ESAB Corporation — Q1 2024 Form 10-Q
Reporting period: 13 weeks ended March 29, 2024; comparable period ended March 31, 2023. ESAB supplies fabrication technology, welding and cutting equipment and consumables, gas-control products, robotics and digital solutions. It reports Americas and EMEA & APAC segments.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Net sales | $689.7 million | $684.0 million |
| Gross profit / margin | $255.0 million / 37.0% | $247.4 million / 36.2% |
| Operating income | $110.7 million | $90.7 million |
| Continuing-operations net income | $62.9 million | $34.1 million |
| Net income attributable to ESAB | $60.0 million | $31.9 million |
| Diluted EPS from continuing operations | $1.00 | $0.54 |
| Operating cash flow | $44.5 million | $38.1 million |
Adjusted EBITDA, a non-GAAP measure, was $129.1 million, or 18.7% of sales, versus $118.0 million, or 17.2%. Excluding Russia, Core adjusted EBITDA was $123.2 million and its margin was 18.8%, compared with $112.7 million and 17.4%. The filing reports continuing-operations net income margin of 9.1%, versus 5.0%.
At March 29, cash and cash equivalents were $76.5 million, down from $102.0 million at year-end 2023. Long-term debt was $992.8 million (principal debt of $993.3 million); the weighted-average borrowing rate was 5.09%. Revolving-facility availability was $738 million, subject to covenants and other requirements. Net cash used in investing was $26.6 million, including $18.1 million for the Sager acquisition; net cash used in financing was $33.9 million. The filing does not present a current ratio or a separate free-cash-flow measure.
Changes and management commentary
- Sales grew 0.8% year over year. Organic growth at existing businesses contributed $16.6 million (2.4%); acquisitions added $1.0 million (0.1%), while currency translation reduced sales by $11.9 million (1.7%). Management attributed organic growth to higher volume and pricing.
- Gross margin expanded 80 basis points, which management attributed primarily to price and product mix, partly offset by unfavorable currency. SG&A declined $4.8 million, primarily from restructuring savings. Restructuring charges fell to $1.9 million from $9.4 million.
- Income tax expense was $18.5 million versus $37.0 million; the effective rate was 22.7% versus 52.0%. The prior-year rate included discrete tax costs, including a $10.9 million expense related to foreign earnings and an increase in uncertain tax positions following an adverse foreign court ruling.
- Q1 included a $12.2 million non-cash pension settlement loss. Net income also included a $1.3 million loss from discontinued operations, primarily asbestos-related activity, versus $0.9 million in the prior-year quarter.
- Americas sales were $296.0 million and Adjusted EBITDA was $54.1 million (18.3% margin); EMEA & APAC sales were $393.7 million and Adjusted EBITDA was $75.0 million (19.1% margin). EMEA & APAC Core adjusted EBITDA margin was 19.2%.
Liquidity, outlook and risks
Management expects operating cash flow to fund working-capital needs and states that available liquidity is adequate for operations over the next 12 months and thereafter. It expects ongoing cash requirements for working capital, acquisitions, capital expenditures, restructuring, asbestos-related payments and debt service. No specific revenue or earnings guidance was provided. Management expressed confidence in long-term organic growth and expects strategic acquisitions to contribute.
After quarter-end, on April 9, 2024, ESAB issued $700 million of 6.25% senior notes due April 15, 2029. It used proceeds to repay $588.8 million, all outstanding borrowings under its Term A-3 facility, and fees; it intended to apply remaining proceeds to revolving debt and general corporate purposes. On April 30, it agreed to acquire SUMIG for approximately $74 million cash, subject to approvals and customary closing conditions, with completion expected in the second half of 2024.
- Russia represented approximately 5% of Q1 revenue ($33.6 million) and approximately $4 million of net income. A potential exit could trigger allocation and disposal of goodwill and realization of an approximately $118 million cumulative translation loss. Geopolitical developments, sanctions and compliance obligations remain risks.
- Asbestos claims and insurance recovery estimates are uncertain. The balance sheet included $257.9 million of asbestos liabilities and $231.6 million of related insurance assets and receivables. The company estimates liabilities for the next 15 years; potential losses beyond that period are not currently estimable. Unresolved claims increased to 14,231 from 13,648 at the start of the quarter.
- Management estimated that a 1% interest-rate increase would have increased quarterly interest expense by approximately $6.9 million. A 10% depreciation in major currencies against the U.S. dollar would reduce equity by approximately $176 million. Foreign currency translation reduced Q1 sales by $11.9 million.
- Other cited exposures include cyclical industrial markets, raw-material and supply-chain costs, acquisition integration, pension obligations, litigation, and international regulatory and operational risks. The company reported compliance with credit-agreement covenants at quarter-end and no material changes to its previously disclosed risk factors.
Investor facts to verify
- Reconcile reported sales and earnings growth with foreign-exchange effects, price/volume trends, and the non-GAAP adjustments underlying Adjusted EBITDA and Core adjusted EBITDA.
- Assess the effect of the post-quarter $700 million note issuance on total debt, interest expense, and remaining revolving borrowings; quarter-end debt and cash do not reflect that transaction.
- Monitor progress, funding and integration risks for the proposed SUMIG acquisition and the recent Sager acquisition.
- Evaluate asbestos liability estimates, insurance recoverability and claim trends, including the unestimated exposure beyond the 15-year accrual horizon.
- Track Russia exposure and potential consequences of any disposition, including the translation loss and possible goodwill allocation.