Business Context and Reporting Period
Colfax Corporation, identified in the filing as a diversified technology company operating under the ESAB and DJO brands, filed an unaudited Form 10-Q for the quarter and six months ended July 3, 2020. Continuing operations consisted of Fabrication Technology and Medical Technology. The Air and Gas Handling business was sold on September 30, 2019 and is presented as discontinued operations.
The filing reflects the effects of the COVID-19 pandemic, including reduced industrial demand, facility closures, delayed elective medical procedures, canceled sporting events, and broad operating restrictions. The filing company is Colfax Corporation; the request metadata identifies Enovis CORP.
Financial Metrics
| Metric | Three Months Ended July 3, 2020 | Six Months Ended July 3, 2020 | Comparable 2019 Period |
|---|---|---|---|
| Net sales | $620.4 million | $1,436.7 million | $908.6 million; $1,592.6 million |
| Gross profit | $241.1 million | $589.3 million | $376.1 million; $637.1 million |
| Gross margin | 38.9% | 41.0% | 41.4%; 40.0% |
| Operating income (loss) | $(4.9) million | $41.9 million | $41.5 million; $43.9 million |
| Net income (loss) from continuing operations | $(3.1) million | $5.7 million | $2.2 million; $(19.3) million |
| Net loss attributable to Colfax | $(8.5) million | $(4.0) million | $(469.2) million; $(521.3) million |
| Adjusted EBITA | $45.1 million | $140.6 million | $127.2 million; $217.4 million |
| Adjusted EBITA margin | 7.3% | 9.8% | 14.0%; 13.7% |
Six-month operating cash flow was $93.2 million, compared with $10.4 million in the prior-year period. Capital expenditures were $50.4 million, and net cash used in investing activities was $53.0 million. Cash decreased by $43.2 million during the six months to $66.4 million at July 3, 2020.
Total debt was $2.247 billion, including $26.5 million classified as current. Long-term debt was $2.221 billion. The company reported $975 million of availability under its revolving credit facility, $185.1 million of capacity under bilateral facilities with no borrowings outstanding, and $1.2 billion of total credit and other facility capacity. Letters of credit outstanding totaled $108.0 million.
Total assets were $7.123 billion and total equity was $3.396 billion at July 3, 2020. Trade receivables were $449.7 million and inventories were $556.7 million.
Material Changes Versus Prior Comparable Period
- Second-quarter sales declined 31.8% year over year, while six-month sales declined 9.8%. Existing-business sales declined 27.9% in the quarter and 18.6% year to date; foreign currency translation reduced sales by $35.0 million and $58.9 million, respectively.
- Fabrication Technology second-quarter sales declined to $414.4 million from $592.7 million, and segment operating income declined to $43.6 million from $81.0 million.
- Medical Technology second-quarter sales declined to $206.0 million from $315.9 million, and segment operating income declined to a $20.8 million loss from $4.6 million of income. Six-month Medical Technology sales increased because 2020 included a full six months of DJO activity versus approximately four months in 2019.
- Gross margin declined 250 basis points in the second quarter, primarily because of lower higher-margin Medical Technology sales and unfavorable production variances. Six-month gross margin increased 100 basis points due largely to the full-period inclusion of DJO.
- Adjusted EBITA declined 64.5% in the second quarter and 35.3% for the six months. Management attributed the decline primarily to COVID-19, partially offset by cost-reduction actions and lower restructuring, transaction, and acquisition-related costs.
- Net loss was significantly lower than in 2019 because the prior-year period included a $481.0 million impairment charge related to the Air and Gas Handling divestiture and substantial acquisition-related costs.
- Working capital provided $59.8 million of cash in the first half of 2020, compared with an $82.0 million use in the prior-year period, reflecting lower sales and reduced spending.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide a quantified full-year revenue or earnings forecast. Management stated that it could not reasonably estimate the full future impact of COVID-19.
- Sales troughed in April and improved sequentially in May and June. All Fabrication Technology facilities had reopened by May, and Medical Technology surgical-product sales achieved single-digit growth versus the prior-year June after elective procedures resumed. The timing and extent of a full recovery remained uncertain.
- Management implemented temporary salary reductions, furloughs and layoffs, lower discretionary spending, reduced capital expenditures, lower supplier purchases, and working-capital actions to mitigate weaker demand.
- On May 1, 2020, the credit agreement was amended to permit specified cash deductions in leverage calculations, increase maximum leverage limits temporarily, reduce certain interest-coverage requirements, and add potential collateral requirements. The company reported compliance with its covenants at July 3, 2020.
- COVID-19 could affect demand, elective procedures, supply chains, customer creditworthiness, liquidity, goodwill and intangible-asset valuations, and deferred tax assets. Management reported no COVID-related valuation impact as of July 3, 2020, but future impacts could be material.
- Asbestos-related contingencies remained significant. Unresolved claims increased to 16,858 from 16,299 at the beginning of 2020. Accrued asbestos liabilities totaled $343.1 million, partly offset by insurance assets and receivables; actual outcomes depend on claims, insurance coverage, insurer solvency, and litigation.
- The company adopted the current expected credit loss standard on January 1, 2020, resulting in a $4.8 million after-tax reduction to opening retained earnings.
- The second-quarter tax benefit was $30.1 million, producing a 90.5% effective tax rate; the six-month tax benefit was $16.9 million, producing a 151.3% effective tax rate. These rates were affected by discrete tax benefits, tax credits, valuation allowances, foreign tax matters, and other jurisdictional items.
Investor Verification Items
- Verify that the filing entity is Colfax Corporation and reconcile it with the request’s Enovis CORP designation.
- Assess the duration and recovery trajectory of COVID-19 impacts on industrial demand, elective procedures, sports activity, and supply chains.
- Review leverage, covenant thresholds, interest coverage, collateral triggers, debt maturities, and the availability of the revolving facility.
- Evaluate whether operating cash flow and liquidity are sufficient for debt service, capital expenditures, restructuring, asbestos payments, and potential acquisitions.
- Separate GAAP results from Adjusted EBITA and assess the sustainability of temporary cost reductions and excluded expenses.
- Monitor asbestos claims, insurance recoveries, litigation outcomes, and potential changes in recorded liabilities.
- Review the unusual tax benefits and valuation allowances before extrapolating quarterly earnings or effective tax rates.