Business Context and Reporting Period
This summary is based on Colfax Corporation’s unaudited Form 10-Q for the quarter ended March 30, 2018; the provided metadata identifies Enovis CORP, but the filing registrant is Colfax Corporation. Colfax operated through Air and Gas Handling and Fabrication Technology, serving global industrial markets under the Howden and ESAB brands. The Fluid Handling business was sold on December 11, 2017, and is presented as discontinued operations.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $880.9 million | $733.6 million | +20.1% |
| Gross profit | $270.6 million | $239.8 million | +12.8% |
| Gross margin | 30.7% | 32.7% | Down 200 bps |
| Operating income | $62.2 million | $60.2 million | +3.2% |
| Operating margin | 7.1% | 8.2% | Down 110 bps |
| Net income from continuing operations | $31.9 million | $38.4 million | Down 17.0% |
| Net income attributable to Colfax | $24.5 million | $38.5 million | Down 36.3% |
| Diluted EPS from continuing operations | $0.22 | $0.29 | Down $0.07 |
| Consolidated diluted EPS | $0.20 | $0.31 | Down $0.11 |
| Cash flow from operating activities | $(2.7) million | $40.4 million | Down $43.1 million |
Reported continuing-operations results included a $14.7 million loss on short-term investments, primarily reflecting the decline in the fair value of CIRCOR shares received in the Fluid Handling sale. The effective tax rate was 15.8%, compared with 24.7% in the prior-year quarter, helped by a $6.1 million discrete tax benefit.
At March 30, 2018, cash and cash equivalents were $268.3 million, compared with $262.0 million at year-end 2017. Total debt was $1.13 billion, including $1.12 billion of long-term debt. The company reported $1.3 billion of availability under its revolving credit facility, $221.2 million of bilateral credit capacity with $97.4 million borrowed, and $442.1 million of outstanding letters of credit. The company stated that it was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue increased $147.3 million, or 20.1%, reflecting $68.8 million of Air and Gas Handling acquisition growth, $73.3 million of Fabrication Technology growth, and favorable foreign currency translation. Approximately 76% of sales came from outside the United States.
- Air and Gas Handling sales rose to $347.7 million from $273.6 million, while segment operating margin declined to 6.7% from 8.3%. The segment experienced weaker power-generation and mining markets, margin pressure from competition, higher material costs, and unfavorable mix.
- Fabrication Technology sales rose to $533.3 million from $460.1 million. Segment operating margin was substantially stable at 12.0% versus 12.1%, although gross margin declined to 34.6% from 35.5% because of raw-material costs, pricing effects, and product mix.
- Gross profit increased, but higher material costs and unfavorable mix reduced gross margin. SG&A increased $25.7 million, primarily from acquisitions and foreign exchange.
- Restructuring charges increased to $7.9 million from $4.8 million. Management expected approximately $30 million of additional restructuring charges during the remainder of 2018.
- Operating cash flow declined to an outflow of $2.7 million, principally due to seasonal working-capital investment, including inventory growth and lower payables. Net working capital consumed $51.8 million before foreign exchange, compared with $31.7 million in the prior-year quarter.
- Investing cash outflows increased to $54.1 million, including approximately $41.1 million for a Fabrication Technology acquisition and $11.1 million of capital expenditures. Financing activities provided $57.4 million, primarily through increased borrowings.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Air and Gas Handling backlog was $889.5 million at March 30, 2018; management expected approximately 74% to convert to revenue during 2018 and 26% thereafter.
- Air and Gas Handling orders from existing businesses declined $83.5 million year over year, mainly because of lower activity in power generation and oil, gas, and petrochemical markets. Management stated that orders could improve if those end markets recovered.
- The company noted normal seasonality, with Air and Gas Handling shipments generally peaking in the fourth quarter and European operations slowing during holiday periods.
- The Fluid Handling sale generated total consideration of $864.9 million, including $555.3 million of cash, 3.3 million CIRCOR shares, and assumption of $168.0 million of net retirement liabilities. The company remained subject to retained asbestos-related contingencies.
- Discontinued operations produced a $2.8 million loss after tax in Q1 2018, compared with $3.1 million of income in Q1 2017. The company retained substantial asbestos-related exposures, including approximately 18,067 unresolved claims at quarter-end, a $356.7 million combined asbestos insurance asset and receivable, and $356.7 million of accrued asbestos liabilities.
- Management warned that asbestos liabilities and insurance recoveries depend on claim trends, settlement costs, coverage interpretations, insurer solvency, and available insurance limits, and actual outcomes could materially affect financial condition, earnings, or cash flow.
- The company adopted revenue recognition Topic 606 and several other accounting standards in 2018 without a material overall financial statement impact. Adoption of the new lease standard is expected to materially increase reported operating lease assets and liabilities beginning January 1, 2019.
- Key disclosed risks include cyclical end markets, commodity prices, acquisition integration, restructuring execution, foreign exchange, raw-material availability, debt restrictions, pension obligations, tax-law changes including GILTI, cybersecurity, product liability, environmental matters, and competitive pressures.
- A hypothetical 1% increase in interest rates during the quarter would have increased interest expense by approximately $2.3 million. A 10% depreciation in major currencies against the U.S. dollar, net of hedging effects, was estimated to reduce equity by approximately $352 million.
Important Facts for Investors to Verify
- Confirm that the intended company is Colfax Corporation rather than Enovis CORP, because the supplied filing is a Colfax Form 10-Q.
- Assess the sustainability of revenue growth after separating acquisition and foreign-exchange effects from organic growth.
- Monitor gross-margin pressure from raw materials, pricing, product mix, and competition, particularly in Air and Gas Handling.
- Reconcile the decline in operating cash flow with inventory growth, payables timing, restructuring payments, pension contributions, and asbestos-related cash flows.
- Evaluate leverage, variable-rate exposure, covenant headroom, revolving-facility availability, and financing used to fund acquisitions.
- Review the valuation volatility and remaining transfer restrictions associated with the CIRCOR shares received in the Fluid Handling divestiture.
- Update estimates for restructuring costs, asbestos claims, insurance recoveries, and related litigation contingencies.
- Consider the effect of foreign exchange, since international operations generated approximately 76% of quarterly sales and produced a significant increase in accumulated other comprehensive income.