ENOVIS CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of our financial statements with a narrative from the perspective of Company's management. This MD&A is divided into four main sections:
•Overview
•Results of Operations •Liquidity and Capital Resources •Critical Accounting Policies The following MD&A should be read together with Part I, Item 1A. "Risk Factors" and the accompanying Consolidated Financial Statements and Notes to Consolidated Financial Statements included in Item 8. of this Form 10-K. The MD&A includes forward-looking statements. For a discussion of important factors that could cause actual results to differ materially from the results referred to in these forward-looking statements, see "Special Note Regarding Forward-Looking Statements."
Overview
Please see Part I, Item 1. "Business" for a discussion of Colfax's objectives and methodologies for delivering shareholder value.
Colfax conducts its operations through two operating segments: Fabrication Technology and Medical Technology.
•Fabrication Technology - a leading global supplier of consumable products and equipment for use in 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 leader in orthopedic solutions, providing 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 a global footprint, with production facilities inEurope ,North America ,South America ,Asia ,Australia andAfrica . 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 isCBS , our business management system.CBS is our culture and includes our values and behaviors, a comprehensive set of tools, and repeatable, teachable processes that we use to drive continuous improvement and create superior value for our customers, shareholders and associates. We believe that our management team's access to, and experience in, the application of theCBS methodology is one of our primary competitive strengths. 33 --------------------------------------------------------------------------------
Outlook
We believe that we are well positioned to grow our businesses organically over the long term by enhancing our product offerings and expanding our customer base. Our Medical Technology segment orthopedic business enjoys sustainable secular drivers such as aging populations that require increasing levels of medical care that should contribute to reduced cyclicality of our Company. In addition, we expect to see benefits from the shift to greater levels of outpatient care, including surgeries at ambulatory surgical centers (ASCs), through increased selling opportunities across our product lines. Our Fabrication Technology business mix is well balanced between sales in emerging markets and developed nations, and equipment and consumables. We intend to continue to utilize our strong global presence and worldwide network of salespeople and distributors to capitalize on growth opportunities by selling regionally-developed and/or marketed products and solutions throughout our served markets. Our geographic and end market diversity helps mitigate the effects from cyclical industrial market exposures. Given this balance, management does not use indices other than general economic trends and business initiatives to predict the overall outlook for the Company. Instead, our individual businesses monitor key competitors and customers, including to the extent possible their sales, to gauge relative performance and outlook for the future. OnMarch 4, 2021 , we announced our plan to separate our fabrication technology and specialty medical technology businesses into two differentiated, independent, and publicly-traded companies. The separation is intended to be structured in a tax-free manner and is targeted to be completed near the end of the first quarter of 2022. Completion of the separation is subject to, among other things, completion of financing and other transactions on satisfactory terms, other steps necessary to qualify the separation as a tax-free transaction, receipt of other regulatory approvals and final approval from the Colfax Board of Directors. There can be no assurance regarding the form and timing of the separation or its completion. The announcement did not have any classification impact to our Consolidated Financial Statements or segment reporting. We will report the fabrication technology business as discontinued operations upon the completion of the separation. On a continuing basis, we face a number of challenges and opportunities, including the successful integration of acquired businesses, application and expansion of ourCBS tools to improve business performance, and rationalization of assets and costs. We expect strategic acquisitions to contribute to our growth. We believe that the extensive experience of our leadership team in acquiring and effectively integrating acquisition targets should enable us to capitalize on future opportunities. The discussion that follows includes a comparison of our results of operations, liquidity and capital resources for the fiscal years endedDecember 31, 2021 and 2020. For a comparison of the Company's results of operations, liquidity and capital resources for the fiscal years endedDecember 31, 2020 and 2019, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 . 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 Pension settlement gains and losses, Restructuring and other related charges and European Union Medical Devices Regulation ("MDR") and related costs, and strategic transaction 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 year ended
The Separation
We currently report our operations through our Fabrication Technology and Medical Technology segments. These businesses operate in distinct markets, with unique business opportunities and investment requirements. As discussed above, onMarch 4, 2021 , we announced the intention to separate these businesses into two differentiated, independent publicly traded companies. The Chairman of our board of directors and co-founder of Colfax,Mitchell P. Rales , is expected to serve on the boards of directors of both companies. The costs incurred in conjunction with the Separation have increased our strategic 34 --------------------------------------------------------------------------------
transaction costs in 2021, which is recorded withing Selling, general and administrative expense on the Consolidated Statements of Operations.
We expect that the Separation will allow each company to: (1) optimize capital allocation for internal investment, mergers and acquisitions, and return of capital to shareholders; (2) tailor investment to its specific business profile and strategic priorities in the most efficient manner possible; (3) increase operating flexibility and resources to capitalize on growth opportunities in its respective markets; and (4) improve both investor alignment with its clear value proposition and the ability for investors to value it based on its distinct strategic, operational and financial characteristics. The Separation would also provide each company with an appropriately valued acquisition currency that could be used for larger, transformational transactions. Please see Part I. Item 1A. "Risk Factors" in this Form 10-K for further discussion of the Company's risks relating to the Separation
Impact of COVID-19
InDecember 2019 , a novel coronavirus disease ("COVID-19") was first reported inChina . OnMarch 11, 2020 , due to worldwide spread of the virus, theWorld 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. Our precautions were initially reduced in 2021 as restrictions were eased, however we have increased these efforts as variants have become more prevalent and in response to local directives. In an effort to contain COVID-19 or slow its spread, governments around the world have enacted measures throughout 2020 and 2021, including temporarily closing businesses not deemed "essential," isolating residents to their homes, limiting access to healthcare, curtailing activities including sporting events, and practicing social distancing. Increased access to vaccinations has contributed to slowing the spread of COVID-19 in certain jurisdictions, resulting in some or all restrictions being lifted in a number of jurisdictions around the world, allowing a return to more normal activity and operational levels during the first half of 2021. However, the emergence and subsequent spread of COVID-19 variants has led to the reinstatement of certain restrictions, which slowed the pace of recovery during the second half of 2021 and the beginning of the first quarter of fiscal 2022. During 2020, 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 sales volumes improved in the second half of 2020, these measures were removed. 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 and 2021. In 2020, the pandemic began to impact our financial results in March, with the most severe financial impact occurring in the second quarter. Subsequently, we observed a partial recovery in the second half of 2020. The surge in COVID-19 cases in the fourth quarter of 2020 contributed to certain jurisdictions putting further restrictions into place, which slowed recovery in the fourth quarter of 2020, and the impact continued into the beginning of the first quarter of 2021, after which sales volumes began to normalize through the second quarter of 2021. Recovery of sales volumes again slowed in the second half of 2021 due to increased restrictions in certain jurisdictions as a result of the growing spread of COVID-19 variants. The most severe headwind we faced was within DJO Reconstructive product sales in the third quarter of 2021 due to delays in elective surgery procedures. We continue to monitor the 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. Given the continued dynamic nature of this situation, including the rise, prevalence and severity of variants of the virus, we cannot reasonably estimate the full impacts of COVID-19 on our financial condition, results of operations or cash flows in the future. COVID-19 and other market dynamics have caused widespread supply chain challenges due to labor, raw material, and component shortages. As a result, we have experienced supply constraints in our businesses, which have led to cost inflation and logistics delays. We are taking actions in an effort to mitigate impacts to our supply chain, such as increasing certain inventory stocks to prevent product input shortfalls, however, we expect these pressures to continue. 35 --------------------------------------------------------------------------------
Please see Part I. Item 1A. "Risk Factors" in this Form 10-K 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 and other investments. 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 year endedDecember 31, 2021 presented in this filing represents the incremental sales in comparison to the portion of the prior period during which we did not own the business. During the year endedDecember 31, 2021 , we completed one acquisition in our Fabrication Technology segment and five acquisitions in our Medical Technology segment for net cash consideration of$206.5 million and equity consideration of$285.7 million . In the first quarter of 2021, our Medical Technology segment acquired Trilliant Surgical, a national provider of foot and ankle orthopedic implants. In the second quarter of 2021, our Medical Technology segment acquiredMedShape, Inc. , a provider of innovative surgical solutions for foot and ankle surgeons using its patented superelastic nickel titanium (NiTiNOL) and shape memory polymer technologies. These two acquisitions were completed for total consideration, net of cash received, of$204.1 million , subject to certain adjustments. TheTrilliant andMedShape acquisitions, along with the prior year acquisition of the Scandinavian Total Ankle Replacement ("STAR") System and Finger Joint Arthroplasty Portfolio from Stryker, created a new growth product portfolio in the foot and ankle surgical market. In the third quarter of 2021, our Medical Technology segment acquiredMathys AG Bettlach ("Mathys"), aSwitzerland -based company that develops and distributes innovative products for artificial joint replacement, synthetic bone graft solutions and sports medicine, for total acquisition equity consideration of$285.7 million of Colfax Common stock. The Mathys acquisition expands our reconstructive product portfolio with its complementary surgical solutions and broadens our Medical Technology segment reach outside theU.S. During the year endedDecember 31, 2020 , we completed five acquisitions in our Medical Technology segment for total consideration, net of cash received, of$67.5 million , subject to certain purchase price adjustments. This includes the fourth quarter acquisition ofLiteCure LLC , aU.S. leader in high-powered laser rehab products for human and veterinary medical applications for net cash consideration after purchase price adjustments of$39.6 million .
Global Operations
Our products and services are available worldwide. The manner in which our products and services are sold differs by region. During 2021, approximately 60% of our sales were shipped to locations outside of theU.S. , mostly from locations outside theU.S. Accordingly, we are affected by market demand, economic and political factors in countries throughout the world. Our ability to grow and our financial performance will be affected by our ability to address a variety of challenges and opportunities that are a consequence of our global operations, including efficiently utilizing our global sales, manufacturing and distribution capabilities, participating in the expansion of market opportunities in emerging markets, successfully completing global acquisitions and engineering innovative new product applications for end users in a variety of geographic markets. However, we believe that our geographic, end market, customer and product diversification may limit the impact that any one country or economy could have on our consolidated results.
Foreign Currency Fluctuations
A significant portion of our Net sales, approximately 59% for 2021, are derived from operations outside theU.S. , with the majority of those sales denominated in currencies other than theU.S. dollar. Because much of our manufacturing and employee costs are outside theU.S. , a significant portion of our costs are also denominated in currencies other than theU.S. dollar. Changes in foreign exchange rates can impact our results of operations and are quantified when significant. For the year endedDecember 31, 2021 compared to 2020, fluctuations in foreign currencies increased Net sales, Gross profit, and Selling, general and administrative expenses each by approximately 1%. 36 --------------------------------------------------------------------------------
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, and more recently supply chain disruptions, have distorted and may continue to distort the effects of historical seasonality patterns.
Material Costs
Our Fabrication Technology segment results may be sensitive to cost changes in our raw materials. Our largest material purchases are for components and raw materials including steel, iron, copper and aluminum. Historically, we have been generally successful in passing raw material cost increases on to our customers. In 2021, we have experienced increasing raw material costs due to inflation, which we have generally passed through to customers to maintain our profit but has resulted in some margin compression. Our principal raw materials and components for our Medical Technology segment are foam ethylene vinyl acetate, copolymer for our bracing and vascular products and cobalt chromium alloy, stainless steel alloys, titanium alloy and ultra high molecular weight polyethylene for our surgical implant products. Input cost inflation historically has not been a material factor to our gross margin, however inflation effects have increased during 2021 and are expected to continue to remain at elevated levels for at least the near term. In response, we have recently started enacting tactical price increases to certain market segments in line with industry trends.
As a company we seek to proactively manage this risk; future changes in component and raw material costs may adversely impact earnings or our margins.
Sales and Cost Mix
The gross profit margins within our Fabrication Technology segment vary in relation to the relative mix of many factors, including the type of product, the location in which the product is manufactured, the end market application for which the product is designed. The consumables product grouping generally has less production complexity and shorter production cycles than equipment products. Gross profit margins within our Medical Technology segment vary primarily based on the type of product and distribution channel. Reconstructive products tend to have higher margins than the prevention and recovery products.
The mix of sales was as follows for the periods presented:
Year Ended December 31,
2021 2020
Fabrication Technology Segment:
Equipment 31 % 31 %
Consumables 69 % 69 %
Medical Technology Segment (1):
Prevention & Recovery 72 % 77 %
Reconstructive 28 % 23 %
(1) The change in product mix from 2020 to 2021 within our Medical Technology
segment is partially due to recent acquisitions of businesses that primarily
sell reconstructive products.
37
--------------------------------------------------------------------------------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 from continuing operations the effect of restructuring and other related charges, MDR and related costs, acquisition-related intangible asset amortization and other non-cash charges, strategic transaction costs, income tax expense (benefit), pension settlement gains and losses, debt extinguishment charges, and interest expense, net. 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 and related costs, acquisition-related intangible asset amortization and other non-cash charges, strategic transaction costs, and pension settlement gains and losses 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 measures 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 withU.S. GAAP. Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparableU.S. GAAP financial measures. The following tables set forth a reconciliation of Net income from continuing operations, the most directly comparableU.S. GAAP financial measure, to Adjusted EBITA. Year Ended December 31, 2021 2020 (Dollars in millions) Net income from continuing operations (GAAP)$ 98.7 $ 64.1 Income tax expense (benefit) 66.7 (6.1) Interest expense, net 72.6 104.3 Pension settlement gain (11.2) - Debt extinguishment charges 29.9 - Restructuring and other related charges(1) 32.9 45.0 MDR and other costs(2) 7.9 6.9 Strategic transaction costs(3) 44.0 2.8 Acquisition-related amortization and other non-cash charges(4) 163.6 143.9 Adjusted EBITA (non-GAAP)$ 505.1 $ 361.0 Net income margin from continuing operations (GAAP) 2.6 % 2.1 % Adjusted EBITA margin (non-GAAP) 13.1 % 11.8 % (1) Restructuring and other related charges includes$5.2 million and$6.6 million of expense classified as Cost of sales on the Company's Consolidated Statements of Operations for the years endedDecember 31, 2021 and 2020, respectively. (2) Primarily related to costs specific to compliance with medical device reporting regulations and other requirements of the European Union MDR. These costs are classified as Selling, general and administrative expense on our Consolidated Statements of Operations. (3) For the year endedDecember 31, 2021 , Strategic transaction costs includes costs related to the Separation and certain transaction and integration costs related to recent acquisitions. For the year endedDecember 31, 2020 , Strategic transaction costs includes costs incurred for the acquisition of DJO. (4) Includes amortization of acquired intangibles and fair value charges on acquired inventory. 38 --------------------------------------------------------------------------------
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 years ended
Year Ended
Fabrication Medical Corporate and
Technology Technology other Total
(Dollars in millions)
Operating income (loss) (GAAP) $ 337.4 $ 31.3 $ (112.0) $ 256.6
Restructuring and other related charges(1) 19.0 13.9 - 32.9
MDR and other costs - 7.9 - 7.9
Segment operating income (loss) (non-GAAP) 356.3 53.1 (112.0) 297.5
Strategic transaction costs 2.9 3.8 37.3 44.0
Acquisition-related amortization and other non-cash charges
35.9 127.7 - 163.6
Adjusted EBITA (non-GAAP) $ 395.1 $ 184.6 $ (74.7) $ 505.1
Segment operating income margin (non-GAAP) 14.7 % 3.7 % - % 7.7 %
Adjusted EBITA margin (non-GAAP) 16.3 % 12.9 % - % 13.1 %
(1) Restructuring and other related charges in the Medical Technology segment
includes $5.2 million of expense classified as Cost of sales on the Company's
Consolidated Statements of Operations.
Year Ended
Fabrication Medical Corporate
Technology Technology and other Total
(Dollars in millions)
Operating income (loss) (GAAP) $ 224.4 $ (1.2) $ (60.8) $ 162.3
Restructuring and other related charges(1) 21.6 23.4 - 45.0
MDR and other costs - 6.9 - 6.9
Segment operating income (loss) (non-GAAP) 246.0 29.1 (60.8) 214.3
Strategic transaction costs - - 2.8 2.8
Acquisition-related amortization and other non-cash charges
36.3 107.6 - 143.9
Adjusted EBITA (non-GAAP) $ 282.3 $ 136.7 $ (58.0) $ 361.0
Segment operating income margin (non-GAAP) 12.6 % 2.6 % - % 7.0 %
Adjusted EBITA margin (non-GAAP) 14.5 % 12.2 % - % 11.8 %
(1) Restructuring and other related charges in the Medical Technology segment
includes $6.6 million of expense classified as Cost of sales on the Company's
Consolidated Statements of Operations.
39
--------------------------------------------------------------------------------Sales
Net sales from continuing operations increased to$3.9 billion in 2021 from$3.1 billion in 2020. The following table presents the components of changes in our consolidated Net sales. Net Sales $ % (Dollars in millions) For the year ended December 31, 2020 $ 3,070.8 Components of Change: Existing businesses(1) 610.9
19.9 %
Acquisitions(2) 141.6 4.6 %
Foreign currency translation(3) 31.0 1.0 %
783.5 25.5 %
For the year ended December 31, 2021 $ 3,854.3
(1) Excludes the impact of foreign exchange rate fluctuations and acquisitions,
thus providing a measure of growth due to factors such as price and volume.
(2) Represents the incremental sales in comparison to the portion of the prior
period during which we did not own the business.
(3) 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 increased during 2021 as compared to 2020 primarily due to the
recovery from the COVID-related sales downturn in 2020, as well as
inflation-related pricing increases, sales from acquisitions, and to a lesser
extent new product sales. Existing business sales of our Fabrication Technology
segment increased $456.6 million due to strong sales volumes, inflation-related
pricing increases and new product initiatives. In our Medical Technology
segment, existing business sales increased $154.3 million due to a recovery in
sales volumes from the decline related to COVID-19 and expansion in the
reconstructive product group from market outperformance and new product
launches. Net sales from acquisitions increased during 2021 as compared to 2020
primarily due to acquisitions in our Medical Technology segment that closed in
2021 and the fourth quarter of 2020. The weakening of the U.S. dollar relative
to other currencies, most notably the Euro, caused a $31.0 million favorable
currency translation impact.
40--------------------------------------------------------------------------------
Operating Results
The following table summarizes our results from continuing operations for the
comparable two-year period.
Year Ended December 31,
2021 2020
(Dollars in millions)
Gross profit $ 1,613.7 $ 1,288.1
Gross profit margin 41.9 % 41.9 %
Selling, general and administrative expense $ 1,329.4 $ 1,087.4
Operating income $ 256.6 $ 162.3
Operating income margin 6.7 % 5.3 %
Net income from continuing operations $ 98.7 $ 64.1
Net income margin from continuing operations 2.6 % 2.1 %
Adjusted EBITA (non-GAAP) $ 505.1 $ 361.0
Adjusted EBITA margin (non-GAAP) 13.1 % 11.8 %
Items excluded from Adjusted EBITA:
Restructuring and other related charges(1) $ 32.9 $ 45.0
MDR and other costs $ 7.9 $ 6.9
Strategic transaction costs $ 44.0 $ 2.8
Acquisition-related amortization and other non-cash charges $ 163.6 $ 143.9
Pension settlement gain $ (11.2) $ -
Interest expense, net $ 72.6 $ 104.3
Debt extinguishment charges $ 29.9 $ -
Income tax expense (benefit) $ 66.7 $ (6.1) (1) Restructuring and other related charges includes
2021 Compared to 2020
Gross profit increased$325.6 million during 2021 in comparison to 2020 due to a$151.5 million increase in our Fabrication Technology Segment and a$172.9 million increase in our Medical Technology segment. The Gross profit increase was primarily attributable to higher sales volumes and the related improved production efficiencies compared to 2020, during which sales volumes were negatively impacted by the COVID-19 pandemic. During 2021, Gross profit also increased due to acquisitions, new product initiatives and favorable foreign currency impacts, partially offset by increased supply chain and logistic costs in both segments. Gross profit margin was consistent with 2020, as margin improvements in both segments were offset by the dilutive impact of inflation, net of customer price increases, in our Fabrication Technology segment, which compressed margins. Selling, general and administrative expense increased$242.0 million primarily due to a$106.1 million increase in costs associated with acquisitions and the related integration costs from the newly acquired businesses, primarily within our Medical Technology segment, the cessation of prior year temporary cost reduction measures that were taken in response to COVID-19, and increased sales commissions from increased sales levels. A$41.2 million increase in strategic transaction costs related to the Separation also increased Selling, general and administrative expense during 2021. Restructuring and other related charges decreased by$12.1 million primarily due to the completion of certain restructuring programs in our Medical Technology segment. Additionally, during 2021, a pension settlement gain of$11.2 million was recognized when the independent trustees of a company pension plan agreed to merge that plan with another company pension plan and contribute its surplus assets. 41 -------------------------------------------------------------------------------- Debt extinguishment charges of$29.9 million were recorded in the second quarter of 2021 due to an early redemption of certain senior notes. Interest expense, net decreased by$31.7 million , primarily due to an overall reduction in debt balances during the current year as a result of the aforementioned redemption of senior notes. The effective tax rate for Net income from continuing operations during 2021 was 40.3%, which was higher than the 2021 U.S. federal statutory tax rate of 21% mainly due to the net impact ofU.S. tax on international operations, capital gains on current year transactions, certain non-deductible expenses, and withholding taxes. These unfavorable impacts were partially offset by the impact of international rates and the reduction of valuation allowances onU.S. and German net operating losses, and foreign tax credits. The effective tax rate for 2020 was (10.4)%, which was lower than the 2020 U.S. federal statutory tax rate of 21% mainly due to the net impact ofU.S. tax credits, a benefit fromU.S. state tax losses, a discrete tax benefit associated with the filing of timely elected change toU.S. Federal tax returns to credit rather than to deduct foreign taxes and reduction of valuation allowance onU.S. federal net operating losses. These favorable impacts were partially offset by the impact of additionalU.S. tax on international operations, withholding taxes, and certain non-deductible expenses. Net income from continuing operations increased in 2021 compared to 2020, largely due to the strong recovery from the prior year COVID-related sales downturn. The sales-related benefits from this recovery in 2021 were partially offset by increases in expenses attributable to the cessation of aforementioned temporary cost reductions implemented during 2020 in reaction to COVID-driven sales reductions, higher income tax expense, as well as increased supply chain and logistic costs. During 2021, we also incurred debt extinguishment charges, increased strategic transaction costs related to the Separation, and higher sales commissions related to greater sales, partially offset by a pension settlement gain. Net income margin from continuing operations increased by 50 basis points due to the aforementioned factors. Adjusted EBITA increased primarily due to the improved sales volumes and new product initiatives, partially offset by the aforementioned supply chain and logistic costs and sales commission increases, and the cessation of the aforementioned temporary cost reductions. Adjusted EBITA margin increased for the same reasons, partially offset by inflation-related pricing increases in our Fabrication Technology segment, as well as recent acquisitions in our Medical Technology segment which were dilutive to the margin, but are expected to be accretive in future years. 42 --------------------------------------------------------------------------------
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. ESAB also offers a range of
digital software and solutions to help its customers increase their
productivity, remotely monitor their welding operations and digitize their
documentation. Products are sold into a wide range of end markets, including
general industry, construction, infrastructure, transportation, energy,
renewable energy, and medical & life sciences.
The following table summarizes selected financial data for our Fabrication
Technology segment:
Year Ended December 31,
2021 2020
(Dollars in millions)
Net sales $ 2,428.1 $ 1,950.1
Gross profit $ 836.0 $ 684.5
Gross profit margin 34.4 % 35.1 %
Selling, general and administrative expense $ 479.7 $ 438.5
Segment operating income (non-GAAP) $ 356.3 $ 246.0
Segment operating income margin (non-GAAP) 14.7 % 12.6 %
Adjusted EBITA (non-GAAP) $ 395.1 $ 282.3
Adjusted EBITA margin (non-GAAP) 16.3 % 14.5 %
Items excluded from Adjusted EBITA:
Restructuring and other related charges $ 19.0 $ 21.6
Strategic transaction costs $ 2.9 $ -
Acquisition-related amortization and other non-cash charges $ 35.9
Net sales in our Fabrication Technology segment increased$478.0 million during 2021 compared to 2020 due to the strong recovery from the COVID-19 effects that impacted 2020, as well as new product initiatives, inflation-related pricing increases, and a$19.3 million favorable foreign currency translation impact. Gross profit increased$151.5 million in 2021 as a result of improved sales volumes and production efficiencies, while Gross profit margin decreased 70 basis points due to the impact of inflation-related pricing and cost increases, which compressed the margin. Selling, general and administrative expense increased in the period primarily due to the cessation of temporary cost reductions implemented in 2020, partially offset by benefits from restructuring initiatives. Segment operating income and Adjusted EBITA increased in 2021 compared to 2020 due to the improved sales volumes, partially offset by increased Selling, general and administrative costs. The related margins increased for the same reasons, partially offset by the aforementioned impact from inflation-related pricing and cost increases 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, surgeons, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers and other healthcare professionals. 43 --------------------------------------------------------------------------------
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:
Year Ended December 31,
2021 2020
(Dollars in millions)
Net sales $ 1,426.2 $ 1,120.7
Gross profit $ 777.7 $ 604.8
Gross profit margin 54.5 % 54.0 %
Selling, general and administrative expense $ 737.7 $ 589.3
Segment operating income (non-GAAP) $ 53.1 $ 29.1
Segment operating income margin (non-GAAP) 3.7 % 2.6 %
Adjusted EBITA (non-GAAP) $ 184.6 $ 136.7
Adjusted EBITA margin (non-GAAP) 12.9 % 12.2 %
Items excluded from Adjusted EBITA:
Restructuring and other related charges(1) $ 13.9 $ 23.4
MDR and other costs $ 7.9 $ 6.9
Strategic transaction costs $ 3.8 $ -Acquisition-related amortization and other non-cash charges $
127.7
(1) Restructuring and other related charges includes
Net sales increased for our Medical Technology segment during 2021 compared with 2020 due to a recovery in sales volumes from the COVID-19-related declines during 2020, as well as continued expansion in the reconstructive product group from market outperformance and new product launches, acquisition-related sales growth of$139.5 million and a favorable foreign currency translation impact of$11.7 million . After a surge of COVID-19 cases in the fourth quarter of 2020, which negatively impacted sales volumes early in 2021, sales volumes began normalizing late in the first quarter and through the second quarter of 2021. However, as a result of the increase in cases of COVID-19 variants during the second half of 2021, recovery slowed during this period, primarily due to a deceleration in elective surgical procedure volumes. Gross profit and Gross profit margins increased during 2021 compared to the prior year due to improved sales volumes and acquisition-related growth, partially offset by increased supply chain and logistic costs. Selling, general and administrative expense also increased primarily due to the additional costs from newly-acquired businesses and related integration costs, the cessation of temporary employee cost reductions implemented during 2020, and higher sales commissions in the current year. Segment operating income, Adjusted EBITA, and related margins all increased as a result of the aforementioned factors. Margin improvements were partially offset by the recent acquisitions, which were dilutive to the 2021 margins, but are expected to be accretive in future years. Restructuring and other related charges decreased by$9.5 million due to the completion of certain projects. 44 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Overview
We finance our long-term capital and working capital requirements through a combination of cash flows from operating activities, various borrowings and the issuances of equity. We expect that our primary ongoing requirements for cash will be for working capital, funding of acquisitions, Separation costs, capital expenditures, restructuring, 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 was determined to be appropriate for strategic acquisitions or other corporate purposes.
Equity Capital
OnMarch 19, 2021 , we completed the underwritten public offering of 16.1 million shares of our Common stock at a price to the public of$46.00 per share, resulting in net proceeds of$711.3 million , after deducting offering expenses and underwriters' discount and commissions. We used these proceeds to pay down certain of our senior notes, as discussed further below. OnFebruary 12, 2018 , our Board of Directors authorized the repurchase of up to$100 million of our Common stock from time-to-time on the open market or in privately negotiated transactions. No stock repurchases have been made under this plan since the third quarter of 2018. As ofDecember 31, 2021 , 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.
Term Loan and Revolving Credit Facility
Our credit agreement (the "Credit Facility") by and among the Company, as the borrower, certainU.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 initial aggregate principal amount of$825 million (the "Term Loan"), each with a maturity date ofDecember 6, 2024 . The Revolver contains a$50 million swing line loan sub-facility. Refer to Note 13, "Debt" in the accompanying Notes to the Consolidated Financial Statements for more information. As ofDecember 31, 2021 , we are in compliance with the covenants under the Credit Facility. As ofDecember 31, 2021 , the weighted-average interest rate of borrowings under the Credit Facility was 1.59%, excluding accretion of original issue discount and deferred financing fees, and there was$375 million undrawn capacity available on the Revolver.
Euro Senior Notes
In 2017, we issued senior unsecured notes with an aggregate principal amount of €350 million (the "Euro Notes"). The Euro Notes are due inApril 2025 , have an interest rate of 3.25% and are guaranteed by certain of our domestic subsidiaries (the "Guarantees"). The Euro Notes and the Guarantees have not been, and will not be, registered under the Securities Act of 1933, as amended (the "Securities Act"), or the securities laws of any other jurisdiction.
2022 Tangible Equity Unit ("TEUs")
In 2019, we issued$460 million in TEUs with a 5.75% interest rate, comprised of 4.6 million units at$100 per unit. Total cash of$447.7 million was received upon closing, comprised of$377.8 million TEU prepaid stock purchase contracts and$69.9 million of TEU amortizing notes dueJanuary 2022 . Subsequent toDecember 31, 2021 , all of the remaining TEU prepaid stock purchase contracts were converted to shares of common stock and the final quarterly cash installment on the TEU amortizing notes was paid. Refer to Notes 13 "Debt" and 14, "Equity" in the accompanying Notes to Consolidated Financial Statements for more information. 45
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2024 Notes and 2026 Notes
In 2019, we issued two tranches of senior notes with aggregate principal amounts of$600 million (the "2024 Notes") and$400 million (the "2026 Notes) to finance a portion of the DJO acquisition. The 2024 Notes were due onFebruary 15, 2024 and had an interest rate of 6.0%. The 2026 Notes are due onFebruary 15, 2026 and have an interest rate of 6.375%. The 2026 notes are guaranteed by certain of our domestic subsidiaries. We redeemed all of the outstanding 2024 Notes and$100 million of the outstanding principal amount of our 2026 Notes onApril 24, 2021 . Refer to Note 13, "Debt" in the accompanying Notes to the Consolidated Financial Statements for more information.
Other Indebtedness
In addition, we are party to various bilateral credit facilities with a
borrowing capacity of
We are also party to letter of credit facilities with an aggregate capacity of$277.3 million . Total letters of credit of$36.0 million were outstanding as ofDecember 31, 2021 .
We believe that our sources of liquidity are adequate to fund our operations for the next twelve months.
Cash Flows As ofDecember 31, 2021 , we had$719.4 million of Cash and cash equivalents, an increase of$618.3 million from the$101.1 million Cash and cash equivalents and restricted cash on hand as ofDecember 31, 2020 . See Note 2, "Summary of Significant Accounting Policies - Restricted Cash" in the accompanying Notes to the Consolidated Financial Statements for further information. The following table summarizes the change in Cash and cash equivalents during the periods indicated: Year Ended December 31, 2021 2020 (Dollars in millions) Net cash provided by operating activities$ 356.1 $ 301.9 Purchases of property, plant and equipment (104.2) (114.8) Proceeds from sale of property, plant and equipment 7.0 9.6 Acquisitions, net of cash received (223.3) (69.8) Net cash used in investing activities (320.5) (175.1) Repayments of debt, net (126.0) (122.9) Proceeds from issuance of common stock, net 745.2 3.5 Payment of debt extinguishment costs (24.4) - Deferred consideration payments and other (9.9) (12.3) Net cash provided by (used in) financing activities 584.9 (131.7) Effect of foreign exchange rates on Cash and cash equivalents (2.2) (3.8) Increase (decrease) in Cash and cash equivalents$ 618.3
Cash used in operating activities related to the discontinued operations of the divested Air and Gas Handling business for the years endedDecember 31, 2021 and 2020 was$9.1 million and$9.4 million , respectively. As a result of previous divestitures, we also retained certain asbestos-related contingencies and insurance coverages. 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. We had net cash inflows of$0.3 million during 2021 and net cash outflows of$2.2 million during 2020, which were net of$32.9 million and$79.6 million of reimbursements from insurance companies on our asbestos insurance asset balances, respectively. 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 pension funding, asbestos-related costs and restructuring. Changes in significant operating cash flow items are discussed below. •Funding requirements of our defined benefit plans, including pension plans and other post-retirement benefit plans, can vary significantly from period to period due to changes in the fair value of plan assets and actuarial assumptions. For 2021 and 2020, cash contributions for defined benefit plans were$7.3 million and$11.0 million , respectively. 46 --------------------------------------------------------------------------------
•During 2021 and 2020, cash payments of
•During 2021 and 2020, cash paid for strategic transaction costs were
•Year endedDecember 31, 2021 results include$78.5 million of outflows from working capital as a result of business recovery and growth increasing in inventory, accounts receivable and payable levels from the COVID-impacted 2020 year, as well as supply chain challenges in 2021 which have also impacted inventory levels. Year endedDecember 31, 2020 results included a$52.3 million inflow from working capital due to lower sales due to COVID-19 and operational improvements. 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 2021 includes$223.3 million of cash used for five acquisitions and three investments in our Medical Technology segment. Cash flows used by investing activities during 2020 included$69.8 million of cash used for five acquisitions and three investments in our Medical Technology segment. Refer to Note 5 "Acquisitions" in the accompanying Notes to the Consolidated Financial Statements for more information. Cash flows provided by financing activities in 2021 includes$126.0 million repayment of borrowings, net and$745.2 million proceeds from the issuance of common stock. Cash flows used in financing activities in 2020 included$122.9 million repayment of borrowings, net and$3.5 million proceeds from the issuance of common stock. Our Cash and cash equivalents as ofDecember 31, 2021 include$42.4 million held in jurisdictions outside theU.S. Cash repatriation of non-U.S. cash into theU.S. may be subject to taxes, other local statutory restrictions and minority owner distributions. 47 --------------------------------------------------------------------------------
Contractual Obligations
Debt
As ofDecember 31, 2021 , the Company's Term Loan and Revolver had principal amounts outstanding of$785 million and$600 million , respectively. There are no required principal payments due on the Term Loan or Revolver within 12 months. As ofDecember 31, 2021 , the Company had outstanding floating and fixed rate notes with varying maturities for an aggregate principal amount of$700.8 million , with$8.3 million payable within 12 months.
Interest Payments on Debt
As ofDecember 31, 2021 , future interest payments associated with the Term Loan and Revolver amount to$44.4 million and$33.9 million , respectively with$15.1 million and$11.6 million payable within 12 months. Future interest payments associated with the notes total$123.5 million with$32.7 million payable within 12 months. Variable interest payments are estimated using a static rate of 1.90%.
Operating Leases
The Company leases certain office spaces, warehouses, facilities, vehicles, and
equipment. As of
Purchase Obligations
As ofDecember 31, 2021 , the Company had other purchase obligations of$280.0 million , with$276.6 million payable within 12 months. Purchase obligations herein exclude open purchase orders for goods or services that are provided on demand as the timing of which is not certain. We have funding requirements associated with our pension and other post-retirement benefit plans as ofDecember 31, 2021 , which are estimated to be$8.6 million for the year endingDecember 31, 2022 . Other long-term liabilities, such as those for asbestos and other legal claims, employee benefit plan obligations, deferred income taxes and liabilities for unrecognized income tax benefits, are excluded from this disclosure since they are not contractually fixed as to timing and amount.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that provide liquidity, capital resources, market or credit risk support that expose us to any liability that is not reflected in our Consolidated Financial Statements atDecember 31, 2021 other than outstanding letters of credit of$36.0 million and unconditional purchase obligations with suppliers of$280.0 million . The Company and its subsidiaries have in the past divested certain of its businesses and assets. In connection with these divestitures, certain representations, warranties and indemnities were made to purchasers to cover various risks or unknown liabilities. We cannot estimate the potential liability, if any, that may result from such representations, warranties and indemnities because they relate to unknown and unexpected contingencies; however, we do not believe that any such liabilities will have a material adverse effect on our financial condition, results of operations or liquidity. 48 --------------------------------------------------------------------------------
Critical Accounting Policies
The methods, estimates and judgments 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. We believe the following accounting policies are the most critical in that they are important to the financial statements and they require the most difficult, subjective or complex judgments in the preparation of the financial statements. For a detailed discussion on the application of these and other accounting policies, see Note 2, "Summary of Significant Accounting Policies" in the accompanying Notes to Consolidated Financial Statements in this Form 10-K.
Asbestos Liabilities and Insurance Assets
Certain subsidiaries are each one of many defendants in a large number of lawsuits that claim personal injury as a result of exposure to asbestos from products manufactured with components that are alleged to have contained asbestos. Such components were acquired from third-party suppliers and were not manufactured by any of our subsidiaries, nor were the subsidiaries producers or direct suppliers of asbestos. The manufactured products that are alleged to have contained asbestos generally were provided to meet the specifications of the subsidiaries' customers, including theU.S. Navy . We sold our Fluid Handling business in 2017, and pursuant to the purchase agreement, we retained the asbestos-related contingencies and insurance coverages. However, as we did not retain an interest in the ongoing operations of the business subject to the contingencies, we have classified asbestos-related activity in our Consolidated Statements of Operations as part of Loss from discontinued operations, net of taxes. See Note 4, "Discontinued Operations" for further information. We have projected future asbestos-related liability costs with regard to pending and future unasserted claims based upon the Nicholson methodology. The Nicholson methodology is a standard approach used by experts and has been accepted by numerous courts. This methodology is based upon risk equations, exposed population estimates, mortality rates, and other demographic statistics. In applying the Nicholson methodology for each subsidiary we performed: (1) an analysis of the estimated population likely to have been exposed or claim to have been exposed to products manufactured by the subsidiaries based upon national studies undertaken of the population of workers believed to have been exposed to asbestos; (2) a review of epidemiological and demographic studies to estimate the number of potentially exposed people that would be likely to develop asbestos-related diseases in each year; (3) an analysis of the subsidiaries' recent claims history to estimate likely filing rates for these diseases and (4) an analysis of the historical asbestos liability costs to develop average values, which vary by disease type, jurisdiction and the nature of claim, to determine an estimate of costs likely to be associated with currently pending and projected asbestos claims. Our projections, based upon the Nicholson methodology, estimate both claims and the estimated cash outflows related to the resolution of such claims for periods up to and including the endpoint of asbestos studies referred to in item (2) above. It is our policy to record a liability for asbestos-related liability costs for the longest period of time that we can reasonably estimate. Accordingly, no accrual has been recorded for any costs which may be paid after the next 15 years. Projecting future asbestos-related liability costs is subject to numerous variables that are difficult to predict, including, among others, the number of future claims that might be received, the type and severity of the disease alleged by each claimant, dismissal rates, the lag time between filing and the settlement of claims, settlement values resulting in part from uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, including fluctuations in the timing of court actions and rulings, and the impact of potential changes in legislative or judicial standards, including potential tort reform. Furthermore, any projections with respect to these variables are subject to even greater uncertainty as the projection period lengthens. These trend factors have both positive and negative effects on the dynamics of asbestos litigation in the tort system and the related best estimate of our asbestos liability, and these effects do not move in linear fashion but rather change over multiple year periods. Accordingly, we monitor these trend factors over time and periodically assess whether an alternative forecast period is appropriate. Taking these factors into account and the inherent uncertainties, we believe that we can reasonably estimate the asbestos-related liability for pending and future claims that will be resolved in the next 15 years and have recorded that liability as our best estimate. While it is reasonably possible that the subsidiaries will incur costs after this period, we do not believe the reasonably possible loss or range of reasonably possible loss is estimable at the current time. Accordingly, no accrual has been recorded for any costs which may be paid after the next 15 years. Defense costs associated 49 --------------------------------------------------------------------------------
with asbestos-related liabilities as well as costs incurred related to litigation against the subsidiaries' insurers are expensed as incurred.
We assessed the subsidiaries' existing insurance arrangements and agreements, estimated the applicability of insurance coverage for existing and expected future claims, analyzed publicly available information bearing on the current creditworthiness and solvency of the various insurers, and employed such insurance allocation methodologies as we believed appropriate to ascertain the probable insurance recoveries for asbestos liabilities. The analysis took into account self-insurance retentions, policy exclusions, pending litigation, liability caps and gaps in coverage, existing and potential insolvencies of insurers as well as how legal and defense costs will be covered under the insurance policies. Each subsidiary has separate insurance coverage acquired prior to our ownership of each independent entity. In our evaluation of the insurance asset, we use differing insurance allocation methodologies for each subsidiary based upon the applicable law pertaining to the affected subsidiary. Management's analyses are based on currently known facts and a number of assumptions. However, projecting future events, such as new claims to be filed each year, the average cost of resolving each claim, coverage issues among layers of insurers, the method in which losses will be allocated to the various insurance policies, interpretation of the effect on coverage of various policy terms and limits and their interrelationships, the continuing solvency of various insurance companies and collectability of claims tendered, the amount of remaining insurance available, as well as the numerous uncertainties inherent in asbestos litigation could cause the actual liabilities and insurance recoveries to be higher or lower than those projected or recorded which could materially affect our financial condition, results of operations or cash flow.
See Note 18, "Commitments and Contingencies" in the accompanying Notes to Consolidated Financial Statements for additional information regarding our asbestos liabilities and insurance assets.
Goodwill represents the costs in excess of the fair value of net assets acquired associated with our business acquisitions. Our business acquisitions typically result in the recognition of goodwill, developed technology, trade name or trademark, and customer relationship intangible assets, which affect the amount of future period amortization expense and possible impairment charges that we may incur. The fair values of acquired intangibles are determined using estimates and assumptions based on information available near the acquisition date. Significant assumptions include the discount rates, projected net sales and operating income metrics, royalty rates and technology obsolescence rates. These assumptions are forward looking and could be affected by future economic and market conditions. We engage third-party valuation specialistswho review the critical assumptions and calculations of the fair value of acquired intangible assets in connection with our significant acquisitions. In connection with our acquisitions ofTrilliant ,MedShape , and Mathys during the year endedDecember 31, 2021 , we recognized aggregate goodwill of approximately$187 million and identifiable intangible assets of approximately$181 million . Refer to Notes 2, 5 and 9 to the Consolidated Financial Statements for a description of the Company's policies relating to goodwill and intangible assets. We evaluate the recoverability ofGoodwill and indefinite-lived intangible assets annually or more frequently if an event occurs or circumstances change in the interim that would more likely than not reduce the fair value of the asset below its carrying amount.Goodwill and indefinite-lived intangible assets are considered to be impaired when the carrying value of a reporting unit or asset exceeds its value. In the evaluation ofGoodwill for impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting entity is less than its carrying value. If we determine that it is more likely than not for a reporting unit's fair value to be greater than its carrying value, a calculation of the fair value is not performed. If we determine that it is more likely than not for a reporting unit's fair value to be less than its carrying value, a calculation of the fair value is performed and compared to the carrying value of that reporting unit. In certain instances, we may elect to forgo the qualitative assessment and proceed directly to the quantitative impairment test. If the carrying value of a reporting unit exceeds its fair value,Goodwill of that reporting unit is impaired and an impairment loss is recorded equal to the excess of the carrying value over its fair value. Generally, we measure fair value of reporting units based on a present value of future discounted cash flows and a market valuation approach. The discounted cash flow models indicate the fair value of the reporting units based on the present value of the cash flows that the reporting units are expected to generate in the future. Significant estimates in the discounted cash flow 50 -------------------------------------------------------------------------------- models include the weighted average cost of capital, revenue growth rates, long-term rate of growth, profitability of our business, tax rates, and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison against certain market information. Significant estimates in the market approach model include identifying appropriate market multiples and assessing earnings before interest, income taxes, depreciation and amortization. Due to the sale of the Air and Gas Handling reporting unit in 2019 and the held for sale accounting treatment, we performed a quantitative analysis for impairment in the second quarter of 2019. Based on the purchase price and the carrying value of the net assets being sold, the Company recorded an impairment loss of$481 million in the second quarter of 2019, which is included in Loss from discontinued operations, net of taxes in the Consolidated Statements of Operations. The impairment loss included a$449 million goodwill impairment charge and a$32 million valuation allowance charge on assets held for sale relating to the initial estimated cost to sell the business. An accumulated other comprehensive loss of approximately$350 million associated with the Air and Gas Handling business was included in the determination of the goodwill impairment charge, which is mostly attributable to the recognition of cumulative foreign currency translation effects from the long-term strengthening of theU.S. Dollar. The Air and Gas Handling business sale was completed onSeptember 30, 2019 . Impairment charges related to the divested Air and Gas Handling business are recorded in Loss from discontinued operations, net of taxes on the Consolidated Statements of Operations. See Note 4, "Discontinued Operations" in the accompanying Notes to Consolidated Financial Statements for further information. A qualitative assessment ofGoodwill was performed for the Fabrication Technology reporting unit for the year endedDecember 31, 2019 which indicated no impairment existed. Additionally, we performed a qualitative assessment ofGoodwill for the Medical Technology reporting unit for the year endedDecember 31, 2019 , which indicated no impairment existed. Due to overall market declines as a result of the COVID-19 pandemic, management decided to forgo the qualitative assessment and performed quantitativeGoodwill impairment tests for both the Fabrication Technology and Medical Technology reporting units for the year endedDecember 31, 2020 , which indicated no impairment existed. For the year endedDecember 31, 2021 , management performed a qualitative assessment ofGoodwill for the Fabrication Technology reporting unit and a quantitative assessment ofGoodwill for the Medical Technology reporting unit, both of which indicated no impairment existed. The carrying amount ofGoodwill of the Fabrication Technology and Medical Technology reporting units for the year endedDecember 31, 2021 was$1.5 billion and$1.9 billion , respectively. We determined the fair value of the Medical Technology reporting unit by equally weighting a discounted cash flow approach and market valuation approach, and the reporting unit's fair value exceeded its carrying amount by approximately 22%. Determining the fair value of a reporting unit requires the application of judgment and involves the use of significant estimates and assumptions which can be affected by changes in business climate, economic conditions, the competitive environment and other factors. We base these fair value estimates on assumptions our management believes to be reasonable but which are unpredictable and inherently uncertain. Future changes in the judgment, assumptions and estimates could result in significantly different estimates of fair value in the future. An increase in discount rates, a reduction in projected cash flows or a combination of the two could lead to a reduction in the estimated fair values, which may result in impairment charges that could materially affect our financial statements in any given year. For sensitivity analysis, we estimated the fair value of the Medical Technology reporting unit if we reduced the long-term revenue growth rate by 25 basis points, and the resulting excess fair value over carrying value decreased by 150 basis points. In the evaluation of indefinite-lived intangible assets for impairment, which includes certain trade names of our Fabrication Technology business, we first assess qualitative factors to determine whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying value. If we determine that it is more likely than not for the indefinite-lived intangible asset's fair value to be greater than its carrying value, a calculation of the fair value is not performed. If we determine that it is more likely than not that the indefinite-lived intangible asset's fair value is less than its carrying value, a calculation is performed and compared to the carrying value of the asset. If the carrying amount of the indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. We measure the fair value of our indefinite-lived intangible assets using the "relief from royalty" method. Significant estimates in this approach include projected revenues and royalty and discount rates for each trade name evaluated. A qualitative assessment was performed for the Fabrication Technology segment trade names for the year endedDecember 31, 2019 , which indicated no impairment existed. For the year endedDecember 31, 2020 , due to overall market declines as a result of the COVID-19 pandemic, we performed quantitative impairment tests on all indefinite-lived trade names within our Fabrication Technology segment, which indicated no impairment existed. For the year endedDecember 31, 2021 , management 51 --------------------------------------------------------------------------------
decided to forgo the qualitative assessment and performed quantitative assessments for all the Fabrication Technology segment trade names, which indicated no impairment existed.
A sustained decline in our end-markets and geographic markets could increase the risk of impairments in future years. Actual results could differ from our estimates and projections, which would also affect the assessment of impairment. As ofDecember 31, 2021 , we haveGoodwill of$3.5 billion and indefinite lived trade names of$199.5 million that are subject to at least annual review for impairment. See Note 9, "Goodwill and Intangible Assets", in the accompanying Notes to Consolidated Financial Statements for further information.
Income Taxes
We account for income taxes under the asset and liability method, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion of the deferred tax asset will not be realized. In evaluating the need for a valuation allowance, we consider various factors, including the expected level of future taxable income and available tax planning strategies. If actual results differ from the assumptions made in the evaluation of our valuation allowance, we record a change in valuation allowance through income tax expense in the period such determination is made. Accounting Standards Codification 740, "Income Taxes" prescribes a recognition threshold and measurement attribute for a position taken in a tax return. Under this standard, we must presume the income tax position will be examined by a relevant tax authority and determine whether it is more likely than not that the income tax position will be sustained upon examination based on its technical merits. An income tax position that meets the more-likely-than-not recognition threshold is then measured to determine the amount of the benefit to be recognized in the financial statements. Liabilities for unrecognized income tax benefits are reviewed periodically and are adjusted as events occur that affect our estimates, such as the availability of new information, the lapsing of applicable statutes of limitations, the conclusion of tax audits and, if applicable, the conclusion of any court proceedings. To the extent we prevail in matters for which liabilities for unrecognized tax benefits have been established or are required to pay amounts in excess of our liabilities for unrecognized tax benefits, our effective income tax rate in a given period could be materially affected. We recognize interest and penalties related to unrecognized tax benefits in the Consolidated Statements of Operations as part of Income tax expense (benefit). Net liabilities for unrecognized income tax benefits, including accrued interest and penalties, were$61.9 million as ofDecember 31, 2021 and are included in Other liabilities or as a reduction to deferred tax assets in the accompanying Consolidated Balance Sheet.
Revenue Recognition
We account for revenue in accordance with Topic 606, "Revenue from Contracts
with Customers". We recognize revenue when control of promised goods or services
is transferred to the customer. The amount of revenue recognized reflects the
consideration to which we expect to be entitled in exchange for transferring the
goods or services. The nature of our contracts gives rise to certain types of
variable consideration, including rebates and other discounts. We include
estimated amounts of variable consideration in the transaction price to the
extent that it is probable there will not be a significant reversal of revenue.
Estimates are based on historical or anticipated performance and represent our
best judgment at the time. Any estimates are evaluated on a quarterly basis
until the uncertainty is resolved. Additionally, related to sales of our medical
device products and services, we maintain provisions for estimated contractual
allowances for reimbursement amounts from certain third-party payors based on
negotiated contracts, historical experience for non-contracted payors, and the
impact of new contract terms or modifications of existing arrangements with
these customers. We report these allowances as a reduction to net sales.
We provide a variety of products and services to our customers. Most of our
contracts consist of a single, distinct performance obligation or promise to
transfer goods or services to a customer. For contracts that include multiple
performance obligations, we allocate the total transaction price to each
performance obligation using our best estimate of the standalone selling price
of each identified performance obligation.
A majority of the revenue we recognize relates to contracts with customers for
standard or off-the-shelf products. As control typically transfers to the
customer upon shipment of the product in these circumstances, revenue is
generally recognized at that point in time. For service contracts, we recognize
revenue ratably over the period of performance as the customer simultaneously
receives and consumes the benefits of the services provided.
Any recognized revenues in excess of customer billings are recorded as a
component of Trade receivables. Billings to customers in excess of recognized
revenues are recorded as a component of Accrued liabilities. Each contract is
evaluated
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individually to determine the net asset or net liability position. Substantially
all of our revenue is recognized at a point in time, and revenue recognition and
billing typically occur simultaneously.
The period of benefit for our incremental costs of obtaining a contract would
generally have less than a one-year duration; therefore, we apply the practical
expedient available and expense costs to obtain a contract when incurred.
Trade receivables are presented net of an allowance for credit losses. The
Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments as of January 1,
2020 . The estimate of current expected credit losses on trade receivables
considers historical credit loss information that is adjusted for current
conditions and reasonable and supportable forecasts. The allowance for credit
losses was $32.5 million as of December 31, 2021 compared to $37.7 million as of
December 31, 2020 and $36.0 million as of January 1, 2020 , following the
adoption of the standard.
Recently Issued Accounting Pronouncements
For detailed information regarding recently issued accounting pronouncements and
the expected impact on our financial statements, see Note 3, "Recently Issued
Accounting Pronouncements" in the accompanying Notes to Consolidated Financial
Statements included in this Form 10-K.
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