Colfax Corporation — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2017, compared with July 1, 2016. The filing identifies the registrant as Colfax Corporation, not Enovis Corp. Results are unaudited and interim results may be affected by seasonality.
Business Context
Colfax was a diversified global industrial manufacturer operating through Gas and Fluid Handling and Fabrication Technology. Products included fans, compressors, pumps, valves, welding and cutting equipment, consumables, and related services. Approximately 73% of second-quarter sales and 72% of six-month sales were generated outside the United States.
Financial Performance
| Metric | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Net sales | $965.8 million | $957.2 million | $1,810.8 million | $1,834.1 million |
| Gross profit | $300.7 million | $301.1 million | $580.1 million | $581.6 million |
| Gross margin | 31.1% | 31.5% | 32.0% | 31.7% |
| Operating income | $92.0 million | $73.1 million | $158.2 million | $121.5 million |
| Operating margin | 9.5% | 7.6% | 8.7% | 6.6% |
| Net income attributable to Colfax | $53.4 million | $39.8 million | $91.9 million | $62.4 million |
| Diluted EPS | $0.43 | $0.32 | $0.74 | $0.51 |
Q2 sales increased 0.9%, while six-month sales declined 1.3%. Q2 operating income increased 26%, and six-month operating income increased 30%. SG&A declined to 21.6% of sales in Q2 and 22.9% for the six-month period, compared with 22.3% and 23.3%, respectively. Effective tax rates were 30.0% in Q2 and 29.0% for the six months, versus 31.7% and 32.3% in the comparable periods.
Cash Flow, Liquidity and Debt
- Six-month operating cash flow was $98.6 million, compared with $56.4 million in the prior-year period.
- Investing cash outflows were $60.6 million, including $50.0 million for acquisitions and $10.6 million for fixed-asset purchases.
- Cash and cash equivalents were $272.2 million at June 30, 2017, up from $221.7 million at December 31, 2016. Approximately $267.5 million was held outside the United States.
- Total debt was $1.33 billion, compared with $1.29 billion at year-end 2016. Debt included $393.6 million of senior unsecured notes, $651.4 million of term loans, $214.8 million of revolving and other borrowings, and $68.5 million under receivables financing.
- In April 2017, Colfax issued €350 million of 3.25% senior unsecured notes due April 2025. Proceeds were used mainly to repay existing borrowings and for general corporate purposes.
- The company reported $1.1 billion of availability under its revolving credit facility, $212.3 million of capacity under bilateral facilities, and $774.7 million of letter-of-credit capacity. It was in compliance with applicable credit covenants.
Material Changes Versus the Prior Period
- Fabrication Technology sales increased to $494.8 million in Q2 and $954.9 million for six months, supported by acquisitions and growth in several markets. Segment operating margin improved to 12.3% in Q2 and 12.2% for six months.
- Gas and Fluid Handling sales declined to $471.0 million in Q2 and $855.9 million for six months, primarily due to weakness in oil, gas and petrochemical markets and foreign-exchange effects. Six-month segment operating margin nevertheless improved to 9.2% from 8.6%.
- Restructuring and other related charges fell to $0.5 million in Q2 and $7.6 million for six months, versus $14.5 million and $32.2 million, respectively. Results benefited from restructuring savings and an approximately $12 million gain on the sale of a previously closed European facility.
- Management reported approximately $9 million of Q2 and $18 million of six-month restructuring-related cost savings, including SG&A savings.
- Working capital consumed $73.3 million of cash during the first six months, primarily because of higher receivables and inventories.
- Two Fabrication Technology acquisitions were completed in Q2 for net cash consideration of €47.3 million. Colfax also agreed to acquire Siemens Turbomachinery Equipment GmbH for approximately €195 million, with closing expected in the fourth quarter of 2017.
Outlook, Risks and Unusual Items
- No specific revenue or earnings guidance was provided in the filing. Colfax expected to incur approximately $25 million of additional restructuring charges during the remainder of 2017.
- Seasonality is material: Gas and Fluid Handling shipments historically peak in the fourth quarter, while European operations generally slow during July, August and December.
- Asbestos litigation remained a significant contingency. Unresolved asbestos claims totaled 18,037 at June 30, 2017. Recorded asbestos liabilities totaled approximately $370.0 million, offset in part by insurance assets and receivables totaling approximately $357.4 million.
- The company received $26.0 million of previously unreimbursed asbestos-related costs from insurers during the first six months. Management stated that the outcome of related insurance matters remains uncertain.
- A 10% depreciation in major currencies, after the effect of euro-denominated borrowings, was estimated to reduce equity by approximately $325 million. A 1% increase in interest rates would have increased Q2 and six-month interest expense by approximately $2.6 million and $5.8 million, respectively.
- Additional risks included cyclical end markets, commodity prices, acquisition integration, restructuring execution, raw-material costs, international operations, credit-facility restrictions, pensions, cybersecurity, taxes, product liability and impairment of goodwill or intangible assets.
- The company disclosed $413,000 of Q2 sales and $1.24 million of sales during the preceding 12 months by a non-U.S. subsidiary to an Iranian petrochemical-sector distributor, with an aggregate net profit margin of 17%.
Investor Verification Priorities
- Confirm the registrant and ticker identity, because the supplied metadata says Enovis Corp while the filing is for Colfax Corporation.
- Assess whether Gas and Fluid Handling demand, particularly in oil, gas, petrochemical and power-generation markets, is improving.
- Verify the sustainability of restructuring savings and the expected $25 million of remaining 2017 restructuring charges.
- Review leverage, variable-rate debt exposure, covenant headroom and the December 2017 scheduled termination of the $80 million receivables financing facility.
- Evaluate funding and insurance coverage for asbestos liabilities, including the uncertainty surrounding insurer recoveries.
- Monitor completion and integration of the Siemens Turbomachinery acquisition and the Q2 Fabrication Technology acquisitions.
- Review the impact of foreign-exchange movements, overseas cash restrictions and the planned adoption of new revenue-recognition guidance in 2018.