Executive Summary / Key Takeaways

• ESAB Corporation is transforming into a premier industrial compounder, strategically shifting its portfolio towards higher-margin equipment and gas control, targeting 22%+ Adjusted EBITDA margins by 2028 or sooner.
• The company delivered a solid Q3 2025, returning to 2% organic growth, with total sales up 8% to $687 million and Adjusted EBITDA increasing 7% to $133 million, demonstrating resilience amidst a dynamic market.
• Strategic acquisitions like EWM GmbH, Bavaria, DeltaP, and Aktiv are accelerating ESAB's technological leadership in advanced welding and medical gas control, expanding its total addressable market and enhancing workflow solutions.
• ESAB Business Excellence (EBX) and AI integration are driving significant operational efficiencies, with a target of $60 million in savings by 2028, while simultaneously funding strategic growth investments.
• Despite near-term tariff-related headwinds in the Americas, ESAB's robust global footprint, strong cash flow generation, and disciplined capital allocation position it for accelerated M&A and long-term value creation.

Forging a Global Industrial Powerhouse

ESAB Corporation, founded in 1904, has evolved into a focused premier industrial compounder, providing fabrication technology, advanced equipment, consumables, gas control equipment, robotics, and digital solutions globally. Its enduring purpose, "Shaping the world we imagine™," is underpinned by a rich history of innovative products and the disciplined ESAB Business Excellence (EBX) system. Operating through two primary segments—the Americas (North and South America) and EMEA APAC (Europe, Middle East, India, Africa, and Asia Pacific)—ESAB has strategically positioned itself with an "in region, for region" manufacturing model, producing approximately 80% of its products locally. This approach has proven crucial in mitigating the impact of global trade dynamics and tariffs.

The company's strategic journey over the past eight years has centered on enhancing operational performance through EBX, fostering innovation, ensuring local agility, and deploying capital effectively. This has led to a significant portfolio shift towards higher-margin, less cyclical businesses, notably gas control and advanced welding equipment. This strategic pivot, combined with continuous EBX initiatives, has driven approximately 700 basis points of margin expansion since 2016, with a clear target of achieving 22%+ Adjusted EBITDA margins by 2028 or sooner.

Competitive Landscape and Technological Leadership

In the competitive landscape of welding, cutting, and industrial gas equipment, ESAB stands as a formidable player alongside industry giants like Lincoln Electric Holdings Inc. (LECO), Illinois Tool Works Inc. (ITW), and Linde plc (LIN). ESAB's competitive strategy is anchored in its comprehensive product range, global reach, and a distinct emphasis on digital integration and workflow solutions.

Against Lincoln Electric, ESAB's offerings in welding consumables and equipment are highly competitive, with a focus on end-to-end digital solutions for productivity and remote monitoring. While LECO is renowned for specialized welding innovations, ESAB's market positioning as a full-service provider, coupled with its extensive distribution network, often fosters greater customer loyalty through bundled solutions. ESAB's product diversification, particularly into medical and life sciences through its gas control segment, provides broader end-market coverage compared to LECO's more concentrated welding focus.

When compared to Illinois Tool Works, a diversified industrial conglomerate, ESAB's portfolio is more specialized in cutting and gas control, potentially offering superior performance in precision applications. ESAB's direct and distributor-based sales model contrasts with ITW's broader diversification, allowing ESAB to maintain a more focused market presence in welding-intensive sectors. ESAB's unique value proposition lies in its digital software for welding operations, which can deliver materially lower operating costs through remote monitoring and productivity enhancements, a differentiator against ITW's more generalized industrial tools.

In the gas control arena, ESAB competes with Linde, a global industrial gases and engineering company. ESAB's integrated welding solutions offer more comprehensive packages than Linde's gas-centric focus. ESAB's branded ecosystem of equipment and software differentiates it through enhanced customer productivity, while Linde excels in scalable gas distribution. ESAB's growth trajectory in specialized segments, particularly medical gas, is strong, while Linde benefits from diversified revenue streams.

ESAB's core technological differentiation is significantly enhanced by EWM's "React technology," acquired in Q3 2025. This breakthrough in arc welding delivers tangible, quantifiable benefits over traditional methods: up to 100% faster weld speeds, twice the deposition rate, and approximately 35% lower heat input. These advancements translate directly into higher productivity for customers, reduced fume generation, and improved weld quality, creating a safer and more efficient shop floor environment. When combined with ESAB's proprietary consumables, torches, and the InduSuite digital overlay, this technology forms an end-to-end ecosystem that is difficult for competitors to match.

The company's commitment to innovation is further evidenced by its substantial R&D investments, totaling $10.5 million in Q3 2025 and $31.1 million for the nine months ended October 3, 2025. ESAB expects to introduce nearly 100 new products in 2025, maintaining a 5-year vitality rate of 23-24%. These initiatives, including university research partnerships and AI integration, are designed to continuously enhance its competitive moat, drive higher average selling prices (ASPs), lower manufacturing costs, improve margins, and solidify its market positioning for long-term growth.

The broader industry trends also play into ESAB's strengths. The AI-driven data center boom and surging power demands, as highlighted by industry reports, are increasing the need for robust energy infrastructure. This trend directly benefits ESAB through increased demand for its products in construction, energy, and renewable energy sectors. The manufacturing sector is also showing signs of recovery, with improvements in order levels and industrial production, further supporting demand for metal fabrication solutions.

Strategic Compounding and Operational Excellence

ESAB's strategic evolution is characterized by its "compounder journey," driven by disciplined capital allocation and a relentless pursuit of accretive acquisitions. The gas control business exemplifies this strategy, having grown from 10% to 18% of total revenue, with a target to reach 25% by 2028. This segment boasts gross margins in the mid-40s, significantly expanding ESAB's total available market by $200 million through recent acquisitions like DeltaP and Aktiv, which provide entry into medical and specialty gas markets.

The company's acquisition strategy is highly selective, focusing on proprietary deals that are EPS accretive in their first year. In 2024, ESAB successfully integrated three bolt-on acquisitions, including SUMIG in Brazil, which expanded its light automation and equipment portfolio in the Americas. The momentum continued into 2025 with four key acquisitions:

• Bavaria Schweisstechnik (April 2025): A European provider of submerged-arc welding applications, strengthening ESAB's proprietary consumables, particularly in flux technology. This positions ESAB to capitalize on EU and German stimulus programs targeting infrastructure and defense.
• DeltaP s.r.l. (June 2025): A European medical central gas systems provider, enhancing ESAB's medical gas control presence with approximately $10 million in annual sales and gross margins over 40%.
• Aktiv Technologies Private Limited (July 2025): An India-based industrial gas equipment manufacturer, adding approximately $5 million in annualized sales with gross margins over 40% and providing a strategic entry into the fast-growing Indian market.
• EWM GmbH (August 2025): A global leader in heavy industrial welding equipment and advanced automation, contributing approximately EUR 120 million in revenue with gross margins exceeding 45%. EWM's "React technology" is a significant technological differentiator, offering superior welding performance.

These acquisitions collectively added approximately $27 million and $35 million to Net sales for the three and nine months ended October 3, 2025, respectively. ESAB's EBX system is central to integrating these businesses and driving operational efficiencies. The company is actively integrating AI into EBX to "raise the bar" on productivity, targeting $60 million in savings by 2028 through Kaizen activities, back-office optimization, and AI-driven initiatives. These savings are strategically reinvested, with approximately $20 million deployed in 2025 for university research partnerships, commercial excellence, and advancing AI capabilities, ensuring sustained long-term growth.

Financial Performance: A Story of Resilience and Expansion

ESAB's financial performance in 2025 reflects its strategic execution and operational resilience in a challenging environment. For the third quarter ended October 3, 2025, total sales rose 8% to $727.85 million, with organic sales increasing 2% year-over-year. Adjusted EBITDA grew 7% to $139.50 million, although the Adjusted EBITDA margin saw a slight reduction of 20 basis points due to the initial dilutive impact of the EWM acquisition.

For the nine months ended October 3, 2025, Net sales reached $2.12 billion, compared to $2.07 billion in the prior year period. Gross profit increased to $790.55 million from $779.13 million, driven by acquisitions, favorable foreign exchange, and price increases, despite higher material costs. Operating income for the nine months was $325.56 million. Net income from continuing operations for the nine months was $207.72 million, a decrease from $219.48 million in the prior year, primarily due to higher interest expense related to acquisition debt, partially offset by a non-cash pension settlement gain in 2024. Adjusted EBITDA for the nine months increased by $19.40 million to $416.90 million, with the Adjusted EBITDA margin expanding by 50 basis points to 19.7%.

Segment-wise, the Americas segment reported Net sales of $292.73 million in Q3 2025, up from $288.82 million in Q3 2024. Adjusted EBITDA for the segment was $57.26 million, with a margin of 19.6%. The segment returned to positive organic growth in Q3, driven by mid-single-digit growth in U.S. equipment and automation. However, the Adjusted EBITDA margin was impacted by ongoing growth investments and a drag from price/cost dynamics related to tariffs. Management anticipates strong margin improvement in 2026 as restructuring initiatives take hold and tariff-related manufacturing shifts are completed.

The EMEA APAC segment continued its strong performance, with Net sales of $435.12 million in Q3 2025, a significant increase from $384.43 million in Q3 2024. Adjusted EBITDA for the segment was $82.24 million, and the margin expanded to 18.9%, up 120 basis points year-over-year. The segment delivered 4% volume growth, fueled by robust execution in high-growth markets like Asia, India, and the Middle East, and high single-digit growth in equipment and automation. Renewed investment and activity in Europe are expected to provide further tailwinds.

ESAB's liquidity remains robust. The company generated over 100% free cash flow conversion in Q3 2025, and achieved a record $321 million in free cash flow in 2024. This strong cash generation has enabled significant debt reduction, with net leverage falling under 1.6x in 2024 and to 1.5x in Q1 2025.

As of October 3, 2025, ESAB had $490 million of borrowing capacity available under its Revolving Facility and an additional $50 million from uncommitted credit lines. The company also recently expanded and extended its credit facilities, entering into an Amended and Restated Credit Agreement on October 16, 2025, providing for a $350 million term loan and a $1.05 billion revolving credit facility, both maturing in October 2030, enhancing its long-term financial flexibility.

Outlook and Strategic Trajectory

ESAB has raised its full-year 2025 guidance, reflecting confidence in its performance and the successful integration of recent acquisitions. The company now expects total sales between $2.71 billion and $2.73 billion, representing approximately 1% organic growth. Adjusted EBITDA is projected to be between $535 million and $540 million, including approximately $3 million from EWM. Adjusted EPS has been tightened to a range of $5.20 to $5.30, with free cash flow conversion anticipated to be around 95%.

Management expects organic growth to improve sequentially, with Q4 2025 performing better than Q3. For the second half of 2025, ESAB anticipates low single-digit organic growth overall, driven by mid-single-digit growth in EMEA APAC and a low single-digit decline in the Americas. Looking into 2026, the company projects strong margin improvement in the Americas, fueled by restructuring and tariff mitigation efforts. EMEA APAC is expected to maintain its strong momentum, benefiting from continued growth in high-growth markets and renewed investment in Europe. The long-term target of 22%+ Adjusted EBITDA margins by 2028 remains a core strategic objective, supported by the ongoing portfolio shift towards higher-margin equipment and gas control.

Risks and Challenges

Despite its strong performance and strategic positioning, ESAB faces several pertinent risks. Tariff uncertainty, particularly impacting the Americas segment and Mexico, has caused unexpected volume headwinds and a slight price/cost drag. While ESAB is actively mitigating these through pricing adjustments and manufacturing relocation, sustained trade tensions could continue to affect profitability. The ongoing Russia-Ukraine conflict also presents a risk, as Russia accounted for 6% of Net sales and $3 million of Net income in Q3 2025, with approximately $48 million in cash and cash equivalents potentially subject to withdrawal delays. A disposition of the Russia business could also realize a cumulative translation loss of approximately $110 million.

Furthermore, ESAB carries asbestos-related liabilities from divested businesses, with an estimable liability for the next 15 years, but the long-term loss beyond this period remains unestimable. Foreign currency exchange rate volatility also poses a risk, with a 10% depreciation in major currencies against the U.S. Dollar potentially reducing equity by $240 million. Commodity price fluctuations for raw materials used in production also represent an ongoing challenge, though managed through fixed-price contracts.

Conclusion

ESAB Corporation is executing a compelling transformation, evolving into a high-margin industrial compounder through a potent combination of operational excellence, strategic acquisitions, and technological leadership. The company's disciplined EBX system, coupled with forward-looking investments in AI and R&D, is driving significant efficiency gains and fostering innovation, particularly in its advanced welding equipment and rapidly expanding gas control businesses. This strategic shift, exemplified by the accretive EWM acquisition and its groundbreaking React technology, is enhancing ESAB's competitive moat and positioning it for sustained market share gains.

While near-term macroeconomic headwinds and tariff-related pressures in the Americas present challenges, ESAB's robust global footprint and proactive mitigation strategies underscore its resilience. The company's strong cash flow generation and flexible balance sheet provide ample capacity for continued strategic M&A, further accelerating its compounder journey. With a clear roadmap to 22%+ Adjusted EBITDA margins by 2028 and a proven track record of execution, ESAB Corporation offers a compelling investment thesis for discerning investors seeking a company poised for profitable growth and long-term value creation in the evolving industrial landscape.