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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)

10/29/2020 | 05:27am 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 October 2, 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 24, 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, 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 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;

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

•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 industries;


•changes in our tax rates, realizability of deferred tax assets, 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 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 or contribute 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 a wide range of industries.

•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 the 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 nine months ended October 2, 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.

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 or restricting employee travel. In an effort to contain
COVID-19 or slow its spread, governments around the world have enacted measures
in 2020, 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.

We implemented a broad range of temporary actions to mitigate the effects of
lower sales levels including temporarily 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 pandemic and actions taken in
response to it have had a variety of impacts on our results of operations during
2020. The most severe financial impact occurred in the second quarter, resulting
in 31.8% lower sales than the second quarter of 2019. We began observing a
recovery in the latter part of the second quarter, and it continued through the
third quarter with sales improving to a 4.8% decrease from the third quarter of
2019.

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, we 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
higher-margin orthopedic solutions market.





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Foreign Currency Fluctuations


A significant portion of our Net sales, approximately 57% and 58% for the three
and nine months ended October 2, 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
nine months ended October 2, 2020 compared to the nine months ended September
27, 2019, fluctuations in foreign currencies had an unfavorable impact on the
change in Net sales from continuing operations of approximately 3% and affected
Gross profit and Selling, general and administrative expenses by less than 2%.
For the third quarter of 2020 compared to the third quarter of 2019,
fluctuations in foreign currencies had an unfavorable impact on the change in
Net sales of approximately 2% and affected Gross profit and Selling, general and
administrative expenses by less than 1%. The changes in foreign exchange rates
since December 31, 2019 also decreased net assets by less than 1% as of
October 2, 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, the business impact caused by the COVID-19
pandemic may 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 our 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, acquisition-related intangible asset amortization and other non-cash
charges, and strategic transaction costs 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 and other initiatives that are fundamentally different from our ongoing
productivity improvements. Colfax management also believes that presenting these
measures allows investors to view its performance using the same measure that we
use in evaluating our 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                           Nine Months Ended
                                                                        September 27,                                September 27,
                                                 October 2, 2020             2019             October 2, 2020             2019
                                                                               (Dollars in millions)
Net income (loss) from continuing operations
(GAAP)                                          $         16.8          $   

3.8 $ 22.6 $ (15.5) Income tax expense (benefit)

                              19.5                 (1.4)                    2.6                  6.8
Interest expense, net(1)                                  25.6                 31.8                    78.6                 86.8
Pension settlement loss                                      -                 33.6                       -                 33.6
Restructuring and other related charges(2)                 6.3                 13.3                    28.5                 50.7
MDR and other(3)                                           2.6                    -                     4.5                    -
Strategic transaction costs(4)                             0.6                  0.9                     3.2                 56.7
Acquisition-related amortization and other
non-cash charges(5)                                       36.2                 43.7                   108.1                124.1
Adjusted EBITA (non-GAAP)                       $        107.7          $   

125.8 $ 248.2$ 343.2 Net income (loss) margin from continuing operations (GAAP)

                                          2.1  %               0.4  %                  1.0  %              (0.6) %
Adjusted EBITA margin (non-GAAP)                          13.4  %              14.9  %                 11.1  %              14.1  %


(1) The nine months ended September 27, 2019 includes $0.8 million of debt
extinguishment charges in the first quarter of 2019.
(2) Restructuring and other related charges includes $2.2 million and $4.9
million of expense classified as Cost of sales on our Condensed Consolidated
Statements of Operations for the three and nine months ended October 2, 2020,
respectively, and $3.5 million of expense classified as Cost of sales on our
Condensed Consolidated Statements of Operations for the three and nine months
ended September 27, 2019.
(3) Primarily related to 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 nine months ended October 2, 2020 and September 27,
2019.
                                                          Three Months Ended October 2, 2020                                                           Nine Months Ended October 2, 2020
                                                                                            Corporate and                             Fabrication             Medical            Corporate
                              Fabrication Technology             Medical Technology             other              Total              Technology             Technology          and other            Total
                                                                                                          (Dollars in millions)
Operating income (loss)
(GAAP)                      $              60.5                 $           16.5            $    (15.1)$   61.9          $         164.3          $     (15.7)$   (44.7)$  103.8
Restructuring and other
related charges(1)                          2.5                              3.8                     -               6.3                     11.4                 17.1                  -              28.5
MDR and other                                 -                              2.6                     -               2.6                        -                  4.5                  -               4.5
Segment operating income
(loss) (non-GAAP)                          63.1                             22.9                 (15.1)             70.8                    175.7                  5.9              (44.7)            136.9
Strategic transaction costs                   -                                -                   0.6               0.6                        -                    -                3.2               3.2
Acquisition-related
amortization and other
non-cash charges                            9.1                             27.1                     -              36.2                     26.8                 81.3                  -             108.1
Adjusted EBITA (non-GAAP)   $              72.2                 $           50.0            $    (14.5)$  107.7          $         202.5          $      87.2$   (41.5)$  248.2
Segment operating income
margin (non-GAAP)                          12.8      %                       7.3    %                -  %            8.8  %                  12.3  %               0.7  %               -  %            6.1  %
Adjusted EBITA margin
(non-GAAP)                                 14.7      %                      15.9    %                -  %           13.4  %                  14.1  %              10.7  %               -  %           11.1  %


(1) For the three and nine months ended October 2, 2020, Restructuring and other
related charges in our Medical Technology segment includes $2.2 million and $4.9
million, respectively, of expense classified as Cost of sales on our Condensed
Consolidated Statements of Operations.
                                                     Three Months Ended September 27, 2019                                                         

Nine Months Ended September 27, 2019

                                 Fabrication                                        Corporate and                              Fabrication                    Medical              Corporate
                                 Technology              Medical Technology             other              Total               Technology                  Technology(1)           and other            Total
                                                                                                           (Dollars in millions)
Operating income (loss)
(GAAP)                      $         68.4              $           13.7            $    (14.3)$   67.9$        211.6                 $           -            $   (99.9)$  111.7
Restructuring and other
related charges(2)                     4.6                           8.7                     -              13.3                    13.0                          37.8                    -              50.7
Segment operating income
(loss) (non-GAAP)                     73.0                          22.5                 (14.3)             81.2                   224.6                          37.8                (99.9)            162.5
Strategic transaction costs              -                             -                   0.9               0.9                       -                             -                 56.7              56.7
Acquisition-related
amortization and other
non-cash charges                       9.2                          34.5                     -              43.7                    26.9                          97.2                    -             124.1
Adjusted EBITA (non-GAAP)   $         82.2              $           56.9            $    (13.4)$  125.8$        251.4$       135.0$   (43.2)$  343.2
Segment operating income
margin (non-GAAP)                     13.5      %                    7.3    %                -  %            9.6  %                 13.3      %                    5.1    %               -  %            6.7  %
Adjusted EBITA margin
(non-GAAP)                            15.2      %                   18.5    %                -  %           14.9  %                 14.9      %                   18.1    %               -  %           14.1  %


(1) Our Medical Technology segment includes results from the acquisition date of
February 22, 2019.
(2) Restructuring and other related charges includes $3.5 million of expense
classified as Cost of sales on our Condensed Consolidated Statements of
Operations for the three and nine months ended September 27, 2019.

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Total Company

Sales

Net sales decreased for the three and nine months ended October 2, 2020 as compared with the three and nine months ended September 27, 2019. The following table presents the components of changes in our consolidated Net sales.

                                                     Three Months Ended                        Nine Months Ended
                                               Net Sales                %              Net Sales(1)              %
                                                                        (Dollars in millions)
For the three and nine months ended
September 27, 2019                           $     846.5$  2,439.1
Components of Change:
Existing Businesses(2)                             (27.4)                (3.2) %           (323.9)               (13.3) %
Acquisitions(3)                                        -                    -  %            199.5                  8.2  %
Foreign Currency Translation(4)                    (13.2)                (1.6) %            (72.1)                (3.0) %
                                                   (40.6)                (4.8) %           (196.5)                (8.1) %
For the three and nine months ended October
2, 2020                                      $     805.9$  2,242.6


(1) The nine months ended September 27, 2019 reflects 217 days of sales 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.

Net sales decreased in the third quarter of 2020 compared with the prior year
period, primarily due to the COVID-19 pandemic. Our Fabrication Technology
segment decreased $31.6 million, slightly offset by a $4.2 million increase in
our Medical Technology segment, primarily due to the growth in our
Reconstructive product group from the resumption of elective surgical
procedures, as well as nonrecurring sales of personal protective equipment
("PPE") in our Prevention and Rehabilitation product group. The strengthening of
the U.S. dollar relative to other currencies caused a $13.2 million currency
translation negative impact.

Net sales decreased in the nine months ended October 2, 2020 compared to the
prior year period, primarily due to the COVID-19 pandemic. Our Fabrication
Technology segment decreased $189.4 million and our Medical Technology segment
decreased $134.5 million for existing businesses, partially offset by the $199.5
million increase from two additional months of acquisition sales in our Medical
Technology segment, 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. The strengthening of the U.S. dollar relative to
other currencies caused a $72.1 million currency translation negative impact.


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Operating Results
The following table summarizes our results of continuing operations for the
comparable periods.
                                                       Three Months Ended                              Nine Months Ended
                                                                                                                     September 27,
                                           October 2, 2020         September 27, 2019         October 2, 2020             2019
                                                                            (Dollars in millions)
Gross profit                              $        344.1          $           368.1          $        933.4$   1,005.2
Gross profit margin                                 42.7  %                    43.5  %                 41.6  %              41.2  %
Selling, general and administrative
expense                                   $        278.1          $         

290.5 $ 806.0$ 846.3 Operating income (loss)

                   $         61.9          $         

67.9 $ 103.8$ 111.7 Operating income (loss) margin

                       7.7  %                     8.0  %                  4.6  %               4.6  %
Net income (loss) from continuing
operations                                $         16.8          $         

3.8 $ 22.6 $ (15.5) Net income (loss) margin from continuing operations

                                           2.1  %                     0.4  %                  1.0  %              (0.6) %
Adjusted EBITA (non-GAAP)                 $        107.7          $         

125.8 $ 248.2$ 343.2 Adjusted EBITA Margin (non-GAAP)

                    13.4  %                    14.9  %                 11.1  %              14.1  %
Items excluded from Adjusted EBITA:
Restructuring and other related
charges(1)                                $          6.3          $         

13.3 $ 28.5 $ 50.7 MDR and other

                             $          2.6          $         

- $ 4.5 $ - Strategic transaction costs

               $          0.6          $             0.9          $          3.2          $      56.7
Acquisition-related amortization and
other non-cash charges                    $         36.2          $            43.7          $        108.1$     124.1
Pension settlement loss                   $            -          $            33.6          $            -          $      33.6

Interest expense, net                     $         25.6          $        

31.8 $ 78.6 $ 86.8 Income tax expense (benefit)

              $         19.5          $         

(1.4) $ 2.6 $ 6.8



(1) Restructuring and other related charges includes $2.2 million and $4.9
million of expense classified as Cost of sales on our Condensed Consolidated
Statements of Operations for the three and nine months ended October 2, 2020,
respectively, and $3.5 million of expense classified as Cost of sales on our
Condensed Consolidated Statements of Operations for the three and nine months
ended September 27, 2019.

Third Quarter of 2020 Compared to Third Quarter of 2019


Gross profit decreased $24.0 million in the third quarter of 2020 compared with
the prior year period due to a $20.1 million decrease in our Fabrication
Technology segment and a $3.8 million decrease in our Medical Technology
segment. The Gross profit decrease was attributable to lower sales volume,
higher freight costs, and production inefficiencies related to the COVID-19
pandemic and unfavorable foreign currency translation, partially offset by new
product initiatives and temporary cost reductions. Gross profit margin declined
as a result of the lower sales and COVID-19 inefficiencies.

Selling, general and administrative expense decreased $12.4 million due to a
$7.5 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, as well as temporary expense reductions.
Restructuring and other related charges decreased due to completing certain
Medical Technology segment restructuring programs.

Interest expense, net decreased $6.2 million, 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 Net income (loss) from continuing operations during
the third quarter of 2020 was 53.7%, which was higher than the 2020 U.S. federal
statutory tax rate of 21%, mainly due to the net impact of additional U.S. tax
on international operations, withholding taxes, and certain non-deductible
expenses. These unfavorable impacts were partially offset by the impact of U.S.
tax credits, a benefit from U.S. state tax losses, and the realization of tax
benefits associated with effective settlements on uncertain tax positions. The
effective tax rate for the third quarter of 2019 was (56.0)%, which was
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lower than the 2019 U.S. federal statutory tax rate of 21% mainly due to a
discrete tax benefit associated with the enactment of tax law changes in a
European jurisdiction offset in part by losses in certain jurisdictions where a
tax benefit was not expected to be recognized in 2019, and non-deductible deal
costs.

Net income (loss) from continuing operations increased in the third quarter of
2020 compared with the prior year period due to the pension settlement loss
incurred in the third quarter of 2019 and a reduction of interest expense,
offset by the impact of the COVID-19 pandemic. Net income (loss) margin from
continuing operations increased by 170 basis points due to the aforementioned
factors. Adjusted EBITA and related margins decreased primarily due to the
impact of the COVID-19 pandemic, partially offset by structural and temporary
reductions in Selling, general and administrative expense.

Nine Months Ended October 2, 2020 Compared to Nine Months Ended September 27, 2019


Gross profit decreased $71.8 million in the nine months ended October 2, 2020
compared to the prior year period, due to a $91.6 million decrease in our
Fabrication Technology segment, partially offset by a $19.8 million increase in
our Medical Technology segment. Gross profit in our Fabrication Technology
segment decreased due to lower sales volume and unfavorable foreign currency
translation, partially offset by new product initiatives and temporary cost
reductions. Gross profit in our Medical Technology segment increased primarily
due to the inclusion of two additional months of activity, partially offset by
decreased sales volume, higher freight costs, and production inefficiencies
related to COVID-19. Gross profit margin improved slightly over the same period,
primarily attributable to including two additional months of results of our
Medical Technology segment in 2020 and temporary cost reductions, partially
offset by the lower sales volume.

Selling, general and administrative expense decreased $40.3 million mainly due
to a $53.4 million decrease in strategic transaction costs and temporary cost
reductions that peaked in the second quarter, all partially offset by two
additional months of results of our Medical Technology segment. Restructuring
and other related charges decreased by $22.2 million due to completing certain
Medical Technology segment restructuring programs.

Interest expense, net decreased by $8.2 million, primarily attributable to lower
interest rates and the December 2019 credit facility capacity reduction.
Additionally, interest expense decreased due to a lower average debt balance in
2020, as proceeds from the sale of the Air and Gas Handling business were used
to pay down debt during the fourth quarter of 2019.

The effective tax rate for Net income (loss) from continuing operations during
the nine months ended October 2, 2020 was 10.5%, which was lower than the 2020
U.S. federal statutory tax rate of 21% mainly due to the net impact of U.S. tax
credits, a benefit from U.S. state tax losses, a discrete tax benefit 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 positions. These favorable impacts were partially offset by the
impact of additional U.S. tax on international operations, withholding taxes,
and certain non-deductible expenses. The effective tax rate for the nine months
ended September 27, 2019 was (78.5)%, which was lower than the 2019 U.S. federal
statutory tax rate of 21% mainly due to losses in certain jurisdictions where a
tax benefit was not expected to be recognized in 2019, $16.7 million of
non-deductible deal costs, and an aggregate $9.2 million unfavorable discrete
U.S. income tax expense due to a change in valuation allowance and state tax
expense as a result of the DJO acquisition, offset in part by a discrete tax
benefit associated with the enactment of tax law changes in a European
jurisdiction.

Net income (loss) from continuing operations increased in the nine months ended
October 2, 2020 compared to the prior year period, largely due to the inclusion
of two additional months of results of our Medical Technology segment in 2020, a
decrease in strategic transaction costs, and the pension settlement loss
incurred during the nine months ended September 27, 2019. These were offset by a
decrease 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 for the same reasons that Net income from continuing operations
increased.

The lower Adjusted EBITA was driven by COVID-19 impacts, partially offset by the
inclusion of two additional months of results of our Medical Technology segment
in 2020 and the reductions in Selling, general and administrative expense from
our temporary cost reduction programs. Adjusted EBITA margin decreased by 300
basis points due primarily to decreases in our Medical Technology segment
Adjusted EBITA margin.

                                       36
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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                              Nine Months Ended
                                                                                                                     September 27,
                                           October 2, 2020         September 27, 2019         October 2, 2020             2019
                                                                            (Dollars in millions)
Net sales                                 $        491.5          $           539.2          $      1,431.4$   1,692.3
Gross profit                              $        174.0          $           194.1                   502.7          $     594.3
Gross profit margin                                 35.4  %                    36.0  %                 35.1  %              35.1  %
Selling, general and administrative
expense                                   $        110.9          $         

121.1 $ 327.0$ 369.7 Segment operating income

                  $         63.1          $         

73.0 $ 175.7$ 224.6 Segment operating income margin

                     12.8  %                    13.5  %                 12.3  %              13.3  %
Adjusted EBITA (non-GAAP)                 $         72.2          $         

82.2 $ 202.5$ 251.4 Adjusted EBITA margin (non-GAAP)

                    14.7  %                    15.2  %                 14.1  %              14.9  %
Items excluded from Adjusted EBITA:
Restructuring and other related charges   $          2.5          $             4.6          $         11.4          $      13.0
Acquisition-related amortization and
other non-cash charges                    $          9.1          $             9.2          $         26.8          $      26.9
Pension settlement loss                   $            -          $            33.6          $            -          $      33.6

Third Quarter of 2020 Compared to Third Quarter of 2019


Net sales in our Fabrication technology segment decreased $47.7 million in the
third quarter of 2020 compared with the prior year period due to a $16.1 million
unfavorable foreign currency translation impact, as well as a 5.9% decrease due
to a decline in customer demand driven by COVID-19, partially offset by new
product initiative sales. The COVID-19 impact was most severe early in the
second quarter, and we realized an approximate 19% sequential improvement in the
third quarter. Sales improved across our regions, most strongly in the
developing regions. Gross profit decreased, and Gross margin decreased 60 basis
points, in the third quarter of 2020 due to lower sales volume caused by
COVID-19, partially offset by new product initiatives and COVID-19-related cost
reduction measures. Selling, general and administrative expense decreased due to
lower discretionary spending and benefits from restructuring initiatives to
reduce costs. In summary, Segment operating income, Adjusted EBITA, and related
margins all declined due to lower sales levels related to COVID-19.

Nine Months Ended October 2, 2020 Compared to Nine Months Ended September 27, 2019


Net sales decreased $260.9 million in the nine months ended October 2, 2020
compared with the prior year period, due to lower sales volumes related to
COVID-19 and a $71.5 million unfavorable foreign currency translation impact.
Despite the $91.6 million reduction in Gross profit due to lower sales resulting
from COVID-19, Gross profit margin was maintained versus the prior year level
due to temporary cost reductions and restructuring benefits. Selling, general
and administrative expense
                                       37
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decreased in the period due to benefits from restructuring initiatives and temporary cost reduction programs. Lower sales levels related to COVID-19 resulted in a decline in Segment operating income, Adjusted EBITA, and related margins over the same period.



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.

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

                                                      Three Months Ended                                Nine Months Ended
                                                                    September 27,                                From February 22, 2019
                                             October 2, 2020             2019             October 2, 2020         to September 27, 2019
                                                                               (Dollars in millions)
Net sales                                   $        314.4$     307.3$        811.2          $         746.7
Gross profit                                $        170.2$     174.0$        430.7          $         410.9
Gross profit margin                                   54.1  %              56.6  %                 53.1  %                  55.0       %

Selling, general and administrative expense $ 152.1$ 155.1$ 434.3 $ 376.7 Segment operating income

                    $         22.9          $      

22.5 $ 5.9 $ 37.8 Segment operating income margin

                        7.3  %               7.3  %                  0.7  %                   5.1       %
Adjusted EBITA (non-GAAP)                   $         50.0          $      

56.9 $ 87.2 $ 135.0 Adjusted EBITA margin (non-GAAP)

                      15.9  %              18.5  %                 10.7  %                  18.1       %

Items excluded from Adjusted EBITA: Restructuring and other related charges(1) $ 3.8 $ 8.7 $ 17.1 $ 37.8 MDR and other

                               $          2.6          $         -          $          4.5          $             -
Acquisition-related amortization and other
non-cash charges                            $         27.1          $      

34.5 $ 81.3 $ 97.2



(1) Restructuring and other related charges includes $2.2 million and $4.9
million of expense classified as Cost of sales on the Company's Condensed
Consolidated Statements of Operations for the three and nine months ended
October 2, 2020, and $3.5 million of expense classified as Cost of sales on the
Company's Condensed Consolidated Statements of Operations for the three and nine
months ended September 27, 2019.

Third Quarter of 2020 Compared to Third Quarter of 2019


Net sales increased for our Medical Technology segment in the third quarter of
2020 compared with the prior year period due to greater organic growth including
approximately $7 million for personal protective equipment that is not expected
to recur. Our Medical Technology segment experienced a severe reduction in sales
in 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 government-ordered restrictions in response to
COVID-19. Sales improved throughout the remainder of the second quarter and in
the third quarter as elective surgical procedures resumed and the degree of
sporting and general activity increased. Third quarter Reconstructive product
line sales grew 9.3%, and Prevention & Rehabilitation sales declined 0.4%. Gross
profit and Gross profit margin declined in the third quarter of 2020 compared to
third quarter of 2019 due to freight and production inefficiencies related to
COVID-19. Selling, general and administrative expense decreased due to lower
acquisition-related amortization of intangible assets. Segment operating income
increased primarily due to the growth in organic sales and reduction of
acquisition-related amortization of intangible assets, partially offset by
freight and production inefficiencies caused
                                       38
--------------------------------------------------------------------------------

by COVID-19. Adjusted EBITA and related margins all declined for the reasons
noted above. Restructuring and other related charges decreased by $4.9 million
due to completing certain projects in earlier periods.

Nine Months Ended October 2, 2020 Compared to Nine Months Ended September 27, 2019


Net sales increased for our Medical Technology segment in the nine months ended
October 2, 2020 compared with the prior year period due to an additional two
months of acquisition sales, partially offset by a decrease in sales volume
related to COVID-19. Gross profit increased as a result of the aforementioned
factors and a $17.0 million decrease of inventory fair value charges. Gross
profit margin declined as a result of lower sales volume, higher freight, and
production inefficiencies related to COVID-19. Selling, general and
administrative expense also increased due to including two additional months of
sales, partially offset by temporary expense reductions. Segment operating
income, Adjusted EBITA, and related margins all declined as a result of the
aforementioned factors. Restructuring and other related charges decreased by
$20.7 million due to completing certain projects.

                                       39
--------------------------------------------------------------------------------

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 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 October 2, 2020, we were in compliance with the covenants under the Credit
Facility. As of October 2, 2020, the weighted-average interest rate of
borrowings under the Credit Facility was 1.91%, excluding accretion of original
issue discount and deferred financing fees, and there was $975 million of credit
available on the Revolver. During the third quarter of 2020, the Company made a
voluntary $40 million principal payment on the Term A-1 loan.

Other Indebtedness

In addition, we are party to various bilateral credit facilities with a borrowing capacity of $189.5 million. As of October 2, 2020, there were no outstanding borrowings under these facilities.


We are also party to letter of credit facilities with an aggregate capacity of
$390.2 million. Total letters of credit of $84.3 million were outstanding as of
October 2, 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 October 2, 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.

                                       40
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Cash Flows

As of October 2, 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:

                                                                             Nine Months Ended
                                                               October 2, 2020           September 27, 2019
                                                                           (Dollars in millions)
Net cash provided by operating activities                     $         173.1          $              65.7
Purchases of property, plant and equipment                              (81.6)                      (100.4)
Proceeds from sale of property, plant and equipment                       4.9                          7.5
Acquisitions, net of cash received                                       (7.5)                    (3,136.8)

Net cash used in investing activities                                   (84.1)                    (3,229.7)
Proceeds (repayments) from borrowings, net                             (116.1)                     2,811.1
Payment for noncontrolling interest share repurchase                        -                        (93.1)
Proceeds from prepaid stock purchase contracts                              -                        377.8

Other                                                                    (9.5)                        (4.9)
Net cash provided by (used in) financing activities                    (125.6)                     3,090.9
Effect of foreign exchange rates on Cash and cash equivalents            (6.6)                        (5.2)
Decrease in Cash and cash equivalents                         $         (43.2)         $             (78.3)



Cash used in operating activities related to the discontinued operations of our
divested Air and Gas Handling business for the nine months ended October 2, 2020
was $7.2 million. Cash provided by operating activities related to the
discontinued operations of our divested Air and Gas Handling business for the
nine months ended September 27, 2019 was $18.0 million. Cash used in investing
activities related to the discontinued operations of the divested Air and Gas
Handling business for the nine months ended September 27, 2019 was $27.5
million.

Cash flows from operating activities increased in the nine months ended October
2, 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, comparing the nine months ended October 2, 2020 with
the comparable prior year period, are discussed below.

•Year-to-date 2020 results include net asbestos outflows of $11.2 million versus
outflows of $18.5 million in 2019, all of which related to our discontinued
operations. These outflows represent disposition of claims, defense costs and
legal expenses related to litigation against our insurers, net of insurance
proceeds.

•Year-to-date payments for restructuring activities reduced from $65.5 million in 2019 to $31.4 million in 2020 as certain projects were completed.


•Year-to-date 2020 results include $44.6 million of inflows from working capital
due to lower sales and operational improvements. Results in the comparable prior
year period included a $91.0 million outflow, due to an increase in Net Sales,
an estimated $40 million one-time effort to bring DJO suppliers into payment
terms consistent with our normal practices, and the elimination of a DJO
accounts receivable factoring program. We define working capital as Trade
receivables, net and Inventories, net, both reduced by Accounts payable and
customer advances and billings in excess of costs incurred.

Cash flows used in investing activities during the nine months ended October 2,
2020 primarily consists of purchases of property, plant and equipment. During
the nine months ended September 27, 2019, cash flows used in investing
activities included the DJO acquisition.

                                       41
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Cash flows used in financing activities for the nine months ended October 2,
2020 included a net increase in repayments on our Revolver and Term Loan. Cash
flows provided by financing activities for nine months ended September 27, 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 October 2, 2020 include $50.7 million held
in jurisdictions outside the U.S. We reduced these levels by $12.1 million in
the third 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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