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ENOVIS CORPORATION

(ENOV)
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Delayed Nyse  -  04:01 2022-12-02 pm EST
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COLFAX CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

02/22/2022 | 06:13am EST

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 in Europe, North America,
South America, Asia, Australia and Africa. 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 CBS, 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 the
CBS methodology is one of our primary competitive strengths.
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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.

On March 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 our CBS 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 ended December 31, 2021 and
2020. For a comparison of the Company's results of operations, liquidity and
capital resources for the fiscal years ended December 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 ended
December 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 December 31, 2021 to the comparable 2020 period is affected by the following additional significant items:

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,
on March 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
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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


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. 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.

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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
ended December 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 ended December 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 acquired
MedShape, 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. The Trilliant and MedShape 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 acquired Mathys AG Bettlach ("Mathys"), a
Switzerland-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 the U.S.

During the year ended December 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 of LiteCure LLC, a U.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 the U.S., mostly from
locations outside the U.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 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 year ended December 31, 2021 compared to 2020, fluctuations
in foreign currencies increased Net sales, Gross profit, and Selling, general
and administrative expenses each by approximately 1%.


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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.
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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 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 with U.S. GAAP.
Investors are encouraged to review the reconciliation of these non-GAAP measures
to their most directly comparable U.S. GAAP financial measures. The following
tables set forth a reconciliation of Net income from continuing operations, the
most directly comparable U.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 ended December 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 ended December 31, 2021, Strategic transaction costs includes
costs related to the Separation and certain transaction and integration costs
related to recent acquisitions. For the year ended December 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.

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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 years ended December 31, 2021 and 2020.

Year Ended December 31, 2021

                                                       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 December 31, 2020

                                                       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.

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Total Company

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.





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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 $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 ended December 31, 2021 and 2020, respectively.

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.

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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 of U.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 on U.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 of U.S. tax credits, a benefit from U.S.
state tax losses, a discrete tax benefit associated with the filing of timely
elected change to U.S. Federal tax returns to credit rather than to deduct
foreign taxes and reduction of valuation allowance on U.S. federal net operating
losses. These favorable impacts were partially offset by the impact of
additional U.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.

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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. 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 $ 36.3




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.
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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 $ 107.6

(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 ended December 31, 2021 and 2020, respectively.


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.

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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


On March 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.

On February 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 of December 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, 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 initial 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. Refer to Note 13, "Debt" in
the accompanying Notes to the Consolidated Financial Statements for more
information.

As of December 31, 2021, we are in compliance with the covenants under the
Credit Facility. As of December 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 in April 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 due January 2022. Subsequent to
December 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.


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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 on February 15, 2024
and had an interest rate of 6.0%. The 2026 Notes are due on February 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 on April 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 $169.0 million. As of December 31, 2021, there were no outstanding borrowings under these facilities.


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 of
December 31, 2021.

We believe that our sources of liquidity are adequate to fund our operations for the next twelve months.


Cash Flows

As of December 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 of December 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  

$ (8.6)




Cash used in operating activities related to the discontinued operations of the
divested Air and Gas Handling business for the years ended December 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.

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•During 2021 and 2020, cash payments of $23.5 million and $39.2 million, respectively, were made related to our restructuring initiatives.

•During 2021 and 2020, cash paid for strategic transaction costs were $23.4 million and $5.1 million, respectively. Payments in 2021 were primarily for costs related to the Separation.


•Year ended December 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 ended December 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 of December 31, 2021 include $42.4 million held
in jurisdictions outside the U.S. Cash repatriation of non-U.S. cash into the
U.S. may be subject to taxes, other local statutory restrictions and minority
owner distributions.
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Contractual Obligations

Debt


As of December 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 of December 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 of December 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 December 31, 2021, the Company had fixed lease payment obligations of $214.3 million, with $45.7 million payable within 12 months.

Purchase Obligations


As of December 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 of December 31, 2021, which are estimated to be
$8.6 million for the year ending December 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 at December 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.

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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 the U.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
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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 and Intangible 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 specialists who 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 of Trilliant, MedShape, and Mathys during the year ended
December 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 of Goodwill 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 of Goodwill 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
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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 the
U.S. Dollar. The Air and Gas Handling business sale was completed on September
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 of Goodwill was performed for the Fabrication
Technology reporting unit for the year ended December 31, 2019 which indicated
no impairment existed. Additionally, we performed a qualitative assessment of
Goodwill for the Medical Technology reporting unit for the year ended December
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 quantitative Goodwill
impairment tests for both the Fabrication Technology and Medical Technology
reporting units for the year ended December 31, 2020, which indicated no
impairment existed.

For the year ended December 31, 2021, management performed a qualitative
assessment of Goodwill for the Fabrication Technology reporting unit and a
quantitative assessment of Goodwill for the Medical Technology reporting unit,
both of which indicated no impairment existed. The carrying amount of Goodwill
of the Fabrication Technology and Medical Technology reporting units for the
year ended December 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 ended December 31, 2019, which indicated no impairment
existed. For the year ended December 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 ended December 31, 2021,
management
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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 of December 31, 2021, we have Goodwill 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 of
December 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
                                       52
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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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