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MarketScreener Homepage  >  Equities  >  Nyse  >  Colfax Corporation    CFX

COLFAX CORPORATION

(CFX)
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COLFAX : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/06/2020 | 06:45am EST

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of
Colfax Corporation ("Colfax," "the Company," "we," "our," and "us") should be
read in conjunction with the Condensed Consolidated Financial Statements and
related footnotes included in Part I. Item 1. "Financial Statements" of this
Quarterly Report on Form 10-Q for the quarterly period ended July 3, 2020 (this
"Form 10-Q") and the Consolidated Financial Statements and related footnotes
included in Part II. Item 8. "Financial Statements and Supplementary Data" of
our Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019
Form 10-K") filed with the Securities and Exchange Commission (the "SEC") on
February 21, 2020.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS


Some of the statements contained in this Form 10-Q that are not historical facts
are forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"). We intend such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in Section 21E of the Exchange Act. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date this Form 10-Q is filed with the SEC. All
statements other than statements of historical fact are statements that could be
deemed forward-looking statements, including statements regarding: the impact of
the COVID-19 global pandemic, including the actions by governments, businesses
and individuals in response to the situation, on the global and regional
economies, financial markets, and overall demand for our products, projections
of revenue, profit margins, expenses, tax provisions and tax rates, earnings or
losses from operations, impact of foreign exchange rates, cash flows, pension
and benefit obligations and funding requirements, synergies or other financial
items; plans, strategies and objectives of management for future operations
including statements relating to potential acquisitions, compensation plans or
purchase commitments; developments, performance or industry or market rankings
relating to products or services; future economic conditions or performance; the
outcome of outstanding claims or legal proceedings including asbestos-related
liabilities and insurance coverage litigation; potential gains and recoveries of
costs; assumptions underlying any of the foregoing; and any other statements
that address activities, events or developments that we intend, expect, project,
believe or anticipate will or may occur in the future. Forward-looking
statements may be characterized by terminology such as "believe," "anticipate,"
"should," "would," "intend," "plan," "will," "expect," "estimate," "project,"
"positioned," "strategy," "targets," "aims," "seeks," "sees," and similar
expressions. These statements are based on assumptions and assessments made by
our management as of the filing date of this Form 10-Q in light of their
experience and perception of historical trends, current conditions, expected
future developments and other factors we believe to be appropriate. These
forward-looking statements are subject to a number of risks and uncertainties
and actual results could differ materially due to numerous factors, including
but not limited to the following:

• risks related to the impact of the COVID-19 global pandemic, including

actions by governments, businesses and individuals in response to the

situation, such as the scope and duration of the outbreak, the nature and

effectiveness of government actions and restrictive measures implemented

in response, material delays and cancellations of medical procedures,

supply chain disruptions, the impact on creditworthiness and financial

       viability of customers, and other impacts on the Company's business and
       ability to execute business continuity plans;



•      changes in the general economy, as well as the cyclical nature of the
       markets we serve;


• the significant turmoil in the commodity markets and decline in certain

       commodity prices, including oil, due to economic disruptions from the
       COVID-19 pandemic and various geopolitical events;


• our ability to identify, finance, acquire and successfully integrate

attractive acquisition targets;

• our exposure to unanticipated liabilities resulting from acquisitions;

• our ability and the ability of our customers to access required capital at

       a reasonable cost;


• our ability to accurately estimate the cost of or realize savings from our

restructuring programs;

• the amount of and our ability to estimate our asbestos-related liabilities;




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•      the solvency of our insurers and the likelihood of their payment for
       asbestos-related costs;


• material disruptions at any of our manufacturing facilities;



•      noncompliance with various laws and regulations associated with our

international operations, including anti-bribery laws, export control

       regulations and sanctions and embargoes;


• risks associated with our international operations, including risks from

       trade protection measures and other changes in trade relations;


• risks associated with the representation of our employees by trade unions

       and work councils;



• our exposure to product liability claims;

• potential costs and liabilities associated with environmental, health and

safety laws and regulations;

• failure to maintain, protect and defend our intellectual property rights;

• the loss of key members of our leadership team;



•      restrictions in our principal credit facility that may limit our
       flexibility in operating our business;


• impairment in the value of intangible assets;

• the funding requirements or obligations of our defined benefit pension

plans and other postretirement benefit plans;

• significant movements in foreign currency exchange rates;

• availability and cost of raw materials, parts and components used in our

       products;


• new regulations and customer preferences reflecting an increased focus on

environmental, social and governance issues, including new regulations

       related to the use of conflict minerals;


• service interruptions, data corruption, cyber-based attacks or network

security breaches affecting our information technology infrastructure;

• risks arising from changes in technology;

• the competitive environment in our industry;

• changes in our tax rates or exposure to additional income tax liabilities,

including the effects of the COVID-19 global pandemic and the U.S. Tax

Cuts and Jobs Act and the Coronavirus Aid, Relief, and Economic Security

       Act (the "CARES Act");


• our ability to manage and grow our business and execution of our business

       and growth strategies;


• the level of capital investment and expenditures by our customers in our

       strategic markets;



• our financial performance;



•      difficulties and delays in integrating the DJO acquisition or fully

realizing projected cost savings and benefits of the DJO acquisition; and



•      other risks and factors, listed in Item 1A. "Risk Factors" in Part I of
       our 2019 Form 10-K and in our subsequent quarterly reports on Form 10-Q,
       including this Form 10-Q.



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The effects of the COVID-19 pandemic, including actions by governments, businesses and individuals in response to it, may give rise to or amplify the risks associated with many of these factors.


Any such forward-looking statements are not guarantees of future performance and
actual results, developments and business decisions may differ materially from
those envisaged by such forward-looking statements. These forward-looking
statements speak only as of the date this Form 10-Q is filed with the SEC. We do
not assume any obligation and do not intend to update any forward-looking
statement except as required by law. See Part I. Item 1A. "Risk Factors" in our
2019 Form 10-K and Part II. Item 1A. "Risk Factors" in this Form 10-Q for a
further discussion regarding some of the reasons that actual results may be
materially different from those that we anticipate.


Overview

In February 2019, we completed our acquisition of DJO Global Inc. ("DJO") for $3.15 billion in cash. The acquisition of DJO has transformed Colfax by creating a new growth platform: Medical Technology.


On September 30, 2019, we completed the sale of our Air and Gas Handling
business for an aggregate purchase price of $1.8 billion, including $1.67
billion cash paid at closing, subject to certain adjustments pursuant to the
purchase agreement, and the assumption of certain liabilities and minority
interests. Accordingly, the results of operations for the Air and Gas Handling
segment have been excluded from the discussion of our results of operations for
all periods presented. Refer to Note 3, "Discontinued Operations" in the
accompanying Notes to Condensed Consolidated Financial Statements for more
information.

Based on the above, we now conduct our continuing operations through two segments: Fabrication Technology and Medical Technology, which also represent our reportable segments.

• Fabrication Technology - a global supplier of consumable products and

equipment for cutting, joining, and automated welding, as well as gas

control equipment, providing a wide range of products with innovative

          technologies to solve challenges in virtually any industry.


• Medical Technology - a leading provider of orthopedic solutions,

providing orthopedic devices, software and services spanning the full

continuum of patient care, from injury prevention to joint replacement

to rehabilitation.

Certain amounts not allocated to the two reportable segments and intersegment eliminations are reported under the heading "Corporate and other."


We have sales, engineering, administrative and production facilities throughout
the world. Through our reportable segments, we serve a global customer base
across multiple markets through a combination of direct sales and third-party
distribution channels. Our customer base is highly diversified in the medical
and industrial end markets.

Integral to our operations is Colfax Business System (CBS). CBS is our business
management system, combining a comprehensive set of tools and repeatable,
teachable processes that we use to create superior value for our customers,
shareholders and associates. Rooted in our core values, it is our culture. We
believe our management team's access to, and experience in, the application of
CBS is one of our primary competitive strengths.



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Results of Operations


The following discussion of Results of Operations addresses the comparison of
the periods presented. Our management evaluates the operating results of each of
its reportable segments based upon Net sales, Segment operating income, which
represents Operating income before Restructuring and other related charges and
European Union Medical Devices Regulation ("MDR") costs, and Adjusted EBITA as
defined in the "Non-GAAP Measures" section.

Items Affecting Comparability of Reported Results

The comparability of our operating results for the three and six months ended July 3, 2020 to the comparable 2019 periods is affected by the following additional significant items:

Recent Events


In December 2019, a novel coronavirus disease ("COVID-19") was first reported in
China. On March 11, 2020, due to worldwide spread of the virus, the World Health
Organization characterized COVID-19 as a pandemic. The COVID-19 global pandemic
has resulted in a widespread health crisis, and the resulting impact on
governments, businesses and individuals and actions taken by them in response to
the situation have resulted in widespread economic disruptions, significantly
affecting broader economies, financial markets, and overall demand for our
products.

The full impacts of the global emergence of COVID-19 on our business are
currently unknown and cannot be predicted. In an effort to protect the health
and safety of our employees, we have taken actions to adopt social distancing
policies at our locations around the world, including working from home,
reducing the number of people in our sites at any one time, and suspending
employee travel. In an effort to contain COVID-19 or slow its spread,
governments around the world have enacted measures, including periodically
closing businesses not deemed "essential," isolating residents to their homes,
limiting access to healthcare, curtailing activities including sporting events,
and practicing social distancing.

The Company implemented a broad range of temporary actions to mitigate the effects of lower sales levels including reducing salaries, furloughing and laying-off employees, significantly curtailing discretionary expenses, re-phasing of capital expenditures, reducing supplier purchase levels and / or prices, adjusting working capital practices and other measures.


As reflected in the discussions that follow, the impact of the pandemic and
actions taken in response to it have had a variety of impacts on our results of
operations for the second quarter of 2020. The most severe impact occurred in
the first month of the quarter with sales 44.5% lower than same month in the
prior year, but the impact eased in each subsequent month. Through the date of
this Form 10-Q, these impacts continued to ease. We expect these effects to
continue to a reduced extent until the pandemic fully subsides.

We continue to monitor the rapidly evolving situation and guidance from
international and domestic authorities, including national and local public
health authorities, and may take additional actions based on their
recommendations. In these circumstances, there may be developments outside our
control that require us to further adjust our operations. As such, given the
dynamic nature of this situation, the Company cannot reasonably estimate the
full impacts of COVID-19 on our financial condition, results of operations or
cash flows in the future.

Please see Part II. Items 1A. "Risk Factors" in this Form 10-Q for further discussion of the Company's risks relating to the COVID-19 pandemic.

Strategic Acquisitions


We complement our organic growth plans with strategic acquisitions. Acquisitions
can significantly affect our reported results, and we report the change in our
Net sales between periods both from existing and acquired businesses. The change
in Net sales due to acquisitions for the periods presented in this filing
represents the incremental sales as a result of acquisitions. On February 22,
2019, we completed the acquisition of DJO, creating a new growth platform in the
high-margin orthopedic solutions market.





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Foreign Currency Fluctuations


A significant portion of our Net sales, approximately 60% and 59% for the three
and six months ended July 3, 2020 respectively, were derived from operations
outside the U.S., with the majority of those sales denominated in currencies
other than the U.S. dollar. Because much of our manufacturing and employee costs
are outside the U.S., a significant portion of our costs are also denominated in
currencies other than the U.S. dollar. Changes in foreign exchange rates can
impact our results of operations and are quantified when significant. For the
six months ended July 3, 2020 compared to the six months ended June 28, 2019,
fluctuations in foreign currencies had an unfavorable impact on the change in
Net sales and Net income (loss) from continuing operations before income taxes
of approximately 4% and 16%, respectively. For the second quarter of 2020
compared to the second quarter of 2019, fluctuations in foreign currencies had
an unfavorable impact on the change in Net sales and Net income (loss) from
continuing operations before taxes of approximately 4% and 21%, respectively.
The changes in foreign exchange rates since December 31, 2019 also decreased net
assets by approximately 1% as of July 3, 2020.

Seasonality


Our European operations typically experience a slowdown during the July, August
and December vacation seasons. Sales in our Medical Technology segment typically
peak in the fourth quarter. However, we expect that the business impact caused
by the COVID-19 pandemic will distort the effects of historical seasonality
patterns.



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Non-GAAP Measures

Adjusted EBITA


Adjusted EBITA, a non-GAAP performance measure, is included in this report
because it is a key metric used by management to assess our operating
performance. Adjusted EBITA excludes from Net income (loss) from continuing
operations the effect of restructuring and other related charges, MDR costs,
acquisition-related intangible asset amortization and other non-cash charges,
and strategic transaction costs, as well as income tax expense (benefit),
interest expense, net and pension settlement loss. We also present Adjusted
EBITA margin, which is subject to the same adjustments as Adjusted EBITA.
Further, we present Adjusted EBITA (and Adjusted EBITA margin) on a segment
basis, where we exclude the impact of restructuring and other related charges,
MDR costs, strategic transaction costs, and acquisition-related amortization and
other non-cash charges from segment operating income. Adjusted EBITA assists
Colfax management in comparing its operating performance over time because
certain items may obscure underlying business trends and make comparisons of
long-term performance difficult, as they are of a nature and/or size that occur
with inconsistent frequency or relate to discrete restructuring plans that are
fundamentally different from the ongoing productivity improvements of the
Company. Colfax management also believes that presenting these measures allows
investors to view its performance using the same measure that the Company uses
in evaluating its financial and business performance and trends.

Non-GAAP financial measures should not be considered in isolation from, or as a
substitute for, financial information calculated in accordance with GAAP.
Investors are encouraged to review the reconciliation of these non-GAAP measures
to their most directly comparable GAAP financial measures. The following tables
set forth a reconciliation of Net income (loss) from continuing operations, the
most directly comparable GAAP financial measure, to Adjusted EBITA.

                                             Three Months Ended             

Six Months Ended

                                       July 3, 2020June 28, 2019

July 3, 2020June 28, 2019

                                                             (Dollars in 

millions)

Net income (loss) from continuing
operations (GAAP)                    $       (3.1 )     $         2.2     $        5.7$      (19.3 )
Income tax expense (benefit)                (30.1 )               6.2            (16.9 )            8.2
Interest expense, net(1)                     28.3                33.2             53.1             55.0
Restructuring and other related
charges(2)                                   11.2                26.6             22.2             37.4
MDR costs(3)                                  1.0                   -              1.9                -
Strategic transaction costs(4)                1.7                 2.5              2.6             55.8
Acquisition-related amortization and
other non-cash charges(5)                    36.1                56.6             71.9             80.4
Adjusted EBITA (non-GAAP)            $       45.1$       127.2$      140.6$      217.4
Net income (loss) margin from
continuing operations (GAAP)                 (0.5 )%              0.2 %            0.4 %           (1.2 )%
Adjusted EBITA margin (non-GAAP)              7.3  %             14.0 %            9.8 %           13.7  %



(1) The six months ended June 28, 2019 includes $0.8 million of debt
extinguishment charges in the first quarter of 2019.
(2) Restructuring and other related charges includes $0.9 million and $2.7
million of expense classified as Cost of sales on the Company's Condensed
Consolidated Statements of Operations for the three and six months ended July 3,
2020, respectively.
(3) Costs specific to compliance with medical device reporting regulations and
other requirements of the European Union Medical Device Regulation of 2017.
(4) Includes costs incurred for the acquisition of DJO.
(5) Includes amortization of acquired intangibles and fair value charges on
acquired inventory.












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The following tables set forth a reconciliation of operating income (loss), the most directly comparable financial statement measure, to Adjusted EBITA by segment for the three and six months ended July 3, 2020 and June 28, 2019.

                                             Three Months Ended July 3, 2020                                                   Six Months Ended July 3, 2020
                           Fabrication                                  Corporate and                      Fabrication                                 Corporate and
                           Technology           Medical Technology          other           Total          Technology          Medical Technology          other           Total
                                                                                          (Dollars in millions)
Operating income
(loss) (GAAP)         $           37.5        $          (26.9 )       $     (15.6 )$    (4.9 )$        103.8        $          (32.2 )       $     (29.6 )$     41.9
Restructuring and
other related
charges(1)                         6.1                     5.1                   -            11.2                8.9                    13.3                   -             22.2
MDR costs                            -                     1.0                   -             1.0                  -                     1.9                   -              1.9
Segment operating
income (loss)
(non-GAAP)                        43.6                   (20.8 )             (15.6 )           7.2              112.6                   (17.0 )             (29.6 )           66.0
Strategic transaction
costs                                -                       -                 1.7             1.7                  -                       -                 2.6              2.6
Acquisition-related
amortization and
other non-cash
charges                            8.8                    27.3                   -            36.1               17.7                    54.2                   -             71.9
Adjusted EBITA
(non-GAAP)            $           52.4        $            6.5         $     (13.8 )$    45.1$        130.3        $           37.2         $     (27.0 )$    140.6
Segment operating
income (loss) margin
(non-GAAP)                        10.5 %                 (10.1 )%                - %           1.2 %             12.0 %                  (3.4 )%                - %            4.6 %
Adjusted EBITA margin
(non-GAAP)                        12.6 %                   3.2  %                - %           7.3 %             13.9 %                   7.5  %                - %            9.8 %



(1) For the three and six months ended July 3, 2020, Restructuring and other
related charges in the Medical Technology segment includes $0.9 million and $2.7
million, respectively, of expense classified as Cost of sales on the Company's
Condensed Consolidated Statements of Operations.

                                           Three Months Ended June 28, 2019                                                Six Months Ended June 28, 2019
                          Fabrication                                Corporate and                      Fabrication                                  Corporate and
                          Technology         Medical Technology          other           Total          Technology         Medical Technology(1)         other           Total
                                                                                         (Dollars in millions)
Operating income
(loss) (GAAP)         $          76.9       $           (17.9 )     $     (17.5 )$    41.5$        143.2        $             (13.8 )     $     (85.6 )$    43.9
Restructuring and
other related charges             4.1                    22.5                 -            26.6                8.4                       29.0                 -            37.4
Segment operating
income (loss)
(non-GAAP)                       81.0                     4.6             (17.5 )          68.1              151.6                       15.3             (85.6 )          81.3
Strategic transaction
costs                               -                       -               2.5             2.5                  -                          -              55.8            55.8
Acquisition-related
amortization and
other non-cash
charges                           8.9                    47.7                 -            56.6               17.6                       62.7                 -            80.4
Adjusted EBITA
(non-GAAP)            $          89.9       $            52.3       $     (14.9 )$   127.2$        169.2        $              78.0       $     (29.8 )$   217.4
Segment operating
income margin
(non-GAAP)                       13.7 %                   1.5 %               - %           7.5 %             13.1 %                      3.5 %               - %           5.1 %
Adjusted EBITA margin
(non-GAAP)                       15.2 %                  16.5 %               - %          14.0 %             14.7 %                     17.7 %               - %          13.7 %


(1) The Medical Technology segment includes results from the acquisition date of February 22, 2019.



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Total Company

Sales


Net sales for the three and six months ended July 3, 2020 decreased as compared
with the three and six months ended June 28, 2019. The following table presents
the components of changes in our consolidated Net sales.
                                           Three Months Ended                Six Months Ended
                                      Net Sales(1)          %          Net Sales(1)          %
                                                          (Dollars in millions)
For the three and six months ended
June 28, 2019                        $      908.6$     1,592.6
Components of Change:
Existing Businesses(2)                     (253.2 )        (27.9 )%          (296.5 )       (18.6 )%
Acquisitions(3)                                 -              -  %           199.5          12.5  %
Foreign Currency Translation(4)             (35.0 )         (3.9 )%         

(58.9 ) (3.7 )%

                                           (288.2 )        (31.8 )%          (155.9 )        (9.8 )%
For the three and six months ended
July 3, 2020                         $      620.4$     1,436.7



(1) The six months ended June 28, 2019 reflects 126 days of sales, respectively,
from our Medical Technology segment, as the DJO acquisition was completed on
February 22, 2019. The increase in Net Sales for the year-to-date period through
February 22, 2020 is reflected in the Acquisitions line.
(2) Excludes the impact of foreign exchange rate fluctuations and acquisitions,
thus providing a measure of change due to factors such as price, product mix and
volume.
(3) Represents the incremental sales as a result of our acquisitions discussed
previously.
(4) Represents the difference between prior year sales valued at the actual
prior year foreign exchange rates and prior year sales valued at current year
foreign exchange rates.

The decrease in Net sales during the second quarter of 2020 compared to the
second quarter of 2019 is primarily attributable to the COVID-19 pandemic
including a $145.3 million decrease in our Fabrication Technology segment and a
$107.9 million decrease in our Medical Technology segment. Fluctuation of
foreign currency translation rates also had a negative impact of $35.0 million
during the quarter due largely to the strengthening of the U.S. dollar relative
to other currencies.

The decrease in Net sales during the six months ended July 3, 2020 compared to
the six months ended June 28, 2019 is attributed to the COVID-19 pandemic
including a $157.8 million decrease in our Fabrication Technology segment and a
$138.7 million decrease in our Medical Technology segment. These decreases are
partially offset by a $199.5 million increase in our Medical Technology
segment's sales from acquisitions, which represents the incremental reported
sales compared to the corresponding prior year period as a result of the
acquisition of DJO being completed on February 22, 2019. Fluctuation of foreign
currency translation rates had a negative impact of $58.9 million during the six
months ended July 3, 2020 due largely to the strengthening of the U.S. dollar
relative to other currencies.

Our Fabrication Technology segment had decreases from existing businesses as a
result of lower sales volume due to a significant decline in customer demand and
certain government-ordered facility closures in the quarter, both due to
COVID-19, partially offset by increases from new product initiatives and pricing
improvements. All of our facilities re-opened as of May. The trough of the
decline for the second quarter of 2020 occurred in April and sales sequentially
improved in May and June, although the adverse impact of the pandemic continued
at a reduced level. The regions most impacted were primarily the developed
regions, but we observed sequential improvements in each of these regions in May
and June. We expect our sales to recover as customer demand recovers, in-line
directionally with industrial GDP improvements and steel consumption; however,
we cannot predict the timing or extent of these improvements.

Our Medical Technology segment observed the most severe reduction in sales
during April 2020 due to a significant decline of elective surgical procedures,
cancellations of organized sports, and overall decrease in general population
activity levels caused by certain stay-at-home orders. Following the trough of
the decline in the second quarter of 2020 due to COVID-19 impact, sales
sequentially improved in May and June. In June, our surgical product sales
achieved single-digit growth compared to June 2019 after elective surgical
procedures resumed and the backlog of procedures was reduced. We cannot predict
the timing of the full

                                       32
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return to prior levels of sales and growth rates for all Medical Technology
product lines, which we expect to be primarily reliant on healthcare access,
elective surgeries, organized sports, general population activity levels, and
employment.

Operating Results

The following table summarizes our results of continuing operations for the
comparable periods.
                                         Three Months Ended                   Six Months Ended
                                   July 3, 2020      June 28, 2019     July 3, 2020     June 28, 2019
                                                         (Dollars in millions)
Gross profit                     $       241.1$       376.1$      589.3$      637.1
Gross profit margin                       38.9  %            41.4 %           41.0 %           40.0  %
Selling, general and
administrative expense           $       235.7$       307.9$      527.9$      555.8
Operating income (loss)          $        (4.9 )$        41.5$       41.9$       43.9
Operating income (loss) margin            (0.8 )%             4.6 %            2.9 %            2.8  %
Net income (loss) from
continuing operations            $        (3.1 )    $         2.2     $        5.7$      (19.3 )
Net income (loss) margin from
continuing operations                     (0.5 )%             0.2 %            0.4 %           (1.2 )%

Adjusted EBITA (non-GAAP) $ 45.1$ 127.2 $

  140.6     $      217.4
Adjusted EBITA Margin (non-GAAP)           7.3  %            14.0 %            9.8 %           13.7  %
Items excluded from Adjusted
EBITA:
Restructuring and other related
charges(1)                       $        11.2$        26.6$       22.2$       37.4
MDR costs                        $         1.0      $           -     $        1.9     $          -
Strategic transaction costs      $         1.7      $         2.5     $        2.6$       55.8
Acquisition-related amortization
and other non-cash charges       $        36.1$        56.6$       71.9$       80.4
Interest expense, net            $        28.3$        33.2$       53.1$       55.0
Income tax expense (benefit)     $       (30.1 )    $         6.2     $      (16.9 )$        8.2

(1) Restructuring and other related charges includes $0.9 million and $2.7 million of expense classified as Cost of sales on the Company's Condensed Consolidated Statements of Operations for the three and six months ended July 3, 2020, respectively.

Second Quarter of 2020 Compared to Second Quarter of 2019


Gross profit decreased $135.0 million during the second quarter of 2020 in
comparison to the second quarter of 2019, including a $66.3 million decrease in
our Fabrication Technology segment and a $68.7 million decrease in our Medical
Technology segment. The Gross profit decrease was attributable to lower sales
volume caused by COVID-19 impact, unfavorable foreign currency translation, and
to a lesser extent unfavorable production variances associated with lower
manufacturing volumes, partially offset by new product initiatives, favorable
freight costs, temporary manufacturing cost reduction actions, and a decrease in
inventory fair value step-up charges. Gross profit margin decreased primarily
due to a decline in higher Gross profit margin Medical Technology segment sales
as well as unfavorable volume-related production variances caused by lower
sales.

The $72.2 million decrease in Selling, general and administrative expense in the
second quarter of 2020 as compared to the second quarter of 2019 was mainly
driven by lower employee costs due to temporary cost reduction measures
implemented to mitigate the COVID-19 sales downturn, a decrease in sales
commissions resulting from lower sales, lower travel costs due to COVID-19
restrictions, and a $20.5 million decrease in acquisition-related amortization
and other non-cash charges due to finalization of the valuation of DJO
definite-lived intangible assets in the fourth quarter of 2019, partially offset
by a decrease in Medical Technology segment inventory step-up charges.
Restructuring and other related charges primarily decreased during the second
quarter of 2020 in comparison to the second quarter of 2019 mainly due to the
significance of the Medical Technology segment restructuring programs in 2019
following the DJO acquisition.

Interest expense, net in the second quarter of 2020 decreased by $4.9 million
compared to the second quarter of 2019, primarily attributable to lower interest
rates as well as an overall reduction of the size of the credit facility from
the December 2019 amendment.

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The effective tax rate for Loss from continuing operations during the second
quarter of 2020 was 90.5%, which was higher than the 2020 U.S. federal statutory
tax rate of 21% mainly due to the impact of U.S. tax credits and state taxes on
the forecasted rate and discrete tax benefits associated with the filing of
timely elected changes to U.S. Federal tax returns to credit rather than to
deduct foreign taxes and the realization of tax benefits associated with
effective settlements on uncertain tax positions. These favorable impacts were
offset by the impact of additional U.S. tax on international operations and
taxable foreign exchange gains. The effective tax rate for the second quarter of
2019 was 73.6%, which was higher than the 2019 U.S. federal statutory tax rate
of 21% mainly due to non-deductible deal costs and an aggregate discrete U.S.
tax expense due to a change in valuation allowance associated with our
acquisition of DJO.

Net income (loss) from continuing operations decreased slightly in the second
quarter of 2020 as compared to the second quarter of 2019 largely due to the
decremental impact of the COVID-19 pandemic, offset by our cost reduction
initiates to mitigate the loss in revenue, a discrete tax benefit recorded in
the current quarter, and a reduction of interest expense. Net income (loss)
margin from continuing operations decreased by 70 basis points during the second
quarter of 2020 in comparison to the second quarter of 2019 for the same reasons
that Net income (loss) from continuing operations decreased, including certain
unfavorable production variances and operating expenses which were partially
offset by cost reductions.

The lower Adjusted EBITA in the second quarter of 2020 as compared to the second
quarter of 2019 was primarily driven by the decremental impact of the COVID-19
pandemic, partially offset by a $14.4 million decrease in Restructuring and
other related charges and a $20.5 million decrease in Acquisition-related
amortization and other non-cash charges. Adjusted EBITA margin decreased by 670
basis points during the second quarter of 2020 in comparison to the second
quarter of 2019, mainly attributable to impacts of the COVID-19 pandemic.

Six Months Ended July 3, 2020 Compared to Six Months Ended June 28, 2019


The $47.8 million decrease in Gross profit during the six months ended July 3,
2020 in comparison to the six months ended June 28, 2019 included a $71.5
million decrease in our Fabrication Technology segment offset by a $23.7
million increase in our Medical Technology segment. Gross profit in our
Fabrication Technology segment decreased due to lower sales volume caused by the
COVID-19 pandemic and unfavorable foreign currency translation, partially offset
by new product initiatives and cost reductions. Gross profit in our Medical
Technology segment increased due to acquisition-related increases due to the
inclusion of six months of activity in 2020 as compared with four months in the
prior year. Improved Gross profit margin in the six months ended July 3, 2020
compared to six months ended June 28, 2019 was primarily attributed to higher
gross margin from our Medical Technology segment.

The $27.9 million decrease in Selling, general and administrative expense in the
six months ended July 3, 2020 as compared to the six months ended June 28, 2019
was mainly due to our temporary cost reduction program to reduce our second
quarter spending including temporarily reducing salaries, lowering discretionary
spending, and deferring other spending and a $53.2 million decrease in strategic
transaction costs, partially offset by DJO acquisition-related increases for the
inclusion of six months of activity in 2020 as compared with four months in the
prior year. The $8.5 million decrease in acquisition-related amortization and
other non-cash charges in the six months ended July 3, 2020 as compared to the
six months ended June 28, 2019 was due to finalization of the valuation of DJO
definite-lived intangible assets in the fourth quarter of 2019, partially offset
by a decrease in Medical Technology segment inventory step-up charges.
Restructuring and other related charges decreased during the six months ended
July 3, 2020 in comparison to the six months ended June 28, 2019 mainly due to
the significance of the Medical Technology segment restructuring programs in
2019 following the DJO acquisition.

Interest expense, net in the six months ended July 3, 2020 decreased by $1.9
million compared to the six months ended June 28, 2019, primarily attributable
to lower interest rates as well as an overall reduction of the size of the
credit facility from the December 2019 amendment.

The effective tax rate for Loss from continuing operations during the six months
ended July 3, 2020 was 151.3%, which was higher than the 2020 U.S. federal
statutory tax rate of 21% mainly due to the impact of U.S. tax credits and state
taxes on the forecasted rate and discrete tax benefits associated with the
filing of timely elected changes to U.S. Federal tax returns to credit rather
than to deduct foreign taxes, the impact of an enacted law change in India, and
the realization of tax benefits associated with effective settlements on
uncertain tax. These favorable impacts were offset by the impact of additional
U.S. tax on international operations and taxable foreign exchange gains. The
effective tax rate for the six months ended June 28, 2019 was (73.6)%, which

                                       34
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was lower than the 2019 U.S. federal statutory tax rate of 21% mainly due to
non-deductible transaction costs and an aggregate discrete U.S. tax expense due
to a change in valuation allowance associated with our acquisition of DJO.

Net income from continuing operations increased in the six months ended July 3,
2020 as compared to the Loss from continuing operations in the six months ended
June 28, 2019 largely due to the impact of a full six months of DJO activities
in 2020, a decrease in Strategic transaction costs, and a discrete tax benefits
recognized in the second quarter of 2020. These were offset by decreases in
Gross Profit from COVID-19 impacts, mitigated by the reductions in Selling,
general and administrative expense from our temporary cost reduction programs.
Net income (loss) margin from continuing operations increased by 160 basis
points during the six months ended July 3, 2020 in comparison to the six months
ended June 28, 2019 for the same reasons that Net income from continuing
operations increased.

The lower Adjusted EBITA in the six months ended July 3, 2020 as compared to the
six months ended June 28, 2019 was primarily driven by COVID-19 impacts offset
by the impact of a full six months of DJO activities in 2020 and the reductions
in Selling, general and administrative expense from our temporary cost reduction
programs. Adjusted EBITA margin decreased by 390 basis points during the six
months ended July 3, 2020 in comparison to the six months ended June 28, 2019,
mainly attributable to decreases in our Medical Technology segment Adjusted
EBITA margin.

Business Segments

As discussed further above, we report results in two reportable segments: Fabrication Technology and Medical Technology.

Fabrication Technology


We formulate, develop, manufacture and supply consumable products and equipment,
including cutting, joining, and automated welding products, as well as gas
control equipment. Our fabrication technology products are marketed under
several brand names, most notably ESAB, providing a wide range of products with
innovative technologies to solve challenges in virtually any industry. ESAB's
comprehensive range of welding consumables includes electrodes, cored and solid
wires and fluxes using a wide range of specialty and other materials, and
cutting consumables including electrodes, nozzles, shields and tips. ESAB's
fabrication technology equipment ranges from portable welding machines to large
customized automated cutting and welding systems. Products are sold into a wide
range of end markets, including infrastructure, wind power, marine, pipelines,
mobile/off-highway equipment, oil, gas, and mining.

The following table summarizes selected financial data for our Fabrication
Technology segment:
                                      Three Months Ended                     Six Months Ended
                                July 3, 2020       June 28, 2019     July 3, 2020      June 28, 2019
                                                       (Dollars in millions)
Net sales                     $        414.4$       592.7$       939.9$      1,153.1
Gross profit                  $        139.9$       206.2             328.7     $        400.2
Gross profit margin                     33.8 %             34.8 %            35.0 %             34.7 %
Selling, general and
administrative expense        $         96.3      $       125.2$       216.1$        248.6
Segment operating income      $         43.6      $        81.0$       112.6$        151.6
Segment operating income
margin                                  10.5 %             13.7 %            12.0 %             13.1 %
Adjusted EBITA (Non-GAAP)     $         52.4      $        89.9$       130.3$        169.2
Adjusted EBITA Margin
(Non-GAAP)                              12.6 %             15.2 %            13.9 %             14.7 %
Items excluded from Adjusted
EBITA:
Restructuring and other
related charges               $          6.1      $         4.1     $         8.9     $          8.4
Acquisition-related
amortization and other
non-cash charges              $          8.8      $         8.9     $        17.7     $         17.6



Net sales decreased $178.3 million in the second quarter of 2020 compared to the
second quarter of 2019. The decrease was primarily due to lower sales volumes as
well as a $33.1 million unfavorable foreign currency translation impact. The
24.5% decrease from existing businesses is primarily a result of lower sales
volume due to certain local government ordered facility

                                       35
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closures in the quarter and significant decline in customer demand due to
COVID-19, partially offset by increases from new product initiatives. All our
closed facilities have re-opened in May. The trough of the decline for the
second quarter of 2020 was observed in April and sales sequentially improved in
May and June, although the adverse impact of the pandemic continued at a reduced
level. The regions most impacted were primarily the developed regions, but we
observed sequential improvements in each of these regions in May and June. We
expect our sales to recover as customer demand recovers, in-line generally with
industrial GDP improvements and steel consumption; however, we cannot predict
the timing of these improvements.

Gross profit decreased in the second quarter of 2020 as compared to the second
quarter of 2019 mainly driven by lower sales volume caused by the COVID-19
pandemic, unfavorable foreign currency translation, and to a lesser extent
unfavorable production variances due to lower volumes, partially offset by new
product initiatives, favorable freight costs associated with lower shipping
volume, and improved pricing and product mix. Gross profit margin decreased by
100 basis points when compared to the same period in 2019, primarily due to
lower production volumes resulting in unfavorable production variances. Selling,
general and administrative expense decreased in the second quarter of 2020
compared to the second quarter of 2019 because of COVID-19-related cost
reduction measures including temporarily reducing salaries and lowering
discretionary spending. In summary, lower sales levels related to COVID-19
resulted in lower Gross profit, Segment operating income, and Adjusted EBITA
in the second quarter of 2020 compared to the second quarter of 2019.

Net sales decreased $213.2 million in the six months ended July 3, 2020 compared
to the six months ended June 28, 2019 primarily due to lower sales volumes
related to COVID-19 as well as a $55.5 million unfavorable foreign currency
translation impact. The decline in sales volume also contributed to the $71.5
million reduction in Gross profit over the same time period. Selling, general
and administrative expense decreased in the period because of temporary cost
reduction programs implemented to reduce spending in the second quarter as
outlined earlier. In summary, lower sales levels related to COVID-19 resulted in
lower Gross profit, Segment operating income, and Adjusted EBITA in the first
half of 2020 compared to the first half of 2019.


Medical Technology


We develop, manufacture and distribute high-quality medical devices and services
across the continuum of patient care from injury prevention to joint replacement
to rehabilitation after surgery, injury or from degenerative disease, enabling
people to regain or maintain their natural motion. Our products are used by
orthopedic specialists, spine surgeons, primary care physicians, pain management
specialists, physical therapists, podiatrists, chiropractors, athletic trainers
and other healthcare professionals. Our products primarily include orthopedic
braces, rehabilitation devices, footwear, surgical implants, and bone growth
stimulators.


                                       36
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The following table summarizes the selected financial data for our Medical
Technology segment:

                                          Three Months Ended                       Six Months Ended
                                                                                         From February 22, 2019
                                    July 3, 2020      June 28, 2019     July 3, 2020        to June 28, 2019
                                                              (Dollars in millions)
Net sales                         $       206.0$       315.9$      496.8      $          439.4
Gross profit                      $       101.2$       169.9$      260.6      $          236.9
Gross profit margin                        49.1  %            53.8 %           52.5  %               53.9 %
Selling, general and
administrative expense            $       123.9$       165.3$      282.2      $          221.6
Segment operating income (loss)   $       (20.8 )    $         4.6     $      (17.0 )    $           15.3
Segment operating income (loss)
margin                                    (10.1 )%             1.5 %           (3.4 )%                3.5 %

Adjusted EBITA (Non-GAAP) $ 6.5 $ 52.3 $

    37.2      $           78.0
Adjusted EBITA Margin (Non-GAAP)            3.2  %            16.5 %            7.5  %               17.7 %
Items excluded from Adjusted
EBITA:
Restructuring and other related
charges(1)                        $         5.1      $        22.5$       13.3      $           29.0
MDR costs                         $         1.0      $           -     $        1.9      $              -
Acquisition-related amortization
and other non-cash charges        $        27.3$        47.7$       54.2      $           62.7


(1) Restructuring and other related charges includes $0.9 million and $2.7 million of expense classified as Cost of sales on the Company's Condensed Consolidated Statements of Operations for the three and six months ended July 3, 2020, respectively.


Net sales and Gross Profit for our Medical Technology segment in the second
quarter of 2020 compared to the second quarter of 2019 decreased primarily due
to lower sales volumes as a result of COVID-19. Our Medical Technology segment
observed the most severe reduction in sales during April 2020 due to a
significant decline of elective surgical procedures, cancellations of organized
sports, and an overall decrease in general population activity levels caused by
certain stay-at-home orders. Following the trough of the decline in the second
quarter of 2020 due to the COVID-19 impact, sales sequentially improved in May
and June, although the adverse impact of the pandemic continued at a reduced
level during such time. Gross profit margins in the second quarter of 2020
compared to second quarter of 2019 declined as a result of a decrease in higher
margin elective surgery products and certain unfavorable production variances
due to lower volume, partially offset by inventory fair value adjustments.
Selling, general and administrative expense decreased in the second quarter of
2020 compared to the second quarter of 2019 due to actions to reduce employee
costs and discretionary spending, a decrease in sales commissions resulting from
lower sales, and a decrease in acquisition-related amortization of intangible
assets. Segment operating income, Adjusted EBITA, and related margins decreased
in the second quarter of 2020 compared to the second quarter of 2019 primarily
due to the significant decrease in sales volumes due to COVID-19, partially
offset by our cost reduction efforts. Restructuring and other related charges
decreased during the second quarter of 2020 in comparison to the second quarter
of 2019, primarily due to completing certain projects in earlier periods.

Net sales and Gross Profit for our Medical Technology segment in the six months
ended July 3, 2020 compared to the six months ended June 28, 2019 increased
primarily due to the inclusion of a six months of DJO activity in 2020 compared
to four months in 2019, partially offset by a decrease in sales volume as a
result of COVID-19. Gross profit increased due to the additional months of
activity as well as a decrease in inventory fair value charges of $16.8 million
in 2020, partially offset by a decrease due to lower sales volume. Gross profit
margins in the six months ended July 3, 2020 compared to the six months ended
June 28, 2019 declined as a result of product mix and certain unfavorable
production variances due to lower volume, offset by inventory fair value
adjustments. Selling, general and administrative expense increased in the six
months ended July 3, 2020 compared to the six months ended June 28, 2019 due to
the additional months of activity, partially offset by actions to reduce
employee costs and discretionary spending, a decrease in sales commissions
resulting from lower sales. Segment operating income, Adjusted EBITA, and
related margins decreased in the six months ended July 3, 2020 compared to the
six months ended June 28, 2019 due to the significant decrease in sales volumes
due to COVID-19, partially offset by our cost reduction efforts. Restructuring
and other related charges decreased during the second quarter of 2020 in
comparison to the second quarter of 2019, primarily due to completing certain
projects in earlier periods.



                                       37
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Liquidity and Capital Resources

Overview


We finance our capital and working capital requirements through a combination of
cash flows from operating activities, various borrowings and the occasional
issuances of equity. We expect that our primary ongoing requirements for cash
will be for working capital, acquisitions, capital expenditures, restructuring
programs, asbestos-related cash outflows, and debt service and required
amortization of principal. We believe we could raise additional funds in the
form of debt or equity if it were determined to be appropriate for strategic
acquisitions or other corporate purposes. Based on our expected cash flows from
operations, current cash positions, and contractually available borrowings under
our credit facility, we expect to have sufficient liquidity to fund working
capital needs and future growth over the next twelve months. At quarter-end, the
Company has a $66.4 million cash balance and $1.2 billion of capacity under its
credit agreement and other facilities.

Term Loan and Revolving Credit Facility


Our credit agreement (the "Credit Facility") by and among the Company, as the
borrower, certain U.S. subsidiaries of the Company, as guarantors, each of the
lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent,
Citizens Bank, N.A., as syndication agent, and the co-documentation agents named
therein consists of a $975 million revolving credit facility (the "Revolver")
and a Term A-1 loan in an aggregate principal amount of $825 million (the "Term
Loan"), each with a maturity date of December 6, 2024. The Revolver contains
a $50 million swing line loan sub-facility. On May 1, 2020, the Company entered
into an amendment to its Credit Facility (the "Amendment"). Refer to Note 10,
"Debt" in the accompanying Notes to Condensed Consolidated Financial Statements
for more information regarding the Amendment.

As of July 3, 2020, we are in compliance with the covenants under the Credit
Facility. As of July 3, 2020, the weighted-average interest rate of borrowings
under the Credit Facility was 1.68%, excluding accretion of original issue
discount and deferred financing fees, and there was $975 million of credit
available on the Revolver.

Other Indebtedness

In addition, we are party to various bilateral credit facilities with a borrowing capacity of $185.1 million. As of July 3, 2020, there were no outstanding borrowings under these facilities.


We are also party to letter of credit facilities with an aggregate capacity of
$401.8 million. Total letters of credit of $108.0 million were outstanding as of
July 3, 2020.

Equity Capital

In 2018, our Board of Directors authorized the repurchase of shares of our
Common stock from time-to-time on the open market or in privately negotiated
transactions. No repurchases of our Common stock have been made under this plan
since the third quarter of 2018. As of July 3, 2020, the remaining stock
repurchase authorization provided by our Board of Directors was $100.0 million.
The timing, amount, and method of shares repurchased is determined by management
based on its evaluation of market conditions and other factors. There is no term
associated with the remaining repurchase authorization.


                                       38
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Cash Flows


As of July 3, 2020, we had $66.4 million of Cash and cash equivalents, a
decrease of $43.2 million from $109.6 million as of December 31, 2019. The
following table summarizes the change in Cash and cash equivalents during the
periods indicated:
                                                               Six Months Ended
                                                       July 3, 2020        June 28, 2019
                                                            (Dollars in millions)
Net cash provided by operating activities           $           93.2     $  

10.4

Purchases of property, plant and equipment                     (50.4 )             (64.0 )
Proceeds from sale of property, plant and equipment              5.0        

3.3

Acquisitions, net of cash received                              (7.5 )          (3,147.8 )
Net cash used in investing activities                          (53.0 )          (3,208.5 )
Proceeds (repayments) from borrowings, net                     (67.8 )      

2,892.7

Payment for noncontrolling interest share
repurchase                                                         -               (93.1 )
Proceeds from prepaid stock purchase contracts                     -        

377.8

Other                                                           (9.6 )      

1.6

Net cash provided by (used in) financing activities            (77.4 )      

3,179.0

Effect of foreign exchange rates on Cash and cash
equivalents                                                     (6.1 )      

6.3

Decrease in Cash and cash equivalents               $          (43.2 )   $  

(12.8 )




Cash used in operating activities related to the discontinued operations of our
divested Air and Gas Handling business for the six months ended July 3, 2020 was
$6.4 million. Cash provided by operating activities related to the discontinued
operations of our divested Air and Gas Handling business for the six months
ended June 28, 2019 was $23.9 million. Cash used in investing activities related
to the discontinued operations our divested Air and Gas Handling business for
the six months ended June 28, 2019 was $19.3 million.

Cash flows from operating activities increased in the first half of 2020 versus
the comparable 2019 period due to changes in working capital, lower
restructuring outlays in 2020, and non-recurring strategic transaction costs in
2019. Cash flows from operating activities can fluctuate significantly from
period-to-period due to changes in working capital and the timing of payments
for items such as restructuring and asbestos-related costs. Changes in
significant operating cash flow items, inclusive of activities for our
discontinued operations, are discussed below.

• Net cash received or paid for asbestos-related costs, net of insurance

proceeds, including the disposition of claims, defense costs and legal

expenses related to litigation against our insurers, creates variability

in our operating cash flows. During the six months ended July 3, 2020, we

had net asbestos cash outflows of $1.5 million. During the six months

ended June 28, 2019, we had net asbestos cash outflows of $12.5 million.

• During the six months ended July 3, 2020 and June 28, 2019, cash payments

       of $25.5 million and $49.2 million, respectively, were made for our
       restructuring initiatives.


• Changes in net working capital also affected the operating cash flows for

the periods presented. We define working capital as Trade receivables, net

and Inventories, net reduced by Accounts payable and customer advances and

billings in excess of costs incurred. During the six months ended July 3,

       2020, net working capital provided cash of $59.8 million, excluding the
       impact of foreign exchange, due to lower sales and spending related to

COVID-19. During the six months ended June 28, 2019, net working capital

consumed cash of $82.0 million, excluding the impact of foreign exchange.

The use of cash included an estimated $40 million one-time effort to bring

DJO suppliers into payment terms consistent with our normal practices, as

       well as to eliminate a DJO accounts receivable factoring program. The
       remaining cash usage primarily related to increase in Net sales from
       existing businesses.



Cash flows used in investing activities during the six months ended July 3, 2020
mostly consists of purchases of property, plant and equipment. During the six
months ended June 28, 2019, cash flows used in investing activities included the
DJO acquisition.


                                       39
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Cash flows used in financing activities for the six months ended July 3, 2020
included a net increase in repayments on our Revolver. Cash flows provided by
financing activities for six months ended June 28, 2019 were impacted by
proceeds from borrowings on newly acquired debt and issuance of common stock in
conjunction with the DJO acquisition, partially offset by the repurchases of a
vast majority of the noncontrolling interest shares of a former Air and Gas
Handling subsidiary in South Africa.

Our Cash and cash equivalents as of July 3, 2020 include $62.7 million held in
jurisdictions outside the U.S. We reduced these levels $26.3 million in the
second quarter of 2020. Cash repatriation of non-U.S. cash into the U.S. may be
subject to taxes, other local statutory restrictions and minority owner
distributions.

Critical Accounting Policies


The methods, estimates and judgments that we use in applying our critical
accounting policies have a significant impact on our results of operations and
financial position. We evaluate our estimates and judgments on an ongoing basis.
Our estimates are based upon our historical experience, our evaluation of
business and macroeconomic trends and information from other outside sources, as
appropriate. Our experience and assumptions form the basis for our judgments
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may vary from what our management
anticipates, and different assumptions or estimates about the future could have
a material impact on our results of operations and financial position.

There have been no other significant additions to the methods, estimates and
judgments included in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Critical Accounting Policies" in our 2019
Form 10-K.

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