Filing Overview
Registrant identified in the filing: Colfax Corporation, not Enovis CORP. This unaudited Form 10-Q covers the quarter and six months ended June 28, 2019, with comparisons to June 29, 2018. Colfax reported continuing operations through Fabrication Technology and Medical Technology following the February 2019 DJO acquisition and the classification of Air and Gas Handling as discontinued operations.
Business Context and Reporting Period
- Colfax provides fabrication technology products under the ESAB brand and medical technology products under the DJO brand.
- Colfax completed the $3.15 billion DJO acquisition on February 22, 2019, creating the Medical Technology segment.
- On May 15, 2019, Colfax agreed to sell its Air and Gas Handling business to affiliates of KPS Capital Partners for enterprise value of approximately $1.8 billion, including $1.66 billion of cash consideration and $140.0 million of assumed liabilities and minority interest. Closing remained subject to customary conditions and regulatory approvals.
Financial Performance and Key Metrics
| Metric | Three months ended June 28, 2019 | Three months ended June 29, 2018 | Six months ended June 28, 2019 | Six months ended June 29, 2018 |
|---|---|---|---|---|
| Net sales | $908.6 million | $560.9 million | $1,592.6 million | $1,094.1 million |
| Gross profit | $376.1 million | $191.9 million | $637.1 million | $376.5 million |
| Gross margin | 41.4% | 34.2% | 40.0% | 34.4% |
| Operating income | $41.5 million | $45.4 million | $43.9 million | $89.7 million |
| Operating margin | 4.6% | 8.1% | 2.8% | 8.2% |
| Income from continuing operations attributable to Colfax | $1.3 million | $47.2 million | $(21.5) million | $67.3 million |
| Adjusted EBITA | $127.2 million | $65.2 million | $217.4 million | $122.2 million |
| Adjusted EBITA margin | 14.0% | 11.6% | 13.7% | 11.2% |
- Consolidated net loss attributable to Colfax was $469.2 million for the quarter and $521.3 million for the six months, compared with net income of $38.5 million and $63.0 million, respectively, in the prior-year periods.
- The reported loss primarily reflected the $481.0 million impairment charge associated with the planned Air and Gas Handling divestiture, including a $449.0 million goodwill impairment and a $32.0 million valuation allowance.
- Medical Technology contributed $315.9 million of second-quarter sales and $439.4 million from the acquisition date through June 28, 2019. Its second-quarter adjusted EBITA margin was 16.5%.
- Fabrication Technology second-quarter sales increased to $592.7 million from $560.9 million, while segment operating margin improved to 13.7% from 12.7%.
Cash Flow, Debt and Liquidity
- Six-month operating cash flow was $10.4 million, down from $33.7 million in the prior-year period.
- Investing cash outflow was $3.21 billion, including $3.15 billion for the DJO acquisition and $64.0 million of capital expenditures.
- Financing cash inflow was $3.18 billion, including new borrowings and $377.8 million of net proceeds from tangible equity units.
- Cash and cash equivalents were $232.2 million at June 28, 2019, including $100.3 million related to Air and Gas Handling assets held for sale.
- Total debt was $4.12 billion, compared with $1.20 billion at December 31, 2018. The company had $400.0 million available under its $1.3 billion revolving facility and reported a 4.22% weighted-average rate on New Credit Facility borrowings.
- Management stated that liquidity sources were adequate to fund operations for the next twelve months. The company was in compliance with its credit facility covenants at quarter-end.
Material Changes Versus the Prior Comparable Period
- Revenue increased 62.0% in the second quarter and 45.6% for the six months, driven primarily by the DJO acquisition and other acquisitions. Foreign currency translation reduced sales by $25.7 million in the quarter and $61.2 million year to date.
- Gross margins expanded substantially because of the higher-margin Medical Technology business.
- Operating income and GAAP continuing-operations earnings declined because of higher interest expense, acquisition-related amortization, transaction costs, restructuring charges and unfavorable tax effects.
- Interest expense increased by $20.3 million in the quarter and $33.2 million for the six months, primarily because of debt incurred to finance DJO.
- Strategic transaction costs were $55.8 million for the six months, primarily related to DJO.
- The company adopted lease accounting guidance on January 1, 2019, recognizing a $153.9 million right-of-use asset and corresponding lease liabilities.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide a clear formal revenue or earnings guidance range.
- Management expects the DJO acquisition to support higher margins, faster growth and lower cyclicality, but integration and realization of anticipated synergies remain execution risks.
- Net proceeds from the Air and Gas Handling sale are required to repay outstanding New Term Loan Facility balances. The transaction could be delayed or fail to close because of regulatory approvals, restructuring requirements, financial statement conditions or other closing conditions.
- Key risks include high leverage and variable-rate debt, foreign currency exposure, cyclical end markets, commodity costs, acquisition integration, restructuring execution, impairment of intangible assets, pension obligations, product liability and asbestos-related claims.
- Asbestos-related liabilities totaled $334.4 million, supported by approximately $338.4 million of insurance assets and receivables. Management cautioned that ultimate liabilities and recoveries could differ materially from recorded amounts.
- A 1% increase in interest rates would have increased interest expense by approximately $9.2 million for the quarter and $15.9 million for the six months. A 10% depreciation in major currencies would have reduced equity by approximately $338 million.
- Management reported effective disclosure controls. Internal control integration for DJO was still in process.
Investor Verification Checklist
- Confirm the intended company identity: the supplied metadata names Enovis CORP, while the filing is for Colfax Corporation.
- Verify completion, final consideration and cash proceeds of the Air and Gas Handling divestiture, including required debt repayment.
- Assess DJO integration progress, normalized margins and whether projected synergies offset acquisition-related amortization and financing costs.
- Review debt maturities, covenant headroom, variable-rate exposure and available revolver capacity.
- Separate recurring operating performance from the $481.0 million divestiture impairment, $55.8 million of transaction costs, restructuring charges and other acquisition-related items.
- Monitor asbestos claims, insurance recoveries, pension obligations and other litigation contingencies.