Business Context and Reporting Period
This filing is Colfax Corporation’s unaudited Form 10-Q for the quarter and nine months ended October 2, 2020. The source filing identifies the registrant as Colfax Corporation, not Enovis CORP. Continuing operations consisted of Fabrication Technology, principally ESAB, and Medical Technology, principally DJO. The Air and Gas Handling business was sold on September 30, 2019 and is presented as discontinued operations.
Results were materially affected by the COVID-19 pandemic, including lower industrial demand, delayed elective medical procedures, supply-chain disruptions and operating inefficiencies. Management reported a recovery from the second quarter’s downturn, with third-quarter sales down 4.8% year over year versus a 31.8% decline in the second quarter.
Key Financial Metrics
| Metric | Three Months Ended October 2, 2020 | Year-over-Year Change | Nine Months Ended October 2, 2020 | Year-over-Year Change |
|---|---|---|---|---|
| Net sales | $805.9 million | Down 4.8% | $2.243 billion | Down 8.1% |
| Gross profit | $344.1 million | Down $24.0 million | $933.4 million | Down $71.8 million |
| Gross margin | 42.7% | Down 80 basis points | 41.6% | Up 40 basis points |
| Operating income | $61.9 million | Down $5.9 million | $103.8 million | Down $7.9 million |
| Operating margin | 7.7% | Down 30 basis points | 4.6% | Flat |
| Net income from continuing operations | $16.8 million | Up from $3.8 million | $22.6 million | Up from a $15.5 million loss |
| Adjusted EBITA | $107.7 million | Down 14.4% | $248.2 million | Down 27.7% |
| Adjusted EBITA margin | 13.4% | Down 150 basis points | 11.1% | Down 300 basis points |
Consolidated net income attributable to Colfax was $13.4 million, or $0.10 per diluted share, for the quarter, compared with $10.5 million, or $0.08 per share, in the prior-year quarter. For the nine-month period, net income attributable to Colfax was $9.4 million, or $0.07 per share, compared with a $510.8 million loss, or $3.77 per share, in 2019.
- Fabrication Technology sales declined 8.9% in the quarter and 15.4% for the nine months. Third-quarter segment operating income was $63.1 million, with a 12.8% margin.
- Medical Technology sales increased 2.3% in the quarter and 8.6% for the nine months, although the nine-month comparison benefited from two additional months of DJO results in 2020. Third-quarter segment operating income was $22.9 million, with a 7.3% margin.
- Cash provided by operating activities was $173.1 million for the nine months, compared with $65.7 million in the prior-year period. Capital expenditures were $81.6 million, producing operating cash flow less capital expenditures of approximately $91.6 million.
- Cash and cash equivalents were $66.4 million at October 2, 2020, down from $109.6 million at December 31, 2019. Management reported approximately $1.2 billion of capacity under the credit agreement and other facilities.
- Total debt was $2.219 billion, including $27.0 million classified as current, compared with $2.312 billion at December 31, 2019. The company had $975 million available under its revolver and a weighted-average Credit Facility borrowing rate of 1.91%.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily from COVID-19-related volume reductions and unfavorable foreign currency translation. The nine-month decline included a $72.1 million currency headwind, while the quarter included a $13.2 million headwind.
- Fabrication Technology was pressured by lower industrial demand, particularly in markets exposed to capital investment and commodities. Management cited an approximate 19% sequential sales improvement in the third quarter.
- Medical Technology recovered as elective procedures and sporting activity resumed. Reconstructive sales grew 9.3% in the quarter, while Prevention and Rehabilitation sales declined 0.4%. Approximately $7 million of third-quarter Medical Technology sales related to PPE and was not expected to recur.
- Adjusted EBITA declined despite temporary cost reductions, restructuring benefits and lower discretionary spending. Medical Technology margins were particularly affected by freight costs, production inefficiencies and lower volume.
- Interest expense declined by $6.2 million in the quarter and $8.2 million for the nine months, reflecting lower interest rates and lower average debt.
- The prior-year period included a $33.6 million pension settlement loss, $56.7 million of DJO acquisition-related strategic transaction costs and a $481 million impairment charge associated with the divested Air and Gas Handling business.
Outlook, Commentary, Risks and Unusual Items
The filing does not provide a clear quantitative revenue, earnings or cash-flow forecast. Management stated that it expects available operating cash flow, cash balances and borrowing capacity to fund working capital and other needs over the next twelve months, but emphasized that the full future impact of COVID-19 cannot reasonably be estimated.
- The May 2020 credit agreement amendment increased permitted leverage thresholds temporarily, allowed specified cash deductions from leverage calculations and reduced the interest coverage requirement to 2.75:1.00 through June 30, 2021. The company was in compliance with its covenants at quarter-end.
- COVID-19 risks include renewed restrictions, delayed or canceled elective procedures, reduced industrial capital spending, supply-chain disruption, customer credit deterioration and weaker cash generation. Management noted that residual caution could affect recovery into 2021.
- Asbestos-related contingencies remained material. At October 2, 2020, accrued asbestos liabilities totaled approximately $321.7 million, offset in part by insurance assets and receivables totaling approximately $305.8 million. Management cautioned that litigation outcomes, insurance coverage and insurer solvency could cause actual liabilities and recoveries to differ materially.
- Restructuring charges were $6.3 million in the quarter and $28.5 million for the nine months. Medical Technology also incurred $2.6 million of MDR and other costs in the quarter and $4.5 million for the nine months.
- The company adopted the current expected credit loss standard on January 1, 2020, recording a $4.8 million after-tax reduction to opening retained earnings.
- Foreign exchange remains significant: approximately 57% of quarterly sales and 58% of nine-month sales came from operations outside the United States. A 10% depreciation in major currencies would have reduced equity by approximately $159 million, net of the Euro debt hedge.
- On October 27, 2020, the board approved change-in-control agreements for four executive officers. Certain qualifying terminations following a change in control could trigger payments equal to two times base salary plus two times target cash bonus opportunity.
Important Facts for Investors to Verify
- Confirm the issuer identity and ticker because the supplied metadata names Enovis CORP, while the filing is for Colfax Corporation, ticker CFX.
- Assess whether the Medical Technology recovery is sustainable after the nonrecurring PPE contribution and whether elective procedures remain vulnerable to renewed COVID-19 restrictions.
- Review leverage, covenant headroom and the temporary terms of the May 2020 credit agreement amendment, including the scheduled tightening of leverage thresholds.
- Evaluate recurring profitability using GAAP results alongside Adjusted EBITA, including acquisition-related amortization, restructuring, MDR costs and other excluded items.
- Reconcile cash generation with debt service, capital expenditures, restructuring payments, asbestos-related outflows and potential working-capital volatility.
- Monitor asbestos claims, insurance recoveries and related litigation, as actual outcomes could materially affect liquidity and financial results.