Business context and reporting period
ESAB Corporation designs and supplies fabrication technology and gas-control solutions, including welding and cutting equipment, consumables, robotics and digital products. This unaudited Form 10-Q covers the 13 weeks ended March 31, 2023; comparisons are with the 13 weeks ended April 1, 2022. ESAB reports Americas and EMEA & APAC segments.
The prior-year quarter preceded ESAB’s April 4, 2022 separation from Enovis and includes allocated parent-company costs. Accordingly, prior-period results may not be fully comparable to results as a standalone company.
Financial results and liquidity
| Metric | Q1 2023 | Prior-year quarter |
|---|---|---|
| Net sales | $684.0 million | $647.9 million |
| Gross profit / margin | $247.4 million / 36.2% | $224.3 million / 34.6% |
| Operating income | $90.7 million | $83.6 million |
| Continuing-operations net income | $34.1 million | $58.4 million |
| Net income attributable to ESAB | $31.9 million | $55.4 million |
| Diluted EPS | $0.52 total; $0.54 continuing operations | $0.93 total; $0.96 continuing operations |
| Adjusted EBITDA (non-GAAP) / margin | $118.0 million / 17.2% | $109.3 million / 16.9% |
| Core adjusted EBITDA (non-GAAP) / margin | $112.7 million / 17.4% | $100.9 million / 16.6% |
Sales rose 5.6%: organic growth contributed $30.5 million (4.7%), acquisitions $19.3 million (3.0%), while currency translation reduced sales by $13.7 million (2.1%). Management attributed organic growth mainly to pricing and new products, partly offset by lower volumes, including Russia-related weakness.
Operating cash flow was $38.1 million, versus $16.1 million. Investing activities used $25.7 million, including $18.7 million for the Therapy Equipment acquisition; financing activities used $7.0 million. Cash increased $10.0 million to $82.1 million. The filing does not provide free cash flow as a stated metric.
At March 31, 2023, total debt was $1.219 billion and cash was $82.1 million. The weighted-average borrowing rate was 4.93%; $531 million of revolving-facility capacity remained available, subject to covenants. Current assets were $1.061 billion and current liabilities $630.4 million. ESAB reported compliance with credit-agreement covenants.
Americas sales were $291.6 million and adjusted EBITDA was $49.4 million (17.0% margin); EMEA & APAC sales were $392.4 million and adjusted EBITDA was $68.5 million (17.5% margin). Core adjusted EBITDA excludes Russia and is a non-GAAP measure.
Material changes and management commentary
- Gross profit and gross margin increased, with management citing pricing, acquisitions and restructuring savings, partly offset by inflation-related costs, lower volumes, unfavorable mix and currency effects.
- Continuing-operations net income fell $24.3 million, primarily due to higher interest expense following the separation financing and a higher effective tax rate. The tax rate rose to 52.0% from 30.6%; discrete items included $10.9 million of tax expense related to a change in the reinvestment assertion on certain foreign earnings and an increased uncertain-tax-position liability following an adverse foreign court ruling.
- SG&A increased $11.9 million, reflecting acquisition costs, growth initiatives and standalone public-company expenses, partly offset by favorable currency translation.
- ESAB acquired Therapy Equipment Limited on January 11, 2023, for approximately $19 million net of cash received. Management expects acquisitions to contribute to growth and believes the company is positioned for long-term organic growth, but provided no quantified guidance.
Risks, contingencies and unusual items
- Russia represented approximately 5% of Q1 revenue and about $2 million of net income; it accounted for approximately 4% of net assets excluding goodwill. A possible exit could result in realization of approximately $100 million of cumulative translation losses, plus goodwill allocation and disposal effects.
- Asbestos-related liabilities and insurance assets remain significant and are subject to uncertainty in claims, coverage, insurer solvency and future recoveries. The company recorded current and long-term asbestos liabilities totaling about $244.8 million and related insurance assets and receivables totaling about $221.0 million. Q1 discontinued-operations loss was $0.9 million; related operating cash use was $5.4 million.
- Other principal exposures include foreign-exchange movements, inflation and supply-chain constraints, variable-rate debt, restructuring execution, acquisition integration, and litigation. A hypothetical 1% interest-rate increase would have increased quarterly interest expense by approximately $1.5 million; swaps hedge approximately $600 million of variable-rate debt.
- Management stated that there were no material changes to the risk factors in the 2022 Form 10-K, and that ordinary-course litigation is not expected to have a material adverse effect, while noting outcomes cannot be assured.
Important facts for investors to verify
- Whether pricing and margin gains can offset cost inflation, weaker volumes and currency headwinds, and how much sales growth is organic versus acquisition-driven.
- The drivers and potential persistence of the elevated 52.0% effective tax rate, including the foreign tax ruling and tax treatment of undistributed earnings.
- Debt-service capacity, covenant headroom and refinancing requirements, particularly the Term Loan A-3 maturity in April 2025.
- Russia-related operating, regulatory and potential exit exposure, including the disclosed cumulative translation loss.
- Assumptions behind asbestos liabilities and insurance recoveries, and the effect of any changes in claims or insurer coverage.
- Acquisition integration and contribution, restructuring costs, and future cash needs for working capital, capital spending, asbestos obligations and dividends.