Colfax Corporation Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. The filing identifies the registrant as Colfax Corporation, operating through Fabrication Technology and Medical Technology segments under the ESAB and DJO brands.
Business context
- Fabrication Technology provides welding, cutting, automation and gas-control products, primarily under ESAB.
- Medical Technology provides orthopedic bracing, rehabilitation, pain-management and reconstructive products, primarily under DJO.
- Approximately 58%–59% of sales were generated or shipped outside the United States; approximately 15,400 employees were employed worldwide.
- The 2019 acquisition of DJO and divestiture of Air and Gas Handling materially changed the portfolio and period comparability. Air and Gas Handling is presented as discontinued operations.
2020 financial performance
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $3.071 billion | $3.327 billion | Down 7.7% |
| Gross profit | $1.288 billion | $1.401 billion | Down $113.0 million |
| Gross margin | 41.9% | 42.1% | Down 20 bps |
| Operating income | $162.3 million | $203.6 million | Down 20.3% |
| Operating margin | 5.3% | 6.1% | Down 80 bps |
| Net income from continuing operations | $64.1 million | $18.9 million | Increased |
| Diluted EPS from continuing operations | $0.44 | $0.10 | Increased |
| Adjusted EBITA | $361.0 million | $476.9 million | Down 24.3% |
| Adjusted EBITA margin | 11.8% | 14.3% | Down 250 bps |
| Net cash provided by operating activities | $301.9 million | $130.9 million | Increased $171.0 million |
Consolidated net income attributable to Colfax was $42.6 million, or $0.31 diluted EPS, compared with a $527.6 million loss, or $(3.89) diluted EPS, in 2019. The 2019 loss primarily reflected the Air and Gas Handling divestiture, including a $449 million goodwill impairment charge.
Segment performance
| Segment | 2020 sales | 2020 segment operating income | 2020 adjusted EBITA margin |
|---|---|---|---|
| Fabrication Technology | $1.950 billion | $246.0 million | 14.5% |
| Medical Technology | $1.121 billion | $29.1 million | 12.2% |
- Fabrication Technology sales declined 13.2%, primarily from lower COVID-19-related demand and unfavorable currency translation. Segment operating margin declined to 12.6% from 13.5%.
- Medical Technology sales increased 3.7% because 2020 included two additional months of DJO results, partly offset by procedure cancellations, reduced clinic capacity and lower sports activity. Segment operating margin declined to 2.6% from 8.9%.
Cash flow, liquidity and debt
- Cash and cash equivalents were $97.1 million; cash and restricted cash totaled $101.1 million at year-end, compared with $109.6 million at December 31, 2019.
- Operating cash flow was $301.9 million. Capital expenditures were $114.8 million, and cash used for acquisitions was $69.8 million.
- Total debt was $2.231 billion, down from $2.312 billion. Debt included a $781.6 million term loan, $991.3 million of 2024 and 2026 notes, $425.0 million of Euro senior notes and $31.3 million of TEU amortizing notes.
- The company had $975 million available under its revolving credit facility, with a weighted-average borrowing rate of 1.90%, and was in compliance with debt covenants at year-end.
- Letter-of-credit facilities had $340.5 million of capacity, with $76.4 million outstanding. Management stated that liquidity was adequate for the next twelve months.
- Contractual obligations totaled $3.189 billion, including $2.247 billion of debt, $456.8 million of estimated debt interest, $208.1 million of operating leases and $276.9 million of purchase obligations.
Material changes versus 2019
- COVID-19 caused a significant decline in demand. Sales fell 31.8% year over year in the second quarter, improved to a 4.8% decline in the third quarter, and declined 3.9% on an equivalent selling-day basis in the fourth quarter, plus 2.9% from fewer selling days.
- Existing-business sales declined $389.5 million, partly offset by $206.6 million of acquisition-related sales. Foreign currency translation reduced sales by $73.8 million.
- Adjusted EBITA declined despite temporary cost reductions, restructuring benefits and lower strategic transaction costs.
- Interest expense declined $15.2 million because of lower interest rates and lower debt.
- Restructuring and related charges declined to $38.4 million from $65.3 million on a GAAP operating-income basis; the non-GAAP reconciliation included $45.0 million in 2020 versus $73.7 million in 2019.
- Colfax completed five Medical Technology acquisitions and three investments for total net consideration of $67.5 million. The fourth-quarter acquisition of LiteCure required $39.6 million of net cash.
- No share repurchases occurred in 2020 or 2019. Approximately $100 million remained under the authorized repurchase program.
Guidance, outlook and management commentary
- The filing does not provide specific quantitative 2021 revenue or earnings guidance.
- Management expects long-term organic growth from expanded product offerings, customer expansion, medical technology demand related to aging populations and outpatient procedures, and geographic and end-market diversification in Fabrication Technology.
- Management expects acquisitions to remain part of the growth strategy and emphasizes integration, Colfax Business System productivity initiatives, asset rationalization and cost reduction.
- Management stated that COVID-19 pressures were expected to continue through at least the first quarter of 2021 and possibly longer, while the full future impact could not be reasonably estimated.
Risks, contingencies and unusual items
- COVID-19 may continue to affect elective procedures, rehabilitation centers, sports activity, industrial capital spending, supply chains, customer creditworthiness and operating continuity.
- Medical Technology is subject to extensive FDA, EU Medical Device Regulation, reimbursement, healthcare fraud-and-abuse, privacy and product-liability requirements.
- Asbestos liabilities related to previously divested businesses totaled $294.8 million at year-end, offset in part by insurance assets and receivables. The company recorded a $7.7 million net pre-tax asbestos charge in 2020 and estimates liabilities only over the next 15 years.
- Goodwill totaled $3.315 billion and indefinite-lived trade names totaled $212.0 million. Quantitative impairment tests performed in 2020 identified no impairment, but Medical Technology had only approximately 12% excess fair value over carrying value.
- The company disclosed an export-control and sanctions matter involving certain transactions by a foreign subsidiary from 2016 through 2020 and stated that a voluntary disclosure was submitted to relevant U.S. agencies; potential fines or sanctions remain possible.
- Pension and other post-retirement plans were underfunded by approximately $125.4 million in aggregate at year-end, with estimated 2021 contributions of $6.9 million.
- On January 19, 2021, DJO acquired Trilliant Surgical for $82.0 million in cash; estimated pro forma annual revenue was approximately 1% of consolidated revenue.
Important facts for investors to verify
- Reconcile the company name and corporate history with the requested Enovis Corporation identifier; this filing itself is for Colfax Corporation.
- Assess whether Medical Technology margins recover after COVID-19-related procedure disruptions and whether the DJO platform produces the expected synergies and growth.
- Review debt maturities, covenant thresholds and refinancing requirements, particularly the substantial 2024 maturities and the 2025–2026 notes.
- Evaluate sensitivity of goodwill, especially Medical Technology goodwill, to discount rates, revenue growth and operating forecasts.
- Monitor asbestos claim trends, insurer solvency and the pending insurance-coverage proceedings.
- Review the sanctions/export-control disclosure and potential financial or regulatory consequences.
- Distinguish GAAP results from Adjusted EBITA, which excludes substantial restructuring, amortization, medical-device-regulatory and other items.