ESAB Corporation — Q2 2023 Form 10-Q
Reporting period: 13 weeks ended June 30, 2023; six-month results are compared with the period ended July 1, 2022. ESAB makes fabrication technology, welding and cutting products, gas-control equipment, and related digital solutions. Its segments are Americas and EMEA & APAC. The filing is unaudited.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $720.4 million | $661.2 million | $1,404.4 million | $1,309.1 million |
| Gross profit | $263.9 million | $227.5 million | $511.3 million | $451.8 million |
| Gross margin | 36.6% | 34.4% | 36.4% | 34.5% |
| Operating income | $108.6 million | $85.9 million | $199.3 million | $169.5 million |
| Continuing-operations income | $68.8 million | $57.9 million | $103.0 million | $116.3 million |
| Net income attributable to ESAB | $65.6 million | $55.2 million | $97.5 million | $110.7 million |
| Diluted EPS from continuing operations | $1.10 | $0.94 | $1.64 | $1.89 |
| Adjusted EBITDA (non-GAAP) | $132.1 million | $110.5 million | $250.1 million | $219.8 million |
| Adjusted EBITDA margin (non-GAAP) | 18.3% | 16.7% | 17.8% | 16.8% |
Cash, debt and liquidity
- Six-month operating cash flow was $100.7 million, versus $43.4 million a year earlier. Investing used $33.3 million, including $18.2 million for the Therapy Equipment acquisition; financing used $67.9 million, principally reflecting net revolving-credit repayments.
- Cash and equivalents were $74.4 million at June 30, 2023, including $62.6 million held outside the United States.
- Gross debt was $1.161 billion ($1.159 billion net of deferred financing fees), down from $1.221 billion at December 31, 2022. The weighted-average borrowing rate was 5.27%; $589 million of revolving capacity remained available, subject to covenants and other conditions.
- ESAB reported compliance with its credit-agreement covenants. Management said cash flow and available debt capacity were adequate for operations over the next 12 months.
Changes versus prior comparable periods
- Q2 sales rose 9.0%: organic growth contributed 8.0%, acquisitions 2.9%, and foreign-currency translation reduced growth by 2.0%. For the first half, sales rose 7.3%, with 6.4% organic growth, 2.9% from acquisitions and a 2.0% currency headwind.
- Q2 continuing-operations income increased $10.9 million, while first-half continuing-operations income fell $13.4 million. Management attributed the first-half decline primarily to substantially higher interest expense following the 2022 separation financing and a higher effective tax rate.
- Gross margin expanded in both periods. Management cited pricing, volume, acquisitions and restructuring/productivity benefits, partly offset by inflation and currency effects.
- Both segments grew sales and Adjusted EBITDA. Q2 Americas sales were $310.3 million and Adjusted EBITDA $58.3 million; EMEA & APAC sales were $410.1 million and Adjusted EBITDA $73.8 million. Excluding Russia, total Core Adjusted EBITDA margin was 18.6% for Q2 and 18.0% for the first half.
Outlook, risks and unusual items
- The filing provides qualitative expectations, not quantified revenue or earnings guidance. Management expects long-term organic growth from product development, customer expansion and geographic reach, and views acquisitions as a growth contributor. It expects continued significant R&D spending. European operations are typically seasonally slower in July, August and December.
- Interest expense and other, net rose to $18.8 million in Q2 and $38.3 million in the first half, from $7.9 million and $7.4 million, respectively. First-half effective tax rate was 36.0%, versus 28.2%; disclosed drivers included $10.9 million of tax expense from a change in reinvestment assertion and a $9.4 million increase in uncertain-tax-position liability following an adverse foreign court ruling.
- Russia accounted for approximately 6% of sales: $40.3 million in Q2 and $77.5 million in the first half. It represented about 4% of net assets excluding goodwill. A possible exit could result in realization of approximately $120 million of cumulative translation losses; sanctions and geopolitical developments could affect operations.
- Asbestos-related liabilities were $234.1 million in total, with related insurance assets and receivables of $212.7 million. The company records estimated liability costs for the next 15 years; costs beyond that period are not estimable. Actual claims, insurance recoveries, insurer solvency and litigation outcomes could differ from estimates. Six-month discontinued-operations cash outflow, mainly asbestos-related, was $9.7 million.
- Other exposures include variable interest rates, foreign exchange, raw-material prices, supply-chain and cyclical-market conditions, and acquisition integration. A hypothetical 1% interest-rate increase would have added about $2.8 million of first-half interest expense. Management reported no material change in risk factors and said disclosure controls were effective.
Important facts for investors to verify
- Whether pricing, volume and margin gains persist as inflation, mix, currency and market conditions change.
- Debt-service costs, covenant headroom and the effect of interest rates despite the $600 million interest-rate swap coverage.
- The drivers of the higher first-half tax rate and the outcomes of uncertain tax positions.
- Russia-related operating exposure and any potential goodwill or foreign-currency translation effects from a change in the business.
- The adequacy and collectability of asbestos insurance recoveries relative to estimated claims and liabilities.
- Acquisition contribution, integration progress and the extent to which non-GAAP Adjusted EBITDA adjustments affect comparisons with GAAP results.