ESAB Corporation — Q3 2022 Form 10-Q
Reporting period: 13 weeks ended September 30, 2022; nine-month figures are for the period ended September 30, 2022. Dollars are in millions except per-share amounts. ESAB manufactures welding, cutting, gas-control, automation and related products, and reports Americas and EMEA & APAC segments.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $620.3 | $606.0 | $1,929.4 | $1,803.9 |
| Gross profit / margin | $209.3 / 33.7% | $207.0 / 34.2% | $661.1 / 34.3% | $625.2 / 34.7% |
| Operating income | $81.0 | $78.7 | $250.5 | $233.2 |
| Continuing-operations net income | $54.3 | $61.4 | $170.6 | $198.1 |
| Net income attributable to ESAB | $52.4 | $60.6 | $163.0 | $195.7 |
| Diluted EPS, including discontinued operations | $0.86 | $1.01 | $2.69 | $3.26 |
| Adjusted EBITDA (non-GAAP) | $105.0 | $102.5 | $324.8 | $301.4 |
| Adjusted EBITDA margin (non-GAAP) | 16.9% | 16.9% | 16.8% | 16.7% |
- Reported sales rose 2.3% in Q3 and 7.0% for nine months. Organic growth was 7.2% and 11.1%, respectively, but unfavorable currency translation reduced sales by 4.9% and 4.1%.
- Pricing drove much of organic growth: inflation-related price increases were approximately $57 million in Q3 and $221 million for nine months. Cost inflation, weaker volumes tied partly to the Russia-Ukraine conflict, and foreign exchange pressured results.
- Q3 Americas sales were $281.4 million, up from $260.0 million; EMEA & APAC sales were $338.9 million, down from $346.0 million. Nine-month segment sales were $844.7 million and $1,084.6 million, respectively.
- Operating cash flow was $122.9 million for nine months, versus $192.1 million. Capital expenditures were $22.0 million. Cash was $60.6 million at quarter-end, compared with $41.2 million at December 31, 2021. The company attributed weaker cash generation in part to working-capital investment, including inventory.
Debt, liquidity and capital
- Long-term debt was $1,132.4 million at September 30, 2022; the weighted-average borrowing rate was 3.82%. ESAB had $615 million available under its revolving facility and reported compliance with its debt covenants.
- The credit agreement includes a $750 million revolving facility and term loans. A $600 million term loan due in 2023 was refinanced in June 2022 with a facility maturing in April 2025; the revolving facility and other term facility mature in April 2027.
- ESAB entered interest-rate swaps covering $600 million of debt, converting that portion to a fixed 3.293% rate plus the applicable spread. The company said a 1-percentage-point rate increase would have raised Q3 interest expense by about $1.3 million absent mitigation.
- ESAB paid a $0.05-per-share dividend in July and declared another $0.05 dividend payable in October. It stated liquidity from operations and available debt was adequate for the next 12 months.
Material changes, outlook and risks
- ESAB completed its spin-off from Enovis on April 4, 2022, and borrowed $1.2 billion as part of the separation consideration. The nine-month 2022 financial statements combine pre-separation carve-out results with post-separation consolidated results; management cautions that periods may not be fully comparable or indicative of future results.
- Management expects standalone public-company costs to exceed historical allocations and estimates them at approximately $35 million annually. It expected 2022 interest expense of $35 million to $40 million. The filing provides no broader quantified revenue or earnings guidance.
- Russia represented approximately 7% of Q3 revenue and 6% of nine-month revenue; the company was evaluating a possible transition out of Russia while continuing to meet applicable contractual obligations. A transition could realize approximately $50 million of accumulated currency translation losses and require goodwill allocation. ESAB increased receivables allowances by about $4 million for Russia and Ukraine exposure.
- Asbestos-related discontinued operations produced losses of $1.0 million in Q3 and $4.9 million for nine months. At quarter-end, asbestos liabilities totaled $271.6 million and related insurance assets and receivables totaled $240.1 million. Recovery and liability estimates depend on litigation, coverage, insurer solvency and other uncertain factors; $19.3 million of operating cash was used for discontinued operations during the nine months.
- Other cited risks include inflation, supply-chain constraints, foreign-exchange movements, seasonality, restructuring execution, cyber and operational disruptions, and the ability to operate independently. The company reported a $245.9 million foreign-currency translation loss in other comprehensive income for the nine months.
- After quarter-end, ESAB acquired Ohio Medical, LLC on October 14, 2022, for approximately $127 million. The business generated over $45 million of sales in the 12 months ended August 31, 2022; ESAB expects a cash tax benefit with a $15 million net present value.
Important facts for investors to verify
- Whether price increases can continue to offset input-cost inflation and whether gross margins stabilize.
- Cash conversion, inventory levels and working-capital needs, including cash outflows from asbestos matters and restructuring.
- Debt service, covenant headroom and refinancing or repayment plans as facilities approach maturity.
- Russia exposure, any decision to exit, and possible currency-translation and goodwill effects.
- Actual standalone public-company costs versus management’s approximately $35 million annual estimate.
- Ohio Medical acquisition funding, integration, realized tax benefits and subsequent operating contribution.
- Comparability of reported results given the separation, changing entity scope and pre-separation allocations.