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CFX > SEC Filings for CFX > Form 10-Q on 25-Jul-2014All Recent SEC Filings

Show all filings for COLFAX CORP

Form 10-Q for COLFAX CORP


25-Jul-2014

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 June 27, 2014 (this "Form 10-Q") and the Consolidated Financial Statements and related footnotes included in Part II. Item 8. "Financial Statements and Supplementary Data" of our Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 Form 10-K") filed with the Securities and Exchange Commission (the "SEC") on February 12, 2014.

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. 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:

• changes in the general economy, as well as the cyclical nature of the markets we serve;

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

• our exposure to unanticipated liabilities resulting from acquisitions;

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

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

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

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

• material disruptions at any of our manufacturing facilities;

• noncompliance with various laws and regulations associated with our international operations, including anti-bribery laws, export control regulations and United States ("U.S.") sanctions and embargoes on certain foreign countries;

• risks associated with our international operations;

• risks associated with the representation of our employees by trade unions and work councils;

• our exposure to product liability claims;


• potential costs and liabilities associated with environmental, health and safety laws and regulations;

• failure to maintain, protect and defend our intellectual property rights;

• the loss of key members of our leadership team;

• restrictions in our credit agreement by and among the Company, Colfax UK Holdings Ltd, the other subsidiaries of the Company party thereto, the lenders party thereto and Deutsche Bank AG New York Branch, as administrative agent, as amended (the "Deutsche Bank Credit Agreement") that may limit our flexibility in operating our business;

• impairment in the value of intangible assets;

• the funding requirements or obligations of our defined benefit pension plans and other post-retirement benefit plans;

• significant movements in foreign currency exchange rates;

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

• new regulations and customer preferences reflecting an increased focus on environmental, social and governance issues, including new regulations related to the use of conflict minerals;

• service interruptions, data corruption, cyber-based attacks or network security breaches affecting our information technology infrastructure;

• risks arising from changes in technology;

• the competitive environment in our industry;

• changes in our tax rates or exposure to additional income tax liabilities;

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

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

• our financial performance; and

• other risks and factors, listed in Item 1A. "Risk Factors" in Part I of our 2013 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 2013 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

We report our 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.

Certain amounts not allocated to the two reportable segments and intersegment eliminations are reported under the heading "Corporate and other."


Colfax has a global geographic footprint, with production facilities in Europe, North America, South America, Asia, Australia and Africa. Through our reportable 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 our business management system. It is a repeatable, teachable process that we use to create superior value for our customers, shareholders and associates. Rooted in our core values, it is our culture. CBS provides the tools and techniques to ensure that we are continuously improving our ability to meet or exceed customer requirements on a consistent basis.

Results of Operations

The following discussion of Results of Operations addresses the comparison of the periods presented. 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

The comparability of our operating results for the second quarter and six months ended June 27, 2014 to the comparable 2013 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 change in Net sales due to acquisitions represents the change in sales due to the following acquisitions:

Gas and Fluid Handling

On July 9, 2013, Colfax completed the acquisition of the common stock of Clarus Fluid Intelligence LLC ("Clarus"), for $13.2 million, which includes the fair value of an estimated additional contingent cash payment of $2.5 million at the acquisition date. The additional contingent payment will be paid during the year ending December 31, 2016 subject to the achievement of certain performance goals. Clarus is a domestic supplier of flushing services for marine applications primarily to U.S. government agencies, with primary operations based in Bellingham, Washington.

On September 30, 2013, the Company completed the acquisitions of TLT-Babcock Inc. ("TLT-Babcock") and Alphair Ventilating Systems Inc. ("Alphair"), for an aggregate purchase price of $55.7 million. TLT-Babcock and Alphair are suppliers of heavy duty and industrial fans in Akron, Ohio and Winnipeg, Manitoba, respectively.

On November 1, 2013, the Company completed the acquisition of ?KD Kompresory
a.s. ("?KDK"), for $69.4 million, including the assumption of debt. ?KDK is a supplier of multi-stage centrifugal compressors to the oil & gas, petrochemical, power and steel industries, based in Prague, Czech Republic.

On November 25, 2013, the Company increased its ownership of Sistemas Centrales de Lubrication S.A. de C.V. ("Sicelub"), previously a less than wholly owned subsidiary in which the Company did not have a controlling interest, from 44% to 100%. Sicelub provides flushing services primarily in Central and South America serving the the oil, gas and petrochemical end market.

On November 29, 2013, the Company completed the acquisition of the global infrastructure and industry division of Fläkt Woods Group ("GII"), for $246.0 million, including the assumption of debt, subject to certain adjustments. GII has operations around the world and will expand the Company's product offerings in the heavy duty industrial and cooling fan market.

Fabrication Technology

On April 14, 2014, Colfax completed the acquisition of Victor Technologies Holdings, Inc. ("Victor") for net cash consideration of $951.2 million, including the assumption of debt, subject to certain adjustments (the "Victor Acquisition"). Victor is a pre-eminent global manufacturer of cutting, gas control and specialty welding solutions. The acquisition will complement the geographic footprint of our fabrication technology segment, as well as expand our product portfolio into new segments and


applications. For the year ended December 31, 2013, Victor had net sales and operating income of $486.8 million and $64.0 million, respectively.

Foreign Currency Fluctuations

A significant portion of our Net sales, approximately 74% and 77% for the three and six months ended June 27, 2014, respectively, 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

As our gas- and fluid-handling customers seek to fully utilize capital spending budgets before the end of the year, historically our shipments have peaked during the fourth quarter. Also, all of our European operations typically experience a slowdown during the July and August holiday season. General economic conditions may, however, impact future seasonal variations.

Sales, Orders and Backlog

Our consolidated Net sales increased from Net sales of $1,074.1 million in the
second quarter of 2013 to $1,199.3 million in the second quarter of 2014. Our
Net sales increased from Net sales of $2,021.3 million in the six months ended
June 28, 2013 to $2,253.7 million in the six months ended June 27, 2014. The
following tables present components of our consolidated Net sales and, for our
gas- and fluid-handling segment, order and backlog growth:
                                               Net Sales             Orders(1)
                                              $           %         $         %
                                                       (In millions)
For the three months ended June 28, 2013 $ 1,074.1               $ 478.2
Components of Change:
Existing businesses(2)                       (53.5 )   (5.0 )%      22.2     4.6 %
Acquisitions(3)                              192.3     17.9  %      89.5    18.7 %
Foreign currency translation(4)              (13.6 )   (1.2 )%       3.9     0.9 %
                                             125.2     11.7  %     115.6    24.2 %
For the three months ended June 27, 2014 $ 1,199.3               $ 593.8



                                            Net Sales                Orders(1)            Backlog at Period End
                                           $           %            $           %             $              %
                                                                     (In millions)
As of and for the six months ended
June 28, 2013                         $ 2,021.3                $   980.3               $     1,388.4
Components of Change:
Existing businesses(2)                        -         -  %        33.3       3.4 %           (39.9 )     (2.9 )%
Acquisitions(3)                           277.4      13.7  %       161.6      16.5 %           232.9       16.8  %
Foreign currency translation(4)           (45.0 )    (2.2 )%         2.0       0.2 %             3.4        0.2  %
                                          232.4      11.5  %       196.9      20.1 %           196.4       14.1  %
As of and for the six months ended
June 27, 2014                         $ 2,253.7                $ 1,177.2               $     1,584.8

(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 Clarus, TLT-Babcock and Alphair, ?KDK, Sicelub and GII and incremental sales as a result of the Victor Acquisition.
(4) Represents the difference between prior year sales, orders and order backlog valued at the actual prior year foreign exchange rates and prior year sales, orders and order backlog valued at current year foreign exchange rates.


The decrease in Net sales from existing businesses during the second quarter of 2014 compared to the second quarter of 2013 was attributable to a decrease of $36.2 million in our gas- and fluid-handling segment and a decrease of $17.3 million in our fabrication technology segment. Orders, net of cancellations, from existing businesses for our gas- and fluid-handling segment increased during the second quarter of 2014 in comparison to the second quarter of 2013 due to growth in the marine, mining and general industrial and other end markets, partially offset by declines in the oil, gas and petrochemical and power generation end markets. The decline in orders from existing businesses in the power generation end market during the second quarter of 2014 in comparison to the second quarter of 2013 was primarily driven by a reduction in orders in China for environmental remediation products.

Net sales from existing businesses during the six months ended June 27, 2014 remained consistent with the six months ended June 28, 2013 due to an increase of $30.2 million in our gas- and fluid-handling segment being offset by a decrease of $30.2 million in our fabrication technology segment. Orders, net of cancellations, from existing businesses for our gas- and fluid-handling segment increased during the six months ended June 27, 2014 in comparison to the six months ended June 28, 2013 due to growth in all end markets except oil, gas and petrochemical.

Business Segments

As discussed further above, the Company reports results in two reportable
segments: gas and fluid handling and fabrication technology. The following table
summarizes Net sales by reportable segment for each of the following periods:
                                                Three Months Ended                       Six Months Ended
                                         June 27, 2014       June 28, 2013       June 27, 2014       June 28, 2013
                                                                       (In millions)
Gas and Fluid Handling                 $         568.9     $         516.8     $       1,142.9     $         941.9
Fabrication Technology                           630.4               557.3             1,110.8             1,079.4
Total Net sales                        $       1,199.3     $       1,074.1     $       2,253.7     $       2,021.3

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 and Imo. 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 selected financial data for our gas- and fluid-handling segment:

                                              Three Months Ended                    Six Months Ended
                                        June 27, 2014     June 28, 2013     June 27, 2014      June 28, 2013
                                                               (Dollars in millions)
Net sales                              $      568.9      $       516.8     $      1,142.9     $       941.9
Gross profit                                  172.7              159.0              335.2             286.0
Gross profit margin                            30.4 %             30.8 %             29.3 %            30.4 %
Restructuring and other related
charges                                $        6.6      $         0.2     $          9.5     $         1.5
Selling, general and administrative
expense                                       127.1               89.5              233.6             174.0
Selling, general and administrative
expense as a percentage of Net sales           22.3 %             17.3 %             20.4 %            18.5 %
Segment operating income               $       45.7      $        69.4     $        101.7     $       111.9
Segment operating income margin                 8.0 %             13.4 %              8.9 %            11.9 %

The $36.2 million Net sales decrease due to existing businesses during the second quarter of 2014 in comparison to the second quarter of 2013, as discussed and defined under "Sales, Orders and Backlog" above, was primarily due to declines in the power generation and oil, gas and petrochemical end markets. Additionally, Net sales increased by $84.2 million and $4.1 million due to acquisition-related growth and changes in foreign exchange rates, respectively. Gross profit increased in the second quarter of 2014 reflecting the impact of acquisitions, which have a lower average gross profit margin and resulted in a reduction of total


gross profit margin in the segment for the quarter. Additionally, improvements to gross profit margin in our gas-handling business were offset by issues in our fluid-handling business. The issues in our fluid-handling business during the second quarter of 2014 included losses incurred in our services business, which historically has achieved relatively high margins, as increased costs did not provide the planned revenue increase. Also, our fluid-handling business was negatively impacted by a decline in sales and gross margins in our fluid-handling systems assembly operations and several specific pump projects that were shipped during the second quarter of 2014 at negative margins. Restructuring and other related charges increased compared to the second quarter of 2013 primarily due to an increase in restructuring actions to reduce the structural costs associated with the acquisitions during the fourth quarter of 2013. Selling, general and administrative expense for the second quarter of 2014 increased compared to the second quarter of 2013 as a result of an increase of $21.7 million due to acquisitions, a $12.1 million impairment loss related to identifiable intangible assets, a $4.0 million loss on disposition of a small fluid-handling business line and a $1.3 million loss from the use of the SICAD II exchange rate at our Venezuelan fluid-handling business.

The $30.2 million Net sales increase due to existing businesses during the six months ended June 27, 2014 in comparison to the six months ended June 28, 2013, as discussed and defined under "Sales, Orders and Backlog" above, was primarily due to growth in gas-handling products and in all end markets except mining and oil, gas and petrochemical. Additionally, Net sales increased by $169.3 million and $1.5 million due to acquisition-related growth and changes in foreign exchange rates, respectively. Gross profit increased in the six months ended June 27, 2014 reflecting the impact of acquisitions, which have a lower average gross profit margin and resulted in a reduction of total gross profit margin in the segment for the period. Additionally, improvements to gross profit margin in our gas-handling business were offset by issues in our fluid-handling business. The issues in our fluid-handling business during the six months ended June 27, 2014 included losses incurred in our services business, which historically has achieved relatively high margins, as increased costs did not provide the planned revenue increase. Also, our fluid-handling business was negatively impacted by a decline in sales and gross margins in our fluid-handling systems assembly operations and several specific pump projects that were shipped during the six months ended June 27, 2014 at negative margins. Restructuring and other related charges increased compared to the six months ended June 28, 2013 primarily due to an increase in restructuring actions to reduce the structural costs associated with the acquisitions during the fourth quarter of 2013. Selling, general and administrative expense for the six months ended June 27, 2014 increased compared to the six months ended June 28, 2013 as a result of an increase of $39.5 million due to acquisitions, a $12.1 million impairment loss related to identifiable intangible assets, a $4.0 million loss on disposition of a small fluid-handling business line and a $1.3 million loss from the use of the SICAD II exchange rate at our Venezuelan fluid-handling business.

Fabrication Technology

We formulate, develop, manufacture and supply equipment and consumable products for use in the cutting and joining of steels, aluminum and other metals and metal alloys. Our fabrication technology products are marketed under several brand names, most notably ESAB and Victor, which we believe are well known in the international cutting and welding industry. Our fabrication technology equipment ranges from portable units to large custom-engineered systems. Our comprehensive range of cutting and welding consumables includes filler metals and related products, such as covered electrodes, cored and solid wires and fluxes, as well as various other products used in welding and cutting processes, such as gas equipment, torches, and contact tips. 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 selected financial data for our fabrication technology segment:

                                              Three Months Ended                    Six Months Ended
                                        June 27, 2014     June 28, 2013     June 27, 2014      June 28, 2013
                                                                (Dollars in millions)
Net sales                              $      630.4      $       557.3     $      1,110.8     $      1,079.4
Gross profit                                  215.5              178.8              378.6              342.5
Gross profit margin                            34.2 %             32.1 %             34.1 %             31.7 %
Restructuring and other related
charges                                $        6.8      $         4.3     $         10.2     $          7.2
Selling, general and administrative
expense                                       138.3              119.5              247.6              238.7
Selling, general and administrative
. . .
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