Business Context and Reporting Period
Colfax Corporation, the registrant identified in the filing, reported unaudited results for the three and six months ended June 29, 2012, compared with July 1, 2011. Colfax is a global industrial manufacturer operating through Gas and Fluid Handling and Fabrication Technology. The January 13, 2012 acquisition of Charter International plc transformed the company into a larger, multi-platform enterprise and materially affects period-to-period comparability.
Key Financial Metrics
| Metric | Three Months Ended June 29, 2012 | Six Months Ended June 29, 2012 |
|---|---|---|
| Net sales | $1,045.7 million | $1,932.0 million |
| Gross profit | $327.9 million | $583.3 million |
| Gross margin | 31.4% | 30.2% |
| Operating income | $60.3 million | $36.2 million |
| Net income (loss) attributable to Colfax | $12.4 million | $(93.2) million |
| Net income (loss) available to common shareholders | $7.3 million | $(102.0) million |
| Diluted earnings (loss) per share | $0.07 | $(1.16) |
- Operating income included $0.8 million of Charter acquisition-related expense, $18.6 million of restructuring charges and $3.2 million of asbestos coverage litigation expense in the second quarter. Six-month amounts were $43.6 million, $27.2 million and $5.5 million, respectively.
- Interest expense increased to $25.7 million in the quarter and $44.7 million year to date, compared with $1.5 million and $3.3 million in the respective 2011 periods.
- Six-month income taxes were $73.3 million despite a pretax loss of $8.5 million, primarily due to a $50.3 million increase in valuation allowances against U.S. deferred tax assets and nondeductible acquisition-related, corporate and interest costs.
- Net cash used in operating activities was $32.1 million for the first six months, compared with $28.4 million provided in the prior-year period. Capital expenditures were $41.0 million.
- Cash used in investing activities was $1.703 billion, including $1.662 billion for acquisitions. Cash provided by financing activities was $2.216 billion.
- Cash and cash equivalents were $539.0 million at June 29, 2012, compared with $75.1 million at December 31, 2011.
- Total debt was $1.691 billion, including $1.658 billion of long-term debt. The weighted-average interest rate under the new credit agreement was 3.90%, with $291.9 million available under the revolving facilities.
Material Changes Versus the Prior Comparable Period
- Reported sales increased from $186.7 million to $1.046 billion in the quarter and from $345.3 million to $1.932 billion for the six months, largely reflecting the Charter acquisition. On a pro forma basis, second-quarter sales increased 2.4% and six-month sales increased 6.3%.
- On a pro forma basis, existing-business sales increased 9.5% in the quarter and 9.9% for the six months, while foreign-currency translation reduced sales by 8.1% and 6.2%, respectively.
- Gross margin declined from 34.6% to 31.4% in the quarter and from 34.1% to 30.2% for the six months, primarily due to the lower-margin Fabrication Technology segment and acquisition-related amortization.
- Six-month results changed from $16.9 million of net income available to common shareholders in 2011 to a $102.0 million loss in 2012, reflecting acquisition financing costs, acquisition-related expenses, restructuring, amortization and the deferred-tax valuation allowance.
- Segment sales for the quarter were $496.5 million in Gas and Fluid Handling and $549.2 million in Fabrication Technology. Segment operating margins were 9.1% and 8.3%, respectively.
Guidance, Outlook, Risks and Unusual Items
- Management expects the stronger U.S. dollar to reduce reported sales and operating profit during the remainder of 2012 and cited weakness in Europe, China and Brazil as near-term risks.
- Management expects continued integration of Charter, application of the Colfax Business System, asset and back-office rationalization, manufacturing consolidation and margin and working-capital improvements. No specific full-year revenue or earnings guidance is provided.
- The company expected approximately $16.0 million of additional restructuring charges during the remainder of 2012.
- Colfax agreed to acquire approximately 91% of Soldex S.A. for approximately $183.4 million, subject to regulatory approvals and expected to close in the third quarter of 2012. The filing states that cash on hand was expected to fund the transaction.
- Debt agreements impose leverage and interest-coverage covenants, restrict dividends and other corporate actions, and are secured by substantial domestic assets and certain foreign subsidiary shares. The company reported compliance as of June 29, 2012.
- The Series A perpetual convertible preferred stock carries a 6% cumulative dividend, increasing to 8% if required dividends are not paid. Preferred dividends reduced earnings available to common shareholders by $8.8 million for the six months.
- Asbestos-related claims remained significant, with 24,051 unresolved claims at June 29, 2012. Recorded asbestos liabilities totaled approximately $421.9 million, partially offset by insurance assets and receivables. Management cautioned that litigation, insurance coverage and insurer solvency uncertainties could materially affect results and cash flow.
- The company had substantial pension obligations, contributed $39.2 million during the first six months and expected additional contributions of $15 million to $25 million during the remainder of 2012.
- Approximately 82% of second-quarter sales and 81% of six-month sales originated outside the United States. A 10% depreciation in major currencies was estimated to reduce equity by approximately $90 million, net of hedging effects.
- Charter was excluded from the scope of the 2012 annual internal-control assessment while integration of its controls continued. Management concluded that disclosure controls and procedures were effective as of June 29, 2012.
Important Facts for Investors to Verify
- Reconcile reported results with pro forma results to isolate Charter acquisition effects, organic growth, acquisitions and foreign-currency translation.
- Assess the sustainability of earnings after excluding acquisition-related costs, restructuring charges, amortization, financing costs and the deferred-tax valuation allowance.
- Review debt maturities, variable-rate exposure, covenant headroom, collateral requirements and available revolver capacity.
- Evaluate working-capital trends and the drivers of negative operating cash flow despite reported quarterly profitability.
- Monitor Charter integration, expected restructuring benefits and the pending Soldex acquisition, including financing and regulatory approval.
- Review asbestos claims, insurance recoveries, pension funding requirements, tax audits and uncertain tax benefits, which totaled $78.7 million before applicable offsets.
- Confirm the filing identity: the supplied Form 10-Q is for Colfax Corporation, not Enovis Corporation.