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CFX > SEC Filings for CFX > Form 10-Q on 31-Oct-2012All Recent SEC Filings

Show all filings for COLFAX CORP

Form 10-Q for COLFAX CORP


31-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of Colfax Corporation ("Colfax," "the Company," "we," "our," and "us") should be read in conjunction with the Condensed Consolidated Financial Statements and related footnotes included in Part I. Item 1. "Financial Statements" of this Quarterly Report on Form 10-Q for the quarterly period ended September 28, 2012 (this "Form 10-Q") and the Consolidated Financial Statements and related footnotes included Part II. Item 8. "Financial Statements and Supplementary Data" of our Annual Report on Form 10-K for the year ended December 31, 2011 (the "2011 Form 10-K") filed with the Securities and Exchange Commission (the "SEC") on February 23, 2012.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements contained in this Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Form 10-Q is filed with the SEC. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements regarding: projections of revenue, profit margins, expenses, tax provisions and tax rates, earnings or losses from operations, impact of foreign exchange rates, cash flows, pension and benefit obligations and funding requirements, synergies or other financial items; plans, strategies and objectives of management for future operations including statements relating to potential acquisitions, compensation plans or purchase commitments; developments, performance or industry or market rankings relating to products or services; future economic conditions or performance; the outcome of outstanding claims or legal proceedings including asbestos-related liabilities and insurance coverage litigation; potential gains and recoveries of costs; assumptions underlying any of the foregoing; and any other statements that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future. Further, the forward-looking statements contained herein include statements about the expected effects of the integration of Charter International plc ("Charter") by Colfax (the "Charter Integration"), the expected benefits from integrating Charter and other benefits associated with the Charter Integration, strategic options and all other statements contained herein regarding the Charter Integration other than historical facts. Forward-looking statements may be characterized by terminology such as "believe," "anticipate," "should," "would," "intend," "plan," "will," "expect," "estimate," "project," "positioned," "strategy," "targets," "aims," "seeks," "sees," and similar expressions. These statements are based on assumptions and assessments made by our management in light of their experience and perception of historical trends, current conditions, expected future developments and other factors we believe to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties, including but not limited to the following:

risks related to the Charter Integration including, but not limited to:

risks related to any unforeseen liabilities of Charter;

our ability to deliver the expected returns and accretive effects on our earnings within our expected timeframes for such returns, or at all;

our ability to successfully integrate Charter;

our additional leverage as a result of the Charter Acquisition, which may limit our flexibility in operating our business;

covenants made to equity investors in connection with the Charter Acquisition that may limit our flexibility in operating our business; and

increased exposure to foreign currency risk;

risks associated with our international operations;

significant movements in foreign currency exchange rates;

changes in the general economy, as well as the cyclical nature of our markets;

our ability to accurately estimate the cost of or realize savings from our restructuring programs;

availability and cost of raw materials, parts and components used in our products;

the competitive environment in our industry;

our ability to identify, finance, acquire and successfully integrate attractive acquisition targets;

the amount of and our ability to estimate our asbestos-related liabilities;

material disruption at any of our significant manufacturing facilities;

the solvency of our insurers and the likelihood of their payment for asbestos-related costs;

our ability to manage and grow our business and execution of our business and growth strategies;

our recent substantial leadership turnover and realignment;

our ability and the ability of customers to access required capital at a reasonable cost;

our ability to expand our business in our targeted markets;

our ability to cross-sell our product portfolio to existing customers;

the level of capital investment and expenditures by our customers in our strategic markets;

our financial performance;

our ability to identify, address and remediate any material weaknesses in our internal control over financial reporting;

our ability to achieve or maintain credit ratings and the impact on our funding costs and competitive position if we do not do so; and

other risks and factors, listed in Item 1A. "Risk Factors" in Part I of our 2011 Form 10-K.

Any such forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ materially from those envisaged by such forward-looking statements. These forward-looking statements speak only as of the date this Form 10-Q is filed with the SEC. We do not assume any obligation and do not intend to update any forward-looking statement except as required by law. See Part I. Item 1A. "Risk Factors" in our 2011 Form 10-K for a further discussion regarding some of the reasons that actual results may be materially different from those that we anticipate.

Overview

During the first quarter of 2012, Colfax completed the acquisition of Charter (the "Charter Acquisition") which has transformed Colfax from a fluid-handling organization into a multi-platform enterprise with a strong global footprint. Following the Charter Acquisition, Colfax reports its operations through the following reportable segments:

Gas & Fluid Handling - a global supplier of a broad range of gas- and fluid-handling products, including pumps, fluid-handling systems and controls, specialty valves, heavy-duty centrifugal and axial fans, rotary heat exchangers and gas compressors, which serves customers in the power generation, oil, gas and petrochemical, mining, marine (including defense) and general industrial and other end markets; and

Fabrication Technology - a global supplier of welding equipment and consumables, cutting equipment and consumables and automated welding and cutting systems.

Colfax has a global geographic footprint, with production facilities in Europe, North America, South America, Asia, Australia and Africa. Through our operating segments, we serve a global customer base across multiple markets through a combination of direct sales and third-party distribution channels. Our customer base is highly diversified and includes commercial, industrial and government customers.

We employ a comprehensive set of tools that we refer to as the Colfax Business System ("CBS"). CBS is a disciplined strategic planning and execution methodology designed to achieve excellence and world-class financial performance in all aspects of our business by focusing on the Voice of the Customer and continuously improving quality, delivery and cost. Modeled on the Danaher Business System, CBS focuses on conducting root-cause analysis, developing process improvements and implementing sustainable systems. Our approach addresses the entire business, not just manufacturing operations.

Outlook

We believe that we are well positioned to grow our businesses organically over the long term by enhancing our product offerings and expanding our customer base. Subsequent to the Charter Acquisition in the first quarter of 2012, our business mix is expected to be well balanced between long- and short-cycle businesses, sales in emerging markets and developed nations and fore- and aftermarket products and services. Given this balance, management no longer uses indices other than general economic trends to predict the overall outlook for the Company. Instead, the individual businesses monitor key competitors and customers, including to the extent possible their sales, to gauge relative performance and outlook for the future.

We expect that the stronger U.S. dollar against most foreign currencies, compared to 2011, is likely to reduce reported sales and operating profits proportionately during the remainder of 2012. In addition, we believe that the recent weakness in the economic outlook for Europe, China and Brazil is likely to impact near term results.

As a result of the Charter Acquisition, we face a number of challenges and opportunities, including the successful integration, application and expansion of our CBS tools to improve margins and working capital management, rationalization of assets and back office functions, and consolidation of manufacturing facilities.

We expect to continue to grow as a result of strategic acquisitions. We believe that the extensive experience of our leadership team in acquiring and effectively integrating acquisition targets should enable us to capitalize on opportunities in the future.

Results of Operations

Upon the closing of the Charter Acquisition, we changed the composition of our reportable segments to reflect the changes in our internal organization resulting from the integration of the acquired businesses. The Company now reports its operations through two reportable segments: gas and fluid handling and fabrication technology. Certain amounts not allocated to the two reportable segments and intersegment eliminations are reported under the heading "Corporate and other." The Company's management evaluates the operating results of each of its reportable segments based upon Net sales and segment operating income
(loss), which represents Operating income before Restructuring and other related charges.

Items Affecting Comparability of Reported Results

In addition to the impact of the Charter Acquisition and the change in composition of our reportable segments, the comparability of our operating results for the third quarter and nine months ended September 28, 2012 to the respective 2011 period is affected by the following additional significant items:

Strategic Acquisitions

We complement our organic growth with strategic acquisitions. Acquisitions can significantly affect our reported results and can complicate period to period comparisons of results. As a consequence, we report the change in our Net sales between periods both from existing and acquired businesses. Orders and order backlog are presented only for the gas- and fluid-handling segment, where this information is relevant. The discussion of Net sales, orders and order backlog in comparison to the respective 2011 period is a proforma comparison that includes the operations acquired in the Charter Acquisition for the comparable period of the prior year, which excludes the first 12 days of 2011. The change in Net sales due to acquisitions represents the change in sales due to the following acquisitions by both Colfax and Charter:

On September 13, 2012, Colfax completed the acquisition of the Co-Vent Group Inc. ("Co-Vent") for $32.3 million. Co-Vent specializes in the custom design, manufacture, and testing of industrial fans, with its primary operations based in Quebec, Canada. As a result of this acquisition, Colfax has expanded its product offerings in the industrial fan market.

In May 2012, Colfax acquired the remaining 83.7% of CJSC Sibes ("Sibes") not already owned by its ESAB business for approximately $8.5 million, including the assumption of debt. Sibes is a leading supplier of welding electrodes to customers in Eastern Russia and strengthens ESAB's position in the attractive Russian welding consumables market, particularly in the energy and natural resources end markets.

On December 6, 2011, Colfax completed the acquisition of COT-Puritech, Inc. for a total purchase price, net of cash acquired, of $39.4 million which includes the fair value of estimated additional contingent cash payments of $4.3 million. The additional contingent cash payments will be paid over two years subject to the achievement of certain performance goals. COT-Puritech, Inc. is a national supplier of oil flushing and remediation services to power generation plants, refinery and petrochemical operations and other manufacturing sites, with its primary operations based in Canton, Ohio.

On July 1, 2011, ESAB acquired 60% of Condor Equipamentos Industriais Ltda ("Condor"), a leading Brazilian manufacturer of gas apparatus used in welding applications, for cash consideration of R$25.2 million.

On March 28, 2011, Howden completed the acquisition of Thomassen Compression Systems BV ("Thomassen"), a leading supplier of high-powered engineered compressors to the oil, gas and petrochemical end market, for approximately 100 million.

On March 3, 2011, ESAB completed the acquisition of LLC Sychevsky Electrodny Zavod ("Sychevsky"), a leading Russian electrode manufacturer based in the Smolensk region for $19.2 million.

On February 14, 2011, Colfax completed the acquisition of Rosscor for $22.3 million, net of cash acquired. Rosscor is a supplier of multiphase pumping technology and certain other highly engineered fluid-handling systems, with its primary operations based in Hengelo, The Netherlands.

Foreign Currency Fluctuations

A significant portion of our Net sales, approximately 81% for both the three and nine months ended September 28, 2012 is derived from operations outside the U.S., with the majority of those sales denominated in currencies other than the U.S. dollar. Because much of our manufacturing and employee costs are outside the U.S., a significant portion of our costs are also denominated in currencies other than the U.S. dollar. Changes in foreign exchange rates can impact our results of operations and are quantified when significant to our discussion.

Seasonality

The results of operations for the three and nine months ended September 28, 2012 are not necessarily indicative of the results of operations that may be achieved for the full year. Quarterly results are affected by seasonal variations in the Company's gas- and fluid-handling segment. As the Company's customers seek to fully utilize capital spending budgets before the end of the year, historically shipments have peaked during the fourth quarter. General economic conditions as well as backlog levels may, however, impact future seasonal variations.

Sales, Orders and Backlog

Our consolidated Net sales decreased by $17.3 million in the third quarter of 2012 in comparison to the proforma net sales for the third quarter of 2011. For the nine months ended September 28, 2012, our consolidated Net sales increased from proforma net sales of $2.8 billion in the nine months ended September 30, 2011 to $2.9 billion (which excludes operations acquired in the Charter Acquisition for the first 12 days of each nine month reporting period presented). The following tables present components of our proforma consolidated Net sales and, for our gas- and fluid-handling segment, proforma order and backlog growth:

                                                Net Sales                      Orders(1)
                                            $              %               $              %
                                                             (In millions)
Proforma for the three months ended
September 30, 2011                      $    971.7                     $    451.2
Components of Change:
Existing businesses(2)                        49.5            5.1 %          18.0            4.0 %
Acquisitions(3)                                5.3            0.5 %           4.2            0.9 %
Foreign currency translation(4)              (72.1 )         (7.4 )%        (29.6 )         (6.5 )%
                                             (17.3 )         (1.8 )%         (7.4 )         (1.6 )%
Three months ended September 28, 2012   $    954.4                     $    443.8




                                            Net Sales                 Orders(1)              Backlog at Period End
                                           $           %             $           %               $               %
                                                                       (In millions)
Proforma as of and for the nine
months ended September 30, 2011        $ 2,789.3                 $ 1,425.6                 $     1,348.2
Components of Change:
Existing businesses(2)                     228.7        8.2 %         44.4        3.1 %             70.0          5.2 %
Acquisitions(3)                             52.3        1.9 %         78.3        5.5 %             12.2          0.9 %
Foreign currency translation(4)           (183.8 )     (6.6 )%       (72.6 )     (5.1 )%           (51.3 )       (3.8 )%
                                            97.2        3.5 %         50.1        3.5 %             30.9          2.3 %
As of and for the nine months ended
September 28, 2012                     $ 2,886.5                 $ 1,475.7                 $     1,379.1


__________

(1) Represents contracts for products or services, net of cancellations for the period for our gas- and fluid-handling operating segment.

(2) Excludes the impact of foreign exchange rate fluctuations and acquisitions, thus providing a measure of growth due to factors such as price, product mix and volume.

(3) Represents the incremental sales, orders and order backlog as a result of our acquisitions of Co-Vent, Sibes, COT-Puritech and Rosscor and the acquisition of Thomassen by Howden and Sychevsky and Condor by ESAB.

(4) Represents the difference between sales from existing businesses valued at current year foreign exchange rates and sales from existing businesses at prior year foreign exchange rates.

The proforma increase in Net sales from existing businesses in the third quarter of 2012 was attributable to an increase of $61.6 million in our gas- and fluid-handling segment, partially offset by a $12.1 million decrease in our fabrication technology segment. Orders, net of cancellations, from existing businesses for our gas- and fluid-handling segment increased during the third quarter of 2012 in comparison to the third quarter of 2011 primarily due to growth in the power generation, mining and general industrial and other end markets.

The proforma increase in Net sales from existing businesses in the nine months ended September 28, 2012 was attributable to increases of $176.6 million and $52.1 million in our gas- and fluid-handling and fabrication technology segments, respectively. Orders, net of cancellations, from existing businesses for our gas- and fluid-handling segment increased during the nine months ended September 28, 2012 in comparison to the comparable 2011 period primarily due to growth in the power generation end market.

Segments



As discussed further above, the Company now reports results in two reportable
segments: gas and fluid handling and fabrication technology. The following table
summarizes Net sales by business segment for each of the following periods:



                                                        Three Months Ended                       Nine Months Ended
                                                                       Proforma                                Proforma
                                                September 28,        September 30,       September 28,       September 30,
                                                    2012                 2011                2012                2011
                                                                              (In millions)
Gas and Fluid Handling                         $         464.9      $         422.9     $       1,386.7     $       1,226.8
Fabrication Technology                                   489.5                548.8             1,499.8             1,562.5
Total Net sales                                $         954.4      $         971.7     $       2,886.5     $       2,789.3

The sales comparisons discussed above are on a proforma basis. Cost information for Charter, ESAB and Howden is not available under the presentation required by the Exchange Act and, as such, proforma discussions are limited to sales.

Gas and Fluid Handling

We design, manufacture, install and maintain gas- and fluid-handling products for use in a wide range of markets, including power generation, oil, gas and petrochemical, mining, marine (including defense) and general industrial and other. Our gas-handling products are principally marketed under the Howden brand name. Howden's primary products are heavy-duty fans, rotary heat exchangers and compressors. The fans and heat exchangers are used in coal-fired and other types of power stations, both in combustion and emissions control applications, underground mines, steel sintering plants and other industrial facilities that require movement of large volumes of air in harsh applications. Howden's compressors are mainly used in the oil, gas and petrochemical end market. Our fluid-handling products are marketed by Colfax Fluid Handling under a portfolio of brands including Allweiler, Baric, Fairmount Automation, Houttuin, Imo, LSC, COT-Puritech, Portland Valve, Tushaco, Warren and Zenith. Colfax Fluid Handling is a supplier of a broad range of fluid-handling products, including pumps, fluid-handling systems and controls, and specialty valves.

The following table summarizes the selected financial data for our gas- and fluid-handling segment:

                                                            Three Months Ended                       Nine Months Ended
                                                    September 28,        September 30,       September 28,       September 30,
                                                        2012                 2011                2012                2011
                                                                              (Dollars in millions)
Net sales                                          $         464.9      $         170.3     $       1,386.7     $         515.6
Gross profit                                                 139.0                 60.6               410.7               178.6
Gross profit margin                                           29.9 %               35.6 %              29.6 %              34.6 %
Restructuring and other related charges            $           1.6      $           5.3     $           5.4     $           6.5
Selling, general and administrative expense                  101.8                 41.1               303.0               123.4
Selling, general and administrative expense as a
percentage of Net sales                                       21.9 %               24.1 %              21.9 %              23.9 %
Segment operating income                           $          33.9      $          20.8     $          98.8     $          61.3
Segment operating income margin                                7.3 %               12.2 %               7.1 %              11.9 %

Year over year fluctuations for the selected financial data are primarily due to the addition of the Howden operations. The $61.6 million sales growth due to existing businesses, as discussed and defined under "Sales, Orders and Backlog" above, during the third quarter of 2012 in comparison to the third quarter of 2011 was primarily due to growth in all end markets, except marine.
Additionally, $14.5 million of acquisition-related amortization expense and $3.6 million increased recurring intangible amortization expense in comparison to the third quarter of 2011 is reflected in Selling, general and administrative expense for the third quarter of 2012.

The $176.6 million sales growth due to existing businesses, as discussed and defined under "Sales, Orders and Backlog" above, during the nine months ended September 28, 2012 in comparison to the nine months ended September 30, 2011 was primarily due to growth in all end markets, except marine. Additionally, $4.5 million and $41.1 million of acquisition-related amortization expense is reflected in Gross profit and Selling, general and administrative expense, respectively, for the nine months ended September 28, 2012, and recurring intangible amortization expense included in Selling, general and administrative expense increased by $9.4 million in comparison to the nine months ended September 30, 2011.

Fabrication Technology

We formulate, develop, manufacture and supply consumable products and equipment for use in the cutting and joining of steels, aluminum and other metals and metal alloys. Our fabrication technology products are principally marketed under the ESAB brand name, which we believe is a leading international welding company with roots dating back to the invention of the welding electrode. ESAB's comprehensive range of welding consumables includes electrodes, cored and solid wires and fluxes. ESAB's fabrication technology equipment ranges from portable units to large custom systems. Products are sold into a wide range of end markets, including wind power, shipbuilding, pipelines, mobile/off-highway equipment and mining.

The following table summarizes the selected financial data for our fabrication technology segment:

                                                            Three Months Ended       Nine Months Ended
                                                               September 28,           September 28,
                                                                   2012                    2012
                                                                       (Dollars in millions)
Net sales                                                   $             489.5     $           1,499.8
Gross profit                                                              149.0                   433.8
Gross profit margin                                                        30.4 %                  28.9 %
Restructuring and other related charges                     $              12.5     $              31.6
Selling, general and administrative expense                               105.1                   327.6
Selling, general and administrative expense as a
percentage of Net sales                                                    21.5 %                  21.8 %
Segment operating income                                    $              43.9     $             106.3
Segment operating income margin                                             9.0 %                   7.1 %

The $12.1 million sales decline due to existing businesses, as discussed and defined under "Sales, Orders and Backlog" above, during the third quarter of 2012 in comparison to the third quarter of 2011 reflects a globally broad-based decline in consumable volumes due to the deteriorating global economic . . .

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