Business Context and Reporting Period
This Form 10-Q was filed by Colfax Corporation for the quarterly period ended October 1, 2021. The company operated through two segments: Fabrication Technology, primarily ESAB, and Medical Technology, primarily DJO. The filing states that Colfax intended to separate these businesses into two independent publicly traded companies, targeted for completion in the first quarter of 2022.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $965.9 million | $805.9 million | $2.831 billion | $2.243 billion |
| Gross profit | $404.9 million | $344.1 million | $1.195 billion | $933.4 million |
| Gross margin | 41.9% | 42.7% | 42.2% | 41.6% |
| Operating income | $64.0 million | $61.9 million | $201.2 million | $103.8 million |
| Operating margin | 6.6% | 7.7% | 7.1% | 4.6% |
| Net income from continuing operations | $28.1 million | $16.8 million | $87.2 million | $22.6 million |
| Net income attributable to Colfax | $25.8 million | $13.4 million | $73.6 million | $9.4 million |
| Diluted EPS from continuing operations | $0.17 | $0.12 | $0.55 | $0.15 |
| Adjusted EBITA | $131.6 million | $107.7 million | $368.9 million | $248.2 million |
| Adjusted EBITA margin | 13.6% | 13.4% | 13.0% | 11.1% |
Cash Flow, Balance Sheet, Debt and Liquidity
- Cash provided by operating activities was $259.9 million for the first nine months of 2021, compared with $173.1 million in the prior-year period.
- Capital expenditures were $73.6 million, and acquisitions and investments used $223.0 million.
- Cash and cash equivalents were $177.5 million at October 1, 2021, compared with $97.1 million at December 31, 2020.
- Total debt was $1.626 billion, down from $2.231 billion at December 31, 2020. Long-term debt was $1.612 billion.
- The company had $850 million available under its $975 million revolving credit facility and reported compliance with its credit covenants. The weighted-average interest rate on Credit Facility borrowings was 1.59%.
- The company stated that available liquidity was adequate to fund operations for the next twelve months.
- Working capital consumed approximately $69.0 million of cash during the first nine months, primarily because of business growth, higher inventories and supply-chain challenges.
Material Changes Versus the Prior Comparable Period
- Sales increased 19.9% in the third quarter and 26.2% for the first nine months. Existing businesses, acquisitions and foreign currency translation contributed to the increases.
- Fabrication Technology sales increased to $606.0 million in the quarter and $1.804 billion year to date. Segment operating income increased to $90.6 million and $267.3 million, respectively.
- Medical Technology sales increased to $359.9 million in the quarter and $1.027 billion year to date. Segment operating income was $10.8 million in the quarter and $31.3 million year to date.
- Medical Technology benefited from acquisitions, including Trilliant, MedShape and Mathys, but recent acquisitions were dilutive to near-term margins.
- Gross margin declined in the third quarter by 80 basis points because of inflation-related pricing and cost increases, while the nine-month gross margin improved by 60 basis points.
- Operating income and net income improved despite higher selling, general and administrative costs, supply-chain and logistics costs, and separation-related expenses.
- Interest expense declined because of lower debt balances following the redemption of $600 million of 2024 Notes and $100 million of 2026 Notes in April 2021.
- The company recorded a $29.9 million debt extinguishment charge and an $11.2 million pension settlement gain during the first nine months of 2021.
- Net income from discontinued operations remained a loss, totaling $1.2 million in the quarter and $10.4 million year to date, principally related to asbestos matters and other divested businesses.
Guidance, Outlook, Risks and Unusual Items
- No specific earnings or revenue guidance is provided in the filing.
- Management targeted completion of the separation in the first quarter of 2022, subject to financing, regulatory approvals, a favorable tax opinion and/or IRS ruling, satisfaction of tax-free transaction requirements and final board approval.
- COVID-19 variants continued to affect demand, elective medical procedures and operating restrictions. Management stated that the full future financial impact could not reasonably be estimated.
- Supply-chain constraints, labor and component shortages, freight delays, commodity inflation and logistics costs were expected to continue.
- Asbestos contingencies remained material. At October 1, 2021, the company reported $291.5 million of accrued and long-term asbestos liabilities, offset by $254.5 million of asbestos insurance assets and receivables. Management cautioned that actual liabilities and recoveries could differ materially from recorded amounts.
- The company completed six acquisitions during the first nine months for $208.1 million of net cash consideration and $285.7 million of equity consideration. The preliminary purchase accounting for Mathys and other acquisitions remained subject to potentially material adjustments.
- Foreign currency exposure was significant: approximately 59% of sales originated outside the United States. A 10% depreciation in major currencies against the U.S. dollar was estimated to reduce equity by approximately $201 million, net of the Euro debt hedge.
- A 1% increase in interest rates was estimated to increase interest expense by approximately $2.2 million for the quarter and $6.6 million for the first nine months.
- Effective tax rates were 44.3% for the quarter and 30.6% year to date, compared with 53.7% and 10.5%, respectively, in the prior-year periods.
Investor Verification Checklist
- Verify the registrant identity and corporate name, because the supplied filing is for Colfax Corporation while the request metadata identifies Enovis CORP.
- Verify completion, financing, tax treatment and final terms of the planned separation of Fabrication Technology and Medical Technology.
- Assess whether pricing actions are offsetting inflation, freight, labor and supply-chain costs without further margin pressure.
- Review the final purchase accounting and integration performance of Mathys, Trilliant, MedShape and other acquisitions.
- Monitor debt covenant headroom, revolving-credit utilization, interest-rate exposure and the January 2022 TEU settlement obligations.
- Evaluate asbestos claims, insurance recoveries and the potential range of future cash outflows.
- Distinguish GAAP earnings from Adjusted EBITA, particularly the effects of acquisition amortization, separation costs, restructuring, debt extinguishment and pension items.