Business Context and Reporting Period
This filing is Colfax Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 28, 2012. The supplied filing identifies the registrant as Colfax Corporation, not Enovis CORP.
Colfax is a global industrial manufacturer serving gas and fluid handling markets under Howden and Colfax Fluid Handling, and fabrication technology markets under ESAB. The January 2012 acquisition of Charter International plc materially transformed the company and added the Fabrication Technology segment.
Key Financial Metrics
| Metric | Three months ended September 28, 2012 | Nine months ended September 28, 2012 |
|---|---|---|
| Net sales | $954.4 million | $2.886 billion |
| Gross profit | $288.0 million | $844.6 million |
| Gross margin | 30.2% | 29.3% |
| Operating income | $51.7 million | $87.8 million |
| Income before taxes | $28.1 million | $19.6 million |
| Net income attributable to Colfax | $9.1 million | $(84.1) million |
| Net income available to common shareholders | $4.0 million | $(98.0) million |
| Basic and diluted earnings per share | $0.04 | $(1.09) |
| Net cash provided by operating activities | Not separately provided for the quarter | $1.1 million |
For comparison, the prior-year reported sales were $170.3 million for the quarter and $515.6 million for the nine months; these comparisons are not directly meaningful because Charter was acquired in 2012. Pro forma sales, assuming Charter was owned for the comparable periods, were $971.7 million for the third quarter of 2011 and $2.789 billion for the first nine months of 2011.
- Segment operating income was $67.5 million for the quarter and $130.9 million for the nine months, before restructuring charges.
- Gas and Fluid Handling generated third-quarter sales of $464.9 million and segment operating income of $33.9 million. Fabrication Technology generated sales of $489.5 million and segment operating income of $43.9 million.
- Cash and cash equivalents were $517.3 million at September 28, 2012, compared with $75.1 million at December 31, 2011. Approximately $288.2 million was held outside the United States.
- Total debt was $1.693 billion, including $1.659 billion of long-term debt. The weighted-average interest rate on Deutsche Bank Credit Agreement borrowings was 3.87%; $291.9 million remained available under the revolver.
- Total assets were $6.056 billion and total equity was $2.180 billion at September 28, 2012.
- Net cash used in investing activities was $1.751 billion, including $1.692 billion for acquisitions and $58.6 million for fixed assets. Net cash provided by financing activities was $2.208 billion.
Material Changes Versus the Prior Comparable Period
- Reported sales increased substantially because the Charter businesses were consolidated beginning January 13, 2012. On a pro forma basis, third-quarter sales decreased 1.8%, while nine-month sales increased 3.5%.
- On a pro forma basis, third-quarter sales from existing businesses increased $49.5 million, or 5.1%, but foreign-currency translation reduced sales by $72.1 million. Nine-month existing-business sales increased $228.7 million, or 8.2%, while currency translation reduced sales by $183.8 million.
- Gross margin declined to 30.2% for the quarter and 29.3% for the nine months, from 35.6% and 34.6%, respectively, primarily because of the lower-margin Fabrication Technology mix and acquisition-related amortization and inventory step-up costs.
- Interest expense increased to $23.6 million for the quarter and $68.3 million for the nine months, versus $1.2 million and $4.5 million, respectively, due primarily to acquisition financing.
- Restructuring charges increased to $15.9 million for the quarter and $43.1 million for the nine months, versus $5.3 million and $7.5 million in the comparable 2011 periods. The company expected approximately $8.0 million of additional restructuring charges during the remainder of 2012.
- The nine-month tax provision was $86.9 million despite pretax income of $19.6 million. The result included a $50.3 million non-cash increase in the valuation allowance against U.S. deferred tax assets and tax effects of nondeductible acquisition-related costs, corporate overhead and interest expense.
- Operating cash flow declined to $1.1 million from $41.7 million, reflecting working-capital investment, $50.3 million of pension contributions, $34.3 million of net asbestos-related cash outflows, restructuring payments and acquisition-related professional fees.
Guidance, Outlook, Risks and Unusual Items
Management did not provide a specific consolidated revenue or earnings forecast. It expects long-term organic growth from broader product offerings, expanded customer relationships and a balanced mix of long- and short-cycle businesses. Management also expects continued growth through strategic acquisitions.
- Management expected the stronger U.S. dollar to reduce reported sales and operating profits during the remainder of 2012. Weakness in Europe, China and Brazil was expected to affect near-term results.
- Key integration priorities included applying Colfax Business System tools, improving margins and working-capital management, rationalizing assets and back-office functions, and consolidating manufacturing facilities.
- The company expected to fund the approximately $183.4 million Soldex acquisition with cash on hand, subject to regulatory approvals and an expected fourth-quarter 2012 closing.
- Debt agreements impose leverage, interest coverage, dividend, repurchase and other restrictive covenants. The company stated that it was in compliance as of September 28, 2012 and believed available liquidity was adequate for the next twelve months.
- Contractual obligations totaled approximately $2.641 billion, including $1.752 billion of debt maturities, $399.7 million of estimated debt interest, $110.1 million of operating leases and $345.8 million of purchase obligations.
- Asbestos claims remained material: 22,361 claims were unresolved at period-end. Recorded asbestos liabilities totaled approximately $439.6 million, partially offset by insurance assets and receivables of approximately $413.4 million. Management cautioned that actual liabilities and insurance recoveries could differ materially from estimates.
- The company had $84.5 million of gross unrecognized tax benefits and was subject to examinations in multiple countries. It estimated that audits and statute expirations could reduce tax expense by up to $2.2 million during the following twelve months.
- All borrowings were variable-rate facilities. A hypothetical 1% increase in interest rates would have increased interest expense by approximately $4.4 million for the quarter and $13.3 million for the nine months.
- Approximately 81% of sales originated outside the United States. Management estimated that a 10% depreciation in major currencies, net of the euro-denominated term loan hedge, would reduce equity by approximately $100 million.
- Disclosure controls were evaluated as effective. The company excluded Charter from its 2012 annual internal-control assessment while integrating Charter’s controls and procedures.
Important Facts for Investors to Verify
- Confirm that the intended issuer is Colfax Corporation rather than Enovis CORP and verify the correct filing and reporting period.
- Assess the sustainability of earnings after separating Charter acquisition effects, acquisition-related amortization, restructuring charges, tax valuation allowances and other unusual items.
- Review debt maturities, variable-rate exposure, covenant headroom and the availability of the revolver relative to acquisition, pension, asbestos and working-capital requirements.
- Evaluate whether the very low nine-month operating cash flow and substantial working-capital balances indicate ongoing cash-conversion pressure.
- Examine the assumptions supporting asbestos liabilities, insurance recoveries, pension funding and uncertain tax positions.
- Monitor Charter integration, restructuring execution, the pending Soldex acquisition and the company’s ability to realize expected synergies and margin improvements.