Colfax Corporation — Form 10-Q Summary
Filing and period: Quarterly report for the three and six months ended July 1, 2011, filed July 29, 2011. The supplied filing identifies the registrant as Colfax Corporation, not Enovis Corporation; investors should verify the company identity and filing reference.
Business Context and Reporting Period
Colfax supplied pumps, fluid-handling systems and controls, and specialty valves to commercial marine, oil and gas, power generation, defense and general industrial markets. The company operated globally, with approximately 81% of second-quarter sales and 80% of year-to-date sales generated outside the United States. Results were unaudited and subject to seasonal effects, including typically higher shipments in the fourth quarter and a European slowdown during July and August.
Financial Performance and Position
| Metric | Three Months Ended July 1, 2011 | Three Months Ended July 2, 2010 | Six Months Ended July 1, 2011 | Six Months Ended July 2, 2010 |
|---|---|---|---|---|
| Net sales | $186.7 million | $123.0 million | $345.3 million | $242.9 million |
| Gross profit | $64.7 million | $43.0 million | $117.9 million | $84.7 million |
| Gross margin | 34.6% | 35.0% | 34.1% | 34.9% |
| Operating income | $16.7 million | $4.9 million | $28.0 million | $6.2 million |
| Operating margin | 8.9% | 4.0% | 8.1% | 2.6% |
| Net income | $10.4 million | $2.1 million | $16.9 million | $1.7 million |
| Diluted EPS | $0.23 | $0.05 | $0.38 | $0.04 |
- Six-month operating cash flow was $28.4 million, compared with $27.4 million in the prior-year period.
- Capital expenditures were $6.4 million, and the Rosscor acquisition used $22.3 million of cash.
- Cash and cash equivalents were $64.2 million at July 1, 2011, versus $60.5 million at December 31, 2010.
- Total debt was $80.5 million, including $77.5 million under the term facility and $3.0 million under the revolving facility. Revolver availability was $120.6 million, excluding other letter-of-credit facilities.
- Total assets were $1.064 billion and shareholders’ equity was $254.3 million at July 1, 2011.
- Inventories increased to $78.6 million from $57.9 million at year-end 2010, reducing operating cash flow.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 51.8%; six-month sales increased 42.2%. Six-month growth comprised $38.8 million from existing businesses, $50.8 million from acquisitions and $12.8 million from foreign-currency translation.
- Rosscor, acquired February 14, 2011 for $22.3 million net of cash acquired, expanded the company’s multiphase pumping and oil-and-gas offerings. The prior-year comparison also benefited from the 2010 Baric acquisition.
- Orders increased to $195.7 million in the second quarter and $354.6 million for the first six months. Period-end backlog was $383.2 million, up 29.0% from July 2, 2010, primarily because of Rosscor and Baric.
- Gross margin declined modestly because the acquired businesses generated a higher proportion of lower-margin foremarket sales. Foremarket sales represented 79% of second-quarter sales versus 75% in the prior-year period.
- Operating margin improved substantially as higher gross profit and lower restructuring and asbestos coverage litigation costs more than offset higher SG&A expense.
- The effective tax rate declined to 31.8% for the quarter and 31.5% year to date, versus 35.0% and 36.1%, respectively, primarily because of lower international tax rates.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2011 oil-and-gas sales and orders to be significantly higher than 2010, general industrial sales and orders to grow, commercial marine and power-generation sales to approximate 2010 levels, and defense sales to approximate 2010 levels while orders declined because of ship-program timing.
- Management cautioned that project delays, order cancellations, economic conditions, foreign-exchange movements and customer capital spending could affect the remainder of 2011.
- Restructuring initiatives were expected to generate approximately $3.5 million of annual pretax savings beginning in the fourth quarter of 2011. Management expected approximately $6.2 million of additional restructuring costs during the remainder of 2011, while the financial statements separately describe approximately $6.0 million for specific productivity actions.
- Asbestos liabilities and related insurance recoverables were significant. Reserves were $418.9 million and insurance recoverables were $362.7 million at July 1, 2011, producing expected net undiscounted cash outlays of $56.2 million over the next 15 years. Insurance litigation could require funding of up to $10 million per quarter until resolution, and another coverage matter had an estimated potential range of positive or negative $30 million relative to recorded insurance assets.
- The company had 22,020 unresolved asbestos claims at July 1, 2011. Actual liabilities and insurance recoveries could differ materially because of claims activity, settlement costs, coverage allocation, insurer solvency and litigation outcomes.
- The credit agreement matured in May 2013, was secured by substantial company assets, and required a total leverage ratio no higher than 3.25 to 1.0 and a fixed-charge coverage ratio no lower than 1.50 to 1.0. The company reported compliance as of July 1, 2011 and expected compliance for the following 12 months.
- Other risks included international operations, currency and interest-rate exposure, raw-material costs, manufacturing disruption, acquisition integration, pension funding, competition and leadership turnover.
Important Facts for Investors to Verify
- Confirm whether this Colfax filing is the intended filing for the requested Enovis Corporation period.
- Reconcile reported sales and backlog growth between organic operations, acquisitions and foreign-currency translation.
- Assess the sustainability of improved operating margins given lower acquired-business gross margins and planned restructuring costs.
- Review asbestos reserve estimates, insurance recoverables, litigation status and potential interim funding requirements.
- Monitor inventory growth, cash conversion, acquisition spending, debt maturities and compliance with credit covenants.
- Verify management’s 2011 end-market outlook against subsequent orders, cancellations and backlog conversion.