2019 Third-Quarter Form 10-Q Summary
Registrant: Colfax Corporation, although the request metadata identifies Enovis CORP. The filing is for Colfax Corporation, formerly the predecessor company to Enovis. Reporting period ended September 27, 2019; comparative period ended September 28, 2018. Financial statements are unaudited.
Business Context and Reporting Period
- Colfax reported two continuing segments: Fabrication Technology, primarily welding and cutting products under the ESAB brand, and Medical Technology, primarily orthopedic and rehabilitation products through DJO.
- Colfax acquired DJO Global on February 22, 2019 for approximately $3.15 billion, creating the Medical Technology segment.
- The Air and Gas Handling business was classified as discontinued operations and was sold on September 30, 2019 for approximately $1.8 billion, including $1.67 billion of cash at closing.
Key Financial Metrics
| Metric | Three Months Ended September 27, 2019 | Three Months Ended September 28, 2018 | Nine Months Ended September 27, 2019 | Nine Months Ended September 28, 2018 |
|---|---|---|---|---|
| Net sales | $846.5 million | $524.0 million | $2.439 billion | $1.618 billion |
| Gross profit | $368.1 million | $171.3 million | $1.005 billion | $547.8 million |
| Gross margin | 43.5% | 32.7% | 41.2% | 33.9% |
| Operating income | $67.9 million | $35.1 million | $111.7 million | $124.8 million |
| Operating margin | 8.0% | 6.7% | 4.6% | 7.7% |
| Income from continuing operations | $3.8 million | $16.7 million | $(15.5) million | $85.3 million |
| Net income attributable to Colfax | $10.5 million | $31.3 million | $(510.8) million | $94.3 million |
| Diluted EPS from continuing operations | $0.02 | $0.14 | $(0.14) | $0.69 |
| Adjusted EBITA | $125.8 million | $50.4 million | $343.2 million | $172.5 million |
| Adjusted EBITA margin | 14.9% | 9.6% | 14.1% | 10.7% |
- Operating cash flow for the first nine months was $65.7 million, compared with $100.8 million in the prior-year period.
- Capital expenditures were $100.4 million, and cash used in acquisitions was $3.137 billion, primarily for DJO.
- Cash and cash equivalents were $166.8 million at September 27, 2019, including $39.7 million classified within assets held for sale.
- Total debt was $4.032 billion, compared with $1.197 billion at December 31, 2018. Debt fair value was approximately $4.0 billion.
- Revolver commitments were $1.3 billion, with $415.0 million available at quarter-end. The weighted-average interest rate on Credit Facility borrowings was 4.22%.
- The Company had $57.8 million of outstanding letters of credit against total facilities of $498.2 million and $35.0 million of borrowings under bilateral credit facilities.
Material Changes Versus the Prior Comparable Period
- Reported sales increased 61.5% for the quarter and 50.7% year to date, driven primarily by the DJO acquisition. Foreign currency translation reduced sales by $14.7 million in the quarter and $76.1 million year to date.
- Medical Technology contributed $307.3 million of third-quarter sales and $746.7 million from the acquisition date through September 27, 2019. Its third-quarter gross margin was 56.6% and adjusted EBITA margin was 18.5%.
- Fabrication Technology sales rose 2.9% in the quarter and 4.6% year to date. Segment operating margin improved to 13.5% in the quarter and 13.3% year to date, from 10.6% and 11.8%, respectively.
- Continuing-operations earnings declined despite higher sales because of substantially higher interest expense, acquisition-related amortization, strategic transaction costs, restructuring costs and a pension settlement loss.
- Interest expense increased to $31.8 million in the quarter and $86.8 million year to date, primarily because of debt incurred to finance DJO.
- Year-to-date net loss included a $481.0 million impairment charge related to the Air and Gas Handling disposal group, including a $449.0 million goodwill impairment and a $32.0 million estimated cost-to-sell valuation allowance.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal quantitative revenue or earnings guidance. Management expected DJO to support higher margins, faster growth and lower cyclicality, with additional opportunities for bolt-on acquisitions.
- On September 30, 2019, after quarter-end, Colfax used $1.65 billion of Air and Gas Handling sale proceeds to repay term loans and Revolver borrowings. Final purchase-price adjustments had not been completed but were not expected to have a material impact.
- The Credit Facility required a maximum leverage ratio that stepped down over time and a minimum interest coverage ratio of 3.00:1.00. Colfax stated that it was in compliance with all covenants at September 27, 2019.
- Restructuring and related charges were $50.7 million year to date; strategic transaction costs were $56.7 million; and acquisition-related amortization and other non-cash charges were $124.1 million.
- A $33.6 million non-U.S. pension settlement loss was recognized in the third quarter.
- Asbestos-related liabilities totaled $332.0 million, offset by approximately $339.7 million of related insurance assets and receivables. Management noted substantial uncertainty regarding future claims, insurance recoveries and litigation outcomes.
- Principal risks include high leverage and variable interest rates, DJO integration and realization of synergies, foreign currency exposure, cyclical markets, raw-material costs, restructuring execution, product liability, cybersecurity, intellectual property, tax matters and asbestos contingencies.
- A 1% increase in interest rates would have increased interest expense by approximately $9.6 million for the quarter and $25.5 million year to date. A 10% depreciation in major currencies would have reduced equity by approximately $332 million.
Important Facts for Investors to Verify
- Confirm the requested company identity: the supplied filing is for Colfax Corporation, not an entity named Enovis CORP.
- Verify the post-quarter-end application of $1.65 billion of divestiture proceeds to debt repayment and the resulting leverage profile.
- Assess whether DJO integration, restructuring and cost-reduction initiatives deliver the expected margin expansion and cash-flow improvement.
- Reconcile GAAP losses with adjusted EBITA and separately evaluate the recurring nature of excluded items.
- Monitor asbestos claims, insurance recoveries and related litigation, including the $332.0 million recorded liability.
- Review covenant compliance and refinancing requirements, particularly the scheduled leverage-ratio step-downs and the $500 million Two Year Term Loan.
- Consider the effect of foreign exchange, variable-rate debt and the mandatory settlement of the tangible equity units, which could result in issuance of approximately 18.4 million to 22.1 million shares in 2022.