ESAB Corp 10-Q

Item 1. Financial Statements ESAB CORPORATION CONSOLIDATED AND CONDENSED STATEMENTS OF OPERATIONS Dollars in thousands, except per share amounts (Unaudited) Three Months Ended March 29, 2024 March 31, 2023 Net sales $ 689,744 $ 684,000 Cost of sales 434,717 436,611 Gross profit 255,027 247,389 Selling, general and administrative expense 142,450 147,282 Restructuring and other related charges 1,924 9,444 Operating income 110,653 90,663 Pension settlement loss 12,155 — Interest expense and other, net 17,091 19,510 Income from continuing operations before income taxes 81,407 71,153 Income tax expense 18,504 37,024 Net income from continuing operations 62,903 34,129 Loss from discontinued operations, net of taxes ( 1,309 ) ( 913 ) Net income 61,594 33,216 Income attributable to noncontrolling interest, net of taxes ( 1,643 ) ( 1,313 ) Net income attributable to ESAB Corporation $ 59,951 $ 31,903 Earnings (loss) per share – basic Income from continuing operations $ 1.01 $ 0.54 Loss on discontinued operations $ ( 0.02 ) $ ( 0.02 ) Net income per share $ 0.99 $ 0.52 Earnings (loss) per share – diluted Income from continuing operations $ 1.00 $ 0.54 Loss on discontinued operations $ ( 0.02 ) $ ( 0.02 ) Net income per share – diluted $ 0.98 $ 0.52 See Notes to Consolidated and Condensed Financial Statements. 2 ESAB CORPORATION CONSOLIDATED AND CONDENSED STATEMENTS OF COMPREHENSIVE INCOME Dollars in thousands (Unaudited) Three Months Ended March 29, 2024 March 31, 2023 Net income $ 61,594 $ 33,216 Other comprehensive (loss) income: Foreign currency translation, net of tax expense of $ 1,531 and $ 45 ( 25,354 ) 42,084 Unrealized income (loss) on derivatives designated and qualifying as cash flow hedges, net of tax expense (benefit) of $ 295 and $( 1,045 ) 1,013 ( 3,581 ) Defined benefit pension and other post-retirement plan activity, net of tax expense of $ 203 and $ 66 629 277 Other comprehensive (loss) income ( 23,712 ) 38,780 Comprehensive income 37,882 71,996 Comprehensive income attributable to noncontrolling interest ( 1,320 ) ( 1,814 ) Comprehensive income attributable to ESAB Corporation $ 36,562 $ 70,182 See Notes to Consolidated and Condensed Financial Statements. 3 ESAB CORPORATION CONSOLIDATED AND CONDENSED BALANCE SHEETS Dollars in thousands, except share and per share amounts (Unaudited) March 29, 2024 December 31, 2023 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 76,495 $ 102,003 Trade receivables, less allowance for credit l osses of $ 25,424 and $ 25,477 430,149 385,198 Inventories, net 405,601 392,858 Prepaid expenses 60,415 61,771 Other current assets 70,088 55,890 Total current assets 1,042,748 997,720 Property, plant and equipment, net 290,431 294,305 Goodwill 1,586,943 1,588,331 Intangible assets, net 484,219 499,535 Lease assets - right of use 94,162 95,607 Other assets 328,986 353,131 Total assets $ 3,827,489 $ 3,828,629 LIABILITIES AND EQUITY CURRENT LIABILITIES: Accounts payable $ 338,399 $ 306,593 Accrued liabilities 292,903 313,489 Total current liabilities 631,302 620,082 Long-term debt 992,798 1,018,057 Other liabilities 521,011 542,833 Total liabilities 2,145,111 2,180,972 Equity: Common stock - $ 0.001 par value - 600,000,000 shares authorized, 60,424,421 and 60,295,634 shares outstanding as of March 29, 2024 and December 31, 2023, respectively 60 60 Additional paid-in capital 1,881,534 1,881,054 Retained earnings 406,867 350,557 Accumulated other comprehensive loss ( 647,661 ) ( 624,272 ) Total ESAB Corporation equity 1,640,800 1,607,399 Noncontrolling interest 41,578 40,258 Total equity 1,682,378 1,647,657 Total liabilities and equity $ 3,827,489 $ 3,828,629 See Notes to Consolidated and Condensed Financial Statements. 4 ESAB CORPORATION CONSOLIDATED AND CONDENSED STATEMENTS OF EQUITY Dollars in thousands, except share and per share amounts (Unaudited) Common Stock Additional Paid in Capital Retained Earnings Accumulated Other Comprehensive Loss Noncontrolling Interest Total Shares Amount Balance at December 31, 2023 60,295,634 $ 60 $ 1,881,054 $ 350,557 $ ( 624,272 ) $ 40,258 $ 1,647,657 Net income — — — 59,951 — 1,643 61,594 Dividends declared ($ 0.06 per share) — — — ( 3,641 ) — — ( 3,641 ) Other comprehensive loss, net of tax expense of $ 2,029 — — — — ( 23,389 ) ( 323 ) ( 23,712 ) Common stock-based award activity 128,787 — 480 — — — 480 Balance at March 29, 2024 60,424,421 $ 60 $ 1,881,534 $ 406,867 $ ( 647,661 ) $ 41,578 $ 1,682,378 Common Stock Additional Paid in Capital Retained Earnings Accumulated Other Comprehensive Loss Noncontrolling Interest Total Shares Amount Balance at December 31, 2022 60,094,725 $ 60 $ 1,865,904 $ 159,231 $ ( 674,988 ) $ 38,251 $ 1,388,458 Net income — — — 31,903 — 1,313 33,216 Dividends declared ($ 0.05 per share) — — — ( 3,033 ) — — ( 3,033 ) Distributions to noncontrolling owners — — — — — ( 1,359 ) ( 1,359 ) Other comprehensive gain, net of tax benefit of $ 934 — — — — 38,279 501 38,780 Common stock-based award activity 127,538 — 2,229 — — — 2,229 Balance at March 31, 2023 60,222,263 $ 60 $ 1,868,133 $ 188,101 $ ( 636,709 ) $ 38,706 $ 1,458,291 See Notes to Consolidated and Condensed Financial Statements. 5 ESAB CORPORATION CONSOLIDATED AND CONDENSED STATEMENTS OF CASH FLOWS Dollars in thousands (Unaudited) Three Months Ended March 29, 2024 March 31, 2023 Cash flows from operating activities: Net income $ 61,594 $ 33,216 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization, and other impairment charges 16,387 21,871 Stock-based compensation expense 4,133 2,994 Deferred income tax ( 638 ) 2,290 Non-cash interest expense 1,062 299 Pension settlement loss 12,155 — Changes in operating assets and liabilities: Trade receivables, net ( 48,946 ) ( 21,048 ) Inventories, net ( 16,078 ) ( 21,611 ) Accounts payable 36,196 28,480 Other operating assets and liabilities ( 21,398 ) ( 8,424 ) Net cash provided by operating activities 44,467 38,067 Cash flows from investing activities: Purchases of property, plant and equipment ( 7,414 ) ( 7,709 ) Proceeds from sale of property, plant and equipment 368 681 Acquisition, net of cash received ( 18,067 ) ( 18,721 ) Other ( 1,501 ) — Net cash used in investing activities ( 26,614 ) ( 25,749 ) Cash flows from financing activities: Proceeds from borrowings on revolving credit facility 115,000 187,000 Repayments of borrowings on term credit facility ( 6,250 ) — Repayments of borrowings on revolving credit facility and other ( 139,035 ) ( 189,765 ) Payment of dividends ( 3,635 ) ( 3,033 ) Distributions to noncontrolling interest holders — ( 1,249 ) Net cash used in financing activities ( 33,920 ) ( 7,047 ) Effect of foreign exchange rates on Cash and cash equivalents ( 9,441 ) 4,769 (Decrease) increase in Cash and cash equivalents ( 25,508 ) 10,040 Cash and cash equivalents, beginning of period 102,003 72,024 Cash and cash equivalents, end of period $ 76,495 $ 82,064 See Notes to Consolidated and Condensed Financial Statements. 6 ESAB CORPORATION NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. Organization and Basis of Presentation Founded in 1904, ESAB Corporation (“ESAB” or the “Company”) is a focused premier industrial compounder. ESAB provides its partners with fabrication technology advanced equipment, consumables, gas control equipment, robotics, and digital solutions. The Company’s rich history of innovative products and workflow solutions and its business system ESAB Business Excellence (“EBX”) enables the Company’s purpose of Shaping the world we imagine TM . 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. On April 4, 2022, ESAB Corporation completed its spin-off from Colfax Corporation (“Colfax,” “Enovis” or “Former Parent”) and became an independent, public-traded company (the “Separation”). The Company’s fiscal year ends December 31. The Company’s first quarter ends on the last business day of the 13 th week after the end of the prior quarter. As used herein, the first quarter results for 2024 and 2023 refer to the 13-week periods ended March 29, 2024 and March 31, 2023, respectively. Russia and Ukraine Conflict The invasion of Ukraine by Russia and the sanctions imposed in response have increased the level of economic and political uncertainty. While ESAB continues to closely monitor the situation and evaluate options, the Company is meeting current contractual obligations while addressing applicable laws and regulations. For the three months ended March 29, 2024, Russia represented approximately 5 % of the Company’s total revenue, and approximately $ 4 million of its Net income. Russia also has approximately 3 % of the Company’s total net assets excluding any goodwill allocation as of March 29, 2024. In case of a disposition of the Russia business, a portion of goodwill would need to be allocated and disposed of at the relative fair value attributable to the Russia business. Russia has a cumulative translation loss of approximately $ 118 million as of March 29, 2024, which could be realized upon a transition out. The Company is closely monitoring 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 Consolidated and Condensed Financial Statements included herein have been prepared by the Company pursuant to the rules and regulations of the Security and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with the accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to SEC rules and regulations; however the Company believes that the disclosures are adequate to make the information presented not misleading. The Consolidated and 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. 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 Condensed Statements of Operations. Research and development costs were $ 10.1 million and $ 9.6 million during the three months ended March 29, 2024 and March 31, 2023, respectively. T hese 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. The Company expects to continue making significant expenditures for research and development to maintain and improve its competitive positions. The accompanying interim Consolidated and Condensed Financial Statements and the related notes should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”), filed with the SEC on February 29, 2024. 7 ESAB CORPORATION NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) 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 Company has classified asbestos-related activity in its Consolidated and Condensed Statements of Operations as part of Loss from discontinued operations, net of taxes. This activity consists primarily of expected settlements, legal and administrative expenses associated with the above liabilities. For the three months ended March 29, 2024 and March 31, 2023, respectively, loss from discontinued operations, net of taxes was $ 1.3 million and $ 0.9 million . S ee Note 14, “Commitments and Contingencies” for further information. Cas h used in operating activities related to discontinued operations for the three months ended March 29, 2024 and March 31, 2023 was $ 3.7 million and $ 5.4 million , respectively. 3. Acquisitions On February 26, 2024, the Company completed the acquisition of Sager S.A., a welding repair and maintenance product and service leader in South America, for $ 18.1 million, net of cash received. On January 11, 2023, the Company completed the acquisition of Therapy Equipment Limited, a regional leader in oxygen regulators, for $ 18.7 million, net of cash received. 4. Revenue The Company provides fabrication technology advanced equipment, consumables, gas control equipment, robotics and digital solutions. The Company’s products are utilized to solve challenges in a wide range of industries. Substantially all revenue is recognized at a point in time. The Company disaggregates its revenue into the following product groups: Three Months Ended March 29, 2024 March 31, 2023 (In thousands) Equipment $ 214,860 $ 200,219 Consumables 474,884 483,781 Total $ 689,744 $ 684,000 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 March 29, 2024 is immaterial. In some circumstances, customers are billed in advance of revenue recognition, resulting in contract liabilities. As of December 31, 2023 and December 31, 2022, total contract liabilities were $ 31.2 million and $ 25.9 million, respectively, and were included in Accrued liabilities on the Consolidated and Condensed Balance Sheets. During the three months ended March 29, 2024 and March 31, 2023, revenue recognized that was included in the contract liabilities balance at the beginning of the year was $ 16.2 million and $ 11.1 million, respectively. As of March 29, 2024 and March 31, 2023, total contract liabilities were $ 29.5 million and $ 28.3 million, respectively, and were included in Accrued liabilities on the Company’s Consolidated and Condensed Balance Sheets. 8 ESAB CORPORATION NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) 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 Condensed Balance Sheets is as follows: Three Months Ended March 29, 2024 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 $ 25,477 $ 651 $ ( 439 ) $ ( 265 ) $ 25,424 5. 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 March 29, 2024 March 31, 2023 (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) $ 61,260 $ 32,816 Less: distributed and undistributed earnings allocated to nonvested shares ( 365 ) ( 237 ) Income from continuing operations attributable to common stockholders $ 60,895 $ 32,579 Weighted-average shares of Common stock outstanding – basic 60,346,121 60,146,348 Income per share from continuing operations – basic $ 1.01 $ 0.54 Computation of earnings per share from continuing operations – diluted: Income from continuing operations attributable to common stockholders $ 60,895 $ 32,579 Weighted-average shares of Common stock outstanding – basic 60,346,121 60,146,348 Net effect of potentially dilutive securities (2) 641,836 339,878 Weighted-average shares of Common stock outstanding – dilution 60,987,957 60,486,226 Net income per share from continuing operations – diluted $ 1.00 $ 0.54 (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 $ 1.6 million for the three months ended March 29, 2024 and $ 1.3 million for the three months ended March 31, 2023. (2) Potentially dilutive securities include stock options, performance-based restricted stock units and non-performance-based restricted stock units. 6. Income Taxes During the three months ended March 29, 2024, Income from continuing operations before income taxes was $ 81.4 million, while Income tax expense was $ 18.5 million. The effective tax rate was 22.7 % for the three months ended March 29, 2024. The effective tax rate differed from the 2024 U.S. federal statutory rate of 21.0% primarily due to withholding taxes. During the three months ended March 31, 2023, Income from continuing operations before income taxes was $ 71.2 million, while Income tax expense was $ 37.0 million. The effective tax rate was 52.0 % for the three months ended March 31, 2023. The effective tax rate differed from the 2023 U.S. federal statutory rate of 21.0% primarily due to discrete tax expenses in 2023 for dividend withholding taxes and an increase in the liability for uncertain tax positions as discussed below, that do not recur in 2024. 9 ESAB CORPORATION NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) During the three months ended March 31, 2023, the Company changed its indefinite reinvestment assertion on certain undistributed earnings of the Company’s foreign subsidiaries, resulting in a total tax expense of $ 10.9 million, as of March 31, 2023 on such earnings that have not been indefinitely reinvested. The Company records a liability for certain unrecognized income tax benefits for which it is more likely than not that a tax position will not be sustained upon examination by the respective taxing authority (“uncertain tax positions”). During the three months ended March 31, 2023, due to an adverse court ruling in a tax case in a foreign jurisdiction, the Company increased the related liability for uncertain tax positions by $ 9.4 million partially offset by changes in other positions. 7. Inventories, Net Inventories, net consisted of the following: March 29, 2024 December 31, 2023 (In thousands) Raw materials $ 153,072 $ 156,583 Work in process 48,627 43,561 Finished goods 253,643 244,580 455,342 444,724 LIFO reserve ( 4,980 ) ( 4,279 ) Allowance for excess, slow-moving and obsolete inventory ( 44,761 ) ( 47,587 ) $ 405,601 $ 392,858 At March 29, 2024 and December 31, 2023 , 26.0 % a nd 27.4 % of total inventories, respectively, were valued using the LIFO method. 8. Accrued and Other Liabilities Accrued and Other liabilities in the Consolidated and Condensed Balance Sheets consisted of the following: March 29, 2024 December 31, 2023 Current Noncurrent Current Noncurrent (In thousands) Accrued taxes and deferred tax liabilities $ 44,727 $ 144,214 $ 45,681 $ 144,662 Compensation and related benefits 75,906 50,750 97,052 52,589 Asbestos liability 34,111 223,829 32,908 234,796 Contract liabilities 29,548 — 31,248 — Lease liabilities 22,936 73,995 22,794 76,609 Warranty liability 12,936 — 12,606 — Third-party commissions 11,224 — 18,711 — Restructuring liability 4,045 256 5,345 354 Other 57,470 27,967 47,144 33,823 $ 292,903 $ 521,011 $ 313,489 $ 542,833 10 ESAB CORPORATION NOTES TO CONSOLIDATED AND 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 Condensed Balance Sheets is as follows: Three Months Ended March 29, 2024 March 31, 2023 (In thousands) Warranty liability, beginning of period $ 12,606 $ 12,946 Accrued warranty expense 2,457 1,393 Changes in estimates related to pre-existing warranties 727 672 Cost of warranty service work performed ( 2,647 ) ( 2,678 ) Foreign exchange translation effect ( 207 ) 964 Warranty liability, end of period $ 12,936 $ 13,297 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 and Other liabilities in the Consolidated and Condensed Balance Sheets is as follows: Three Months Ended March 29, 2024 Balance at Beginning of Period Charges Payments Foreign Currency Translation Balance at End of Period (In thousands) Restructuring and other related charges: Termination benefits (1) $ 4,595 $ 1,320 $ ( 1,507 ) $ ( 352 ) $ 4,056 Facility closure costs and other (2) 1,104 604 ( 1,404 ) ( 59 ) 245 Total $ 5,699 $ 1,924 $ ( 2,911 ) $ ( 411 ) $ 4,301 (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. 9. Benefit Plans The Company sponsors various defined benefit plans and other post-retirement benefits plans, including health and life insurance, for certain eligible employees or former employees. During the three months ended March 29, 2024, the Company recognized a non-cash pension settlement loss of $ 12.2 million related to the transfer of plan assets to a third party as part of externalizing the risk associated with a foreign defined benefit plan. This amount is reflected in Pension settlement loss in the Consolidated and Condensed Statements of Operations. 10. Debt Long-term debt consisted of the following: March 29, 2024 December 31, 2023 (In thousands) Term loans $ 981,250 $ 987,500 Revolving credit facilities 12,000 32,000 Total debt 993,250 1,019,500 Unamortized deferred financing fees ( 452 ) ( 1,443 ) Long-term debt $ 992,798 $ 1,018,057 11 ESAB CORPORATION NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) Term Loans and Revolving Credit Facility 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 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 consisting 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. As March 29, 2024, the Credit Agreement consisted of the following facilities: • A $ 750 million revolving credit facility (the “Revolving Facility”) with a maturity date of April 4, 2027, of which $ 12 million was drawn; • A Term A-1 loan with an aggregate principal amount of $ 393 million (the “Term Loan A-1 Facility”) with a maturity date of April 4, 2027; and • A Term A-3 loan with an aggregate principal amount of $ 589 million (the “Term Loan A-3 Facility”) with a maturity date of April 3, 2025. Refer to Note 16, “Subsequent Events” for further information. The draw-down and repayment related to these term facilities are presented net within the Consolidated and 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 United States 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 12 ESAB CORPORATION NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) Average (“SONIA”) plus an adjustment (as all such rates are defined in the Credit Agreement Amendment), in each case, plus the applicable interest rate margin. The applicable interest rate margin changes based upon the Company’s total leverage ratio (consolidated total debt divided by EBITDA, as defined in the credit agreement and 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 year ended December 31, 2022. Refer to Note 11, “Derivatives” for additional information. As of March 29, 2024, the weighted-average interest rate of borrowings under the Credit Agreement was 5.09 %, including the net impact from the interest rate and cross currency swaps and excluding accretion of deferred financing fees, and there was $ 738 million of borrowing capacity available under the Revolving Facility, subject to meeting financial covenants and other requirements. Other Indebtedness In addition to the debt agreements discussed above, the Company also has the ability to incur approximately $ 77 million of indebtedness pursuant to certain uncommitted credit lines, consisting of an uncommitted credit line 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 $ 109.0 million. Total letters of credit of $ 28.3 million were outstanding as of March 29, 2024. Deferred Financing Fees The Company had total deferred financing fees of $ 1.3 million included in its Consolidated Balance Sheet as of March 29, 2024, which will be charged to Interest expense 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 $ 1.3 million, $ 0.8 million of deferred financing fees relating to the Revolving Facility are included in Other assets and $ 0.5 million of deferred financing fees relating to the Term Facilities are recorded as a contra-liability within Long-term debt. 11. 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 March 29, 2024. The Company does not expect any counterparties to fail to meet their obligations. The Company records derivatives in the Consolidated and 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. In March 2024, the Company received $ 5.5 million to settle one of the interest rate swaps associated with the Company’s floating-rate debt. The termination of the interest rate swap related to the anticipated repayment of the Term A-3 Facility when 13 ESAB CORPORATION NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) completed in April with the proceeds of the April 2024 $ 700 million Senior Note Offering. Refer to Note 16, “Subsequent Events” for further information. As this interest rate swap was designated as a cash flow hedge, $ 5.5 million was deferred in accumulated other comprehensive income (loss) (“AOCI”) and will be recognized in earnings over the period the originally forecasted hedged transaction impacts earnings. The remaining $ 300 million swap will continue to be hedged against the remaining floating-rate debt. For the remaining swap, the spread was 1.250 % as of March 29, 2024. This agreement involves 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. This interest rate swap agreement is designated and qualifies 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 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. The Company did not have any ineffectiveness related to the cash flow hedges during the three months ended March 29, 2024 . The cash inflows and outflows associated with the Company’s interest rate swap agreement designated as cash flow hedges are classified in cash flows from operating activities in the accompanying Consolidated and Condensed Statements of Cash Flows. The Company expects a gain of $ 4.0 million , net of tax, r elated 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 March 29, 2024. The effects of designated cash flow hedges on the Company’s Consolidated and Condensed Statements of Operations consisted of the following: Three Months Ended Derivative type (Gain) recognized in the Consolidated and Condensed Statements of Operations: March 29, 2024 March 31, 2023 (In thousands) Interest rate swap agreements Interest expense and other, net $ ( 2,722 ) $ ( 1,977 ) 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 include provisions 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 March 29, 2024, 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 and other, net line item in the Consolidated and 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 AOCI into earnings during the period of change. The Com pany did not have any ineffectiveness related to net investment hedges during the three months ended March 29, 2024 . 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 Condensed Statements of Cash Flows. 14 ESAB CORPORATION NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) The effects of the excluded components of designated net investment hedges on the Company’s Consolidated and Condensed Statements of Operations consisted of the following: Three Months Ended Derivative type (Gain) recognized in the Consolidated and Condensed Statements of Operations: March 29, 2024 March 31, 2023 (In thousands) Cross currency swap agreements Interest expense and other, net $ ( 1,179 ) $ ( 1,201 ) The table below shows the fair value of the derivatives recognized in the Consolidated Balance Sheet: March 29, 2024 December 31, 2023 Designated as hedging instruments Other Liabilities Other Assets Other Liabilities Other Assets (In thousands) Cross currency swap agreements $ 15,783 $ — $ 22,232 $ — Interest rate swap agreements — 5,174 — 9,522 Total $ 15,783 $ 5,174 $ 22,232 $ 9,522 Derivatives Not Designated as Hedging Instruments The Company has certain foreign currency contracts that are not designated as hedges. As of March 29, 2024 and December 31, 2023, the Company had foreign currency contracts related to purchases and sales with notional values of $ 267.2 million and $ 232.5 million, respectively. The table below shows the fair value of derivative instruments not designated in a hedging relationship recognized in the Consolidated Balance Sheet: March 29, 2024 December 31, 2023 Not designated as hedging instruments Accrued Liabilities Other Current Assets Accrued Liabilities Other Current Assets (In thousands) Foreign currency contracts $ 431 $ 874 $ 596 $ 1,088 The amounts in the table above as of March 29, 2024 reflect the fair value of the Company’s foreign currency contracts on a net basis where allowable under master netting agreements. Had these amounts been recognized on a gross basis, the impact would have been a $ 0.6 million increase in Other current assets with a corresponding increase in Accrued liabilities. The Company recognized the following in its Consolidated and Condensed Financial Statements related to its derivative instruments not designated in a hedging relationship: Three Months Ended Foreign currency contracts March 29, 2024 March 31, 2023 (In thousands) Change in unrealized gains (losses) $ ( 49 ) $ 143 Realized gains (losses) ( 394 ) 1,027 The above gains or losses on foreign currency contracts are usually offset by foreign exchange exposure on cash and intercompany positions, all of which are recognized in Interest expense and other, net, in the Consolidated and Condensed Statements of Operations. 12. 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. 15 ESAB CORPORATION NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) 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: March 29, 2024 Level One Level Two Level Three Total (In thousands) Assets: Cash equivalents $ 2,968 $ — $ — $ 2,968 Foreign currency contracts - not designated as hedges — 1,457 — 1,457 Interest rate swap agreements — 5,174 — 5,174 Deferred compensation plans — 4,281 — 4,281 $ 2,968 $ 10,912 $ — $ 13,880 Liabilities: Foreign currency contracts - not designated as hedges $ — $ 1,014 $ — $ 1,014 Cross currency swap agreements — 15,783 — 15,783 Deferred compensation plans — 4,281 — 4,281 $ — $ 21,078 $ — $ 21,078 December 31, 2023 Level One Level Two Level Three Total (In thousands) Assets: Cash equivalents $ 6,027 $ — $ — $ 6,027 Foreign currency contracts - not designated as hedges — 2,261 — 2,261 Interest rate swap agreements — 9,522 — 9,522 Deferred compensation plans — 3,488 — 3,488 $ 6,027 $ 15,271 $ — $ 21,298 Liabilities: Foreign currency contracts - not designated as hedges $ — $ 1,769 $ — $ 1,769 Cross currency swap agreements — 22,232 — 22,232 Deferred compensation plans — 3,488 — 3,488 $ — $ 27,489 $ — $ 27,489 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 March 29, 2024, the impact of the credit valuation adjustment on the Company’s derivatives is immaterial. Refer to Note 11, “Derivatives” for additional information. There were no transfers in or out of Level One, Two or Three during the three months ended March 29, 2024. 16 ESAB CORPORATION NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) 13. Equity Accumulated Other Comprehensive Loss The following tables present the changes in the balances of each component of AOCI including reclassifications out of AOCI for the three months ended March 29, 2024 and March 31, 2023. 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 Net Investment Hedges Cash Flow Hedges Total (In thousands) Balance at December 31, 2023 $ ( 59,805 ) $ ( 554,622 ) $ ( 17,215 ) $ 7,370 $ ( 624,272 ) Other comprehensive income (loss) before reclassifications: Foreign currency translation adjustment 243 ( 38,265 ) 4,995 — ( 33,027 ) Gain on long-term intra-entity foreign currency transactions — 7,996 — — 7,996 Unrealized loss on cash flow hedges — — — 3,920 3,920 Other comprehensive income (loss) before reclassifications 243 ( 30,269 ) 4,995 3,920 ( 21,111 ) Amounts reclassified from Accumulated other comprehensive loss (1)(2) 629 — — ( 2,907 ) ( 2,278 ) Net current period Other comprehensive income (loss) 872 ( 30,269 ) 4,995 1,013 ( 23,389 ) Balance at March 29, 2024 $ ( 58,933 ) $ ( 584,891 ) $ ( 12,220 ) $ 8,383 $ ( 647,661 ) (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. (2) During the three months ended March 29, 2024, the amount within Cash Flow Hedges is a component of Interest expense and other, net. See Note 11, “Derivatives” for additional details. Accumulated Other Comprehensive Loss Components Net Unrecognized Pension and Other Post-Retirement Benefit Cost Foreign Currency Translation Adjustment Net Investment Hedges Cash Flow Hedges Total (In thousands) Balance at December 31, 2022 $ ( 63,847 ) $ ( 613,907 ) $ ( 8,336 ) $ 11,102 $ ( 674,988 ) Other comprehensive income (loss) before reclassifications: Net actuarial loss ( 2 ) — — — ( 2 ) Foreign currency translation adjustment ( 108 ) 31,276 ( 2,086 ) — 29,082 Gain on long-term intra-entity foreign currency transactions — 12,501 — — 12,501 Unrealized loss on cash flow hedges — — — ( 2,051 ) ( 2,051 ) Other comprehensive (loss) income before reclassifications ( 110 ) 43,777 ( 2,086 ) ( 2,051 ) 39,530 Amounts reclassified from Accumulated other comprehensive loss (1)(2) 279 — — ( 1,530 ) ( 1,251 ) Net current period Other comprehensive (loss) income 169 43,777 ( 2,086 ) ( 3,581 ) 38,279 Balance at March 31, 2023 $ ( 63,678 ) $ ( 570,130 ) $ ( 10,422 ) $ 7,521 $ ( 636,709 ) (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. (2) During the three months ended March 31, 2023, the amount within Cash Flow Hedges is a component of Interest expense and other, net. See Note 11, “Derivatives” for additional details. 17 ESAB CORPORATION NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) 14. Commitments and Contingencies Asbestos Contingencies Certain entities that became subsidiaries of ESAB Corporation in connection with the Separation are the legal obligor, or owner, 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 settlement value 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 to plaintiffs. The Company has classified asbestos-related activity in Loss from discontinued operations, net of taxes in the Consolidated and 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 that 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. 18 ESAB CORPORATION NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) Asbestos-related claims activity since December 31 is as follows: Three Months Ended March 29, 2024 March 31, 2023 (Number of claims) Claims unresolved, beginning of period 13,648 14,106 Claims filed (1) 1,297 986 Claims resolved (2) ( 714 ) ( 749 ) Claims unresolved, end of period 14,231 14,343 (1) Claims filed include all asbestos claims for which notification have been received or a file has been opened. (2) Claims resolved include all asbestos claims that have been settled, dismissed or that are in the process of being settled or dismissed based upon agreements or understandings in place with counsel for the claimants. The Company’s Consolidated Balance Sheet included the following amounts related to asbestos-related litigation: March 29, 2024 December 31, 2023 (In thousands) Long-term asbestos insurance asset (1) $ 213,323 $ 221,489 Long-term asbestos insurance receivable (1) 18,306 17,868 Accrued asbestos liability (2) 34,111 32,908 Long-term asbestos liability (3) 223,829 234,796 (1) Included in Other assets in the Consolidated Balance Sheets. (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 Sheets. (3) Included in Other liabilities in the Consolidated Balance Sheets. 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 that 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. 15. Segment Information ESAB is a focused premier industrial compounder. ESAB provides its partners with fabrication technology, advanced equipment, consumables, gas control equipment, welding robotics and digital solutions. 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. 19 ESAB CORPORATION NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS — (Continued) (Unaudited) The Company’s management evaluates the operating results of each of its reportable segments based upon Net sales and Adjusted EBITDA, which represents Net income from continuing operations excluding the impact of Income tax expense, Interest expense and other, net, Pension settlement (loss), Restructuring and other related charges, acquisition - amortization and other related charges and depreciation and other amortization . The Com pany’s segment results were as follows: Three Months Ended March 29, 2024 March 31, 2023 (In thousands) Net sales: Americas $ 296,047 $ 291,569 EMEA & APAC 393,697 392,431 $ 689,744 $ 684,000 Adjusted EBITDA (1) : Americas $ 54,098 $ 49,442 EMEA & APAC 75,039 68,547 $ 129,137 $ 117,989 (1) The following is a reconciliation of Net income from continuing operations to Adjusted EBITDA. Three Months Ended March 29, 2024 March 31, 2023 (In thousands) Net income from continuing operations $ 62,903 $ 34,129 Income tax expense 18,504 37,024 Interest expense and other, net (1) 17,091 19,510 Pension settlement loss 12,155 — Restructuring and other related charges 1,924 9,444 Acquisition - amortization and other related charges (2) 7,777 9,289 Depreciation and other amortization 8,783 8,593 Adjusted EBITDA $ 129,137 $ 117,989 (1) Relates to removal of interest expense, net included within the Interest expense and other, net line within the Consolidated and Condensed Statements of Operations. (2) Includes transaction expenses, amortization of intangibles, fair value charges on acquired inventories and integration expenses. 16. Subsequent Events On April 9, 2024, the Company completed a $ 700.0 million Senior Note Offering (“the Offering”). The Offering has a contractual interest rate of 6.25 % and expected maturity date of April 15, 2029. The Company used the net proceeds from the Offering to repay $ 588.8 million of borrowings under its Term Loan A-3 Facility and pay fees associated with the Offering. The Company intends to use the remaining proceeds received to repay borrowings under its Revolving Facility and other general corporate purposes. The Offering did not have any material changes to the required financial covenants for the Company. The dividend of $ 3.6 million included in Accrued liabilities in the Consolidated Balance Sheet at March 29, 2024 was paid on April 12, 2024 to stockholders of record as of March 29, 2024. On April 30, 2024, the Company reached an agreement to acquire SUMIG Soluções para Solda e Corte Ltda, a South American light automation and equipment business for approximately $ 74 million of cash consideration. This acquisition is expected to be completed during the second half of 2024, subject to the receipt of applicable regulatory approvals and customary closing conditions. 20