ESAB Corporation — Q2 2022 Form 10-Q
Business context and reporting period
ESAB supplies welding, cutting, specialty gas-control, robotics and digital products through its Americas and EMEA & APAC segments. This unaudited quarterly report covers the 13 weeks ended July 1, 2022; comparative Q2 ended July 2, 2021. ESAB completed its spin-off from Enovis on April 4, 2022. Because 2022 results include newly contributed entities and pre-separation allocated costs, comparisons with 2021 and the balance sheet may not reflect a fully standalone company on a consistent basis.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $661.2M | $629.8M | $1,309.1M | $1,197.9M |
| Gross profit / margin | $227.5M / 34.4% | $218.4M / 34.7% | $451.8M / 34.5% | $418.2M / 34.9% |
| Operating income | $85.9M | $82.2M | $169.5M | $154.5M |
| Continuing-operations net income | $57.9M | $78.1M | $116.3M | $136.6M |
| Diluted EPS, continuing operations | $0.94 | $1.29 | $1.89 | $2.25 |
| Adjusted EBITDA (non-GAAP) | $110.5M | $104.7M | $219.8M | $198.9M |
Q2 total net income was $56.0M, including a $1.9M after-tax loss from discontinued operations; diluted EPS including discontinued operations was $0.91. Adjusted EBITDA margin was 16.7% in Q2 versus 16.6% a year earlier. The effective tax rate increased to 25.7% from 16.7% in Q2, and was 28.2% for the first half versus 17.8%.
First-half operating cash flow was $43.4M, down from $122.6M; capital expenditures were $13.7M. The decline reflected working-capital investment, including inventory, and $13.7M of operating cash used by discontinued operations, mainly asbestos-related. Cash was $53.5M at July 1, 2022, versus $41.2M at year-end 2021. Inventory rose to $473.8M from $420.1M.
Long-term debt was $1,182.2M. The weighted-average borrowing rate was 2.39% at quarter-end, before later swaps; $565M remained available on the revolving facility. The company reported compliance with debt covenants. Current assets were $1,041.4M and current liabilities $642.1M.
Material changes versus the prior comparable period
- Q2 sales grew 5.0%; sales from existing businesses increased 8.7%, while unfavorable currency translation reduced sales by $23.3M. First-half sales grew 9.3%, including a $44.7M adverse currency impact.
- Pricing drove much of organic sales growth: inflation-related customer price increases were approximately $82M in Q2 and $164M for the first half. They were partly offset by inflationary input costs, lower Russia-related volumes and currency headwinds.
- Americas Q2 sales rose to $291.1M from $253.6M, and adjusted EBITA to $45.2M from $34.3M. EMEA & APAC sales fell to $370.1M from $376.2M, and adjusted EBITA to $56.4M from $60.8M, with currency, energy costs and Russia-related volume declines weighing on results.
- Continuing-operations net income declined despite higher sales and operating income. The prior-year quarter included an $11.2M pension settlement gain; Q2 2022 also had higher interest and tax expense.
- On a non-GAAP basis, adjusted EBITDA excluding Russia increased to $105.0M from $92.8M in Q2, and the corresponding margin expanded to 16.6% from 15.8%.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance was provided. Management described long-term organic growth opportunities through product development, customer expansion, acquisitions and its business-excellence system. It expects annual standalone public-company costs of approximately $35M and 2022 interest expense of $35M–$40M; these are estimates, not formal earnings guidance.
- Management stated that cash flows from operations and available liquidity should be adequate for the next 12 months. It expects cash needs for working capital, acquisitions, capital expenditures, restructuring, asbestos costs and debt service.
- Russia represented approximately 4% of Q2 and 5% of first-half revenue. ESAB was evaluating a potential transition out of Russia; a disposition could require goodwill allocation and write-off, and could realize approximately $30M of cumulative currency translation loss. The company increased credit-loss allowances by about $4M for Russian and Ukrainian exposures.
- Supply constraints, labor and component shortages, freight and raw-material inflation, COVID-19 effects, foreign-exchange movements, and geopolitical uncertainty remain risks. A 1% interest-rate increase during Q2 would have increased interest expense by approximately $3M. Swaps entered after quarter-end hedge $600M of floating-rate debt; separate cross-currency swaps hedge part of the euro net investment.
- Asbestos liabilities were $277.6M, with related insurance assets and receivables totaling $241.9M. The company accrued estimated claims through 15 years; losses beyond that period were not estimable. Actual claims, insurance recoveries and insurer solvency could differ materially from estimates. Other ordinary-course litigation was not expected to have a material adverse effect, though adverse outcomes could be material.
- Restructuring charges were $4.6M in Q2 and $10.0M for the first half; separation costs were $3.5M and $7.1M, respectively. Q2 discontinued-operations loss was $1.9M after tax. A $3.0M quarterly dividend was paid July 18, 2022.
Important facts for investors to verify
- Assess standalone comparability: pre-separation allocations, contributed corporate entities and new public-company costs affect reported periods.
- Track whether pricing continues to offset input-cost inflation, and whether margin trends improve or deteriorate by segment.
- Monitor operating cash conversion, inventory and receivables, debt levels, interest expense and covenant headroom.
- Evaluate Russia exposure, any exit decision, and possible related goodwill or currency-translation charges.
- Review asbestos claim trends, insurance recoverability and the assumptions supporting the recorded liabilities.
- Distinguish GAAP results from management’s adjusted EBITA and EBITDA measures and review their reconciliations.