Colfax Corporation Form 10-K Summary
Filing and reporting period: The source is Colfax Corporation’s Form 10-K for the fiscal year ended December 31, 2018, filed February 21, 2019. The request metadata identifies Enovis CORP and “2018 Q4,” but the provided filing is for Colfax Corporation and primarily reports full-year 2018 results; fourth-quarter data are included in the unaudited quarterly table.
Business context
Colfax operated through two reportable segments: Air and Gas Handling, marketed principally under Howden, and Fabrication Technology, marketed principally under ESAB. The company served global industrial, infrastructure, energy, mining, welding and fabrication markets. Approximately 76%–77% of 2018 sales were generated or shipped outside the United States, and approximately 49% of sales were shipped to emerging markets.
Colfax employed approximately 15,500 people at year-end 2018. The company’s management system, the Colfax Business System, was used to pursue organic growth, margin improvement, working-capital efficiency and cash-flow improvement.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $3.667 billion | $3.300 billion | +11.1% |
| Gross profit | $1.133 billion | $1.029 billion | +10.0% |
| Gross margin | 30.9% | 31.2% | Down 30 bps |
| Operating income | $236.9 million | $76.1 million | Improved materially |
| Operating margin | 6.5% | 2.3% | Up 420 bps |
| Net income from continuing operations | $182.8 million | $(54.5) million | Returned to profitability |
| Net income attributable to Colfax | $140.2 million | $151.1 million | Down 7.2% |
| Diluted EPS from continuing operations | $1.40 | $(0.59) | Improved |
| Net cash from operating activities | $226.4 million | $218.8 million | +3.5% |
| Cash and cash equivalents | $245.0 million | $262.0 million | Down $17.0 million |
| Total debt | $1.199 billion | $1.061 billion | +13.0% |
Reported 2018 net income included a $28.4 million after-tax loss from discontinued operations, primarily related to retained asbestos obligations and related tax effects. Consolidated net income was $154.5 million, compared with $169.5 million in 2017.
Air and Gas Handling sales increased 8.1% to $1.474 billion, while segment operating income increased to $134.0 million from $126.2 million. Fabrication Technology sales increased 13.2% to $2.193 billion, and segment operating income increased to $249.9 million from $224.4 million. Fabrication Technology represented approximately 60% of total sales.
Cash flow was pressured by $290.9 million of acquisition spending, $69.6 million of capital expenditures and $200.0 million of share repurchases. Investing activities used $167.9 million, and financing activities used $47.2 million. Working capital consumed $31.0 million before foreign-exchange effects.
At December 31, 2018, Colfax also had $757.4 million of letter-of-credit capacity, of which $344.1 million was outstanding, and $1.1 billion of availability under its existing revolving credit facility.
Material changes versus the prior comparable period
- Sales increased $366.6 million, driven by acquisitions and growth in Fabrication Technology, partially offset by lower Air and Gas Handling sales from existing businesses and unfavorable foreign-currency translation.
- Operating income benefited from the absence of the $152.7 million goodwill and trademark impairment charge recorded in 2017 and from acquisition-related growth and restructuring benefits.
- Gross margin declined modestly because higher customer pricing to offset inflation increased both sales and cost of sales, particularly in Fabrication Technology.
- Restructuring and related charges increased to $77.7 million from $68.4 million. Approximately $51.4 million of restructuring cash payments were made during 2018.
- Interest expense increased to $44.1 million from $41.1 million, primarily due to higher rates on senior unsecured debt.
- Colfax recorded a $10.1 million loss on short-term investments after selling CIRCOR shares received in connection with the 2017 Fluid Handling divestiture. The sale generated $139.5 million of net cash proceeds.
- Colfax repurchased 6.45 million shares for $200.0 million, leaving $100.0 million of authorized repurchase capacity at year-end.
- Air and Gas Handling backlog declined to $832.2 million from $893.4 million. Approximately 74% of year-end 2018 backlog was expected to be recognized as revenue in 2019.
Guidance, outlook, risks and unusual items
Management did not provide a specific consolidated earnings or revenue forecast. It stated that the business was positioned for long-term organic growth through expanded product offerings, customer development, acquisitions, CBS initiatives, asset rationalization and cost reductions. Near-term priorities included reducing leverage associated with the planned DJO acquisition.
In November 2018, Colfax agreed to acquire DJO Global for $3.2 billion in cash. The transaction was expected to close in the first quarter of 2019 and was intended to create a high-margin orthopedic-solutions platform. Financing included a $1.3 billion revolving facility, $1.2 billion five-year term loan, $500 million two-year term loan, $460 million of tangible equity units and $1.0 billion of senior unsecured notes. The company also announced that it was evaluating strategic options, including a potential divestiture, for Air and Gas Handling.
The DJO transaction creates significant execution, integration, regulatory, healthcare reimbursement, leverage, interest-cost and potential goodwill-impairment risks. If the transaction failed under specified circumstances, Colfax could owe DJO a $220.5 million termination fee. Management also stated that it did not plan to pursue other material acquisitions or share repurchases until leverage was reduced.
- Key operating risks included cyclical demand, commodity prices, customer capital spending, raw-material costs, tariffs, foreign exchange, Brexit, cybersecurity, labor relations and international regulatory compliance.
- Air and Gas Handling remained exposed to weakness in power generation, oil, gas and petrochemical markets; existing-business orders declined $30.3 million in 2018 excluding acquisitions and currency effects.
- Asbestos liabilities were recorded for the next 15 years, but costs beyond that period were not estimable. Year-end asbestos liabilities totaled approximately $345.0 million, supported by approximately $341.2 million of insurance assets and receivables.
- Unresolved asbestos claims totaled 16,417 at year-end. Net asbestos cash outflows were $5.6 million in 2018, after $57.0 million of insurance reimbursements.
- The company had $2.6 billion of goodwill and $383.8 million of indefinite-lived trade names subject to impairment testing. The 2018 Air and Gas Handling impairment analysis showed fair value only 9% above carrying value.
- The effective tax rate for continuing operations was approximately 0.0% in 2018, influenced by Tax Act adjustments, research and foreign tax credits, deferred tax-asset realizations and reductions in uncertain tax positions.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2018. The financial statement audit opinion was unqualified.
Most important facts for an investor to verify
- Confirm the correct issuer: the provided filing is Colfax Corporation, not Enovis CORP.
- Verify completion, financing, purchase accounting and post-closing performance of the DJO acquisition.
- Assess pro forma leverage, debt maturities, interest expense, covenant compliance and the company’s deleveraging plan after the acquisition.
- Evaluate whether Air and Gas Handling will be divested, retained or otherwise repositioned, and the effect on revenue, margins and cash flow.
- Monitor Air and Gas Handling backlog, orders and exposure to power-generation, oil-and-gas and other cyclical markets.
- Review asbestos claim trends, insurance recoverability, insurer solvency and potential cash requirements beyond the company’s 15-year estimate.
- Assess goodwill and intangible-asset impairment sensitivity, particularly given the limited 9% valuation cushion in Air and Gas Handling.
- Reconcile continuing-operations performance with discontinued-operations losses, restructuring costs, acquisition costs and other non-recurring items.
- Consider dilution from the $460 million tangible equity units, which could convert into approximately 18.4 million to 22.1 million common shares in 2022 if not otherwise settled.