $ 121.7 $ 442.8 $ 394.0 Net income from continuing operations $ 60.8 $ 54.3 $ 163.8 $ 170.6 Net income margin from continuing operations 8.9 % 8.8 % 7.9 % 8.8 % Adjusted EBITDA (non-GAAP) $ 122.5 $ 105.0 $ 372.6 $ 324.8 Adjusted EBITDA margin (non-GAAP) 18.0 % 16.9 % 17.9 % 16.8 % Core adjusted EBITDA (non-GAAP) $ 117.8 $ 95.5 $ 356.9 $ 301.4 Core adjusted EBITDA margin (non-GAAP) 18.3 % 16.9 % 18.1 % 16.8 % Items excluded from Adjusted EBITDA: Restructuring and other related charges (1) $ 3.1 $ 6.7 $ 17.7 $ 16.6 Acquisition-amortization and other related charges (2) $ 9.3 $ 7.2 $ 27.8 $ 22.5 Separation costs (3)(4) $ — $ 1.8 $ — $ 8.9 Interest expense and other, net $ 20.5 $ 12.2 $ 58.8 $ 19.6 Income tax expense $ 19.8 $ 17.8 $ 77.8 $ 63.6 Pension settlement gain $ — $ (3.3) $ — $ (3.3) Depreciation and other amortization $ 9.0 $ 8.3 $ 26.6 $ 26.2 Items excluded from Core adjusted EBITDA: Adjusted EBITDA attributable to Russia (non-GAAP) (5) $ 4.7 $ 9.5 $ 15.7 $ 23.4 (1) Includes severance and other termination benefits, including outplacement services as well as the cost of relocating associates, relocating equipment, lease termination, impairment of long-lived assets and other costs in connection with the closure of and optimization of facilities and product lines. (2) Includes transaction expenses, amortization of intangibles, fair value charges on acquired inventories and integration expenses. (3) Includes non-recurring charges and employee costs related to 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. (4) Amounts are allocated to the segments as a percentage of revenue as the costs or gain are not discrete to either segment. (5) Adjusted EBITDA relating to Russia for the three and nine months ended September 29, 2023 and September 30, 2022. Third Quarter of 2023 Compared to Third Quarter of 2022 Gross profit increased $40.4 million in the third quarter of 2023, which resulted in the gross profit margin expanding 300 basis points to 36.7% compared with the prior year period. This increase was primarily attributable to benefits from sales volumes, acquisitions, and price, partially offset by inflation-related cost increases and unfavorable currency translation. Selling, general and administrative expense increased $23.7 million in the third quarter of 2023, compared to the prior year period. This increase is primarily driven by incremental costs from acquisitions, growth initiatives, higher employee costs, partially offset by savings from restructuring initiatives. The effective tax rate of 24.6% for the quarter ended September 29, 2023 was in line with the effective tax rate of 24.7% for the same period ending September 30, 2022. Net income from continuing operations increased $6.5 million in the third quarter of 2023, compared with the prior year period primarily due to an increase in gross profit, partially offset by an increase in selling, general and administrative expenses and interest expense. Net income margin from continuing operations increased slightly due to the items discussed above. 34 In the third quarter of 2023, Adjusted EBITDA increased $17.5 million and Adjusted EBITDA margin increased by 110 basis points compared to the same period in 2022 benefiting from higher Gross profit partially offset by an increase in Selling, general and administrative expenses. Core adjusted EBITDA increased from $95.5 million to $117.8 million, and Core adjusted EBITDA margins expanded 140 basis points from 16.9% to 18.3%. Nine Months Ended September 29, 2023 Compared to Nine Months Ended September 30, 2022 Gross profit increased $99.9 million in the nine months ended September 29, 2023, which resulted in gross profit margin increasing compared with the prior year period. This increase was primarily attributable to benefits from increased sales volumes, price increases, acquisitions, and restructuring initiatives, partially offset by inflation-related cost increases and unfavorable currency translation. Selling, general and administrative expense increased $48.8 million in the nine months ended September 29, 2023, compared to the prior year period. This increase is primarily driven by incremental costs from acquisitions, employee costs, growth initiatives and costs related to being an independent public company, partially offset by a favorable currency translation impact and savings from restructuring initiatives. The effective tax rate of 32.2% for the nine months ended September 29, 2023 differed from the effective tax rate of 27.2% for the same period ending September 30, 2022 due to the increase in discrete tax adjustments for dividend withholding taxes and an increase in unrecognized tax benefits due to an adverse court ruling in a tax case in a foreign jurisdiction. Net income from continuing operations decreased $6.8 million in the nine months ended September 29, 2023, compared with the prior year period, primarily due to the interest expense related to our Term Facility and Revolving Facility established during the second quarter of 2022 in connection with the Separation and a higher effective tax rate in the nine months ended September 29, 2023, as mentioned above. Net income margin from continuing operations decreased by 90 basis points primarily due to the items discussed above. In the nine months ended September 29, 2023, Adjusted EBITDA increased $47.8 million and Adjusted EBITDA margin increased by 110 basis points compared to the same period in 2022 benefiting from higher Gross profit partially offset by an increase in Selling, general and administrative expenses. Core adjusted EBITDA increased from $301.4 million to $356.9 million, and Core adjusted EBITDA margins expanded 130 basis points from 16.8% to 18.1%. 35 Business Segments We formulate, develop, manufacture, and supply consumable products and equipment, including cutting, joining, and automated welding products, as well as gas control equipment. Our products are marketed under several brand names, most notably ESAB, providing a wide range of products with innovative technologies to solve challenges in virtually any 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 including 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 end markets, including general industry, infrastructure, renewable energy, medical and life sciences, transportation, construction and energy. We report results in two reportable segments: Americas and EMEA & APAC. Americas The following table summarizes selected financial data for our Americas segment: Three Months Ended Nine Months Ended September 29, 2023 September 30, 2022 September 29, 2023 September 30, 2022 (Dollars in millions) Net sales $ 305.8 $ 281.4 $ 907.7 $ 844.7 Gross profit $ 116.0 $ 91.8 $ 336.9 $ 280.9 Gross profit margin 37.9 % 32.6 % 37.1 % 33.2 % Selling, general and administrative expense $ 68.0 $ 53.4 $ 199.0 $ 169.3 Adjusted EBITDA (non-GAAP) $ 57.2 $ 46.4 $ 164.9 $ 138.9 Adjusted EBITDA margin (non-GAAP) 18.7 % 16.5 % 18.2 % 16.4 % Items excluded from Adjusted EBITDA: Restructuring and other related charges $ 1.6 $ 1.9 $ 5.4 $ 9.1 Acquisition- amortization and other related charges $ 5.2 $ 4.0 $ 16.0 $ 12.3 Separation costs $ — $ 0.8 $ — $ 4.6 Depreciation and other amortization $ 3.9 $ 3.2 $ 11.1 $ 10.1 Third Quarter of 2023 Compared to Third Quarter of 2022 Net sales in our Americas segment increased $24.4 million in the third quarter of 2023, compared with the prior year period. Net sales from existing business increased $11.3 million partially offset by $1.5 million in unfavorable currency translation. The increase in Net sales from existing business was mainly due to pricing increases partially offset by a decrease in sales volumes, which was primarily a result of a product line simplification initiative . The Ohio Medical acq uisition contributed to $14.6 million of the overall sales increase. Gross profit increased $24.2 million due to price increases, benefits from the product line simplification initiative, and the Ohio Medical acquisition, partially offset by inflation-related cost increases, a decrease in sales volumes and an unfavorable currency impact. Gross profit margin expanded 530 basis points to 37.9%, due to price increases, benefits from a product line simplification initiative, productivity improvements, and the accretive impact of the Ohio Medical acquisition, partially offset by inflation. Selling, general and administrative expense increased primarily due to growth initiatives, employee costs and the Ohio Medical acquisition . Adj usted EBITDA increased $10.8 million to $57.2 million and margins expanded 220 basis points to 18.7% primarily because of the aforementioned factors. Nine Months Ended September 29, 2023 Compared to Nine Months Ended September 30, 2022 Net sales in our Americas segment increased $62.9 million in the nine months ended September 29, 2023, compared with the prior year period. Net sales from existing business increased $35.4 million partially offset by $13.9 million in unfavorable currency translation. The increase in Net sales from existing business was primarily due to customer pricing increases offset by a slight decrease in sales volumes. The Ohio Medical acquisition contributed to $41.5 million of the overall sales increase. Gross profit increased $56.0 million to $336.9 million due to customer price increases, benefits from a product line simplification initiative, and the Ohio Medical acquisition, partially offset by inflation-related cost increases, a slight decrease 36 in sales volumes and an unfavorable currency impact. Gross profit margin increased 390 basis points to 37.1% prim arily due to price increases, benefits from a product line simplification initiative, a nd the accretive impact of the Ohio Medical acquisition partially offset by inflation. Selling, general and administrative expense increased primarily due to employee costs and growth initiative spending, the Ohio Medical acquisition, and an unfavorable currency impact. Adjusted EBITDA increased $26.0 million to $164.9 million an d margins expand ed 180 ba sis points to 18.2% primar ily because of the aforementioned factors. EMEA & APAC The following table summarizes the selected financial data for our EMEA & APAC segment: Three Months Ended Nine Months Ended September 29, 2023 September 30, 2022 September 29, 2023 September 30, 2022 (Dollars in millions) Net sales $ 375.2 $ 338.9 $ 1,177.8 $ 1,084.6 Gross profit $ 133.7 $ 117.5 $ 424.1 $ 380.3 Gross profit margin 35.6 % 34.7 % 36.0 % 35.1 % Selling, general and administrative expense $ 77.4 $ 68.2 $ 243.8 $ 224.8 Adjusted EBITDA (non-GAAP) $ 65.3 $ 58.6 $ 207.7 $ 185.9 Adjusted EBITDA margin (non-GAAP) 17.4 % 17.3 % 17.6 % 17.1 % Core adjusted EBITDA (non-GAAP) $ 60.6 $ 49.2 $ 192.0 $ 162.5 Core adjusted EBITDA margin (non-GAAP) 17.9 % 16.6 % 18.1 % 16.7 % Items excluded from Adjusted EBITDA: Restructuring and other related charges $ 1.6 $ 4.8 $ 12.3 $ 7.6 Acquisition- amortization and other related charges $ 4.0 $ 3.3 $ 11.9 $ 10.2 Separation costs $ — $ 1.0 $ — $ 4.3 Depreciation and other amortization $ 5.0 $ 5.1 $ 15.5 $ 16.1 Items excluded from Core adjusted EBITDA Adjusted EBITDA attributable to Russia (non-GAAP) $ 4.7 $ 9.5 $ 15.7 $ 23.4 Third Quarter of 2023 Compared to Third Quarter of 2022 Net sales increased for our EMEA & APAC segment by $36.3 million in the third quarter of 2023, compared with the prior year period. Net sales from existing business increased $36.0 million offset by $6.4 million in unfavorable currency translation. The increase in Net sales from existing business was primarily due to an increase in sales volumes and to a lesser extent, acquisitions and sales of new products. The Swift-Cut Limited and Therapy Equipment acquisitions contributed $6.7 million of the overall sales increase. Gross pr ofit increased $16.2 million in the third quarter of 2023 compared with the prior yea r period primarily due to an increase in sales volumes, acquisitions, and benefits from restructuring initiatives. Gross profit margin expanded 90 basis points compared to the same period in 2022 due to the increase in sales as mentioned above, accretive impact of acquisitions, and benefits from restructuring initiatives. Selling, general and administrative expense increased compared to the same period in 2022 due to higher employee costs and spending to support growth initiatives. Core adjusted EBITDA increased from $49.2 million to $60.6 million and the related Core adjusted EBITDA margins expande d 130 basis points from 16.6% to 17.9% primarily because of the aforementioned factors. Nine Months Ended September 29, 2023 Compared to Nine Months Ended September 30, 2022 Net sales increased for our EMEA & APAC segment by $93.1 million in the nine months ended September 29, 2023, compared with the prior year period. Net sales from existing business increased $95.5 million offset by $20.6 million in unfavorable currency translation. The increase in Net sales from existing business was primarily due to an increase in sales volumes and inflation-related pricing increases. The Swift-Cut Limited and Therapy Equipment acquisitions contributed $18.2 million of the overall sales increase. Gross profit increased $43.8 million in the nine months ended September 29, 2023, compared with the prior year period primarily due to customer price increases and increased sales volumes, partially offset by 37 inflation-related cost increases. Gross profit margin expande d 90 basis points compared to the same period in 2022, due to the increase in sales noted above and benefits from restructuring initiatives. Selling, general and administrative exp ense increased compared to the same period in 2022 due to acquisitions and increased employee costs, partially offset by restructuring initiatives. Core adjusted EBITDA increased from $162.5 million to $192.0 million and the related Core adjusted EBITDA margins expanded 140 basis points from 16.7% to 18.1%. 38 Liquidity and Capital Resources Overview Prior to the completion of the Separation, we financed our working capital requirements through cash flows from operating activities and arrangements with our Former Parent. We currently expect to finance our working capital requirements through cash flows from operating activities. We expect that our primary ongoing requirements for cash will be for working capital, funding of acquisitions, capital expenditures and restructuring related cash outflows, asbestos-related cash outflows, and debt service and required amortization of principal and, pending Board approval, payment of cash dividends. In conjunction with the Separation on April 4, 2022, we 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 us by Enovis in connection with the Separation. On June 28, 2022, we 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 A-3 Facility with a maturity date of April 3, 2025 to refinance our existing Term Loan A-2 Facility (the “Term Loan A-3 Facility” and together with the Term Loan A-1 Facility, the “Term Loans”). Also on June 28, 2022, we borrowed the entire $600 million under the 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 remained unchanged. As of September 29, 2023, we were in compliance with the covenants under the Credit Agreement. As of September 29, 2023, the weighted average interest rate of borrowings under the Credit Agreement was 5.22%, excluding accretion of deferred financing fees. Refer to Note 10 “Derivatives” in the accompanying Notes contained elsewhere in this Form 10-Q for more information related to swap agreements. As of end of the third quarter, we had the capacity for additional indebtedness of up to $653 million available on the Revolving Facility, subject to meeting financial covenants and other requirements. Additionally, we have the ability to incur $76 million of indebtedness pursuant to certain uncommitted credit lines, consisting of an uncommitted credit line that we currently have in place, which we have used from time to time in the past for short-term working capi tal needs. Refer to Note 9 “Debt” in the accompanying Notes contained elsewhere in this Form 10-Q for more information related to the Facilities. We believe that we could raise additional funds in the form of debt or equity if it were determined to be appropriate for strategic acquisitions or other corporate purposes. We believe that our sources of liquidity between debt and cash flows from operating activities are adequate to fund our operations for the next twelve months. 39 Cash Flows As of September 29, 2023, we had $82.8 million of Cash and cash equivalents, an increase of $10.8 million from the balance as of December 31, 2022 of $72.0 million. The following table summarizes the change in Cash and cash equivalents during periods indicated: Nine Months Ended September 29, 2023 September 30, 2022 (Dollars in Millions) (1) Net cash provided by operating activities $ 208.1 $ 122.9 Purchases of property, plant and equipment (28.9) (22.0) Proceeds from sale of property, plant and equipment 5.2 4.3 Acquisition, net of cash received (18.7) — Net cash used in investing activities (42.4) (17.7) Proceeds from borrowings on term credit facility — 1,000.0 Proceeds from borrowings on revolving credit facility and other 454.7 495.9 Repayments of borrowings on term credit facility (6.3) — Repayments of borrowings on revolving credit facility and other (578.6) (360.0) Payment of deferred financing fees and other — (4.9) Payments of deferred consideration — (1.5) Payment of dividends (9.7) (3.0) Distributions to noncontrolling interest holders (2.3) (2.0) Consideration to Former Parent in connection with the Separation — (1,200.0) Transfers from Former Parent, net — 2.8 Net cash used in financing activities (142.2) (72.7) Effect of foreign exchange rates on Cash and cash equivalents (12.7) (13.2) Increase in Cash and cash equivalents $ 10.8 $ 19.4 (1) Numbers may not sum due to rounding. Cash flows from operating activities can fluctuate significantly from period to period due to changes in working capital and the timing of payments for items such as pension funding, asbestos-related costs and restructuring program funding. Changes in significant operating cash flow items are discussed below. • Operating cash flow was positively impacted by increased operating income and improvement in working capital turns offset by higher interest payments f or the nine months ended September 29, 2023, which were related to our Term Loans and Revolving Facil ity. • Discontinued operations for the nine months ended September 29, 2023 and September 30, 2022 were outflows of $12.2 million and $19.3 million, respectively, which were mainly asbestos-related. • Restructuring initiatives were $15.4 million for the nine months ended September 29, 2023 and $17.7 million for the nine months ended September 30, 2022, which includes severance and other termination benefits including outplacement services as well as 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. Cash flows used in investing activities include $18.7 million of cash used primarily for the acquisition of Therapy Equipment Limited during the nine months ended September 29, 2023. Cash outflows used in financing activities of $142.2 million during the nine months ended September 29, 2023 was driven by net repayment of borrowings on the Revolving Facility of $123.9 million, repayment of $6.3 million on the term credit 40 facility, distributions to non-controlling interest holders of $2.3 million and the payment of three cash dividends totaling $9.7 million. Our Cash and cash equivalents as of September 29, 2023 includ e $73.4 million held in jurisdictions outside the United States Cash repatriation of non-United States cash into the United States may be subject to taxes, other local statutory restrictions and minority owner distributions. Critical Accounting Policies The methods, estimates and judgments that we use in applying our critical accounting policies have a significant impact on our results of operations and financial position. We evaluate our estimates and judgments on an ongoing basis. Our estimates are based upon our historical experience, our evaluation of business and macroeconomic trends and information from other outside sources, as appropriate. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what our management anticipates, and different assumptions or estimates about the future could have a material impact on our results of operations and financial position. There have been no other significant additions or changes to the methods, estimates and judgments included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies” in the 2022 Form 10-K.