Form 10-Q Summary
Filing identity: The supplied filing is for Colfax Corporation, not Enovis Corporation. It covers the quarter and nine months ended September 30, 2011, with comparative periods ended October 1, 2010. Financial statements are unaudited.
Business Context and Reporting Period
Colfax supplied pumps, fluid-handling systems and controls, and specialty valves through global operations serving commercial marine, oil and gas, power generation, defense and general industrial markets. Approximately 70% of third-quarter sales and 71% of nine-month sales came from operations outside the United States.
Results were seasonally affected by the typical European summer slowdown and expected fourth-quarter shipment concentration. The filing also reflects the February 2011 acquisition of Rosscor and the August 2010 acquisition of Baric.
Key Financial Metrics
| Metric | Three months ended September 30, 2011 | Three months ended October 1, 2010 | Nine months ended September 30, 2011 | Nine months ended October 1, 2010 |
|---|---|---|---|---|
| Net sales | $170.3 million | $132.4 million | $515.6 million | $375.3 million |
| Gross profit | $60.6 million | $47.1 million | $178.6 million | $131.8 million |
| Gross margin | 35.6% | 35.6% | 34.6% | 35.1% |
| Operating income | $5.4 million | $8.6 million | $33.5 million | $14.8 million |
| Operating margin | 3.2% | 6.5% | 6.5% | 3.9% |
| Net income | $3.7 million | $5.9 million | $20.6 million | $7.6 million |
| Basic and diluted EPS | $0.08 | $0.13 | $0.47 | $0.17 |
- Sales increased 28.6% in the third quarter and 37.4% for the nine-month period. Growth reflected existing-business demand, acquisitions and favorable foreign-currency translation.
- Third-quarter net income declined 36.9% year over year, primarily because of higher acquisition-related professional fees, restructuring charges, asbestos costs and other selling, general and administrative expenses.
- Nine-month net income increased substantially, benefiting from higher gross profit and lower asbestos coverage litigation and restructuring expenses relative to the prior period.
- Cash provided by operating activities was $41.7 million versus $35.3 million in the prior-year period. Investing cash use was $33.0 million, including $22.3 million for the Rosscor acquisition and $10.7 million of capital expenditures.
- Cash and cash equivalents were $64.4 million at September 30, 2011, compared with $60.5 million at December 31, 2010.
- Total debt was $75.0 million, including $10.0 million current debt, versus $82.5 million at December 31, 2010. Revolver availability was $129.5 million, and the company reported compliance with its debt covenants.
- Total assets were $1.039 billion and shareholders’ equity was $245.5 million at September 30, 2011.
- Order backlog was $373.4 million at September 30, 2011, up 6.3% from $351.2 million at October 1, 2010. Nine-month orders increased 32.6% to $529.4 million.
Material Changes Versus the Prior Comparable Period
- Gross margin was unchanged at 35.6% in the third quarter but declined 50 basis points for the nine months, primarily because acquired Rosscor and Baric sales had lower foremarket margins.
- Third-quarter operating margin fell to 3.2% from 6.5%. Acquisition-related fees totaled $5.7 million during the quarter and nine-month period and were included in selling, general and administrative expense.
- Restructuring charges were $5.3 million in the third quarter and $7.5 million for nine months, compared with $2.4 million and $9.5 million, respectively. Management expected approximately $2.0 million of additional restructuring costs during the remainder of 2011 and estimated annual pretax savings of approximately $4.1 million beginning in the first quarter of 2012.
- Asbestos liability and defense costs increased to $4.4 million in the third quarter and $7.6 million for nine months. Asbestos coverage litigation expense was $3.1 million and $8.5 million, respectively.
- Inventory increased to $79.2 million from $57.9 million at year-end 2010, contributing to working-capital use of cash.
- Accumulated deficit improved to $39.4 million from $60.1 million, while accumulated other comprehensive loss was $128.1 million, including foreign-currency effects.
Guidance, Outlook, Risks and Unusual Items
Management expected full-year 2011 oil and gas sales and orders to be significantly above 2010 levels, general industrial sales and orders to grow, power-generation sales to approximate 2010 levels, and defense sales to approximate 2010 levels while orders declined because of ship-program timing. Commercial marine fourth-quarter sales and orders were expected to be consistent with 2010 levels.
On September 12, 2011, Colfax agreed to acquire Charter International plc, expected to close in the first quarter of 2012. The transaction value was approximately $2.4 billion. Financing arrangements included $680 million of securities issued to BDT, $125 million of common-stock sales to Mitchell Rales, Steven Rales and Markel, and a proposed Deutsche Bank credit facility with $1.8 billion of term loans and $300 million of revolver commitments.
- The Charter transaction remained subject to shareholder approvals, regulatory approvals and other closing conditions. Failure or delay could result in significant costs and adverse business effects.
- The transaction would materially increase leverage, dilute existing shareholders, add preferred-stock dividends and give BDT significant governance and consent rights.
- Colfax recorded a $5.4 million fair-value asset for a foreign-exchange option with a $2.9 billion notional amount related to the proposed acquisition. Changes in fair value were recognized in selling, general and administrative expense.
- Asbestos reserves were $413.3 million and related insurance recoverables were $353.6 million at September 30, 2011. Net projected cash outlay for the next 15 years was $59.7 million, excluding uncertainty after that period.
- The company had 22,512 unresolved asbestos claims. Management cautioned that claim volumes, settlement costs, insurance coverage, insurer solvency and litigation outcomes could materially change the recorded amounts and cash requirements.
- A court judgment in asbestos insurance litigation resulted in a $2.1 million provision during the third quarter. One subsidiary could have required funding of up to $10 million per quarter while insurance litigation continued.
- Other risks included cyclical markets, foreign-currency movements, raw-material costs, manufacturing disruptions, pension funding, restructuring execution, goodwill impairment, international regulatory compliance and acquisition integration.
- The company stated that disclosure controls and procedures were effective and that no material change in internal control over financial reporting occurred during the period.
Investor Verification Priorities
- Confirm the issuer identity: the source filing is Colfax Corporation, despite the request identifying Enovis CORP.
- Verify whether the Charter acquisition closed as planned, the final purchase price and financing, resulting leverage and dilution.
- Reconcile acquisition-related fees, restructuring costs and asbestos charges when assessing normalized operating earnings.
- Review asbestos claim trends, insurance recoveries, insurer solvency and subsequent litigation outcomes.
- Assess cash conversion, inventory growth, capital expenditures and liquidity after completion of the proposed acquisition.
- Verify the actual realization of the estimated $4.1 million annual restructuring savings.
- Monitor foreign-exchange exposure, including the acquisition-related option and the effect of currency movements on earnings and comprehensive income.