Business Context and Reporting Period
The supplied filing is Colfax Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 28, 2018, rather than an Enovis Corporation filing. Colfax operated through two continuing segments: Air and Gas Handling and Fabrication Technology, marketed primarily under the Howden and ESAB brands. The Fluid Handling business was sold on December 11, 2017 and is presented as discontinued operations.
Financial Performance and Position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $875.4 million | $844.5 million | $2,681.6 million | $2,426.1 million |
| Gross profit | $270.9 million | $263.9 million | $829.0 million | $761.8 million |
| Gross margin | 30.9% | 31.2% | 30.9% | 31.4% |
| Operating income | $60.2 million | $74.8 million | $188.1 million | $205.1 million |
| Operating margin | 6.9% | 8.9% | 7.0% | 8.5% |
| Net income attributable to Colfax | $31.3 million | $45.9 million | $94.3 million | $137.8 million |
| Diluted EPS | $0.26 | $0.37 | $0.77 | $1.11 |
- Continuing-operations net income attributable to Colfax was $34.0 million in Q3 and $125.6 million for the first nine months, compared with $43.8 million and $116.0 million, respectively, in the prior-year periods.
- Discontinued operations produced a loss of $2.7 million in Q3 and $31.3 million for nine months, compared with income of $2.1 million and $21.8 million in the comparable 2017 periods.
- Nine-month operating cash flow was $100.8 million, down from $114.7 million. Capital expenditures were $40.2 million and acquisition spending was $83.8 million.
- Cash and cash equivalents were $285.9 million at September 28, 2018, compared with $262.0 million at December 31, 2017. Approximately $281.7 million was held outside the United States.
- Total debt was $1.142 billion, including $1.136 billion of long-term debt, versus $1.061 billion at year-end 2017. The company had $1.2 billion available under its revolving credit facility and was in compliance with debt covenants.
- Cash flow included $139.5 million of proceeds from the sale of CIRCOR shares received in the Fluid Handling divestiture and $200.0 million of share repurchases.
Material Changes Versus the Prior Comparable Period
- Nine-month sales increased 10.5%, primarily from acquisitions and Fabrication Technology growth. Q3 sales increased 3.7%, despite a $35.3 million foreign-currency translation headwind.
- Fabrication Technology sales increased 8.7% in Q3 and 12.6% for nine months. Higher volume, acquisitions and pricing supported growth, but material-cost inflation reduced margins.
- Air and Gas Handling sales declined 3.0% in Q3 but increased 7.5% for nine months. Existing-business sales weakened, particularly in power generation and oil and gas, while acquisitions contributed materially.
- Restructuring charges increased to $15.9 million in Q3 and $40.8 million for nine months, compared with $7.3 million and $23.1 million, respectively. Management expected approximately $30 million of additional restructuring charges during the remainder of 2018.
- SG&A increased $13.0 million in Q3 and $66.5 million for nine months, largely due to acquired businesses and growth initiatives.
- The nine-month effective tax rate fell to 7.7% from 26.2%, mainly because of $33.7 million of discrete tax benefits. The Q3 rate was 24.6%, compared with 21.8%.
- Accumulated other comprehensive loss attributable to currency translation increased substantially, contributing to a $62.1 million nine-month comprehensive loss attributable to Colfax.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide a clear quantitative full-year earnings or revenue guidance figure.
- Air and Gas Handling backlog was $835.6 million at September 28, 2018; management expected approximately 43% to convert to revenue in 2018 and 57% thereafter.
- On October 1, 2018, after the reporting period, Colfax acquired Gas Control Equipment Group AB for $216.1 million. GCE had approximately $120 million of revenue for the preceding twelve months.
- Argentina became highly inflationary during Q3. Peso devaluation reduced Fabrication Technology segment operating income by $1.2 million.
- Asbestos-related matters remain material. Unresolved claims totaled 16,269 at period-end; recorded asbestos liabilities totaled approximately $343.3 million, partially offset by insurance assets and receivables of approximately $347.1 million. Actual liabilities and recoveries could differ materially.
- Key risks include cyclical markets, commodity and raw-material costs, foreign exchange, interest rates, acquisitions and integration, restructuring execution, customer capital spending, international regulatory compliance, cyber risks, product liability, pension funding and tax-law changes.
- A hypothetical 1% increase in applicable interest rates would have increased interest expense by approximately $2.8 million in Q3 and $7.5 million for nine months. A 10% depreciation in major currencies would have reduced equity by approximately $345 million, net of hedging effects.
- The company adopted the revenue-recognition standard on a full retrospective basis with no material impact. It estimated that adoption of the new lease standard in 2019 would add operating lease assets and liabilities of less than 3% of total assets.
- Management concluded that disclosure controls were effective and reported no material change in internal control over financial reporting.
Facts Investors Should Verify
- Confirm that the intended issuer is Colfax Corporation, because the request metadata identifies Enovis Corporation while the supplied filing is for Colfax.
- Reconcile reported consolidated results with continuing operations after the Fluid Handling divestiture.
- Assess the sustainability of sales growth given the reliance on acquisitions, declining Air and Gas Handling existing-business sales and lower order growth for the nine-month period.
- Evaluate margin pressure from inflation, material costs, restructuring charges and foreign-currency movements.
- Review liquidity after the October 1, 2018 GCE acquisition, $200 million of share repurchases and increased debt.
- Monitor asbestos claim developments, insurance recoveries and potential cash-flow volatility.
- Adjust interpretation of nine-month earnings for the unusually low 7.7% effective tax rate and associated discrete tax benefits.