Business Context and Reporting Period
This Form 10-Q is filed by Colfax Corporation, not Enovis Corp., for the quarter and nine months ended September 29, 2017. Colfax operated through Air and Gas Handling and Fabrication Technology following the classification of its Fluid Handling business as discontinued operations.
Colfax entered into an agreement to sell Fluid Handling to CIRCOR International for $542 million in cash, approximately 3.3 million CIRCOR shares, and the assumption of certain liabilities. Closing was expected during the fourth quarter of 2017, subject to regulatory and other conditions.
Financial Performance and Position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $844.5 million | $766.5 million | $2,426.1 million | $2,373.3 million |
| Gross profit | $263.9 million | $238.3 million | $761.8 million | $742.4 million |
| Gross margin | 31.2% | 31.1% | 31.4% | 31.3% |
| Operating income | $74.8 million | $58.7 million | $205.1 million | $177.4 million |
| Operating margin | 8.9% | 7.7% | 8.5% | 7.5% |
| Net income attributable to Colfax | $45.9 million | $28.0 million | $137.8 million | $90.3 million |
| Diluted EPS | $0.37 | $0.23 | $1.11 | $0.73 |
Continuing-operations net income was $49.6 million in Q3 and $129.9 million for the nine-month period. Discontinued operations contributed $2.1 million in Q3 and $21.8 million year to date, compared with a loss in the prior-year periods.
- Segment performance: Q3 Air and Gas Handling sales increased to $362.3 million and segment operating income increased to $40.2 million. Nine-month sales declined to $989.0 million and segment operating income declined to $97.6 million.
- Fabrication Technology: Q3 sales increased to $482.2 million and segment operating income to $56.2 million. Nine-month sales increased to $1,437.1 million and segment operating income to $172.7 million.
- Cash flow: Nine-month operating cash flow was $114.7 million, up from $101.9 million. Capital expenditures were $20.7 million and acquisition spending was $56.9 million.
- Liquidity: Cash and cash equivalents were $272.5 million at September 29, 2017, including $12.0 million associated with Fluid Handling. The company reported $1.3 billion of total debt and approximately $1.1 billion available under its revolving credit facility.
- Leverage and facilities: The company had $416 million of outstanding letters of credit and $52.3 million of receivables-financing borrowings. It was in compliance with its debt covenants.
- Balance sheet: Total assets were $6.84 billion and total equity was $3.51 billion at September 29, 2017.
Material Changes Versus the Prior Comparable Period
- Q3 sales increased 10.2%, while nine-month sales increased 2.2%. Growth was led by Fabrication Technology and Q3 organic growth in both continuing segments.
- Operating margin improved by 120 basis points in Q3 and 100 basis points year to date, supported by restructuring savings and lower restructuring charges.
- Interest expense increased by $4.4 million in Q3 and $4.1 million year to date, primarily because of higher interest costs on senior unsecured debt.
- Restructuring charges declined to $7.3 million in Q3 and $23.1 million year to date, versus $11.8 million and $38.0 million, respectively.
- Working capital consumed $156.7 million of cash year to date, primarily because of higher receivables and inventories and lower customer advances and project billings.
- The company issued €350 million of 3.25% senior unsecured notes due in April 2025 and used proceeds partly to repay other borrowings.
- Retained earnings included a $10.0 million cumulative adjustment from adopting stock-compensation accounting guidance.
Guidance, Outlook, Risks and Unusual Items
- No quantitative full-year earnings or revenue guidance is provided in the filing.
- Management expects approximately $22 million of additional restructuring charges during the remainder of 2017, including approximately $3 million related to discontinued operations.
- Management expected the Fluid Handling sale to close in the fourth quarter of 2017 and expected to record a material gain. The value of the equity consideration could change with CIRCOR’s share price and other purchase-price adjustments.
- Colfax completed the acquisition of Siemens Turbomachinery Equipment GmbH on October 2, 2017 for approximately €193 million. The acquisition was expected to strengthen Air and Gas Handling’s compression and steam-turbine offerings.
- Colfax retained asbestos-related contingencies and insurance coverage after the planned Fluid Handling sale. At September 29, 2017, asbestos-related liabilities included $53.6 million of current accrued liabilities and $309.0 million of long-term liabilities, offset partly by insurance assets and receivables.
- Management identified risks related to completing the sale, regulatory approvals, separation costs, CIRCOR share-price volatility, cyclical markets, commodity prices, acquisitions, foreign exchange, pensions, raw-material costs, cybersecurity, product liability and debt covenants.
- Approximately 76% of nine-month sales were generated outside the United States. A hypothetical 10% depreciation in major currencies would have reduced equity by approximately $350 million, net of the translation effect of euro-denominated borrowings.
- The filing states that quarterly results are seasonal, with shipments historically peaking in the fourth quarter. A 1% increase in interest rates would have increased interest expense by approximately $8.3 million for the nine-month period.
Important Facts for Investors to Verify
- Confirm the correct issuer: the supplied filing is for Colfax Corporation, although the request identifies Enovis Corp.
- Verify whether the CIRCOR transaction closed on the expected timetable, the final cash and equity consideration, and the resulting gain.
- Reconcile continuing-operations results after the Fluid Handling disposal and assess the effect of the discontinued-operation classification.
- Monitor debt levels, covenant compliance, variable-rate exposure and the December 19, 2017 scheduled termination date of the receivables-financing facility.
- Assess the sustainability of restructuring savings, particularly against higher material costs and weaker orders in certain power-generation, oil, gas and petrochemical markets.
- Evaluate asbestos claims, insurance recoveries and the liabilities retained after the Fluid Handling sale.
- Review the post-quarter-end Siemens acquisition, purchase accounting, financing and integration performance.