Business Context and Reporting Period
This unaudited Form 10-Q is for Colfax Corporation, not Enovis Corp., for the three months ended March 28, 2014, compared with March 29, 2013. Colfax operated through Gas and Fluid Handling and Fabrication Technology, selling globally under the Howden, ESAB and Colfax Fluid Handling brands.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $1,054.3 million | $947.1 million | 11.3% increase |
| Gross profit | $325.6 million | $290.7 million | 12.0% increase |
| Gross margin | 30.9% | 30.7% | 20 bps increase |
| Operating income | $87.7 million | $72.3 million | 21.3% increase |
| Net income | $54.8 million | $32.3 million | 69.9% increase |
| Net income attributable to Colfax | $46.8 million | $27.6 million | 69.4% increase |
| Net income available to common shareholders | $24.9 million | $22.6 million | 10.3% increase |
| Basic and diluted EPS | $0.22 | $0.21 | Increase |
| Net cash used in operating activities | $(67.0) million | $(13.4) million | Greater use of cash |
Cash and cash equivalents were $482.2 million at March 28, 2014, up from $311.3 million at December 31, 2013. Total debt was $1.149 billion, down from $1.487 billion at year-end. The company reported $897.9 million of availability under revolving credit subfacilities and $451.4 million of outstanding letters of credit. Borrowings had a weighted-average interest rate of 2.01%, excluding original issue discount accretion.
Operating cash flow was pressured by a $147.2 million increase in net working capital, including lower accounts payable and higher receivables and inventory. Capital expenditures were $12.6 million. Cash contributions to defined benefit plans were $15.2 million, and net asbestos-related cash outflows were $12.6 million.
Material Changes Versus the Prior Comparable Period
- Sales increased $107.2 million, consisting of $53.5 million from existing businesses, $85.1 million from acquisitions and a $31.4 million unfavorable foreign-currency effect.
- Gas and Fluid Handling sales increased to $573.9 million from $425.1 million; segment operating income increased to $56.0 million from $42.5 million. Its margin declined to 9.8% from 10.0%, while gross margin declined to 28.3% from 29.9% because acquired businesses had lower margins and aftermarket and services volumes were weaker.
- Fabrication Technology sales declined to $480.4 million from $522.0 million, primarily because of foreign exchange and lower consumable volumes. Segment operating income nevertheless increased to $53.9 million from $44.5 million, and margin improved to 11.2% from 8.5% due to cost-control and restructuring initiatives.
- Interest expense fell to $12.3 million from $23.3 million, reflecting lower borrowing rates, reduced debt and the absence of certain 2013 amendment-related charges.
- The effective tax rate declined to 27.3% from 34.2%, primarily due to lower international tax rates, partly offset by losses in jurisdictions where tax benefits were not expected to be recognized.
- The Series A preferred stock was converted into 12.2 million common shares on February 12, 2014. Colfax paid approximately $23.4 million in connection with the conversion, including a $19.6 million inducement expense.
- Colfax issued 9.2 million common shares for aggregate proceeds of $632.5 million and recorded $22.1 million of issuance costs. The proceeds were used in part to repay borrowings.
Guidance, Outlook, Risks and Unusual Items
On April 14, 2014, after quarter-end, Colfax completed the $947.3 million acquisition of Victor Technologies Holdings, including assumed debt. Management expected the acquisition to expand the Fabrication Technology product portfolio and geographic footprint. Victor reported 2013 sales of $486.8 million and operating income of $64.0 million. Colfax funded the transaction with approximately $610.4 million of equity-offering proceeds and $336.9 million of additional borrowings.
Management expected approximately $55 million of additional restructuring and related charges during the remainder of 2014. Management stated that liquidity sources were adequate for operations over the next twelve months, subject to the risks and covenants of the credit agreement.
- Asbestos-related liabilities totaled approximately $401.2 million, partially offset by reported insurance assets and receivables. Management cautioned that claim volumes, insurance recoveries, insurer solvency and coverage disputes could materially affect results and cash flow.
- Unresolved asbestos claims increased to 22,548 from 22,393 at the beginning of the quarter.
- Two derivative complaints were filed in March 2014 concerning the preferred-stock conversion and related cash payment. Management did not expect a material adverse effect but intended to defend the claims.
- Approximately 80% of first-quarter sales came from operations outside the United States. A 10% depreciation in major currencies was estimated to reduce equity by approximately $150 million, net of hedging effects.
- The company identified risks from cyclical markets, acquisitions and integration, restructuring execution, raw-material costs, customer capital spending, debt covenants, pensions, litigation, foreign exchange, taxes, cybersecurity and international operations.
- Quarterly results are seasonal, with gas- and fluid-handling shipments historically peaking in the fourth quarter.
Important Facts to Verify
- Verify that the intended issuer is Colfax Corporation; the supplied filing does not identify Enovis Corp.
- Assess the post-quarter-end financing, leverage and integration effects of the Victor acquisition.
- Reconcile the significant operating cash-flow use with working-capital growth and expected seasonal cash requirements.
- Review asbestos reserves, insurance recoveries, claim trends and potential coverage litigation.
- Evaluate the effect of the preferred-stock conversion and equity issuance on share count, EPS and ownership dilution.
- Confirm the expected $55 million of remaining 2014 restructuring charges and their effect on margins and cash flow.
- Monitor foreign-exchange exposure, variable-rate debt and compliance with the credit agreement’s leverage and interest-coverage covenants.