Enovis CORP annual report, FY2012

Filing scope and business context

The provided filing is Colfax Corporation’s Form 10-K for the fiscal year ended December 31, 2012, filed February 18, 2013. The request metadata identifies Enovis CORP and “2012 Q4,” but the filing itself identifies the registrant as Colfax Corporation and reports full-year results, not a standalone fourth quarter. Colfax was a diversified industrial manufacturer operating through Gas and Fluid Handling and Fabrication Technology, with products sold under Howden, ESAB and Colfax Fluid Handling brands.

The January 2012 acquisition of Charter International plc substantially transformed the company and makes comparisons with 2011 difficult. The filing states that approximately 80% of 2012 sales were derived from operations outside the United States.

Financial performance and position

Metric	2012	2011
Net sales	$3.914 billion	$693.4 million
Gross profit	$1.152 billion	$240.1 million
Gross margin	29.4%	34.6%
Operating income	$140.0 million	$25.9 million
Operating margin	3.6%	3.7%
Net income attributable to Colfax	$(64.4) million	$4.6 million
Net loss available to common shareholders	$(83.4) million	$4.6 million
Basic and diluted EPS	$(0.92)	$0.10
Net cash provided by operating activities	$164.3 million	$57.2 million

Pro forma sales, including Charter and Soldex as if acquired at the beginning of 2011, increased from $3.839 billion in 2011 to $3.914 billion in 2012, a 1.9% increase. Existing-business sales increased 5.3%, acquisitions added 2.2%, and foreign-currency translation reduced sales by 5.6%.
Segment sales were $1.901 billion for Gas and Fluid Handling and $2.013 billion for Fabrication Technology. Pro forma segment operating margins were 7.4% and 7.0%, respectively.
Gross margin declined primarily because of the post-acquisition sales mix, acquisition-related inventory step-up expense of $18.7 million, and the greater proportion of lower-margin consumables and aftermarket sales.
Interest expense increased to $91.6 million from $5.9 million because of debt used to finance the Charter acquisition. Income taxes were $90.7 million despite $48.4 million of pretax income, principally because of a $50.3 million non-cash increase in the valuation allowance on U.S. deferred tax assets.
Cash and cash equivalents were $482.4 million at year-end, including $396.5 million held outside the United States. Total debt was $1.728 billion, compared with $111.5 million at year-end 2011.
Operating cash flow was supported by a $78.3 million improvement from working capital. Investing cash outflow was $1.941 billion, including $1.860 billion for acquisitions and $83.6 million for capital expenditures. Financing activities provided $2.193 billion through debt and equity issuance, partially offset by repayments and preferred dividends.
Gas and Fluid Handling backlog was $1.4 billion at December 31, 2012, compared with $1.3 billion of pro forma backlog at December 31, 2011.

Material changes versus the prior comparable period

Colfax completed the approximately $2.6 billion Charter acquisition on January 13, 2012, adding welding, cutting, automation and air- and gas-handling businesses. Charter and Soldex represented approximately 83% of 2012 net sales.
Additional 2012 transactions included the acquisitions of Soldex, Co-Vent and the remaining interests in Sibes, plus an increased ownership interest in ESAB India.
The company’s workforce increased to 16,286 associates from 2,211, largely because of Charter. Goodwill increased to $2.074 billion from $204.8 million, and net intangible assets increased to $779.0 million from $41.0 million.
Restructuring and other related charges increased to $60.1 million from $9.7 million, and Charter acquisition-related expense was $43.6 million. Management expected an additional approximately $30.0 million of restructuring costs in 2013.
The company issued common and preferred equity in January 2012 and raised additional common equity in March 2012. At year-end, 13.9 million Series A perpetual convertible preferred shares were outstanding, carrying a 6% cumulative dividend rate.
The company reported a $42.3 million consolidated net loss, compared with $4.6 million of net income in 2011. The loss reflected acquisition-related costs, higher amortization, restructuring, interest expense and tax valuation allowances.

Guidance, outlook, risks and unusual items

Management did not provide specific consolidated revenue or earnings guidance. It stated that the business was positioned for long-term organic growth through expanded product offerings, customer expansion, a balanced mix of long- and short-cycle businesses, and exposure to developed and emerging markets. Management expected continued growth through strategic acquisitions.

Key integration priorities included applying the Colfax Business System, improving margins and working capital, rationalizing assets and back-office functions, and consolidating manufacturing facilities.
The Deutsche Bank Credit Agreement included variable-rate debt, leverage and interest-coverage covenants, restrictions on additional debt, dividends, repurchases, investments and asset dispositions. The company was in compliance at December 31, 2012. Revolver availability was $291.9 million.
Asbestos liabilities totaled $434.0 million and related insurance assets totaled $394.8 million. Insurance coverage litigation remained unresolved; potential interim funding requirements could reach $10 million per quarter until final resolution.
Defined benefit and other post-retirement plans had a combined funded deficit of approximately $412.8 million at year-end. Estimated 2013 cash contributions were $51.8 million.
Contractual obligations totaled $2.730 billion, including $1.784 billion of debt principal, $405.6 million of estimated debt interest, $125.7 million of operating leases and $380.6 million of purchase obligations.
Major risks included cyclical industrial demand, acquisition integration, leverage and variable interest rates, foreign currency exposure, raw-material costs, international regulatory and sanctions compliance, labor relations, product liability, environmental claims, cybersecurity, pension funding, goodwill impairment and tax assessments.
The company disclosed that acquired foreign subsidiaries completed final shipments under four Iranian sales agreements before withdrawing from the Iranian market. It stated that no future shipments to Iran were intended. Historical Cuban sales totaling approximately $60,000 were reported to OFAC as potentially violative transactions.
Management and the independent auditor concluded that internal control over financial reporting was effective; however, Charter and Soldex, which represented 83% of 2012 sales, were excluded from management’s assessment because integration of their controls was incomplete.

Facts investors should verify

Confirm the correct issuer: the supplied filing is for Colfax Corporation, not Enovis CORP.
Separate reported 2012 results from pro forma results because Charter was acquired in January 2012 and substantially changed the company’s scale and business mix.
Assess whether operating cash flow can support debt service, pension contributions, asbestos payments, restructuring costs and future acquisitions.
Review debt maturities, variable-rate exposure, covenant thresholds and the availability and conditions of the revolving credit facility.
Evaluate the assumptions underlying the $434.0 million asbestos liability and $394.8 million insurance asset, including insurer solvency and pending coverage litigation.
Monitor goodwill and intangible assets of approximately $2.853 billion, deferred tax valuation allowances of $372.0 million and the potential effect of future impairments or tax recoveries.
Review the integration of Charter and Soldex internal controls, restructuring execution, expected synergies and the additional $30.0 million of anticipated 2013 restructuring costs.