ESAB Corporation — Q1 2022 Form 10-Q
Reporting period: 13 weeks ended April 1, 2022; unaudited. ESAB was spun off from Colfax (renamed Enovis) on April 4 and began NYSE trading April 5. Historical statements are carve-out financials; certain corporate entities and liabilities were added in 2022, limiting comparability with 2021.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $647.9 million | $568.1 million | +14.0% |
| Gross profit / margin | $224.3 million / 34.6% | $199.8 million / 35.2% | Margin down 0.6 points |
| Operating income / margin | $83.6 million / 12.9% | $72.3 million / 12.7% | Income +15.7% |
| Continuing net income | $58.4 million | $58.5 million | Nearly flat |
| Net income attributable to ESAB | $55.4 million | $57.7 million | Down 3.9% |
| Diluted EPS | $0.93 total; $0.96 continuing | $0.96 total; $0.96 continuing | Total EPS includes discontinued loss |
| Operating cash flow | $16.1 million | $62.8 million | Down $46.8 million |
Sales gains were primarily price increases (about $82 million), with contributions from new products and volume; foreign exchange reduced reported sales by $21.4 million. Adjusted EBITA, a non-GAAP measure, rose to $100.3 million from $84.7 million, and its margin increased to 15.5% from 14.9%. Adjusted EBITDA rose to $109.3 million from $94.3 million. These measures exclude specified costs and should be considered alongside GAAP results.
Americas sales were $272.3 million, up from $226.2 million; segment operating income was $33.8 million versus $24.8 million. EMEA & APAC sales were $375.6 million versus $342.0 million; segment operating income was $55.1 million versus $50.6 million. Segment operating income is a non-GAAP measure as presented by the company.
Financial position and liquidity
At April 1, cash and cash equivalents were $56.6 million, current assets $1.048 billion, and current liabilities $652.4 million. Inventories were $462.5 million, up from $420.1 million at year-end 2021. No debt under the new credit facilities was outstanding at quarter-end; the facilities closed after quarter-end.
Operating cash flow fell mainly because working capital absorbed cash: receivables used $29.8 million and inventories used $41.9 million. Management attributed higher receivables and inventory to growth and supply-chain challenges. Capital expenditures were $5.9 million.
On April 4, ESAB incurred $1.2 billion of debt and paid a $1.2 billion dividend to Enovis as part of the separation. Borrowings comprised a $600 million 364-day term loan, a $400 million five-year term loan, and $200 million under a $750 million revolving facility. The loans carry floating rates; the company said it was evaluating options to reduce floating-rate exposure. Management expects 2022 interest expense of $35–$40 million and believes liquidity will be adequate for the next 12 months.
Changes, outlook, and risks
- Revenue growth was more than offset at the gross-margin level by inflation-related cost and pricing effects; consolidated gross margin declined 0.6 percentage points. Higher compensation, separation costs, and a roughly $4 million increase in receivables allowances also raised SG&A.
- Income tax expense increased to $25.7 million from $14.0 million; the effective tax rate rose to 30.6% from 19.3%, reflecting, among other factors, foreign-exchange gains and nondeductible expenses. Q1 included $3.6 million of separation costs and $5.3 million of restructuring charges.
- Management describes long-term organic growth opportunities and expects liquidity to support operations, investment, and acquisitions, but provided no specific sales or earnings forecast. It expects approximately $35 million annually in incremental standalone public-company costs, above historical allocated costs.
- Russia represented about 6% of Q1 sales, $5 million of net income, and 2% of net assets. ESAB was evaluating a possible transition out of Russia; a cumulative translation loss of about $100 million could be realized. The company increased receivables allowances by approximately $4 million for Russian and Ukrainian credit risks.
- Asbestos obligations inherited through the separation are classified as discontinued operations. At April 1, recorded asbestos liabilities totaled about $288.6 million, alongside about $246.2 million of insurance assets and receivables. Estimates cover claims management can reasonably project over 15 years; actual liabilities and insurance recoveries may differ materially. Q1 discontinued operations had a $2.0 million after-tax loss and used $4.6 million of operating cash.
- Other risks cited include supply-chain constraints, labor and freight challenges, inflation, COVID-19 impacts, foreign exchange, floating-rate debt, and the costs and execution demands of operating independently. Management says ordinary-course litigation is not expected to be material, while noting outcomes cannot be assured.
Key facts for investors to verify
- Post-separation debt balances, refinancing or repayment of the 364-day loan, interest costs, covenant headroom, and plans to manage floating-rate exposure.
- Whether pricing continues to offset input-cost inflation without further margin pressure, and whether working capital converts into cash.
- Actual standalone public-company costs compared with the approximately $35 million annual estimate, plus separation-related expenses.
- Financial and operational effects of any Russia exit, including potential realization of the approximately $100 million translation loss and customer-credit exposure.
- Development of asbestos claims, insurance recoverability, and the adequacy of recorded reserves; also note that carve-out accounting and added entities affect year-over-year comparability.