Business Context and Reporting Period
This Form 10-K was filed by Colfax Corporation for the fiscal year ended December 31, 2021. The filing predates the planned separation under which the medical technology business would become Enovis Corporation and the fabrication technology business would operate independently under the ESAB name. Both businesses remained in continuing operations at December 31, 2021. The separation was targeted for near the end of the first quarter of 2022.
- Fabrication Technology: Welding, cutting, automation and gas-control products, primarily under the ESAB brand.
- Medical Technology: Orthopedic bracing, rehabilitation, pain management, joint replacement and related products, primarily under the DJO brand.
- Approximately 59% of 2021 sales were generated outside the United States, and the company employed approximately 16,200 people.
Key Financial Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $3,854.3 million | $3,070.8 million | 25.5% increase |
| Gross profit | $1,613.7 million | $1,288.1 million | 25.3% increase |
| Gross margin | 41.9% | 41.9% | Flat |
| Operating income | $256.6 million | $162.3 million | Increase |
| Operating margin | 6.7% | 5.3% | Up 140 basis points |
| Net income from continuing operations | $98.7 million | $64.1 million | Increase |
| Continuing-operations net margin | 2.6% | 2.1% | Up 50 basis points |
| Adjusted EBITA | $505.1 million | $361.0 million | 40.0% increase |
| Adjusted EBITA margin | 13.1% | 11.8% | Up 130 basis points |
| Net cash provided by operating activities | $356.1 million | $301.9 million | Increase |
| Capital expenditures | $104.2 million | $114.8 million | Decrease |
| Cash and cash equivalents | $719.4 million | $97.1 million | Increase |
Consolidated net income attributable to Colfax was $71.7 million, or $0.46 diluted earnings per share, compared with $42.6 million, or $0.31 per diluted share, in 2020. Discontinued operations generated a $22.4 million net loss, primarily reflecting retained asbestos-related and divestiture-related matters.
Segment Results
| Segment | 2021 Sales | 2020 Sales | 2021 Adjusted EBITA | 2021 Adjusted EBITA Margin |
|---|---|---|---|---|
| Fabrication Technology | $2,428.1 million | $1,950.1 million | $395.1 million | 16.3% |
| Medical Technology | $1,426.2 million | $1,120.7 million | $184.6 million | 12.9% |
Fabrication Technology sales increased 24.5%, driven by volume recovery, pricing and new products, while gross margin declined 70 basis points to 34.4% because inflation and supply-chain costs outpaced pricing benefits. Medical Technology sales increased 27.3%, reflecting recovery from pandemic-related declines, acquisitions and growth in reconstructive products. Its gross margin improved to 54.5% from 54.0%.
Material Changes Versus the Prior Comparable Period
- Sales benefited from recovery from the 2020 COVID-19 downturn, inflation-related pricing and acquisitions. Existing-business sales increased $610.9 million, acquisitions contributed $141.6 million and foreign currency translation contributed $31.0 million.
- The company completed six acquisitions in 2021: five in Medical Technology and one in Fabrication Technology. These transactions involved $206.5 million of net cash consideration and $285.7 million of equity consideration.
- Medical Technology acquired Trilliant Surgical, MedShape and Mathys, expanding foot-and-ankle, reconstructive and international product offerings. Acquired businesses were initially dilutive to margins but were expected to become accretive over time.
- A March 2021 equity offering generated $711.3 million of net proceeds. The company used the proceeds to redeem all $600 million of its 2024 Notes and $100 million of its 2026 Notes.
- Debt extinguishment charges were $29.9 million, while net interest expense declined to $72.6 million from $104.3 million.
- Strategic transaction costs increased to $44.0 million from $2.8 million, largely because of the planned separation.
- Working capital used $78.5 million of cash in 2021, compared with a $52.3 million source in 2020, as sales recovery and supply-chain challenges increased receivables and inventories.
- There were no share repurchases in 2021 or 2020; approximately $100 million remained available under the authorization at year-end.
Liquidity, Debt and Cash Flow
- Total debt was $2.1 billion at December 31, 2021, compared with $2.2 billion at year-end 2020. Principal amounts included a $782.4 million term loan, $604.6 million of revolving and other borrowings, $395.6 million of Euro notes and $297.9 million of remaining 2024 and 2026 Notes.
- The revolving credit facility had $375 million of undrawn capacity, and borrowings under the credit facility carried a weighted-average interest rate of 1.59% at year-end.
- The company was in compliance with its debt covenants and stated that liquidity was adequate to fund operations for the next twelve months.
- Operating cash flow was $356.1 million. Investing cash outflows included $223.3 million for acquisitions and investments and $104.2 million for capital expenditures.
- Financing activities provided $584.9 million, primarily reflecting $745.2 million of common-stock issuance proceeds, partly offset by $126.0 million of net debt repayments and $24.4 million of debt-extinguishment payments.
- Contractual obligations included $214.3 million of fixed operating lease payments, $280.0 million of unconditional purchase obligations and estimated 2022 pension and other post-retirement contributions of $8.6 million.
Guidance, Outlook, Risks and Unusual Items
Management did not provide a specific numerical revenue or earnings forecast in the filing. It expressed a long-term expectation for organic growth supported by aging populations, increased outpatient care and ambulatory surgical procedures in Medical Technology, and geographic, product and end-market diversity in Fabrication Technology.
- Separation risk: Completion depended on financing, regulatory approvals, board approval and tax-free treatment. The separation could be delayed, altered or not completed, and could generate significant transaction costs and execution risks.
- COVID-19: Variants continued to affect elective procedures, physical therapy activity, sporting events, industrial demand and supply chains. Management expected pandemic-related pressures to continue at least into the first quarter of 2022.
- Inflation and supply chain: Raw-material, labor, freight and logistics inflation caused margin pressure. The company used price increases, inventory actions and multiple suppliers to mitigate these effects.
- Medical regulation and reimbursement: FDA requirements, the European Union Medical Device Regulation, reimbursement changes, healthcare fraud-and-abuse rules and product liability claims could affect sales, costs and market access.
- Asbestos contingencies: The company recorded an asbestos liability of $292.4 million, including $30.6 million current and $261.8 million long term, partially offset by insurance assets and receivables. Estimates depend on claims, settlement costs, insurer solvency and litigation outcomes.
- Goodwill and intangible assets: Goodwill totaled $3.5 billion. No impairment was recorded in 2021, but the Medical Technology reporting unit’s fair value exceeded carrying value by approximately 22%, making future performance, discount rates and projected cash flows important sensitivities.
- Tax and pension matters: The effective tax rate rose to 40.3% from a 10.4% benefit in 2020. Pension and post-retirement obligations were underfunded by approximately $100.3 million at year-end.
- Unusual items: Results included a $11.2 million pension settlement gain, $29.9 million of debt-extinguishment charges, $32.9 million of restructuring charges, $7.9 million of EU MDR-related costs and $44.0 million of strategic transaction costs.
Most Important Facts for Investors to Verify
- Confirm the completed separation structure, allocation of debt and other liabilities, tax treatment and the resulting financial statements for Enovis and ESAB.
- Assess whether 2021 sales and margin recovery was sustained after pandemic effects, particularly in elective procedures and industrial capital spending.
- Monitor leverage, debt maturities and compliance with the credit facility’s leverage and interest-coverage covenants.
- Evaluate the ability to offset raw-material, labor and freight inflation through pricing without further margin erosion.
- Review acquisition integration performance, purchase-accounting adjustments and the expected accretion from Trilliant, MedShape and Mathys.
- Reassess goodwill impairment sensitivity, especially for Medical Technology, and the assumptions supporting its approximately 22% fair-value cushion.
- Track asbestos claims, insurance recoveries and the sustainability of insurer reimbursements, including potential quarterly cash funding of up to $10 million.
- Verify medical-device regulatory compliance, reimbursement trends and any product liability, FDA or EU MDR developments.