Business Context and Reporting Period
The source filing is Colfax Corporation’s unaudited Form 10-Q for the quarter and six months ended June 29, 2018. The request metadata identifies Enovis CORP, but the filing identifies the registrant as Colfax Corporation; this entity mismatch should be verified.
Colfax operated through two continuing segments: Air and Gas Handling, including Howden products and services, and Fabrication Technology, including ESAB welding and cutting products. The Fluid Handling business was sold on December 11, 2017, and is presented as discontinued operations.
Key Financial Metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $925.3 million | $848.0 million | $1,806.2 million | $1,581.6 million |
| Gross profit | $287.4 million | $258.1 million | $558.1 million | $497.9 million |
| Gross margin | 31.1% | 30.4% | 30.9% | 31.5% |
| Operating income | $65.7 million | $70.1 million | $127.9 million | $130.3 million |
| Operating margin | 7.1% | 8.3% | 7.1% | 8.2% |
| Net income attributable to Colfax | $38.5 million | $53.4 million | $63.0 million | $91.9 million |
| Diluted EPS from continuing operations | $0.52 | $0.30 | $0.74 | $0.58 |
| Consolidated diluted EPS | $0.31 | $0.43 | $0.51 | $0.74 |
Six-month operating cash flow was $33.7 million versus $98.6 million in the prior-year period. Investing activities provided $97.0 million, primarily from the $139.5 million sale of CIRCOR shares and other divestiture proceeds. Financing activities used $115.7 million, including $143.9 million of share repurchases. Cash and cash equivalents were $257.7 million at June 29, 2018.
Total debt was $1.074 billion, including $403.6 million of senior unsecured notes, $559.9 million of term loans and $110.1 million of revolver and other borrowings. The company reported $1.2 billion of revolving-credit availability and compliance with its debt covenants. The estimated fair value of debt was approximately $1.1 billion.
Segment sales for the quarter were $364.4 million in Air and Gas Handling and $560.9 million in Fabrication Technology. Segment operating margins were 7.3% and 12.7%, respectively.
Material Changes Versus the Prior Comparable Period
- Quarterly sales increased 9.1%; six-month sales increased 14.2%. Acquisitions and foreign-currency translation were the principal contributors.
- Fabrication Technology delivered quarterly sales growth of $66.1 million and segment operating income growth of $10.3 million. Existing-business sales, pricing and volumes improved, although higher raw-material costs constrained margins.
- Air and Gas Handling quarterly sales increased modestly, but existing-business sales declined $46.4 million. Segment operating income fell $8.0 million, and segment margin declined to 7.3% from 9.8%, reflecting lower volumes and higher acquisition-related expenses.
- Operating income declined despite higher gross profit because SG&A and restructuring charges increased. Restructuring charges were $16.9 million in the quarter and $24.9 million for the six months, versus $11.1 million and $15.8 million, respectively.
- Continuing-operations earnings benefited from tax discrete items, including $20.8 million in the quarter and $26.9 million for the six months. The effective tax rates were negative 11.4% and negative 0.9%, respectively, compared with 32.0% and 28.7% in the prior-year periods.
- Consolidated earnings declined because discontinued operations generated losses of $25.7 million in the quarter and $28.6 million for the six months, versus income of $16.6 million and $19.7 million in the prior-year periods. The losses included asbestos-related activity, divestiture expenses, tax effects and a loss on disposal.
Guidance, Outlook, Risks and Unusual Items
- Air and Gas Handling backlog was $837.5 million at June 29, 2018; management expected approximately 64% to be recognized as revenue in 2018 and 36% thereafter.
- Management expected to incur approximately $40 million to $50 million of additional restructuring charges during the remainder of 2018. No broader earnings or revenue guidance is provided in the filing text.
- Management cited weakness in power generation, mining, oil, gas and petrochemical markets, delayed end-market recovery, and a $20 million order cancellation connected with restrictions affecting non-U.S. subsidiaries.
- Asbestos exposure remains material. At June 29, 2018, accrued and long-term asbestos liabilities totaled approximately $352.7 million, supported by asbestos insurance assets and receivables totaling approximately $356.4 million. Management cautioned that actual liabilities and recoveries may differ materially because of claims, coverage, insurer solvency and litigation uncertainties.
- Six-month net asbestos-related cash outflow was $10.5 million, compared with a $10.8 million inflow in the prior-year period. Defined-benefit plan contributions were $17.6 million.
- Approximately 76% of sales were generated outside the United States. A 10% depreciation in major currencies, net of hedging effects, was estimated to reduce equity by approximately $312 million.
- Management stated that a 1% increase in interest rates would have increased interest expense by approximately $2.5 million for the quarter and $4.8 million for the six months.
- The company disclosed that certain non-U.S. subsidiaries were winding down Iran-related activities following changes in U.S. sanctions requirements. Disclosed second-quarter Iran-related revenue totaled approximately $3.8 million, with varying profitability by transaction.
- The company adopted revenue-recognition guidance under Topic 606 retrospectively without a material impact. It expected adoption of the lease standard on January 1, 2019 to materially increase reported operating lease assets and liabilities.
Investor Verification Priorities
- Verify whether this Colfax filing, rather than an Enovis filing, is the intended source document.
- Assess the sustainability of earnings excluding discrete tax benefits, the CIRCOR-share gain and discontinued-operations effects.
- Monitor Air and Gas Handling orders, backlog conversion and exposure to power-generation, mining, oil and gas markets.
- Evaluate the effect of restructuring charges and the expected additional $40 million to $50 million of 2018 charges.
- Reconcile weak operating cash flow with reported earnings, particularly working-capital investment, pension funding and asbestos-related payments.
- Review leverage, variable-rate debt exposure, covenant headroom and the use of revolver borrowings.
- Assess asbestos claims and insurance recoverability, including the 17,574 unresolved claims at quarter-end.
- Consider foreign-exchange, raw-material-cost, sanctions-compliance and Iran-related risks.