Free Writing Prospectus
Table of Contents

Issuer Free Writing Prospectus
Dated April 25, 2008
Filed Pursuant to Rule 433
Registration Statement No. 333-148486

This document comprises a prospectus relating to Colfax Corporation and has been approved on April 25, 2008 by the German Financial Supervisory Authority (BaFin) in accordance with section 13 of the German Securities Prospectus Act (Wertpapierprospektgesetz) which implemented the Prospectus Directive for the purposes of an offer of shares of our common stock to the public in Germany. Colfax Corporation has applied to BaFin to provide the Swedish Financial Supervisory Authority (Finansinspektionen) with a certificate of approval attesting that the prospectus has been drawn up in accordance with the German Securities Prospectus Act for purposes of a simultaneous offer of shares of our common stock to the public in Sweden. The shares of common stock are offered by Colfax Corporation and by the selling stockholders identified in this prospectus. After pricing of the offering, we expect that the shares will trade on the New York Stock Exchange under the symbol “CFX”.

LOGO

Prospectus

for

the public offering of

up to 21,562,500 shares of common stock

including up to 2,812,500 shares of common stock

in connection with potential overallotments

with an expected public offering price between $15.00 and $17.00

of

Colfax Corporation

Richmond, Virginia, United States of America

CUSIP: 194014 106

International Securities Identification Number (ISIN): US1940141062

Merrill Lynch & Co.

Lehman Brothers

UBS Investment Bank

 

 

 

Robert W.

Baird & Co.

  Banc of America Securities LLC   Deutsche Bank Securities  

KeyBanc

Capital Markets

April 25, 2008

We have filed a registration statement (including a prospectus) with the United States Securities and Exchange Commission (SEC) in connection with the offering of shares of our common stock in the United States (Registration No. 333-148486). Before you invest, you should read the prospectus in that registration statement and other documents we have filed with the SEC for more complete information about us and this offering. You may get these documents for free by visiting EDGAR on the SEC Website at www.sec.gov. Alternatively, any underwriter participating in the offering will arrange to send you the prospectus, which you may request by calling 1- 212 449 1000.

A copy of the most recent prospectus that satisfies the requirements of the SEC can be found at the following URL link: http://www.totalmerrill.com/publish/mkt/prospectus/pdfs/red_cfx.pdf

Neither the SEC nor any state securities commission in the United States has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense in the United States.


Table of Contents

TABLE OF CONTENTS

 

     Page

Prospectus Summary

   1

German Translation of the Prospectus Summary

   14

Risk Factors

   30

Special Note Regarding Forward-Looking Statements

   40

Industry and Market Data

   40

Use of Proceeds

   41

Dividend Policy

   42

Capitalization

   43

Dilution

   44

Selected Consolidated Financial and Other Data

   46

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   48

Business

   69

Management

   83

Certain Relationships and Related Party Transactions

   111

Principal and Selling Stockholders

   113

Description of Capital Stock

   116

Shares of Common Stock Eligible for Future Sale

   122

Material United States Federal Tax Considerations for Non-United States Holders

   124

Material German Tax Considerations

   127

Material Swedish Tax Considerations

   131

The Offering

   133

Underwriting

   137

Legal Matters

   143

Experts

   143

Where You Can Find More Information

   143

Additional Information

   145

Index to Financial Statements

   F-1

Signature Page

   S-1

 

 

You should rely only on the information contained in this prospectus. We, the selling stockholders, and the underwriters have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date. Neither we nor the underwriters assume any obligation to update the information appearing in this prospectus, save as required by law (in particular, our obligation to publish supplements pursuant to section 16(1) of the German Securities Prospectus Act (Wertpapierprospektgesetz)).

 

 

Unless otherwise indicated, references in this prospectus to “Colfax,” the “company,” “we,” “our” and “us” refer to Colfax Corporation and its subsidiaries. In the prospectus, references to “United States” or “U.S.” are to the United States of America, references to “Germany” are to the Federal Republic of Germany and references to “Sweden” are to The Kingdom of Sweden. In this prospectus, references to “euro” or “€” are to the single currency which was introduced as of January 1, 1999 at the start of the third stage of European economic and monetary union, references to “U.S. dollars”, “USD” or “$” are to United States dollars and references to “SEK” are to Swedish Krona.

 

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PROSPECTUS SUMMARY

The following summary is to be read as an introduction to this prospectus. This summary is qualified in its entirety by the more detailed information and the consolidated financial statements and related notes appearing elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including the section entitled “Risk Factors,” our consolidated financial statements and the related notes, before making an investment decision. Colfax Corporation assumes responsibility for the contents of the summary of this prospectus. Colfax Corporation can, however, only be held liable for the contents of the summary if the summary is misleading, incorrect or contradictory when read in conjunction with other sections of the prospectus. When asserting legal claims based on the information contained in the prospectus, an investor acting as plaintiff may have to bear the costs of translating the prospectus prior to commencement of the court case pursuant to the statutes of the individual member states of the European Economic Area.

Our Business

We are a global supplier of a broad range of fluid handling products, including pumps, fluid handling systems and specialty valves. We believe that we are a leading manufacturer of rotary positive displacement pumps, which include screw pumps, gear pumps and progressive cavity pumps. We have a global manufacturing footprint, with production facilities in Europe, North America and Asia, as well as worldwide sales and distribution channels. Our products serve a variety of applications in five strategic markets: commercial marine, oil and gas, power generation, global navy and general industrial. We design and engineer our products to high quality and reliability standards for use in critical fluid handling applications where performance is paramount. We also offer customized fluid handling solutions to meet individual customer needs based on our in-depth technical knowledge of the applications in which our products are used. Our products are marketed principally under the Allweiler, Fairmount, Houttuin, Imo, LSC, Portland Valve, Tushaco, Warren, and Zenith brand names. We believe that our brands are widely known and have a premium position in our industry. Allweiler, Houttuin, Imo and Warren are among the oldest and most recognized brands in the markets in which we participate, with Allweiler dating back to 1860.

We serve a global customer base across multiple markets through a combination of direct sales and marketing associates and third-party distribution channels. Our customer base is highly diversified and includes commercial, industrial, marine and governmental customers such as Alfa Laval, Cummins, General Dynamics, Hyundai Heavy Industries, Siemens, Solar Turbines, Thyssenkrupp, the U.S. Navy and various sovereign navies around the world. We have a large installed base, which, combined with the critical nature of the applications in which our products are used, leads to a tendency for our customers to replace “like for like” products. This tendency leads to significant aftermarket demand for replacement products as well as for spare parts and maintenance service.

We employ a comprehensive set of tools and processes known as the Colfax Business System, or 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.

We have an experienced management team that has established a focused industrial manufacturing business with strong market positions within the fluid handling industry. We believe we are well positioned to continue to grow by enhancing our product offerings and expanding our customer base in each of our strategic markets. We also have successfully completed and integrated several acquisitions and expect to continue to

 

 

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pursue acquisitions of complementary businesses that will broaden our product portfolio, expand our geographic footprint or enhance our position in our strategic markets.

Our Market Opportunity

The global fluid handling industry is highly fragmented, with over 10,000 companies competing across numerous markets and sectors of the economy. Because fluid handling products often are used in critical applications, we believe the most successful industry participants are those that have the technical capabilities to meet customer specifications, offer products with reputations for quality and reliability and can provide timely delivery and strong aftermarket support.

We believe there is strong growth potential for our products and services in our strategic markets, which are global in nature and have a need for highly engineered, critical fluid handling solutions. We believe that our global presence positions us to compete successfully in all of our markets throughout the world.

Our Competitive Strengths

We believe that the following competitive strengths position us as a premium provider of fluid handling products and will contribute to our future growth:

 

  Ÿ  

Strong Market Positions, Broad Product Portfolio and Leading Brands.    We believe that we are a leading manufacturer of rotary positive displacement pumps, which include screw pumps, gear pumps and progressive cavity pumps. We offer a broad portfolio of fluid handling products that fulfill critical needs of customers across numerous industries. Our brands are among the oldest and most recognized in the markets in which we participate.

 

  Ÿ  

Strong Application Expertise.    We believe that our reputation for quality and technical expertise positions us as a premium supplier of fluid handling products. With over 140 years of experience, we have significant expertise in designing and manufacturing fluid handling products that are used in critical applications, such as lubricating power generation turbines, transporting crude oil through pipelines and transferring heavy fuel oil in commercial marine vessels.

 

  Ÿ  

Extensive Global Sales, Distribution and Manufacturing Network.    We sell our products through over 300 direct sales and marketing associates and more than 450 authorized distributors in 79 countries. We believe that our global reach within the highly fragmented, worldwide fluid handling industry provides us with an ability to better serve our customers. Our European, North American and Asian manufacturing capabilities provide us with the ability to optimize material sourcing, transportation and production costs and lower foreign currency risk.

 

  Ÿ  

We Use CBS to Continuously Improve Our Business.    CBS is our business system designed to encourage a culture of continuous improvement in all aspects of our operations and strategic planning. 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.

 

  Ÿ  

Large Installed Base Generating Aftermarket Sales and Service.    With a product history dating back to 1860, we have a significant installed base across numerous industries. Because of the critical applications in which our products are used and the high quality and reliability of our products, we believe there is a tendency for our customers to replace “like for like” products. This tendency leads to significant aftermarket demand for replacement products as well as spare parts and for repair and maintenance service. In the year ended December 31, 2007, we estimate that approximately 25% of our revenues were derived from aftermarket sales and services.

 

 

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  Ÿ  

Broad and Diverse Customer Base.    Our customer base spans numerous industries and is geographically diverse. Approximately 66% of our sales in 2007 were derived from operations outside of the U.S. In addition, no single customer represented more than 3% of our sales during that period.

 

  Ÿ  

Management Team with Extensive Industry Experience and Focus on Strategic Development.    We are led by a senior management team with an average of over 20 years of experience in industrial manufacturing. John A. Young, our President and Chief Executive Officer, is one of our founders and played a key role in developing the acquisition strategy that formed our company. Since 1995, as part of this strategy, we have acquired 12 companies and divested businesses that do not fit within our long-term growth strategy.

Our Growth Strategy

We intend to continue to increase our sales, expand our geographic reach, broaden our product offerings and improve our profitability through the following strategies:

 

  Ÿ  

Apply CBS to Drive Profitable Sales Growth and Increase Shareholder Value.    The core element of our management philosophy is CBS, which we implement in each of our businesses. CBS is a strategic planning and execution methodology designed to achieve world-class excellence in all aspects of our business. CBS focuses our organization on continuous improvement and performance goals by empowering our associates to develop innovative strategies to meet customer needs. Rather than a static process, CBS continues to evolve as we benchmark ourselves against best-in-class industrial companies.

 

  Ÿ  

Execute Market Focused Strategies.    We believe that our five strategic markets are attractive due to their ongoing capital expenditure requirements, growth rates and global nature.

 

  Ÿ  

Commercial Marine—We intend to continue to increase our installed base of products and grow our aftermarket sales and service revenues. We also intend to expand our capabilities in the Asia Pacific region by utilizing our Chinese and Indian facilities to offer locally manufactured products, reduce production costs and provide local customer service and support.

 

  Ÿ  

Oil and Gas—We intend to continue our strategy of offering oil and gas customers increased efficiency and lower total cost of ownership by replacing legacy products currently in use with our more efficient products. We also intend to capture the growing need for complex turnkey systems through the development of solutions that can undertake the difficult task of handling varying mixtures of heavy crude oil, natural gas and water at the same time. We intend to continue to target the fast growing oil and gas markets around the world, including Asia and developing nations.

 

  Ÿ  

Power Generation—We intend to use our extensive expertise in power generation applications to continue our growth as a provider of turnkey systems in this market. We also intend to use our global presence to strengthen relationships with large original equipment manufacturers.

 

  Ÿ  

Global Navy—We intend to continue to design, develop and manufacture high value fluid handling systems to meet the needs of evolving naval requirements worldwide. For example, we are currently working with the U.S. Navy to incorporate advanced electronics and controls into our products, and we are also focused on expanding our repair and service capabilities for naval customers.

 

 

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  Ÿ  

General Industrial—We intend to continue to apply our application expertise to supply our customers in diverse industries such as chemicals, pulp and paper processing and commercial construction with a portfolio of products that can solve their most critical fluid handling needs. We also intend to grow our presence in the general industrial market by targeting new applications for our existing products, deploying regionally focused strategies and utilizing our global presence and sales channels to sell our solutions worldwide.

 

  Ÿ  

Target Fast Growing Regions by Leveraging Our Global Manufacturing, Sales and Distribution Network.    We intend to continue to utilize our strong global presence and worldwide network of distributors to capitalize on growth opportunities by selling regionally developed and marketed products and solutions throughout the world. As our customers have become increasingly global in scope, we have increased our global reach to serve our customers by maintaining a local presence in numerous markets and investing in sales and marketing capabilities worldwide. For example, we have recently expanded our manufacturing capabilities by establishing a plant in China and acquiring an Indian manufacturer of fluid handling products.

 

  Ÿ  

Develop New Products, Applications and Technologies.    We will continue to engineer our key products to meet the needs of new and existing customers and also to improve our existing product offerings to strengthen our market position. We intend to develop technological, or “SMART,” solutions, which incorporate advanced electronics, sensors and controls, through the use of our Voice of the Customer process to solve specific customer needs. We believe our SMART solutions will reduce our customers’ total cost of ownership by providing real-time diagnostic capabilities to minimize downtime, increase operational efficiency and avoid unnecessary costs.

 

  Ÿ  

Grow Our Offerings of Systems and Solutions.    We will continue to provide high value added fluid handling solutions by utilizing our engineering and application expertise and our brand recognition and sales channels to drive incremental revenue. We intend to establish regional system manufacturing capabilities to address our customers’ desire to purchase turnkey modules and their preference for outsourced assembly. Part of our strategy is to continue to seek a greater share of overall project value by providing complete systems and solutions, particularly where we control project design.

 

  Ÿ  

Continue to Pursue Strategic Acquisitions that Complement Our Platform.    We believe that the fragmented nature of the fluid handling industry presents substantial consolidation and growth opportunities for companies with access to capital and the management expertise to execute a disciplined acquisition and integration program. We believe that we can identify a number of attractive acquisition candidates in the future and that strategic acquisition growth will give us a competitive advantage over small competitors through greater purchasing power, a larger global sales and distribution network and a broader portfolio of products and services.

 

 

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Other Information

Company Information

We were organized as a Delaware corporation in 1998. Our principal executive offices are located at 8730 Stony Point Parkway, Suite 150, Richmond, Virginia 23235, United States, and our main telephone number at that address is +1 (804) 560-4070. Our corporate website address is www.colfaxcorp.com. The contents of our website are not a part of this prospectus.

Management

Upon completion of this offering, we will have an authorized board of directors consisting of 8 members, a majority of whom will be independent.

The following table lists our current executive officers, directors, key employees and those who will become executive officers and directors upon consummation of the offering.

 

Name

  

Position

John A. Young

   President and Chief Executive Officer and Director

G. Scott Faison

   Senior Vice President, Finance and Chief Financial Officer

Thomas M. O’Brien

   Senior Vice President, General Counsel and Secretary

Michael K. Dwyer

   Senior Vice President, General Manager - Asia Pacific

Steven W. Weidenmuller

   Senior Vice President, Human Resources

Joseph B. Niemann

   Senior Vice President, Marketing and Strategic Planning

William E. Roller

   Senior Vice President, General Manager - Americas

Mario E. DiDomenico

   Senior Vice President, General Manager - Engineered Products

Dr. Michael Matros

   Senior Vice President, General Manager - Allweiler

Mitchell P. Rales

   Director

Steven M. Rales(1)

   Director

Patrick W. Allender

   Director Nominee

C. Scott Brannan

   Director Nominee

Joseph O. Bunting III

   Director Nominee and Vice President

Thomas S. Gayner

   Director Nominee

Clay Kiefaber

   Director Nominee

Rajiv Vinnakota

   Director Nominee

 

(1)   Steven M. Rales has submitted his resignation as a director effective immediately prior to the effective time of the registration statement.

Auditors

Our auditors are Ernst & Young LLP, an independent registered public accounting firm, One James Center, Suite 1000, 901 E. Cary Street, Richmond, VA, 23219, United States of America.

Share Capital

Upon the completion of this offering, our authorized capital stock will consist of 200,000,000 shares of common stock, $ 0.001 par value per share and 10,000,000 shares of preferred stock, $ 0.001 par value per share. Immediately after the completion of the offering, 41,229,588 shares of common stock and no shares of preferred stock will be outstanding.

 

 

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Related Party Transactions

Upon completion of this offering, we intend to adopt a related person transactions policy pursuant to which our executive officers, directors and principal stockholders, including their immediate family members, will not be permitted to enter into a related person transaction with us without the consent of our audit committee, another independent committee of our board of directors or the full board.

We pay a quarterly management fee of $250,000 to Colfax Towers, Inc., an entity that is wholly owned by Mitchell Rales and Steven Rales. Joseph Bunting, currently a Vice President and a director nominee, serves as an officer of Colfax Towers. Payment of this management fee is to be discontinued following this offering. In April 2005, in connection with the sale of our power transmission business, we redeemed shares of our Series A Convertible Preferred Stock from each of Mitchell Rales and Steven Rales for an aggregate price of $82,000,000. We have entered into a registration rights agreement, dated May 30, 2003 with two of our directors and principal stockholders Mitchell Rales and Steven Rales, pursuant to which they are entitled to rights with respect to the registration of certain of their shares following this offering under the Securities Act. We have entered into an amended and restated stockholders’ agreement with a number of our stockholders, which terminates by its terms upon the completion of this offering. We have agreed to reimburse the selling stockholders, Mitchell and Steven Rales and certain entities wholly owned by them, for the underwriting discount on the shares sold by them. We have further agreed to pay to our selling stockholders certain declared but unpaid dividends out of the proceeds of this offering. We intend to enter into indemnification agreements with our directors and executive officers.

Trademarks

We have rights to a variety of trade names, service marks and trademarks for use in our business, including Colfax, Allweiler, Fairmount, Houttuin, Imo, LSC, Portland Valve, Tushaco, Warren and Zenith in the U.S. and, where appropriate, in other countries. This prospectus also includes product names and other trade names and service marks owned by us and other companies. The trade names and service marks of other companies are the property of those other companies.

 

 

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The Offering

 

Common stock offered by us

7,825,947 shares(1)

 

Common stock offered by the selling stockholders

10,924,053 shares(1)

 

  The offering consists of a public offering of the shares in the United States, Germany and Sweden, and an international private placement elsewhere. The public offering in Germany and Sweden covered by this prospectus consists solely of an offering of our common stock to our employees as well as to certain distributors, customers, business associates and related persons in a process called “Reserved Share Offering.”

 

Common stock outstanding after the offering

41,229,588 shares

 

Initial public offering price; price range

The initial public offering price will be determined following the expiration of the bookbuilding period and is expected to take place on or about May 7, 2008. The price range within which institutional investors may submit purchase orders in the bookbuilding process is intended to be $15.00 to $17.00.

 

  For purposes of the Reserved Share Offering, the initial public offering price is expected to be published in the Frankfurter Allgemeine Zeitung, a newspaper of record in Frankfurt am Main, as soon as practicable after the pricing date, in compliance with the German Securities Prospectus Act.

 

Use of proceeds

We estimate that our net proceeds from this offering will be approximately $111.3 million based on the midpoint of the price range set forth on the cover page of this prospectus. We intend to use these net proceeds to repay $38.2 million of indebtedness outstanding under our credit facility, to pay dividends to existing preferred stockholders that have been declared but unpaid in the amount of $35.1 million, to pay special bonuses of approximately $22.5 million to certain of our executives under previously adopted executive compensation plans and approximately $11.8 million to reimburse the selling stockholders for the underwriting discount incurred on the shares sold by them in this offering. We also intend to declare a dividend payable from the proceeds of this offering to preferred stockholders of record immediately prior to the consummation of this offering. This dividend will accrue from January 1, 2008 through the consummation of this offering at a rate equal to LIBOR plus 2.5% of the original purchase price of our issued and outstanding preferred stock. Assuming a closing date of May 12, 2008 for this offering, the amount of this dividend would be $3.7 million. We intend to use the balance, if any, of the proceeds for working capital and other general corporate purposes.

 

 

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We will not receive any of the proceeds from the sale of shares by the selling stockholders.

Affiliates of Merrill Lynch, Pierce, Fenner & Smith Incorporated, which we refer to as Merrill Lynch, UBS Securities LLC and Banc of America Securities LLC, underwriters in this offering, are parties to our credit facility. The affiliates of Merrill Lynch and Banc of America Securities LLC will receive approximately $3.6 million and $1.5 million, respectively, of the proceeds used to pay a portion of the indebtedness outstanding under our credit facility.

 

Reserved Share Offering

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 937,500 shares offered by this prospectus for sale to some of our directors, officers, employees, distributors, customers, business associates and related persons. If these persons purchase reserved shares, this will reduce the number of shares available for sale to the general public. Any reserved shares that are not confirmed for purchase by 9:00 am New York time on the day following the day of the pricing of this offering will be offered by the underwriters to the general public on the same terms as the other shares.

 

  In order to participate in the Reserved Share Offering, you must have been indicated by us to the underwriters as being an eligible participant. All full time employees, to the extent permitted by applicable law, and certain other persons have been named by us as participants to the underwriters.

 

  The offer period for participants under the Reserved Share Offering is expected to be from the day after the publication date of this prospectus until May 7, 2008. If you have received notice from us that you are an eligible participant, you must submit your “indication of interest” on or before May 2, 2008 in accordance with the instructions contained therein, at which time the underwriters will open a brokerage account in your name.

 

  If shares have been allocated to you for purchase when we determine the initial public offering price, and you confirm your interest to purchase the shares, you will be responsible for payment no later than the closing date (expected to be May 12, 2008).

 

 

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Delivery and Settlement

Delivery of the allotted shares against payment of the initial public offering price and the customary securities commission is expected to take place on or about May 12, 2008.

 

Listing

We intend to list our common stock on the NYSE under the trading symbol “CFX.”

The number of shares outstanding after the offering includes 593,659 vested restricted stock units that will be granted upon consummation of this offering and excludes up to 5,906,341 remaining shares reserved for issuance under our 2008 omnibus incentive plan. Unless we indicate otherwise, the information in this prospectus:

 

  Ÿ  

reflects a 13,436.22841 - for -1 split of our outstanding common stock that occurred on April 21, 2008;

 

  Ÿ  

assumes the conversion of all of our outstanding preferred stock into common stock upon completion of this offering;

 

  Ÿ  

assumes the application of the net proceeds of this offering,

 

  Ÿ  

assumes the filing of our restated certificate of incorporation and the adoption of our amended and restated bylaws immediately before the completion of this offering;

 

  Ÿ  

assumes that the initial public offering price of the common stock will be $16.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus; and

 

  Ÿ  

assumes that the underwriters do not exercise their overallotment option to purchase up to an additional 2,812,500 shares from us.

 

(1)   The total number of shares being offered by us and the selling stockholders is 18,750,000, assuming no exercise of the underwriters’ overallotment option. While the total number of shares being offered will not change, the number of shares shown as being offered by the us (7,825,947) and the selling stockholders (10,924,053) is an estimate and may change based on the initial per share offering price. The estimated number of shares of common stock shown as being offered by us and the selling stockholders is based upon an assumed offering price of $16.00 per share, the midpoint of the price range set forth on the cover page of this prospectus. The number of shares offered by the selling stockholders is calculated by dividing $174.8 million (the original issue price of the preferred stock) by the initial per share offering price. The number of shares being offered by us is calculated by subtracting the number of shares offered by the selling stockholders from 18,750,000, the total number of shares being offered.

 

 

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Summary Consolidated Financial and Other Information

The following table sets forth our summary consolidated financial and other information as of the dates for the periods indicated. The financial data for each of the three years in the period ended December 31, 2007 are derived from our consolidated financial statements, which have been audited by Ernst & Young LLP.

You should read this information in conjunction with the consolidated financial statements and the notes to those consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

 

     Year ended December 31,  
Dollars in thousands, except per share amounts    2007     2006    2005  

Statement of Operations Data:

       

Net sales

   $ 506,305     $ 393,604    $ 345,478  

Cost of sales

     330,714       256,806      222,353  
                       

Gross profit

     175,591       136,798      123,125  

Selling, general and administrative expenses

     98,500       80,103      74,594  

Research and development expenses

     4,162       3,336      2,855  

Legacy asbestos (income) expense

     (50,346 )     33,816      18,112  
                       

Operating income

     123,275       19,543      27,564  

Interest expense

     19,246       14,186      9,026  

Provision for income taxes

     39,147       3,866      6,907  
                       

Income from continuing operations

     64,882       1,491      11,631  

Net income

     64,882       94      12,247  

Earnings (loss) per share from continuing operations—basic and diluted(1)

   $ 1.79     $ 0.07    $ (0.09 )

 

Dollars in thousands    As of December 31, 2007
   Actual    As Adjusted(2)

Balance Sheet Data:

     

Cash and cash equivalents

   $ 48,093    48,093

Goodwill and intangibles, net

     185,353    185,353

Asbestos insurance asset, including current portion

     305,228    305,228

Total assets

     896,540    896,540

Total current liabilities

     148,374    148,374

Asbestos liability, including current portion

     376,233    376,233

Total debt, including current portion

     206,493    168,367

 

     Year ended December 31,
Dollars in thousands    2007    2006    2005

Other Data:

        

EBITDA(3)(4)

   $ 138,514    $ 29,627    $ 39,610

 

(1) Computed based on income from continuing operations available to holders of common stock.
(2)  

As adjusted to give effect to our sale of common stock in this offering at an assumed offering price of $16.00 per share, which is the midpoint of the price range, and the receipt and application of the net proceeds thereof as described above in this prospectus summary under “The Offering—Use of Proceeds.”

 

 

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(3)   EBITDA includes legacy asbestos (income) expense of $(50,346), $33,816 and $18,112 for the years ended December 31, 2007, 2006 and 2005, respectively, and discontinued operations expense (income) of $1,397 and $(616) for the years ended December 31, 2006 and 2005, respectively.
(4)   We are presenting EBITDA because we believe that it provides useful information to investors about us, our business and our financial condition. We define EBITDA as net income before the effects of interest expense, taxes, depreciation and amortization. We believe EBITDA is useful to investors because it is one of the measures used by our board of directors and management to evaluate our business, including in our internal management reporting, budgeting and forecasting processes, in comparing our operating results across our business as well as to those of our competitors and other companies in our industry, as an internal profitability measure, as a component in evaluating our ability and the desirability of making capital expenditures and significant acquisitions and as an element in determining executive compensation. Further, EBITDA and similar measures are widely used by investors, rating agencies and securities analysts as a key measure to compare companies in our industry and debt-service capabilities.

 

       EBITDA is not a measurement of financial performance or liquidity under GAAP and should not be considered as an alternative to net income or any other indicator of operating performance or as an alternative to cash flow from operating activities or any other measure of liquidity derived in accordance with GAAP. Because EBITDA is calculated before recurring cash charges including interest expense and taxes, and is not adjusted for capital expenditures or other recurring cash requirements of the business, it should not be considered as a measure of discretionary cash available to invest in the growth of the business. There are a number of material limitations to the use of EBITDA as an analytical tool, including the following:

 

  Ÿ  

EBITDA does not reflect our interest expense;

 

  Ÿ  

EBITDA does not reflect our tax expense or the cash requirements to pay our taxes; and

 

  Ÿ  

although depreciation and amortization are non-cash expenses in the period recorded, the assets being depreciated and amortized may have to be replaced in the future, and EBITDA does not reflect the cash requirements for such replacement.

We compensate for these limitations by relying primarily on our GAAP financial measures and by using EBITDA only supplementally. We believe that consideration of EBITDA, together with a careful review of our GAAP financial measures, is the most informed method of analyzing our company.

The following table reconciles net income to EBITDA:

 

     Year ended December 31,
Dollars in thousands    2007    2006    2005

Net income

   $ 64,882    $ 94    $ 12,247

Interest expense

     19,246      14,186      9,026

Provision for income taxes

     39,147      3,866      6,907

Depreciation and amortization

     15,239      11,481      11,430
                    

EBITDA

   $ 138,514    $ 29,627    $ 39,610
                    

Recent Developments

We estimate that our net sales for the three months ended March 28, 2008 were between $130.0 million and $131.0 million. We estimate that operating income(1) for the three months ended March 28, 2008 was between $14.6 million and $15.0 million. We estimate that orders for the three months ended March 28, 2008 were approximately $180.3 million and that our order backlog as of March 28, 2008 was approximately $353.6 million. Our estimates of the foregoing are based upon our preliminary analysis of anticipated results and actual results may be significantly different.

 

 

(1)

 

We estimate operating income includes approximately $3.4 million in legacy asbestos expense, which is comprised of $3.1 million in legal cost related to litigation against our asbestos insurers and $0.3 million in liability and defense cost related to asbestos claims.

 

 

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Summary of Risk Factors

We are exposed to several risks, one or more of which could severely impair the financial condition of Colfax. In summary, these are:

 

  Ÿ  

The majority of our sales are derived from international operations. We are subject to specific risks associated with international operations.

 

  Ÿ  

Significant movements in foreign currency exchange rates may harm our financial results.

 

  Ÿ  

We are dependent on the availability of raw materials, as well as parts and components used in our products.

 

  Ÿ  

The markets we serve are highly competitive and some of our competitors may have resources superior to ours. Responding to this competition could reduce our operating margins.

 

  Ÿ  

Acquisitions have formed a significant part of our growth strategy in the past and are expected to continue to do so. If we are unable to identify suitable acquisition candidates or integrate the businesses we acquire or realize the intended benefits, our growth strategy may not succeed. Acquisitions involve numerous risks, including risks related to integration and undisclosed or underestimated liabilities.

 

  Ÿ  

We may require additional capital to finance our growth. If the terms on which the additional capital is available are unsatisfactory or if the additional capital is not available at all, we may not be able to pursue our growth strategy.

 

  Ÿ  

A material disruption at any of our manufacturing facilities could adversely affect our ability to generate sales and meet customer demand.

 

  Ÿ  

Changes in the general economy and the cyclical nature of our markets could harm our operations and financial performance.

 

  Ÿ  

The loss of key management could have a material adverse effect on our ability to run our business.

 

  Ÿ  

Available insurance coverage, the number of future asbestos-related claims and the average settlement value of current and future asbestos-related claims of two of our subsidiaries could be different than we have estimated, which could materially and adversely affect our financial condition, results of operation and cash flow.

 

  Ÿ  

Our international operations are subject to the laws and regulations of the United States and many foreign countries. Failure to comply with these laws may affect our ability to conduct business in certain countries and may affect our financial performance.

 

  Ÿ  

Our foreign subsidiaries have done and may continue to do business in countries subject to U.S. sanctions and embargoes, including Iran and Syria, and we have limited managerial oversight over those activities. Failure to comply with these sanctions and embargoes may result in enforcement or other regulatory actions.

 

  Ÿ  

If we fail to comply with export control regulations, we could be subject to substantial fines or other sanctions.

 

  Ÿ  

Approximately 44% of our employees are represented by foreign trade unions. If the representation committees responsible for negotiating with these unions on our behalf are unsuccessful at negotiating new and acceptable agreements when the existing agreements with our employees covered by the unions expire, we could experience business disruptions or increased costs.

 

 

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  Ÿ  

Our manufacturing business is subject to the possibility of product liability lawsuits, which could harm our business.

 

  Ÿ  

As a manufacturer, we are subject to a variety of environmental and health and safety laws for which compliance could be costly. In addition, if we fail to comply with such laws, we could incur liability that could result in penalties and costs to correct any non-compliance.

 

  Ÿ  

As the present or former owner or operator of real property, or generator of waste, we could become subject to liability for environmental contamination, regardless of whether we caused such contamination.

 

  Ÿ  

Failure to maintain and protect our trademarks, trade names and technology may affect our operations and financial performance.

 

  Ÿ  

If we are unable to complete our assessment as to the adequacy of our internal controls over financial reporting as of December 31, 2009 as required by Section 404 of the Sarbanes-Oxley Act of 2002, or if material weaknesses are identified and reported, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of your investment and make it more difficult for us to raise capital in the future.

 

  Ÿ  

Some of our stockholders may exert significant influence over us.

 

  Ÿ  

We intend to use a large portion of the net proceeds of this offering to repay indebtedness outstanding under our existing credit facility, pay previously declared and unpaid dividends, pay a dividend expected to be declared prior to consummation of the offering, reimburse the selling stockholders for the underwriting discount incurred on the shares sold by them and pay bonuses to certain executives.

 

  Ÿ  

Future sales of our shares after this offering, or the perception that such sales could occur, could negatively affect the market price of our stock.

 

  Ÿ  

We have no intention of paying cash dividends on our common stock in the foreseeable future.

 

  Ÿ  

Investors in this offering will experience immediate dilution in net tangible book value per share.

 

  Ÿ  

Our common stock has no prior public market, and our stock price could be volatile and could decline after this offering.

 

  Ÿ  

Provisions in our charter documents and Delaware law may delay or prevent an acquisition of our company, which could decrease the value of your shares.

 

  Ÿ  

There may be limitations on our ability to fully utilize our net operating loss and minimum tax credit carryforwards in future periods.

 

 

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GERMAN TRANSLATION OF THE PROSPECTUS SUMMARY

ZUSAMMENFASSUNG DES PROSPEKTS

Die folgende Zusammenfassung ist als Einführung zu diesem Prospekt zu verstehen. Sie wird in ihrer Gesamtheit von den ausführlicheren Informationen und den Konzernabschlüssen sowie den dazugehörigen Anhängen, die sich an anderer Stelle in diesem Prospekt befinden, bestimmt. Diese Zusammenfassung enthält möglicherweise nicht alle Informationen, die Sie vor einer Anlage in die Aktien der Colfax-Gruppe erwägen sollten. Bevor Sie eine Anlageentscheidung treffen, sollten Sie den gesamten Prospekt, insbesondere den Abschnitt „Risk Factors“, die Konzernabschlüsse der Colfax-Gruppe sowie die dazugehörigen Anhänge, sorgfältig lesen. Die Colfax Corporation übernimmt die Verantwortung für den Inhalt der Zusammenfassung dieses Prospekts. Die Colfax Corporation kann für den Inhalt der Zusammenfassung jedoch nur haftbar gemacht werden, falls die Zusammenfassung,wenn sie im Zusammenhang mit den anderen Teilen dieses Prospekts gelesen wird, irreführend, unrichtig oder widersprüchlich ist. Für den Fall, dass vor einem Gericht Ansprüche aufgrund der in diesem Prospekt enthaltenen Informationen geltend gemacht werden, ist der als Kläger auftretende Anleger nach den Rechtsvorschriften des jeweiligen Mitgliedsstaates des Europäischen Wirtschaftsraums möglicherweise verpflichtet, die Kosten für die Übersetzung des Prospekts vor Prozessbeginn zu tragen.

Geschäftstätigkeit der Colfax-Gruppe

Die Colfax-Gruppe ist ein weltweiter Anbieter eines breiten Spektrums von Produkten zum Transport von Flüssigkeit (Fluidtechnik Produkten), darunter Pumpen, Fluidtechnik-Systeme und Spezialventile. Nach Ansicht der Colfax-Gruppe ist sie ein führender Hersteller von Rotationsverdrängerpumpen, wozu auch Schraubenspindelpumpen, Zahnradpumpen und Exzenterschneckenpumpen gehören. Die Colfax-Gruppe verfolgt eine globale Fertigungsstrategie und verfügt über Produktionsstätten in Europa, Nordamerika und Asien sowie über weltweite Absatz- und Vertriebskanäle. Die Produkte der Colfax-Gruppe kommen in einer Vielzahl von Anwendungen auf fünf strategischen Märkten zum Einsatz: Handelsschifffahrt, Öl- und Gasindustrie, Energieerzeugung, Kriegsmarine und Allgemeine Industrie. Die Colfax-Gruppe entwickelt und fertigt ihre Produkte nach hohen Qualitäts- und Zuverlässigkeitsstandards für den Einsatz in kritischen Fluidtechnik -Anwendungen, bei denen es auf höchste Leistungsfähigkeit ankommt. Aufbauend auf ihrem umfassenden technischen Verständnis der Anwendungen, in denen ihre Produkte zum Einsatz kommen, bietet die Colfax-Gruppe darüber hinaus maßgeschneiderte Flüssigkeitshandling-Lösungen an, um die besonderen Bedürfnisse der Kunden erfüllen zu können. Die Produkte der Colfax-Gruppe werden überwiegend unter den Markennamen Allweiler, Fairmount, Houttuin, Imo, LSC, Portland Valve, Tushaco, Warren und Zenith vermarktet. Die Colfax-Gruppe ist der Ansicht, dass ihre Marken weithin bekannt und in ihrer Branche hervorragend positioniert sind. Allweiler, Houttuin, Imo und Warren zählen zu den ältesten und bekanntesten Marken in den Märkten, in denen die Colfax-Gruppe vertreten ist; Allweiler wurde bereits im Jahre 1860 gegründet.

Die Colfax-Gruppe bedient über eine Kombination aus Direktvertrieb, Vertriebsmitarbeitern und Vertriebskanälen von Drittunternehmen eine weltweite Kundenbasis über eine Vielzahl von Märkten hinweg. Die Kundenbasis der Colfax-Gruppe ist sehr stark diversifiziert und umfasst Kunden aus den Bereichen Handel, Industrie und Seefahrt sowie der öffentliche Hand. Zu ihren Kunden gehören unter anderen Alfa Laval, Cummins, General Dynamics, Hyundai Heavy Industries, Siemens, Solar Turbines, Thyssenkrupp, die Kriegsmarine der Vereinigten Staaten von Amerika und die Kriegsmarine verschiedener Staaten weltweit. Die Colfax-Gruppe kann auf eine breit angelegte Basis zurückgreifen, was, zusammen mit der anspruchsvollen Art der Anwendungsbereiche, in denen ihre Produkte zum Einsatz kommen, dazu führt, dass ihre Kunden dazu neigen ihre Produkte durch gleiche Produkte zu ersetzen. Diese Tendenz führt zu einer erheblichen Nachfrage auf dem Sekundärmarkt sowohl nach Austauschprodukten als auch nach Ersatzteilen und Wartungsdienstleistungen.

 

 

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Die Colfax-Gruppe setzt ein umfassendes Set aus Einrichtungen und Verfahren ein, das unter der Bezeichnung Colfax Business System oder CBS bekannt ist. CBS ist eine disziplinierte strategische Planungs- und Ausführungsmethodik, die zum Ziel hat, durch Fokussierung auf Kundenbedürfnisse und ständige Verbesserung von Qualität, Lieferung und Kosten, in allen Geschäftsfeldern der Colfax-Gruppe ausgezeichnete Ergebnisse und eine Finanz- und Ertragslage auf Weltklasseniveau zu erreichen.

Die Colfax-Gruppe kann auf ein erfahrenes Führungsteam zählen, das ein klar ausgerichtetes Industriefertigungsgeschäft mit starken Marktpositionen innerhalb der Flüssigkeitshandling-Branche aufgebaut hat. Die Colfax-Gruppe ist der Auffassung, dass sie für ein fortgesetztes Wachstum durch eine Verbesserung ihres Produktangebots und einen Ausbau ihrer Kundenbasis auf allen ihren strategischen Märkten gut aufgestellt ist. Sie hat darüber hinaus in der Vergangenheit mehrere Übernahmen durchgeführt und erfolgreich eingegliedert. Die Colfax-Gruppe geht davon aus, auch weiterhin ergänzende Geschäftsbereiche zu erwerben, durch die ihre Produktpalette ausgebaut, ihre geografische Präsenz erweitert und ihre Position auf ihren strategischen Märkten gestärkt wird.

Marktchance

Die weltweite Flüssigkeitshandling-Industrie ist hochgradig fragmentiert. Über 10.000 Unternehmen stehen über zahlreiche Märkte und Branchen hinweg untereinander im Wettbewerb. Da Flüssigkeitshandling-Produkte häufig in kritischen Anwendungen zum Einsatz kommen, sind nach Auffassung der Colfax-Gruppe diejenigen Branchenteilnehmer am erfolgreichsten, die über das technische Know-how zur Erfüllung der Kundenvorgaben verfügen, Produkte anbieten, die den Ruf haben, qualitativ hochwertig und zuverlässig zu sein, pünktlich liefern können und einen leistungsstarken Kundendienst auf dem Sekundärmarkt bieten können.

Die Colfax-Gruppe ist der Auffassung, dass es ein erhebliches Wachstumspotenzial für ihre Produkte und Dienstleistungen auf ihren weltweiten strategischen Märkten gibt, auf denen eine Nachfrage nach hoch entwickelten Flüssigkeitshandling-Lösungen für kritische Anwendungen besteht. Die Colfax-Gruppe ist der Ansicht, dass sie dank ihrer weltweiten Präsenz in der Lage ist, sich erfolgreich im Wettbewerb auf allen ihren Märkten weltweit behaupten zu können.

Wettbewerbsstärken

Die Colfax-Gruppe ist der Auffassung, dass die folgenden Wettbewerbsstärken sie als Premium-Anbieter von Flüssigkeitshandling-Produkten positioniert und zu ihrem künftigen Wachstum beitragen werden:

 

  Ÿ  

Starke Marktstellung, breite Produktpalette und führende Marken.    Die Colfax-Gruppe ist der Auffassung, dass sie ein führender Hersteller von Rotationsverdrängerpumpen ist, wozu unter anderen Schraubenspindelpumpen, Zahnradpumpen und Exzenterschneckenpumpen zählen. Die Colfax-Gruppe bietet ein breites Spektrum an Flüssigkeitshandling-Produkten an, die anspruchsvolle Anforderungen von Kunden aus zahlreichen Branchen erfüllen. Die Marken der Colfax-Gruppe zählen in den Märkten, in denen sie tätig ist, zu den ältesten und bekanntesten.

 

  Ÿ  

Umfassende Anwendungsexpertise.    Die Colfax-Gruppe ist der Auffassung, dass sie durch ihren Ruf als Qualitätsanbieter mit technischem Fachwissen als Premium-Anbieter von Flüssigkeitshandling-Produkten positioniert ist. Mit über 140-jähriger Erfahrung verfügt die Colfax-Gruppe über ein umfassendes Fachwissen in der Entwicklung und Herstellung von Flüssigkeitshandling-Produkten, die in kritischen Anwendungen zum Einsatz kommen, wie etwa bei der Schmierung von Turbinen zur Stromerzeugung, dem Transport von Rohöl über Pipelines und bei dem Transport von Schweröl in Handelsschiffen.

 

  Ÿ  

Umfassendes weltweites Verkaufs-, Vertriebs- und Fertigungsnetz.    Die Colfax-Gruppe verkauft ihre Produkte durch mehr als 300 Direktverkaufs- und Vertriebsmitarbeiter und über 450 autorisierte

 

 

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Vertriebshändler in 79 Ländern. Die Colfax-Gruppe ist der Auffassung, dass ihre weltweite Präsenz innerhalb der hochgradig fragmentierten weltweiten Flüssigkeitshandling-Industrie es ihr ermöglicht, ihre Kunden besser zu bedienen. Die Fertigungskapazitäten der Colfax-Gruppe in Europa, Nordamerika und Asien ermöglichen ihr eine Optimierung der Kosten für Materialbeschaffung, Transport und Herstellung sowie eine Verminderung des Wechselkursrisikos.

 

  Ÿ  

Die Colfax-Gruppe setzt CBS zur ständigen Optimierung ihres Geschäfts ein.    CBS, das Geschäftssystem der Colfax-Gruppe, wurde zur Förderung einer Kultur der ständigen Optimierung aller Aspekte ihrer Betriebsabläufe und ihrer strategischen Planung entwickelt. Aufbauend auf dem Danaher Business System liegt der Schwerpunkt von CBS in der Ursachenanalyse, der Entwicklung von Prozessverbesserungen und der Einführung nachhaltiger Systeme. Dieser Ansatz erfasst dabei alle Geschäftsbereiche, nicht nur den Fertigungsbetrieb.

 

  Ÿ  

Umfangreiche installierte Basis, die Verkäufe und Dienstleistungen auf dem Sekundärmarkt generiert.    Dank ihrer bis in das Jahr 1860 zurückreichenden Produktgeschichte verfügt die Colfax-Gruppe über eine umfassende installierte Basis über zahlreiche Branchen hinweg. Aufgrund der kritischen Anwendungsbereiche, bei denen ihre Produkte zum Einsatz kommen, gepaart mit der hohen Qualität und Zuverlässigkeit ihrer Produkte, ist die Colfax-Gruppe der Auffassung, dass ihre Kunden dazu neigen ihre Produkte durch gleiche Produkte zu ersetzen. Diese Tendenz führt zu einer erheblichen Nachfrage auf dem Sekundärmarkt sowohl nach Austauschprodukten als auch nach Ersatzteilen und Reparatur- sowie Wartungsdienstleistungen. In dem Geschäftsjahr, das am 31. Dezember 2007 endete, wurden nach Schätzung der Colfax-Gruppe circa 25 % ihrer Einnahmen durch Verkäufe und Dienstleistungen auf dem Aftermarket erzielt.

 

  Ÿ  

Breite und diversifizierte Kundenbasis.    Die Kundenbasis der Colfax-Gruppe erstreckt sich über zahlreiche Branchen und ist geografisch diversifiziert. Im Jahr 2007 wurden circa 66 % ihrer Verkäufe durch Transaktionen außerhalb der USA erzielt. Darüber hinaus machte kein einzelner Kunde mehr als 3 % der Verkäufe in diesem Zeitraum aus.

 

  Ÿ  

Führungsteam mit umfassender Branchenkenntnis und Fokus auf strategische Entwicklung.    Die Geschäftsleitung der Colfax-Gruppe besteht aus einem Führungsteam mit durchschnittlich über 20 Jahren Erfahrung in der industriellen Fertigung. John A. Young, President und Chief Executive Officer der Colfax-Gruppe und einer ihrer Gründer, spielte eine Schlüsselrolle bei der Erarbeitung der Akquisitionsstrategie, die zum Aufbau der Colfax-Gruppe führte. Als Bestandteil dieser Strategie hat die Colfax-Gruppe seit 1995 zwölf Unternehmen übernommen und Geschäftsbereiche abgestoßen, die nicht zu ihrer langfristigen Wachstumsstrategie passen.

Wachstumsstrategie

Die Colfax-Gruppe beabsichtigt, mithilfe der folgenden Strategien auch künftig eine Erhöhung ihres Umsatzes, die Ausweitung ihrer geografischen Reichweite, die Erweiterung ihres Produktangebots und die Steigerung ihrer Rentabilität zu erreichen:

 

  Ÿ  

Anwendung von CBS für ein ertragreiches Umsatzwachstum und zur Steigerung des Shareholder Value.    CBS ist das Kernelement der Managementphilosophie der Colfax-Gruppe und wird in allen ihren Geschäftsbereichen eingesetzt. CBS ist eine strategische Planungs- und Ausführungsmethodik, die entwickelt wurde um in allen Bereichen des Geschäfts der Colfax-Gruppe ausgezeichnete Ergebnisse auf Weltniveau zu erzielen. CBS richtet die Colfax-Gruppe auf die ständige Optimierung und auf Leistungsziele aus, indem es ihren Mitarbeitern ermöglicht, innovative Strategien zur Erfüllung von Kundenbedürfnissen zu entwickeln. CBS ist kein statisches Verfahren, sondern wird vielmehr ständig weiterentwickelt, während sich die Colfax-Gruppe mit Unternehmen vergleicht, die zu den besten ihrer Klasse zählen.

 

 

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  Ÿ  

Umsetzung marktorientierter Strategien.    Die Colfax-Gruppe ist der Auffassung, dass es sich bei ihren fünf strategischen Märkten dank ihres andauernden Investitionsbedarfs, ihrer Wachstumsraten und ihrer weltweiten Ausdehnung um attraktive Märkte handelt.

 

  Ÿ  

Handelsschifffahrt—Das Ziel der Colfax-Gruppe ist es, auch weiterhin ihre bestehende Produktbasis zu erweitern und ihre Erlöse aus Verkäufen und Dienstleistungen auf dem Sekundärmarkt zu steigern. Ferner beabsichtigt die Colfax-Gruppe die Erweiterung ihrer Kapazitäten im Asien-Pazifik-Raum, indem sie ihre Einrichtungen in China und Indien nutzt, um vor Ort gefertigte Produkte anzubieten, Produktionskosten zu senken und lokalen Kundendienst und -betreuung anzubieten.

 

  Ÿ  

Öl- und Gasindustrie—Die Colfax-Gruppe beabsichtigt eine Fortführung ihrer bisherigen Strategie, die darin besteht, Öl- und Gaskunden höhere Effizienz und niedrigere Gesamtbetriebskosten durch Tausch von derzeit im Betrieb befindlichen Altprodukten durch ihre effizienteren Produkte zu bieten. Ferner plant die Colfax-Gruppe, die wachsende Nachfrage nach schlüsselfertigen Systemen zu nutzen, indem sie Lösungen entwickelt, die die schwierige gleichzeitige Handhabung verschiedener Mischungen aus Schweröl, Erdgas und Wasser ermöglichen. Die Colfax-Gruppe beabsichtigt, weiterhin die schnell wachsenden Öl- und Gasmärkte weltweit, auch Asien und die Entwicklungsländer, als Zielgruppe zu nehmen.

 

  Ÿ  

Energieerzeugung—Die Colfax-Gruppe beabsichtigt die Nutzung ihrer umfassenden Expertise für Energieerzeugungsanwendungen zur Fortsetzung ihres Wachstums als Anbieter von schlüsselfertigen Systemen auf diesem Markt. Des Weiteren beabsichtigt die Colfax-Gruppe, ihre weltweite Präsenz für eine Stärkung ihrer Geschäftsbeziehungen zu großen Originalausrüstungsherstellern (Original Equipment Manufacturers) zu nutzen.

 

  Ÿ  

Kriegsmarine—Die Colfax-Gruppe beabsichtigt, auch weiterhin hochwertige Flüssigkeitshandling-Systeme zu konzipieren, zu entwickeln und zu fertigen, um den entstehenden Anforderungen der Kriegsmarinen weltweit zu entsprechen. Derzeit arbeitet die Colfax-Gruppe beispielsweise mit der Kriegsmarine der Vereinigten Staaten von Amerika (United States Navy) zusammen, um hochentwickelte Elektronik und Bedienelemente in ihre Produkte zu integrieren. Ferner setzt die Colfax-Gruppe einen Schwerpunkt auf die Ausweitung ihrer Reparatur- und Servicekapazitäten für Marinekunden.

 

  Ÿ  

Allgemeine Industrie—Die Colfax-Gruppe beabsichtigt, auch künftig ihre Anwendungsexpertise zu nutzen, um ihren Kunden aus verschiedenen Branchen, wie etwa der Chemieindustrie, Zellstoff- und Papierverarbeitung und Bauindustrie, eine Palette von Produkten anbieten zu können, die ihre anspruchsvollsten Anforderungen in Sachen Flüssigkeitshandling erfüllen. Die Colfax-Gruppe beabsichtigt ferner eine Ausweitung ihrer Präsenz auf dem allgemeinen Industriemarkt, indem sie neue Anwendungsmöglichkeiten für ihre bestehenden Produkte erschließt, regional ausgerichtete Strategien einsetzt und ihre weltweite Präsenz sowie Vertriebskanäle nutzt, um ihre Lösungen weltweit zu vertreiben.

 

  Ÿ  

Ausrichtung auf schnell wachsende Regionen durch wirksamen Einsatz des weltweiten Fertigungs-, Verkaufs- und Vertriebsnetzes.    Die Colfax-Gruppe beabsichtigt, auch weiterhin ihre starke globale Präsenz und ihr weltweites Netz von Vertriebshändlern zu nutzen, um durch den weltweiten Verkauf von regional entwickelten und vermarkteten Produkten und Lösungen Wachstumschancen wahrzunehmen. Da die Kunden der Colfax-Gruppe zunehmend global aufgestellt sind, hat sie ihre globale Reichweite erweitert, um ihre Kunden durch örtliche Vertretungen in zahlreichen Märkten und durch Investitionen in Vertriebs- und Marketingkapazitäten weltweit bedienen zu können. Beispielsweise hat die Colfax-Gruppe in jüngster Zeit durch die Errichtung eines Werkes in China und durch die Übernahme eines indischen Herstellers von Flüssigkeitshandling-Produkten ihre Fertigungskapazitäten ausgebaut.

 

 

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  Ÿ  

Entwicklung von neuen Produkten, Anwendungen und Technologien.    Die Colfax-Gruppe wird die Entwicklung ihrer Schlüsselprodukte fortsetzen, um die Bedürfnisse neuer und bestehender Kunden zu erfüllen, sowie um ihr bestehendes Produktangebot zu verbessern und so ihre Marktposition zu stärken. Die Colfax-Gruppe beabsichtigt eine kundenorientierte Technologie, oder „SMART“- Lösungen zu entwickeln, die hoch entwickelte Elektronik, Sensoren und Bedienelemente enthalten um dadurch spezielle Kundenbedürfnisse zu erfüllen. Die Colfax-Gruppe ist der Ansicht, dass ihre SMART-Lösungen künftig die Gesamtbetriebskosten ihrer Kunden senken werden, indem sie Echtzeitdiagnosefunktionen zur Verfügung stellen, mit denen Ausfallzeiten minimiert, die Betriebseffizienz erhöht und unnötige Kosten vermieden werden.

 

  Ÿ  

Steigerung des Angebots an Systemen und Lösungen.    Die Colfax-Gruppe wird auch künftig hochwertige Flüssigkeitshandling-Lösungen anbieten, indem sie ihre Ingenieurs- und Anwendungsexpertise sowie ihre Markenbekanntheit und ihre Vertriebskanäle nutzt, um so zusätzliche Umsätze zu generieren. Die Colfax-Gruppe beabsichtigt den Aufbau regionaler Systemfertigungskapazitäten, um dem Wunsch ihrer Kunden nach schlüsselfertigen Modulen und ihrer Präferenz für ein Outsourcing der Montage zu entsprechen. Ein Teil der Strategie besteht darin, durch Lieferung von Komplettsystemen und -lösungen einen höheren Anteil am Gesamtwert von Projekten zu erzielen, insbesondere in Fällen, in denen die Colfax-Gruppe über den Projektaufbau entscheidet.

 

  Ÿ  

Fortsetzung strategischer Zukäufe, die die Plattform der Colfax-Gruppe ergänzen.    Die Colfax-Gruppe ist der Auffassung, dass die Fragmentierung der Flüssigkeitshandling-Industrie erhebliche Konsolidierungs- und Wachstumsmöglichkeiten für Unternehmen bietet, die über Zugang zu Kapital verfügen und deren Geschäftsleitung die fachliche Kompetenz besitzt, ein diszipliniertes Übernahme- und Eingliederungsprogramm umzusetzen. Die Colfax-Gruppe ist der Ansicht, dass sie in der Lage sein wird, in Zukunft eine Reihe attraktiver Übernahmekandidaten genau zu bestimmen und dass sie sich durch ein Wachstum im Wege von strategischen Übernahmen durch eine höhere Kaufkraft, ein größeres weltweites Verkaufs- und Vertriebsnetz und eine breitere Produkt- und Dienstleistungspalette einen Wettbewerbsvorteil gegenüber kleineren Wettbewerbern verschaffen wird.

 

 

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Sonstige Angaben

Angaben zur Gesellschaft

Die Colfax-Gruppe wurde 1998 als Gesellschaft nach dem Recht des US-Bundesstaates Delaware gegründet. Ihre Hauptgeschäftsstelle befindet sich in 8730 Stony Point Parkway, Suite 150, Richmond, Virginia 23235, Vereinigte Staaten von Amerika. Die zentrale Telefonnummer unter dieser Anschrift lautet +1 (804) 560-4070. Die Webseite des Unternehmens ist www.colfaxcorp.com. Der Inhalt dieser Website ist nicht Bestandteil dieses Prospekts.

Geschäftsleitung

Bei Abschluss dieses Angebots wird die Colfax-Gruppe über ein vertretungsberechtigtes Board of Directors (Leitungs- und Aufsichtsorgan) mit acht Mitgliedern verfügen, von denen die Mehrzahl unabhängig sein wird.

In der nachstehenden Übersicht sind die gegenwärtigen Mitglieder der Geschäftsleitung (Executive Officers), Mitglieder des Board of Directors (Directors) und Mitarbeiter in Schlüsselpositionen der Colfax-Gruppe sowie diejenigen Personen aufgeführt, die bei Abschluss des Angebots Executive Officers und Directors sein werden.

 

Name

  

Position

John A. Young

   President, Chief Executive Officer und Director

G. Scott Faison

   Senior Vice President, Finance und Chief Financial Officer

Thomas M. O’Brien

   Senior Vice President, General Counsel und Secretary

Michael K. Dwyer

   Senior Vice President, General Manager - Asia Pacific

Steven W. Weidenmuller

   Senior Vice President, Human Resources

Joseph B. Niemann

   Senior Vice President, Marketing and Strategic Planning

William E. Roller

   Senior Vice President, General Manager - Americas

Mario E. DiDomenico

   Senior Vice President, General Manager - Engineered Products

Dr. Michael Matros

   Senior Vice President, General Manager - Allweiler

Mitchell P. Rales

   Director

Steven M. Rales(1)

   Director

Patrick W. Allender

   Director Nominee

C. Scott Brannan

   Director Nominee

Joseph O. Bunting III

   Director Nominee und Vice President

Thomas S. Gayner

   Director Nominee

Clay Kiefaber

   Director Nominee

Rajiv Vinnakota

   Director Nominee

 

(1)   Steven M. Rales hat seinen Rücktritt als Director mit Wirkung zum Zeitpunkt der Wirksamkeit der Registrierungserklärung erklärt.

Abschlussprüfer

Abschlussprüfer der Colfax-Gruppe ist Ernst & Young LLP, eine unabhängige, eingetragene Wirtschaftsprüfungsgesellschaft, One James Center, Suite 1000, 901 E. Cary Street, Richmond, VA, 23219, Vereinigte Staaten von Amerika.

Grundkapital

Nach Abschluss dieses Angebots wird sich das genehmigte Grundkapital der Colfax-Gruppe aus 200.000.000 Stammaktien (common stock) mit einem Nennwert von USD 0,001 je Aktie und 10.000.000 Vorzugsaktien (preferred stock) mit einem Nennwert von USD 0,001 je Aktie zusammensetzen. Unmittelbar nach Abschluss des Angebots werden 41.229.588 Stammaktien und keine Vorzugsaktien ausgegeben sein.

 

 

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Geschäfte und Rechtsbeziehungen mit nahe stehenden Personen

Die Colfax-Gruppe beabsichtigt, nach Abschluss dieses Angebots Grundsätze für Geschäfte und Rechtsbeziehungen mit nahe stehenden Personen einzuführen, nach denen es ihren Executive Officers, Directors und ihren Hauptaktionären sowie deren unmittelbaren Familienangehörigen untersagt ist, ohne Zustimmung des Prüfungsausschusses, eines weiteren unabhängigen Ausschusses des Board of Directors oder des gesamten Board of Directors mit der Colfax-Gruppe Geschäfte abzuschließen.

Die Colfax-Gruppe zahlt vierteljährlich eine Verwaltungsvergütung in Höhe von USD 250.000 an die Colfax Towers, Inc. Diese Gesellschaft befindet sich vollständig im Eigentum von Mitchell Rales und Steven Rales. Joseph Bunting, derzeit Vice President und Director Nominee, ist als leitender Angestellter bei Colfax Towers, Inc. beschäftigt. Die Zahlung dieser Verwaltungsvergütung wird nach Abschluss dieses Angebots eingestellt. Im April 2005 kaufte die Colfax-Gruppe im Zusammenhang mit der Veräußerung ihres Geschäftsbereichs Stromübertragung Wandelvorzugsaktien ihrer Serie A (Series A Convertible Preferred Stock) mit einem Gesamtpreis von USD 82.000.000 von Mitchell Rales und Steven Rales zurück. Am 30. Mai 2003 schloss sie darüber hinaus eine Vereinbarung über Registrierungsrechte mit ihren zwei Directors und Hauptanteilseignern Mitchell Rales und Steven Rales ab, wonach sie Ansprüche haben auf Rechte im Bezug auf die Registrierung bestimmter ihrer Aktien nach Abschluss dieses Angebots gemäß dem U. S. Securities Act (Wertpapiergesetz der Vereinigten Staaten von Amerika). Die Colfax-Gruppe hat mit einer Reihe ihrer Aktionäre eine ergänzte und neu gefasste Aktionärsvereinbarung geschlossen, die gemäß den in dieser Vereinbarung vorgesehenen Bestimmungen mit dem Abschluss dieses Angebots endet. Die Colfax-Gruppe hat sich bereit erklärt, die veräußernden Aktionäre, Mitchell und Steven Rales sowie bestimmte, ihnen vollständig gehörende Gesellschaften für den Zeichnungsabschlag auf die von ihnen verkauften Aktien zu entschädigen. Des Weiteren hat die Colfax-Gruppe zugestimmt, ihren veräußernden Aktionären bestimmte beschlossene, aber bisher nicht ausgeschüttete Dividenden zu zahlen. Die Colfax-Gruppe beabsichtigt, Freistellungsvereinbarungen mit ihren Directors und Executive Officers abzuschließen.

Marken

Die Colfax-Gruppe ist Eigentümerin einer Reihe von Handelsbezeichnungen, Dienstleistungsmarken und Handelsmarken zur Verwendung für ihr Geschäft in den Vereinigten Staaten und gegebenenfalls in anderen Ländern; hierzu zählen unter anderen Colfax, Allweiler, Fairmount, Houttuin, Imo, LSC, Portland Valve, Tushaco, Warren und Zenith. Dieser Prospekt enthält darüber hinaus Produktbezeichnungen und sonstige Handelsbezeichnungen und Dienstleistungsmarken, die sich im Eigentum der Colfax-Gruppe oder im Eigentum anderer Unternehmen befinden. Die Handelsbezeichnungen und Dienstleistungsmarken anderer Unternehmen sind Eigentum dieser anderen Unternehmen.

 

 

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Das Angebot

 

Angebotene Stammaktien

7.825.947 Aktien(1)

 

Von den veräußernden Aktionären angebotene Stammaktien

10.924.053 Aktien(1)

Das Angebot besteht aus einem öffentlichen Angebot der Aktien in den Vereinigten Staaten von Amerika, der Bundesrepublik Deutschland und dem Königreich Schweden und einer internationalen Privatplatzierung in anderen Ländern. Das von diesem Prospekt abgedeckte öffentliche Angebot in der Bundesrepublik Deutschland und Schweden besteht allein in einem Angebot der Stammaktien der Colfax-Gruppe an ihre Mitarbeiter und bestimmte Vertriebshändler, Kunden, Geschäftspartner und nahe stehenden Personen im Rahmen eines als „Bevorrechtigte Zuteilung“ (Reserved Share Offering) bezeichneten Verfahrens.

 

Nach dem Angebot ausstehende Stammaktien

41.229.588 Aktien

 

Platzierungspreis; Preisspanne

Der Platzierungspreis wird nach Ablauf des Bookbuilding-Zeitraums festgelegt; diese Festlegung wird voraussichtlich am oder um den 7. Mai 2008 erfolgen. Die Preisspanne, innerhalb derer während des Bookbuilding-Verfahrens Kaufangebote von institutionellen Anlegern abgegeben werden können, soll USD 15,00 bis USD 17,00 betragen.

Der Platzierungspreis wird für die Zwecke der Bevorrechtigten Zuteilung gemäß dem Wertpapierprospektgesetz durch Bekanntmachung in einem Börsenpflichtblatt, voraussichtlich in der Frankfurter Allgemeinen Zeitung, veröffentlicht, sobald dies nach dem Preisfestlegungstag möglich ist.

 

Verwendung des Emissionserlöses

Nach Schätzung der Colfax-Gruppe wird sich der Nettoemissionserlös aus dem Angebot—basierend auf dem Mittelwert der auf dem Deckblatt des Prospekts genannten Preisspanne—auf ca. USD 111,3 Mio. belaufen. Die Colfax-Gruppe beabsichtigt, den Nettoemissionserlös für folgende Zwecke zu verwenden: Tilgung von im Rahmen ihrer Kreditlinie ausstehenden Schulden in Höhe von USD 38,2 Mio., Zahlung von beschlossenen aber noch nicht gezahlten Dividenden in Höhe von USD 35,1 Mio. an bestehende Inhaber von Vorzugsaktien, Zahlung von Sonderboni in Höhe von ungefähr USD 22,5 Mio. an ihre Führungskräfte im Rahmen von bereits zuvor eingeführten Vergütungsplänen für Führungskräfte und Zahlungen in Höhe von ungefähr USD 11,8 Mio. zur Entschädigung der veräußernden Aktionäre für den Zeichnungsabschlag auf die von ihnen in diesem Angebot verkauften Aktien. Die Colfax-Gruppe beabsichtigt zudem, eine Dividende zu beschließen, die aus den Emissionserlösen an die registrierten Vorzugsaktionäre unmittelbar vor der Abwicklung dieses Angebots bezahlt wird. Diese Dividende wird vom 1. Januar 2008 bis zum Ende dieses Angebots mit einer Rate von LIBOR plus 2,5% des ursprünglichen Kaufpreises für die ausgegebenen und umlaufenden Vorzugsaktien verzinst. Nimmt man an, dass der

 

 

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Schlusstag dieses Angebots am 12. Mai 2008 ist, würde der Gesamtbetrag dieser Dividende USD 3,7 Mio. betragen. Die Colfax-Gruppe beabsichtigt, einen etwaigen Restbetrag des Emissionserlöses für Betriebskapital und sonstige allgemeine Unternehmenszwecke zu verwenden.

Die Colfax-Gruppe wird keine Emissionserlöse vom Verkauf der Aktien der veräußernden Aktionäre erhalten.

Verbundene Unternehmen von Merrill Lynch, Pierce, Fenner & Smith Incorporated, die nachfolgend als Merrill Lynch bezeichnet werden, UBS Securities LLC und Banc of America Securities LLC, welche alle Emissionsbanken im Rahmen dieses Angebots sind, sind Parteien der Kreditlinie der Colfax-Gruppe. Die verbundenen Unternehmen von Merrill Lynch und Banc of America Securities LLC werden zur Tilgung eines Teils der unter der Kreditlinie ausstehenden Schulden der Colfax-Gruppe ungefähr USD 3,6 Mio. bzw. USD 1,5 Mio. vom Emissionserlös erhalten.

 

Bevorrechtigte Zuteilung

Auf das Ersuchen der Colfax-Gruppe hin haben die Emissionsbanken bis zu 937.500 der im Rahmen dieses Prospekts angebotenen Aktien für den Verkauf zum Platzierungspreis an einige ihrer Directors, leitenden Angestellten, Mitarbeiter, Vertriebshändler, Kunden, Geschäftspartner und nahe stehenden Personen reserviert. Falls diese Personen die für sie reservierten Aktien kaufen, verringert dies die Anzahl der Aktien, die für einen Verkauf an die Öffentlichkeit zu Verfügung stehen. Reservierte Aktien, deren geplanter Kauf nicht bis 09:00 New Yorker Uhrzeit am Tag, der dem Tag der Festlegung des Preises folgt, bestätigt wird, werden von den Emissionsbanken der Öffentlichkeit zu denselben Bedingungen wie die übrigen Aktien zum Erwerb angeboten.

Damit Sie an der bevorrechtigten Zuteilung teilnehmen können, müssen Sie den Emissionsbanken durch die Colfax-Gruppe als berechtigter Teilnehmer benannt worden sein. Es wurden sämtliche Vollzeitbeschäftigten, soweit nach anwendbarem Recht zulässig, und bestimmte andere Personen von der Colfax-Gruppe gegenüber den Emissionsbanken als Teilnehmer angegeben.

Der Angebotszeitraum für Teilnehmer der bevorrechtigten Zuteilung wird voraussichtlich einen Tag nach dem Tag der Veröffentlichung dieses Prospekts beginnen und bis zum 7. Mai 2008 andauern. Falls Sie von der Colfax-Gruppe eine Mitteilung darüber erhalten haben, dass Sie ein berechtigter Teilnehmer sind, müssen Sie Ihre „Erklärung des

 

 

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Zeichnungsinteresses“ (indication of interest) gemäß den darin enthaltenen Anweisungen bis spätestens zum 2. Mai 2008 eingereicht haben; zu diesem Zeitpunkt werden dann die Emissionsbanken ein Broker-Konto auf Ihren Namen eröffnen.

Falls Ihnen zum Zeitpunkt der Festlegung des Platzierungspreises durch die Colfax-Gruppe Aktien zum Kauf zugeteilt worden sind und Sie Ihr Interesse am Kauf der Aktien bestätigen, sind Sie zur Zahlung bis spätestens zum Stichtag (voraussichtlich am 12. Mai 2008) verpflichtet.

 

Lieferung und Zahlung

Die Lieferung der zugeteilten Aktien gegen Zahlung des Platzierungspreises und der üblichen Wertpapierprovision erfolgt voraussichtlich am oder um den 12. Mai 2008.

 

Börsennotierung

Die Colfax-Gruppe beabsichtigt die Notierung ihrer Stammaktien an der New York Stock Exchange (NYSE) unter dem Börsenkürzel „CFX“.

In der Anzahl der nach dem Angebot auszugebenden Aktien sind 593.659 unwiderrufbare Restricted Stock Units enthalten, die mit Beendigung dieses Angebots zugeteilt werden, und bis zu 5.906.341 übrige Aktien nicht enthalten, die für die Ausgabe im Rahmen des Omnibus Incentive Plans für 2008 der Colfax-Gruppe reserviert sind. Sofern nicht anderweitig angegeben, wird bei den Angaben in diesem Prospekt:

 

  Ÿ  

ein 13.436,22841-zu-1-Aktiensplit der ausstehenden Stammaktien der Colfax-Gruppe berücksichtigt, der am 21. April 2008 erfolgte;

 

  Ÿ  

davon ausgegangen, dass eine Umwandlung aller ausgegebenen Vorzugsaktien der Colfax-Gruppe in Stammaktien nach Abschluss dieses Angebots erfolgt;

 

  Ÿ  

die planmäßige Verwendung des Nettoemissionserlöses aus diesem Emissionsangebot zugrunde gelegt;

 

  Ÿ  

die Einreichung der neu gefassten Gründungsurkunde der Colfax-Gruppe und die positive Beschlussfassung über die ergänzte und neu gefasste Satzung unmittelbar vor Abschluss dieses Angebots zugrunde gelegt;

 

  Ÿ  

ein Platzierungspreis der Stammaktien von USD 16,00 je Aktie, d. h. der Mittelwert der auf dem Deckblatt des Prospekts genannten Preisspanne zugrunde gelegt; und

 

  Ÿ  

davon ausgegangen, dass die Emissionsbanken ihre Mehrzuteilungsoption auf den Kauf von bis zu 2.812.500 zusätzlichen Aktien von der Colfax-Gruppe nicht ausüben.

 

(1)   Die Gesamtzahl der von der Colfax-Gruppe und den veräußernden Aktionären angebotenen Aktien ist 18.750.000, soweit keine der Emissionsbanken ihre Überzuteilungs-Option ausüben wird. Während die Gesamtzahl der angebotenen Aktien sich nicht verändern wird, sind die Zahlen betreffend der Aktien, die von der Colfax-Gruppe (7.825.947) und den veräußernden Aktionären (10.924.053) als angeboten ausgewiesen sind, nur geschätzt und können sich, basierend auf dem Angebotspreis pro Aktie, verändern. Die geschätzten Zahlen der Stammaktien, die von der Colfax-Gruppe und den veräußernden Aktionären als angeboten ausgewiesen sind, basieren auf einem angenommenen Angebotspreis von USD 16,00 pro Aktie, d. h. dem Mittelwert der auf dem Deckblatt des Prospekts genannten Preisspanne. Die Anzahl der von den veräußernden Aktionären angebotenen Aktien wird durch Division von USD 174,8 Mio. (dem ursprünglichen Ausgabepreis der Vorzugsaktien) durch den Angebotspreis pro Aktie bestimmt. Die Anzahl der von der Colfax-Gruppe angebotenen Aktien berechnet sich durch Subtraktion der Anzahl der von den veräußernden Aktionären angebotenen Aktien von der Gesamtzahl der angebotenen Aktien von 18.750.000.

 

 

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Zusammenfassung der Konzern-Finanzdaten und sonstigen Angaben

In der nachfolgenden Tabelle sind die Konzern-Finanzdaten und sonstigen Angaben der Colfax-Gruppe für die dort angegebenen Zeiträume zusammenfassend dargestellt. Die Finanzdaten für jedes der drei Geschäftsjahre in der Zeit bis zum 31. Dezember 2007 sind den von Ernst & Young LLP geprüften Konzernabschlüssen der Colfax-Gruppe entnommen.

Diese Angaben sollten zusammen mit den Konzernabschlüssen einschließlich der dazugehörigen Anhänge sowie mit der „Management’s Discussion and Analysis of Financial Condition and Results of Operations“ gelesen werden, die sich an anderer Stelle in diesem Prospekt befinden.

 

     Geschäftsjahr zum 31. Dezember  
in Tausend Dollar, außer Angaben je Aktie    2007     2006    2005  

Daten der Gewinn- und Verlustrechnung:

       

Umsatzerlöse

   USD 506.305     USD 393.604    USD 345.478  

Umsatzkosten

   330.714     256.806    222.353  
                 

Bruttoergebnis vom Umsatz

   175.591     136.798    123.125  

Vertriebskosten, Allgemeine Verwaltungskosten

   98.500     80.103    74.594  

Forschungs—und Entwicklungskosten

   4.162     3.336    2.855  

Aufwendungen für Asbest—Altlasten (Ertrag)

   (50.346 )   33.816    18.112  
                 

Betriebsergebnis

   123.275     19.543    27.564  

Zinsaufwendungen

   19.246     14.186    9.026  

Rückstellungen für Körperschaftssteuern

   39.147     3.866    6.907  

Ertrag der fortgeführten Geschäftstätigkeiten

   64.882     1.491    11.631  

Nettogewinn

   64.882     94    12.247  

Gewinn (Verlust) je Aktie aus fortgeführten Geschäftstätigkeiten—unverwässert und verwässert(1)

   USD 1,79     USD 0,07    USD (0,09 )

 

     Zum 31. Dezember 2007
in Tausend Dollar    Tatsächlich    Angepasst(2)

Daten der Bilanz:

     

Barmittel and Barmitteläquivalente

   USD 48.093    USD 48.093

Geschäfts—oder Firmenwert und immaterielle Vermögenswerte, netto

   185.353    185.353

Asbestbezogene Versicherungsvermögenswerte, inkl. Gegenwärtiger Anteil

   305.228    305.228

Bilanzsumme

   896.540    896.540

Gesamte derzeitige Verbindlichkeiten

   148.374    148.374

Asbestbezogene Verbindlichkeiten, inkl. Gegenwärtiger Anteil

   376.233    376.233

Gesamtverschuldung, inkl. Gegenwärtiger Anteil

   206.493    168.367

 

     Geschäftsjahr zum 31. Dezember
in Tausend Dollar    2007    2006    2005

Sonstige Daten:

        

EBITDA(3)(4)

   USD 138.514    USD 29.627    USD 39.610

 

(1)   Berechnet auf Grundlage des den Inhabern von Stammaktien zur Verfügung stehenden Ergebnisses aus laufenden Geschäften.

 

 

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(2)   Angepasst unter Berücksichtigung des Verkaufs von Stammaktien im Rahmen dieses Angebots zu einem angenommenen Angebotspreis von USD 16,00 je Aktie, d. h. des Mittelwerts der Preisspanne, und der Einnahme sowie der Verwendung des Nettoemissionserlöses gemäß der Darstellung unter “Das Angebot-Verwendung des Emissionserlöses” in dieser Zusammenfassung des Prospekts.
(3)   EBITDA beinhaltet Aufwendungen für Asbest-Altlasten (Ertrag) in Höhe von USD (50.346), USD 33.816 und USD 18.112 in den Jahren, die am 31. Dezember 2007, 2006 bzw. 2005 endeten, und Aufwendungen für eingestellte Operationen (Ertrag) in Höhe von USD 1.397 und USD (616) in den Jahren, die am 31. Dezember 2006 bzw. 2005 endeten.
(4)   Die Colfax-Gruppe veröffentlicht das EBITDA, da sie der Ansicht ist, dass es den Investoren nützliche Informationen über die Colfax-Gruppe, ihr Geschäft und ihre finanzielle Verfassung bringt. Die Colfax-Gruppe definiert das EBITDA als Jahresüberschuss vor Zinskosten, Steuern und Abschreibungen. Die Colfax-Gruppe ist der Ansicht, dass das EBITDA nützlich ist für Investoren, da es einer der Maßstäbe ist, die ihr Board of Directors und ihr Management verwenden, um das Geschäft der Colfax-Gruppe zu beurteilen, und da das EBITDA sowohl bei der internen Berichterstattung durch das Management, bei Budgetierungs- und Prognose-Prozessen, beim Vergleich ihrer operativen Ergebnisse im eigenen Unternehmen sowie mit Wettbewerbern und anderen Unternehmen in ihrer Branche, als Maß der internen Profitabilität, als Bestandteil der Beurteilung ihrer Möglichkeiten Investitionen und signifikante Akquisitionen zu machen sowie deren Attraktivität als auch als Bestandteil bei der Festlegung der Vergütung von Führungskräften eingesetzt wird. Darüber hinaus werden das EBITDA und vergleichbare Messgrößen häufig von Anlegern, Ratingagenturen und Wertpapieranalysten als Hauptmessgröße zum Vergleich von Unternehmen in der Branche der Colfax-Gruppe und für die Fähigkeit Schulden bedienen zu können herangezogen.

 

       Bei dem EBITDA handelt es sich um keine Kennzahl der Finanz- und Ertragslage oder für die Liquidität, die nach den in den USA allgemein anerkannten Rechnungslegungsgrundsätzen („US-GAAP“) berechnet wurde. Folglich sollte das EBITDA weder als Alternative zum Nettogewinn oder sonst einem Indikator für operative Leistung, noch als Alternative zum Cashflow aus Geschäftstätigkeit oder sonst einer nach US-GAAP ermittelten Messgröße für Liquidität betrachtet werden. Da die Berechnung des EBITDA vor periodisch wiederkehrenden Zahlungen, einschließlich Zinsaufwendungen und Steuern erfolgt, und keine Anpassungen im Hinblick auf Investitionsaufwendungen oder sonstige periodisch wiederkehrende Barmittelerfordernisse im Rahmen des Geschäftsbetriebs vorgenommen werden, sollte es nicht als Kennzahl für die zur Investition in das Wachstum des Geschäfts verfügbaren Barmittel betrachtet werden.

 

       Es gibt eine Anzahl von Einschränkungen durch die Benutzung von Adjusted EBITDA als ein analytisches Werkzeug, einschließlich der Folgenden:

 

  Ÿ  

EBITDA gibt nicht die Belastungen der Colfax-Gruppe mit Zinsausgaben wieder;

 

  Ÿ  

EBITDA gibt nicht die Steuerausgaben oder den hierfür notwendigen Geldbedarf der Colfax-Gruppe wieder; und

 

  Ÿ  

obwohl Abschreibungen als Ausgaben nicht in Geld im Abrechnungszeitraum erfasst werden, kann es sein, dass der Anlagegegenstand, der abgeschrieben wird, in der Zukunft ersetzt werden muss und EBITDA spiegelt den Geldbedarf für eine Ersatzanschaffung nicht wieder.

 

       Die Colfax-Gruppe kompensiert diese Beschränkungen, indem sie sich primär auf ihre US-GAAP Maß- und Verhältniszahlen verlässt und indem sie EBITDA nur ergänzend heranzieht. Die Colfax-Gruppe ist der Auffassung, dass eine Betrachtung des EBITDA zusammen mit einer sorgfältigen Untersuchung ihrer US-GAAP Maß- und Verhältniszahlen das aufschlussreichste Verfahren zur Analyse des Unternehmens darstellt.

 

 

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       Die nachstehende Tabelle enthält eine Überleitung des gemäß US-GAAP ermittelten Nettogewinns auf das EBITDA:

 

    Geschäftsjahr zum 31. Dezember
in Tausend Dollar   2007   2006   2005

Nettogewinn

  USD 64.882   USD 94   USD 12.247

Zinsaufwendungen

    19.246     14.186     9.026

Rückstellung für Körperschaftssteuern

    39.147     3.866     6.907

Abschreibungen

    15.239     11.481     11.430
                 

EBITDA

  USD   138.514   USD   29.627   USD   39.160
                 

 

 

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Jüngste Entwicklung

 

    

 

Die Colfax-Gruppe schätzt, dass ihr Nettoumsatz in den am 28. März 2008 geendeten drei Monaten zwischen USD 130,0 Mio. und USD 131,0 Mio. lag. Die Colfax-Gruppe schätzt, dass das Betriebsergebnis(1) in den am 28. März 2008 geendeten drei Monaten zwischen USD 14,6 Mio. und USD 15,0 Mio. lag. Die Colfax-Gruppe schätzt, dass Bestellungen in den am 28. März 2008 geendeten drei Monaten von ungefähr USD 180,3 Mio. eingingen und dass ihr unerledigter Auftragsbestand zum 28. März 2008 bei ungefähr USD 353,6 Mio. lag. Die vorstehenden Schätzungen basieren auf einer vorläufigen Analyse der antizipierten Ergebnisse durch die Colfax-Gruppe und die tatsächlichen Ergebnisse können signifikant abweichen.

 

 

 

(1)   Die Colfax-Gruppe schätzt, dass ihr Betriebsergebnis ungefähr USD 3,4 Mio. an Aufwendungen für Asbest-Altlasten beinhaltet, die sich aus USD 3,1 Mio. Rechtsverfolgungskosten gegen die Asbest-Versicherer der Colfax-Gruppe und aus USD 0,3 Mio. Kosten für Asbest-Haftung und Verteidigung gegen Asbest-Klagen zusammensetzen.

 

 

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Zusammenfassung der Risikofaktoren

Die Colfax-Gruppe ist einer Reihe von Risiken ausgesetzt, die einzeln oder zusammen wesentlich nachteilige Auswirkungen auf die Finanzlage der Colfax-Gruppe haben könnten. Zusammengefasst sind dies:

 

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Der überwiegende Teil des Umsatzes der Colfax-Gruppe entfällt auf grenzüberschreitende Geschäftstätigkeiten. Die grenzüberschreitenden Geschäftstätigkeit birgt bestimmte Risiken für die Colfax-Gruppe.

 

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Erhebliche Veränderungen der Fremdwährungswechselkurse können nachteilige Auswirkungen auf die finanziellen Ergebnisse der Colfax-Gruppe haben.

 

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Die Colfax-Gruppe ist von der Verfügbarkeit von Rohstoffen abhängig, sowie von Teilen und Komponenten, die sie in ihren Produkten verwendet.

 

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Die von der Colfax-Gruppe bedienten Märkte sind von starkem Wettbewerb geprägt. Einige Wettbewerber der Colfax-Gruppe könnten über Mittel verfügen, die denen der Colfax-Gruppe überlegen sind. Die Teilnahme an diesem Wettbewerb könnte die operative Marge der Colfax-Gruppe verringern.

 

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Übernahmen waren in der Vergangenheit ein wichtiger Bestandteil der Wachstumsstrategie der Colfax-Gruppe und werden dies voraussichtlich auch künftig sein. Falls es der Colfax-Gruppe nicht gelingt, geeignete Übernahmekandidaten zu finden oder die erworbenen Unternehmen einzugliedern oder die mit der Übernahme angestrebten Nutzen zu erzielen, könnte ihre Wachstumsstrategie möglicherweise nicht erfolgreich sein. Übernahmen sind mit zahlreichen Risiken verbunden, unter anderen mit Risiken im Zusammenhang mit der Eingliederung und mit nicht offen gelegten oder unterbewerteten Verbindlichkeiten.

 

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Die Colfax-Gruppe könnte zur Finanzierung ihres Wachstums zusätzliches Kapital benötigen. Falls die Bedingungen, zu denen dieses zusätzliche Kapital verfügbar ist, unbefriedigend sind oder dieses überhaupt nicht verfügbar ist, so ist die Colfax-Gruppe möglicherweise nicht in der Lage, ihre Wachstumsstrategie weiterzuverfolgen.

 

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Ein erheblicher Störfall in einer der Fertigungseinrichtungen der Colfax-Gruppe könnte sich nachteilig auf ihre Fähigkeit zur Generierung von Umsätzen und zur Erfüllung von Kundenanforderungen auswirken.

 

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Die allgemeine Wirtschaftslage und die Zyklizität der Märkte, auf denen die Colfax-Gruppe tätig ist, könnten ihren Geschäftsbetrieb und ihre Finanz- und Ertragslage beeinträchtigen.

 

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Der Verlust von Führungskräften in Schlüsselpositionen könnte sich wesentlich nachteilig auf die Fähigkeit der Colfax-Gruppe zur Führung des Geschäfts auswirken.

 

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Der verfügbare Versicherungsschutz, die Anzahl künftiger asbestbezogener Klagen sowie die durchschnittlichen Vergleichsabfindungen von laufenden und zukünftigen asbestbezogener Klagen zweier Tochtergesellschaften der Colfax-Gruppe könnten von den Schätzungen der Colfax-Gruppe abweichen, was sich erheblich nachteilig auf ihre Finanzlage, das Betriebsergebnis und den Kapitalfluss (Cashflow) auswirken könnte.

 

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Die grenzüberschreitenden Geschäftstätigkeiten der Colfax-Gruppe unterliegen den Gesetzen und Vorschriften der Vereinigten Staaten von Amerika sowie zahlreicher anderer Länder. Eine Nichteinhaltung dieser Gesetze könnte ihre Fähigkeit zur Durchführung von Geschäften in bestimmten Ländern sowie ihre Finanz- und Ertragslage beeinträchtigen.

 

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Die ausländischen Tochtergesellschaften der Colfax-Gruppe betrieben in der Vergangenheit Geschäfte in Ländern, für die Sanktionen und Embargos der Vereinigten Staaten von Amerika gelten -einschließlich Iran und Syrien- und werden dies möglicherweise auch künftig tun. Die Colfax-Gruppe hat nur bedingt Kontrolle über diese Tätigkeiten. Das Versäumnis, diese Sanktionen und Embargos zu befolgen, kann zu Zwangsmaßnahmen oder anderen behördlichen Maßnahmen führen.

 

 

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  Ÿ  

Falls die Colfax-Gruppe gegen Ausfuhrkontrollvorschriften verstoßen sollte, könnten gegen sie erhebliche Geldstrafen oder andere Strafmaßnahmen verhängt werden.

 

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Circa 44 % der Mitarbeiter der Colfax-Gruppe werden von ausländischen Gewerkschaften vertreten. Falls es den Vertretungsorganen, die dafür verantwortlich sind, im Namen der Colfax-Gruppe mit diesen Gewerkschaften zu verhandeln, nicht gelingen sollte, beim Auslaufen bestehender Vereinbarungen mit den von den Gewerkschaften vertretenen Mitarbeitern der Colfax-Gruppe neue annehmbare Vereinbarungen auszuhandeln, könnte es zu Unterbrechungen des Geschäftsbetriebs oder zu erhöhten Kosten kommen.

 

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Das Fertigungsgeschäfts der Colfax-Gruppe könnte sich möglicherweise Produkthaftungsklagen ausgesetzt sehen, was zur Beeinträchtigung des Unternehmens führen könnte.

 

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Als Hersteller gelten für die Colfax-Gruppe eine Reihe von Umwelt-, Gesundheits- und Sicherheitsgesetzen, deren Erfüllung möglicherweise kostenintensiv ist. Darüber hinaus könnte die Colfax-Gruppe im Falle einer Nichteinhaltung solcher Gesetze haftbar gemacht und einer Geldstrafe sowie etwaigen Kosten für die Beseitigung ausgesetzt werden.

 

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Die Colfax-Gruppe könnte als gegenwärtige oder ehemalige Eigentümerin oder Betreiberin von Immobilien oder als Erzeugerin von Abfällen für Umweltverschmutzung haften, gleich ob sie die betreffende Verschmutzung verursacht hat oder nicht.

 

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Falls es der Colfax-Gruppe nicht gelingen sollte, ihre Handelsmarken, Handelsbezeichnungen und Technologien aufrechtzuerhalten und zu schützen, könnte dies ihre Geschäftstätigkeit und ihre Finanz- und Ertragslage beeinträchtigen.

 

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Falls es der Colfax-Gruppe nicht gelingen sollte, ihre Beurteilung der Angemessenheit des rechnungslegungsbezogenen internen Kontrollsystems zum 31. Dezember 2009 abzuschließen, wie dies Section 404 des Sarbanes-Oxley Act von 2002 vorschreibt, oder falls wesentliche Mängel festgestellt und berichtet werden, könnten Anleger das Vertrauen in die Zuverlässigkeit ihrer Abschlüsse verlieren, was zu einem Sinken des Werts Ihrer Anlage führen könnte und der Colfax-Gruppe die künftige Kapitalbeschaffung erschweren könnte.

 

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Einige Aktionäre der Colfax-Gruppe könnten erheblichen Einfluss auf die Colfax-Gruppe ausüben.

 

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Die Colfax-Gruppe beabsichtigt, einen großen Teil des Nettoemissionserlöses aus diesem Angebot für die Tilgung von im Rahmen ihrer bestehenden Kreditlinie ausstehenden Verbindlichkeiten, für Begleichung von bisher beschlossenen, aber noch nicht gezahlten Dividenden, zur Zahlung einer Dividende deren Beschluss vor Beendigung des Angebots erwartet wird, zur Entschädigung veräußernder Aktionäre für den Zeichnungsabschlag auf die von ihnen verkauften Aktien sowie für Bezahlung von Geldprämien an bestimmte Führungskräfte zu verwenden.

 

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Verkäufe von Aktien der Colfax-Gruppe nach Abschluss dieses Angebots oder der bloße Eindruck, dass es zu solchen Verkäufen kommen könnte, könnten sich nachteilig auf den Marktkurs der Aktien der Colfax-Gruppe auswirken.

 

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Die Colfax-Gruppe beabsichtigt nicht, in absehbarer Zeit Bardividenden auf ihre Stammaktien zu zahlen.

 

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Für Anleger, die sich an diesem Angebot beteiligen, wird es zu einer unmittelbaren Verwässerung des Nettobuchwerts je Aktie kommen.

 

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Für die Stammaktien der Colfax-Gruppe besteht kein vorheriger öffentlicher Markt. Der Kurs ihrer Aktien könnte stark schwanken und nach diesem Angebot sinken.

 

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Bestimmungen der Gründungsurkunde der Colfax-Gruppe oder das Recht des US-Bundesstaates Delaware könnten eine Übernahme der Colfax Corporation verzögern oder verhindern, was zu einem Sinken des Werts Ihrer Aktien führen könnte.

 

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Es könnten sich Beschränkungen der Möglichkeiten der Colfax-Gruppe ergeben, ihre Netto-Verluste und Verlustvorträge in zukünftigen Veranlagungszeiträumen voll nutzbar zu machen.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with the other information in this prospectus, before making an investment decision. If any of the following risks actually occur, our business, financial condition or operating results could suffer. As a result, the trading price of our common stock could decline and you could lose all or part of your investment in our common stock.

Risks Related to Our Business

The majority of our sales are derived from international operations. We are subject to specific risks associated with international operations.

In the year ended December 31, 2007, we derived approximately 66% of our sales from operations outside of the U.S. with manufacturing facilities in seven countries. Sales from international operations, export sales and the use of manufacturing facilities outside of the U.S. are subject to risks inherent in doing business outside the U.S. These risks include:

 

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economic instability;

 

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partial or total expropriation of our international assets;

 

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trade protection measures, including tariffs or import-export restrictions;

 

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currency exchange rate fluctuations and restrictions on currency repatriation;

 

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significant adverse changes in taxation policies or other laws or regulations; and

 

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the disruption of operations from political disturbances, terrorist activities, insurrection or war.

Significant movements in foreign currency exchange rates may harm our financial results.

We are exposed to fluctuations in currency exchange rates. In the year ended December 31, 2007, approximately 66% of our sales were denominated in currencies other than the U.S. dollar. We do not engage to a material extent in hedging activities intended to offset the risk of exchange rate fluctuations. Any significant change in the value of the currencies of the countries in which we do business against the U.S. dollar could affect our ability to sell products competitively and control our cost structure, which, in turn, could adversely affect our results of operations and financial condition.

A significant portion of our revenues and income are denominated in Euros and Swedish Kronor. Consequently, depreciation of the Euro or Krona against the U.S. dollar has a negative impact on the income from operations of our European operations. Large fluctuations in the rate of exchange between the Euro, the Krona and the U.S. dollar could have a material adverse effect on our results of operations and financial condition.

We are dependent on the availability of raw materials, as well as parts and components used in our products.

While we manufacture many of the parts and components used in our products, we require substantial amounts of raw materials and purchase some parts and components from suppliers. The availability and prices for raw materials, parts and components may be subject to curtailment or change due to, among other things, suppliers’ allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates and prevailing price levels. Any change in the supply of, or price for, these raw materials or parts and components could materially affect our business, financial condition, results of operations and cash flow. In addition, delays in delivery of components or raw materials by our suppliers could cause delays in our delivery of products to our customers.

 

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The markets we serve are highly competitive and some of our competitors may have resources superior to ours. Responding to this competition could reduce our operating margins.

We sell most of our products in highly fragmented and competitive markets. We believe that the principal elements of competition in our markets are:

 

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the ability to meet customer specifications;

 

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application expertise and design and engineering capabilities;

 

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product quality and brand name;

 

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timeliness of delivery;

 

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price; and

 

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quality of aftermarket sales and support.

In order to maintain and enhance our competitive position, we intend to continue our investment in manufacturing quality, marketing, customer service and support and distribution networks. We may not have sufficient resources to continue to make these investments and we may not be able to maintain our competitive position. Our competitors may develop products that are superior to our products, develop methods of more efficiently and effectively providing products and services or adapt more quickly than we do to new technologies or evolving customer requirements. Some of our competitors may have greater financial, marketing and research and development resources than we have. As a result, those competitors may be better able to withstand the effects of periodic economic downturns. In addition, pricing pressures could cause us to lower the prices of some of our products to stay competitive. We may not be able to compete successfully with our existing competitors or with new competitors. If we fail to compete successfully, the failure would have a material adverse effect on our business and results of operations.

Acquisitions have formed a significant part of our growth strategy in the past and are expected to continue to do so. If we are unable to identify suitable acquisition candidates or integrate the businesses we acquire or realize the intended benefits, our growth strategy may not succeed. Acquisitions involve numerous risks, including risks related to integration and undisclosed or underestimated liabilities.

Historically, our business strategy has relied on acquisitions. We expect to derive a significant portion of our growth by acquiring businesses and integrating those businesses into our existing operations. We intend to seek acquisition opportunities both to expand into new markets and to enhance our position in our existing markets. However, our ability to do so will depend on a number of steps, including our ability to:

 

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identify suitable acquisition candidates;

 

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negotiate appropriate acquisition terms;

 

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obtain financing that we may need to complete proposed acquisitions;

 

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complete the proposed acquisitions; and

 

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integrate the acquired business into our existing operations.

If we fail to achieve any of these steps, our growth strategy may not be successful.

In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies, services and products of the acquired company, the potential loss of key employees of the acquired company and the diversion of our management’s attention from other business concerns. This is the case particularly in the fiscal quarters immediately following the completion of an acquisition because the operations of the acquired business are integrated into the acquiring businesses’ operations during this period. We cannot be sure that we will accurately anticipate all of the changing demands that any future acquisition may impose on our management, our operational and management information systems and our financial systems.

 

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Once integrated, acquired operations may not achieve levels of revenue, profitability or productivity comparable with those that our existing operations achieve, or may otherwise not perform as we expected.

We may underestimate or fail to discover liabilities relating to a future acquisition during the due diligence investigation and we, as the successor owner, might be responsible for those liabilities. For example, two of our acquired subsidiaries are each one of many defendants in a large number of lawsuits that claim personal injury as a result of exposure to asbestos from products manufactured with components that are alleged to have contained asbestos. Although our due diligence investigations in connection with these acquisitions uncovered the existence of potential asbestos-related liabilities, the scope of such liabilities were greater than we had originally estimated. Although we seek to minimize the impact of underestimated or potential undiscovered liabilities by structuring acquisitions to minimize liabilities and obtaining indemnities and warranties from the selling party, these methods may not fully protect us from the impact of undiscovered liabilities. Indemnities or warranties are often limited in scope, amount or duration, and may not fully cover the liabilities for which they were intended. The liabilities that are not covered by the limited indemnities or warranties could have a material adverse effect on our business and financial condition.

We may require additional capital to finance our growth. If the terms on which the additional capital is available are unsatisfactory or if the additional capital is not available at all, we may not be able to pursue our growth strategy.

Our growth strategy will require additional capital investment to complete acquisitions, integrate the completed acquisitions into our existing operations and to expand into new markets.

We intend to pay for future acquisitions using a combination of cash, capital stock, notes and assumption of indebtedness. To the extent that we do not generate sufficient cash internally to provide the capital we require to fund our growth strategy and future operations, we will require additional debt or equity financing. We cannot be sure that this additional financing will be available or, if available, will be on terms acceptable to us. If we fail to obtain sufficient additional capital in the future, that failure will limit our ability to implement our business strategy. In addition, even if future debt financing is available, it may result in (1) increased interest expense, (2) increased term loan payments, (3) increased leverage, and (4) decreased income available to fund further acquisitions and expansion. It may also limit our ability to withstand competitive pressures and make us more vulnerable to economic downturns. If future equity financing is available, it may dilute the equity interests of our existing stockholders.

A material disruption at any of our manufacturing facilities could adversely affect our ability to generate sales and meet customer demand.

If operations at our manufacturing facilities were to be disrupted as a result of significant equipment failures, natural disasters, power outages, fires, explosions, terrorism, adverse weather conditions or other reasons, our financial performance could be adversely affected as a result of our inability to meet customer demand for our products. Interruptions in production could increase our costs and reduce our sales. Any interruption in production capability could require us to make substantial capital expenditures to remedy the situation, which could negatively affect our profitability and financial condition. We maintain property damage insurance which we believe to be adequate to provide for reconstruction of facilities and equipment, as well as business interruption insurance to mitigate losses resulting from any production interruption or shutdown caused by an insured loss. However, any recovery under our insurance policies may not offset the lost sales or increased costs that may be experienced during the disruption of operations, which could adversely affect our financial performance.

Changes in the general economy and the cyclical nature of our markets could harm our operations and financial performance.

Our financial performance depends, in large part, on conditions in the markets we serve and on the general condition of the global economy. Any sustained weakness in demand, downturn or uncertainty in the global economy could reduce our sales and profitability and affect our financial performance. In addition, our

 

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products are sold in many industries, some of which are cyclical and may experience periodic downturns. Cyclical weakness in the industries we serve could lead to reduced demand for our products and affect our profitability and financial performance.

The loss of key management could have a material adverse effect on our ability to run our business.

Because our senior management has been key to our growth and success, we may be adversely affected if we lose any member of our senior management. We are highly dependent on our senior management team, including John Young, our President and Chief Executive Officer, as a result of their extensive experience. The loss of key management or the inability to attract, retain and motivate sufficient numbers of qualified management personnel could have a material adverse effect on us and our business.

Available insurance coverage, the number of future asbestos-related claims and the average settlement value of current and future asbestos-related claims of two of our subsidiaries could be different than we have estimated, which could materially and adversely affect our financial condition, results of operation and cash flow.

Two of our subsidiaries are each one of many defendants in a large number of lawsuits that claim personal injury as a result of exposure to asbestos from products manufactured with components that are alleged to have contained asbestos. Such components were acquired from third-party suppliers and were not manufactured by any of our subsidiaries nor were the subsidiaries producers or direct suppliers of asbestos. For purposes of our financial statements, we have estimated the future claims exposure and the amount of insurance available based upon certain assumptions with respect to future claims and liability costs. We estimate the liability costs to be incurred in resolving pending and forecasted claims for the next 15 year period.

Our decision to use a 15 year period is based on our belief that this is the extent of our ability to forecast liability costs. We also estimate the amount of insurance proceeds available for such claims based on the current financial strength of the various insurers, our estimate of the likelihood of payment and applicable current law. We reevaluate these estimates regularly. Although we believe our current estimates are reasonable, a change in the time period used for forecasting our liability costs, the actual number of future claims brought against us, the cost of resolving these claims, the likelihood of payment by, and the solvency of, insurers and the amount of remaining insurance available could be substantially different than our estimates, and future revaluation of our liabilities and insurance recoverables could result in material adjustments to these estimates, any of which could materially and adversely affect our financial condition, results of operations and cash flow. In addition, the company incurs defense costs related to those claims, a portion of which has historically been reimbursed by our insurers. We also incur litigation costs in connection with actions against certain of the subsidiaries’ insurers relating to insurance coverage. While these costs may be significant, we are unable to predict the amount or duration of such costs. Additionally, we may experience delays in receiving reimbursement from insurers, during which time we may be required to pay cash for settlement or legal defense costs. Any increase in the actual number of future claims brought against us, the defense costs of resolving these claims, the cost of pursuing claims against our insurers, the likelihood and timing of payment by, and the solvency of, insurers and the amount of remaining insurance available, could materially and adversely affect our financial condition, results of operations and cash flow.

Our international operations are subject to the laws and regulations of the United States and many foreign countries. Failure to comply with these laws may affect our ability to conduct business in certain countries and may affect our financial performance.

We are subject to a variety of laws regarding our international operations, including the Foreign Corrupt Practices Act and regulations issued by U.S. Customs and Border Protection, the Bureau of Industry and Security and the regulations of various foreign governmental agencies. We cannot predict the nature, scope or effect of future regulatory requirements to which our international sales and manufacturing operations might be subject or the manner in which existing laws might be administered or interpreted. Future regulations could limit the countries in which some of our products may be manufactured or sold, or could restrict our access to, and increase the cost of obtaining, products from foreign sources. In addition, actual or alleged violations of these laws could result in enforcement actions and financial penalties that could result in substantial costs.

 

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Our foreign subsidiaries have done and may continue to do business in countries subject to U.S. sanctions and embargoes, including Iran and Syria, and we have limited managerial oversight over those activities. Failure to comply with these sanctions and embargoes may result in enforcement or other regulatory actions.

From time to time, certain of our foreign subsidiaries sell products to companies and entities located in, or controlled by the governments of, certain countries that are or have previously been subject to sanctions and embargoes imposed by the U.S. government and/or the United Nations, such as Iran and Syria. With the exception of the U.S. sanctions against Cuba, the applicable sanctions and embargoes generally do not prohibit our foreign subsidiaries from selling non-U.S.-origin products and services in those countries. However, Colfax Corporation, its U.S. personnel and its domestic subsidiaries, as well as employees of our foreign subsidiaries who are U.S. citizens, are prohibited from participating in, approving or otherwise facilitating any aspect of the business activities in those countries. These constraints may negatively affect the financial or operating performance of such business activities. We cannot be certain that our attempts to comply with U.S. sanction laws and embargoes will be effective, and as a consequence we may face enforcement or other actions if our compliance efforts are not effective. Actual or alleged violations of these laws could result in substantial fines or other sanctions which could result in substantial costs. In addition, Iran and Syria currently are identified by the State Department as state sponsors of terrorism and may be subject to increasingly restrictive sanctions. Because certain of our foreign subsidiaries have contact with and transact business in such countries, including sales to enterprises controlled by agencies of the governments of such countries, our reputation may suffer due to our association with these countries, which may have a material adverse effect on the price of our common stock. Further, certain U.S. states and municipalities have recently enacted legislation regarding investments by pension funds and other retirement systems in companies that have business activities or contacts with countries that have been identified as state sponsors of terrorism and similar legislation may be pending in other states. As a result, pension funds and other retirement systems may be subject to reporting requirements with respect to investments in companies such as ours or may be subject to limits or prohibitions with respect to those investments that may have a material adverse effect on the price of our shares.

In addition, we have recently discovered that one of our foreign subsidiaries made a small number of sales of approximately $60,000 in the aggregate to two customers in Cuba which may have been made in violation of regulations of the U.S. Treasury Department’s Office of Foreign Assets Control, or OFAC. Cuba is also identified by the U.S. State Department as a state sponsor of terrorism. We have submitted an initial notice of voluntarily disclosure to OFAC regarding these transactions. Our inquiry into these transactions is continuing and we will submit a full disclosure report to OFAC as soon as possible. As a result of these sales, we may be subject to fines or other sanctions.

If we fail to comply with export control regulations, we could be subject to substantial fines or other sanctions.

Some of our products manufactured or assembled in the United States are subject to the U.S. Export Administration Regulations, administered by the U.S. Department of Commerce, Bureau of Industry and Security, which require that we obtain an export license before we can export such products to specified countries. Additionally, some of our products are subject to the International Traffic in Arms Regulations, which restrict the export of certain military or intelligence-related items, technologies and services to non-U.S. persons. Failure to comply with these laws could harm our business by subjecting us to sanctions by the U.S. government, including substantial monetary penalties, denial of export privileges and debarment from U.S. government contracts.

Approximately 44% of our employees are represented by foreign trade unions. If the representation committees responsible for negotiating with these unions on our behalf are unsuccessful at negotiating new and acceptable agreements when the existing agreements with our employees covered by the unions expire, we could experience business disruptions or increased costs.

As of January 31, 2008, we had approximately 2,059 employees worldwide. In certain countries, labor and employment laws are more restrictive than in the U.S. and, in many cases, grant significant job protection to

 

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employees, including rights on termination of employment. In Germany, Sweden and the Netherlands, by law, some of our employees are represented by trade unions in these jurisdictions, which subjects us to employment arrangements very similar to collective bargaining agreements. If our employees represented by foreign trade unions were to engage in a strike, work stoppage or other slowdown in the future, we could experience a significant disruption of our operations. Such disruption could interfere with our business operations and could lead to decreased productivity, increased labor costs and lost revenue.

Although we have not experienced any recent strikes or work stoppages, we cannot offer any assurance that the representation committees that negotiate with the foreign trade unions on our behalf will be successful in negotiating new collective bargaining agreements or other employment arrangements when the current ones expire. Furthermore, future labor negotiations could result in significant increases in our labor costs.

Our manufacturing business is subject to the possibility of product liability lawsuits, which could harm our business.

In addition to the asbestos-related liability claims described above, as the manufacturer of equipment for use in industrial markets, we face an inherent risk of exposure to other product liability claims. Although we maintain strict quality controls and procedures, we cannot be sure that our products will be free from defects. In addition, some of our products contain components manufactured by third-parties, which may also have defects. We maintain insurance coverage for product liability claims. Our insurance policies have limits, however, that may not be sufficient to cover claims made against us. In addition, this insurance may not continue to be available to us at a reasonable cost. With respect to components manufactured by third-party suppliers, the contractual indemnification that we seek from our third-party suppliers may be limited and thus insufficient to cover claims made against us. If our insurance coverage or contractual indemnification is insufficient to satisfy product liability claims made against us, the claims could have an adverse effect on our business and financial condition. Even claims without merit could harm our reputation, reduce demand for our products, cause us to incur substantial legal costs and distract the attention of our management.

As a manufacturer, we are subject to a variety of environmental and health and safety laws for which compliance could be costly. In addition, if we fail to comply with such laws, we could incur liability that could result in penalties and costs to correct any non-compliance.

Our business is subject to international, federal, state and local environmental and safety laws and regulations, including laws and regulations governing emissions of: regulated air pollutants; discharges of wastewater and storm water; storage and handling of raw materials; generation, storage, transportation and disposal of regulated wastes; and worker safety. These requirements impose on our business certain responsibilities, including the obligation to obtain and maintain various environmental permits. If we were to fail to comply with these requirements or fail to obtain or maintain a required permit, we could be subject to penalties and be required to undertake corrective action measures to achieve compliance. In addition, if our non-compliance with such regulations were to result in a release of hazardous materials to the environment, such as soil or groundwater, we could be required to remediate such contamination, which could be costly. Moreover, noncompliance could subject us to private claims for property damage or personal injury based on exposure to hazardous materials or unsafe working conditions. Changes in applicable requirements or stricter interpretation of existing requirements may result in costly compliance requirements or otherwise subject us to future liabilities.

As the present or former owner or operator of real property, or generator of waste, we could become subject to liability for environmental contamination, regardless of whether we caused such contamination.

Under various federal, state and local laws, regulations and ordinances, and, in some instances, international laws, relating to the protection of the environment, a current or former owner or operator of real property may be liable for the cost to remove or remediate contamination on, under, or released from such

 

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property and for any damage to natural resources resulting from such contamination. Similarly, a generator of waste can be held responsible for contamination resulting from the treatment or disposal of such waste at any off-site location (such as a landfill), regardless of whether the generator arranged for the treatment or disposal of the waste in compliance with applicable laws. Costs associated with liability for removal or remediation of contamination or damage to natural resources could be substantial and liability under these laws may attach without regard to whether the responsible party knew of, or was responsible for, the presence of the contaminants. In addition, the liability may be joint and several. Moreover, the presence of contamination or the failure to remediate contamination at our properties, or properties for which we are deemed responsible, may expose us to liability for property damage or personal injury, or materially adversely affect our ability to sell our real property interests or to borrow using the real property as collateral. We cannot be sure that we will not be subject to environmental liabilities in the future as a result of historic or current operations that have resulted or will result in contamination.

Failure to maintain and protect our trademarks, trade names and technology may affect our operations and financial performance.

The market for many of our products is, in part, dependent upon the goodwill engendered by our trademarks and trade names. Trademark protection is therefore material to a portion of our business. The failure to protect our trademarks and trade names may have a material adverse effect on our business, financial condition and operating results. Litigation may be required to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights of others. Any action we take to protect our intellectual property rights could be costly and could absorb significant management time and attention. As a result of any such litigation, we could lose any proprietary rights we have. In addition, it is possible that others will independently develop technology that will compete with our patented or unpatented technology. The development of new technologies by competitors that may compete with our technologies could reduce demand for our products and affect our financial performance.

If we are unable to complete our assessment as to the adequacy of our internal controls over financial reporting as of December 31, 2009 as required by Section 404 of the Sarbanes-Oxley Act of 2002, or if material weaknesses are identified and reported, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of your investment and make it more difficult for us to raise capital in the future.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include in their annual reports on Form 10-K a report of management on the company’s internal controls over financial reporting, including management’s assessment of the effectiveness of the company’s internal controls over financial reporting as of the company’s fiscal year end. In addition, the independent registered public accounting firm auditing a public company’s financial statements must also attest to, and report on, the operating effectiveness of the company’s internal controls. While we will expend significant resources in developing the necessary documentation and testing procedures, 2009 will be the first year for which we must complete the assessment and undergo the attestation process required by Section 404 and there is a risk that we may not be able to comply with all of its requirements. If we do not timely complete our assessment or if our internal controls are not designed or operating effectively as required by Section 404, our independent registered public accounting firm may issue a qualified opinion on the effectiveness of our internal controls. It is also possible that material weaknesses in our internal controls could be found. If we are unable to remediate any material weaknesses by December 31, 2009, our independent registered public accounting firm would be required to issue an adverse opinion on our internal controls. If our independent registered public accounting firm renders an adverse opinion due to material weaknesses in our internal controls, then investors may lose confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to raise capital in the future.

 

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Risks Related to This Offering

Some of our stockholders may exert significant influence over us.

Currently, two of our directors and principal stockholders, Mitchell P. Rales and Steven M. Rales, together, and through certain entities wholly owned by them, own all of our outstanding preferred stock and a majority of our outstanding common stock, which, on an as-converted basis, represents an aggregate of approximately 89% of our outstanding common stock. This approximate percentage is calculated using an assumed offering price of $16.00 per share, the midpoint of the price range set forth on the cover page of this prospectus. The actual number of shares into which the preferred stock will be converted is equal to $174.8 million (the original issue price of the preferred stock) divided by the initial per share offering price. All shares of our preferred stock are expected to be converted into common stock and sold in this offering. Therefore, the combined beneficial ownership of Mitchell Rales and Steven Rales after this offering is anticipated to be reduced to approximately 44% of our outstanding shares. Even after this offering, however, the level of ownership of these stockholders, and the service of Mitchell Rales on our board of directors, will enable them to continue to exert significant influence over all matters involving us, including matters presented to our stockholders for approval, such as election and removal of our directors and change of control transactions. This concentration of ownership and voting power may also have the effect of delaying or preventing a change in control of our company and could prevent stockholders from receiving a premium over the market price if a change in control is proposed. The interests of these persons may not coincide with the interests of the other holders of our common stock with respect to our operations or strategy.

We intend to use a large portion of the net proceeds of this offering to repay indebtedness outstanding under our existing credit facility, pay previously declared and unpaid dividends, pay a dividend expected to be declared prior to consummation of the offering, reimburse the selling stockholders for the underwriting discount on the shares sold by them and pay bonuses to certain executives.

We have broad discretion to determine how to use the net proceeds of this offering, and have elected to apply $38.2 million of the proceeds to repay indebtedness outstanding under our credit facility, $35.1 million of the proceeds to pay previously declared and unpaid dividends to existing preferred stockholders, approximately $3.7 million of the proceeds to pay a dividend expected to be declared payable to preferred stockholders, approximately $11.8 million of the proceeds to reimburse the selling stockholders for the underwriting discount on the shares sold by them and approximately $22.5 million of the proceeds to pay special bonuses to certain of our executives under previously adopted executive compensation plans.

Using a large portion of the net proceeds of this offering in the manner described above means that we will only have available a small portion of the proceeds of the offering for use for other corporate purposes. As a result, we may need to seek additional debt or equity financing to fund operations and future growth. If we are not able to incur additional debt or sell additional equity on favorable terms, we may be unable to fund operations or expand our business, which could adversely affect our financial condition.

Future sales of our shares after this offering, or the perception that such sales could occur, could negatively affect the market price of our stock.

Future sales of a substantial amount of our common stock in the public market following this offering, or the perception that such sales could occur, could adversely affect the market price of our common stock. Upon completion of this offering, we expect to have 41,229,588 outstanding shares of our common stock (or 44,042,088 shares if the underwriters exercise their option to purchase additional shares in full), which numbers are based upon the midpoint of the price range set forth on the cover page of this prospectus. Beginning approximately 180 days after completion of this offering, except for any shares acquired by our “affiliates,” as that term is defined in Rule 144 under the Securities Act, any of these shares may be resold immediately in the public market. We cannot predict the effect that future sales made under Rule 144, Rule 701 or otherwise will have on the market price of our common stock.

 

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We have no intention of paying cash dividends on our common stock in the foreseeable future.

We currently expect to retain future earnings, if any, to finance operations and our acquisition strategy, and do not anticipate paying any cash dividends for the foreseeable future. Therefore, you may not receive any return on an investment in our common stock unless you sell your common stock for a price greater that the price that you paid for it.

Investors in this offering will experience immediate dilution in net tangible book value per share.

The initial public offering price per share will significantly exceed the net tangible book value per share of our common stock. As a result, investors in this offering will experience immediate dilution of $16.38 in net tangible book value per share based on an initial public offering price of $16.00, which is the midpoint of the price range set forth on the cover page of this prospectus. This dilution occurs in large part because our earlier investors paid substantially less than the initial public offering price when they purchased their shares. Investors in this offering may also experience additional dilution as a result of shares of common stock that may be issued in connection with a future acquisition.

Our common stock has no prior public market, and our stock price could be volatile and could decline after this offering.

Before this offering, our common stock had no public market. We will negotiate the initial public offering price per share with the representatives of the underwriters and, therefore, that price may not be indicative of the market price of our common stock after the offering. We cannot assure you that an active public market for our common stock will develop after this offering, or that if it does develop, it will be sustained. In the absence of a public trading market, you may not be able to liquidate your investment in our common stock. In addition, the market price of our common stock could be subject to significant fluctuations after this offering. Among the factors that could affect our stock price are:

 

  Ÿ  

quarterly variations in our operating results;

 

  Ÿ  

changes in sales or earnings estimates or publication of research reports by analysts;

 

  Ÿ  

speculation in the press or investment community;

 

  Ÿ  

strategic actions by us or our competitors, such as acquisitions or restructurings;

 

  Ÿ  

actions by institutional stockholders or other large stockholders;

 

  Ÿ  

product liability, including asbestos, lawsuits against us;

 

  Ÿ  

changes in accounting principles;

 

  Ÿ  

general market conditions; and

 

  Ÿ  

domestic and international, political and economic factors unrelated to our performance that affect our production facilities or our markets.

In particular, we cannot assure you that you will be able to resell your shares at or above the initial public offering price. The stock markets have experienced extreme volatility in recent years that has been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. In the past, following periods of volatility in the market price of a company’s securities, class action litigation has often been instituted against the company. Any litigation of this type brought against us could result in substantial costs and a diversion of our management’s attention and resources, which would harm our business, operating results and financial condition.

 

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Provisions in our charter documents and Delaware law may delay or prevent an acquisition of our company, which could decrease the value of your shares.

Our certificate of incorporation and bylaws and Delaware law contain provisions that may make it difficult for a third-party to acquire us without the consent of our board of directors. These provisions include prohibiting stockholders from taking action by written consent, prohibiting special meetings of stockholders called by stockholders and prohibiting stockholder nominations and approvals without complying with specific advance notice requirements. In addition, our board of directors has the right to issue preferred stock without stockholder approval, which our board of directors could use to effect a rights plan or “poison pill” that could dilute the stock ownership of a potential hostile acquirer and may have the effect of delaying, discouraging or preventing an acquisition of our company. Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding voting stock. Although Mitchell Rales and Steven Rales, both individually and in the aggregate, hold more than 15% of our outstanding voting stock, this provision of Delaware law does not apply to them.

There may be limitations on our ability to fully utilize our net operating loss and minimum tax credit carryforwards in future periods.

As of December 31, 2007, we had net operating loss (“NOLs”) and minimum tax credit (“MTCs”) carry forwards of approximately $38.7 million and $4.2 million, respectively. The NOLs, if not utilized to offset tax income in future periods, will expire at various dates beginning in 2021 while the MTCs do not expire. If we experience an “ownership change” within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended, as a result of the offering or future changes in ownership, our ability to use our NOLs existing at the time of any such ownership change to offset our taxable income, if any, generated in taxable periods after the ownership change would be subject to an annual limitation summarized below. In the event of an ownership change, the amount of NOLs which we may utilize on an annual basis under Section 382 would generally be equal to the product of the value of our outstanding stock immediately prior to the ownership change (less certain capital contributions during the preceding two years) and the “long term tax exempt rate” (determined monthly and, for ownership changes occurring in the month of April 2008, 4.55%).

Similarly, the amount of any MTCs that may be carried forward to a post ownership change tax year is limited to the amount of tax liability attributed to taxable income that does not exceed the aforementioned Section 382 limitation computation.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (including, in particular, the sections therein labeled “Outlook” and “Asbestos-Related Litigation”) and “Business,” contains forward-looking statements. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include:

 

  Ÿ  

risks associated with our international operations;

 

  Ÿ  

significant movements in foreign currency exchange rates;

 

  Ÿ  

the competitive environment in our industry;

 

  Ÿ  

our ability to identify and successfully integrate attractive acquisition targets;

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

our ability to expand our business in our targeted markets;

 

  Ÿ  

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

 

  Ÿ  

our financial performance; and

 

  Ÿ  

others risks and factors listed under “Risk Factors” and elsewhere in this prospectus.

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation, except as required by law, to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this prospectus.

INDUSTRY AND MARKET DATA

Industry and market data used in this prospectus are based on independent industry publications from sources such as The Freedonia Group, Elsevier, European Industrial Forecasting, the Hydraulic Institute and other publicly available information.

 

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USE OF PROCEEDS

We estimate that we will receive $111.3 million in net proceeds from our sale of the 7,825,947 shares of common stock sold by us in the offering (or approximately $153.3 million if the underwriters exercise their overallotment option in full). Our estimated net proceeds from the offering represent the amount we expect to receive after the underwriting discount and our payment of the other expenses of the offering payable by us. We estimate that the selling stockholders will receive $174.8 million in proceeds from their sale of 10,924,053 shares of common stock in the offering. We will not receive any proceeds from the sale of shares by the selling stockholders. For purposes of estimating our net proceeds, we have assumed that the initial public offering price of the common stock will be $16.00, which is the midpoint of the price range set forth on the cover page of this prospectus. The total number of shares being offered by us and the selling stockholders is 18,750,000, assuming no exercise of the underwriters’ overallotment option. While the total number of shares being offered will not change, the number of shares shown as being offered by the us (7,825,947) and the selling stockholders (10,924,053) is an estimate and may change based on the initial per share offering price. The estimated number of shares of common stock shown as being offered by us and the selling stockholders is based upon an assumed offering price of $16.00 per share, the midpoint of the price range set forth on the cover page of this prospectus. The number of shares offered by the selling stockholders is calculated by dividing $174.8 million (the original issue price of the preferred stock) by the initial per share offering price. The number of shares being offered by us is calculated by subtracting the number of shares offered by the selling stockholders from 18,750,000, the total number of shares being offered.

We intend to use $38.2 million of the proceeds we receive from this offering to pay indebtedness outstanding under our credit facility. As of December 31, 2007, we had approximately $205.3 million principal amount, along with accrued interest, outstanding under our credit facility. The weighted average interest rate at December 31, 2007 of our indebtedness under the credit facility was 7.4%. Within our credit facility, the revolving line of credit expires on May 30, 2010 and the term loan matures on December 19, 2011. We also intend to use $35.1 million of the proceeds of this offering to pay to existing preferred stockholders dividends that have been declared but unpaid due to the restrictions on payment of dividends contained in our credit facility. We also intend to declare a dividend payable from the proceeds of this offering to preferred stockholders of record immediately prior to the consummation of this offering. This dividend will accrue from January 1, 2008 through the consummation of this offering at a rate equal to LIBOR plus 2.5% of the original purchase price of our issued and outstanding preferred stock. Assuming a closing date of May 12, 2008 for this offering, the amount of this dividend would be $3.7 million. Mitchell Rales and Steven Rales, and certain entities controlled entirely by them, currently own all of our outstanding preferred stock. We will also use approximately $22.5 million of the proceeds of this offering to pay amounts due, as a result of this offering, to participants in our 2001 Employee Appreciation Rights Plan and our 2006 Executive Stock Rights Plan, which are bonus plans for certain executive officers. See “Management—Compensation Discussion and Analysis” for additional information concerning these plans. In addition, we intend to use approximately $11.8 million of our net proceeds from this offering to reimburse the selling stockholders for the underwriting discount on the shares sold by them in this offering, which will be recognized as an expense in the quarter in which it is paid. We intend to use the balance of the net proceeds, if any, for working capital and other general corporate purposes, which may include funding for possible acquisitions. We have no agreement with respect to any future acquisition, although we assess opportunities on an ongoing basis and from time to time hold discussions with other companies regarding potential transactions.

Affiliates of Merrill Lynch, UBS Securities LLC and Banc of America Securities LLC, underwriters in this offering, are parties to our credit facility. The affiliates of Merrill Lynch and Banc of America Securities LLC will receive approximately $3.6 million and $1.5 million, respectively, of the proceeds used to pay a portion of the indebtedness outstanding under the Term B loan under our credit facility. See “Underwriting—Other Relationships.”

 

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DIVIDEND POLICY

We intend to retain our earnings for use in the operation and expansion of our business and we do not anticipate paying any dividends on the common stock in the foreseeable future. Payment of future dividends, if any, will be determined in the sole discretion of our board of directors and will depend upon, among other things, the future earnings, operations, capital requirements and general financial condition and prevailing business and economic conditions, as well as statutory restrictions on our ability to pay dividends.

 

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CAPITALIZATION

The following table shows, as of December 31, 2007 our capitalization:

 

  Ÿ  

on an actual basis;

 

  Ÿ  

on a pro forma basis to reflect the automatic conversion of all of our outstanding preferred stock into shares of common stock upon completion of this offering based upon an assumed public offering price of $16.00 per share, the midpoint of the price range set forth on the cover page of this prospectus; and

 

  Ÿ  

on a pro forma as adjusted basis to reflect (i) the sale of 7,825,947 common stock by us in this offering at an assumed public offering price of $16.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after the deduction of the estimated underwriting discount and offering expenses payable by us and (ii) the application of the net proceeds of this offering in the manner described under “Use of Proceeds.”

The share data in the table below are based on shares outstanding as of December 31, 2007. The number of outstanding shares as of that date excludes up to 6,500,000 shares of common stock reserved for future issuance under our 2008 omnibus incentive plan.

You should read this table in conjunction with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

 

     December 31, 2007  
(in thousands, except per share data)    Actual     Pro Forma     Pro Forma,
As Adjusted
 

Total debt, including current portion

   $ 206,493     $ 206,493     $ 168,367  

Shareholders’ equity (deficit):

Preferred stock, undesignated, $0.001 par value per share; 256,785 shares authorized; 174,784.828 shares issued and outstanding actual, 0 shares issued and outstanding pro forma and pro forma as adjusted

     1      

Common stock, $0.001 par value per share; 200,000,000 shares authorized actual, shares authorized pro forma and pro forma as adjusted; 21,885,929 shares issued and outstanding actual, 32,809,982 shares issued and outstanding pro forma and 40,635,929 shares issued and outstanding pro forma as adjusted

     22       33       41  

Additional paid-in capital

     201,660       201,650       312,905  

Retained earnings (deficit)

     (109,238 )     (109,238 )     (141,640 )

Accumulated other comprehensive loss

     (39,394 )     (39,394 )     (39,394 )
                        

Total shareholders’ equity (deficit)

     53,051       53,051       131,912  
                        

Total capitalization

   $ 259,544     $ 259,544     $ 300,279  
                        

 

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DILUTION

Purchasers of the common stock in the offering will suffer an immediate and substantial dilution in net tangible book value per share. Dilution is the amount by which the initial public offering price paid by purchasers of shares of our common stock exceeds the net tangible book value per share of our common stock after the offering. Net tangible book value represents the amount of our total tangible assets reduced by our total liabilities. Tangible assets equal our total assets less goodwill and intangible assets. Net tangible book value per share represents our net tangible book value divided by the number of shares of common stock outstanding. As of December 31, 2007, our net tangible book value was ($132.3) million and our net tangible book value per share was ($6.05).

After giving effect to the sale of 7,825,947 shares of common stock in the offering by us at an initial public offering price of $16.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, the assumed conversion of all shares of preferred stock based upon the same assumed initial public offering price and the application of the estimated net proceeds of this offering to us assuming a closing date of this offering of May 12, 2008, our adjusted net tangible book value as of December 31, 2007 would have been ($15.5) million, or ($0.38) per share. This represents an immediate accretion in net tangible book value of $3.66 per share to existing stockholders and an immediate dilution of $16.38 per share to new investors purchasing shares in the offering. The following table illustrates this per share dilution:

 

     Per Share  

Assumed initial public offering price per share

       $16.00  

Net tangible book value per share as of December 31, 2007

   $ (6.05 )  
          

Pro forma net tangible book value per share as of December 31, 2007

   $ (4.03 )  

Increase in net tangible book value per share attributable to new investors

   $ 3.66    

Adjusted net tangible book value per share after this offering

     $ (0.38 )
          

Dilution per share to new investors

     $ 16.38  
          

A $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share would increase (decrease) our adjusted net tangible book value after the offering by approximately $17.5 million and dilution per share to new investors by approximately $0.58, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.

If the underwriters exercise in full their option to purchase additional shares, the adjusted net tangible book value per share after the offering would be $0.60 per share, the increase in net tangible book value per share to existing stockholders would be $4.63 per share and the dilution to new investors would be $15.40 per share.

The following table summarizes as of December 31, 2007, after giving effect to the conversion of all outstanding shares of convertible preferred stock into an aggregate of 10,924,053 shares of common stock upon the closing of this offering, the number of shares of common stock purchased, the total consideration paid and the average price per share paid, or to be paid, by existing stockholders and by new investors purchasing common stock in this offering. The calculation below is based on an assumed initial public offering price of $16.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, before deduction of estimated underwriting discounts and commissions and offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average Price
Per Share
     Number    Percent     Amount    Percent    

Existing stockholders

   21,885,929    53.9 %   $ 26,898,172    8.2 %   $ 1.23

New investors

   18,750,000    46.1     $ 300,000,000    91.8     $ 16.00
                          

Total

   40,635,929    100 %   $ 326,898,172    100 %  
                          

 

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The share data in the table above are based on shares outstanding as of December 31, 2007. The number of outstanding shares at that date excludes up to 6,500,000 shares of common stock reserved for future issuance under our 2008 omnibus incentive plan.

A $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share would increase (decrease) the total consideration paid by new investors by $18.75 million and increase (decrease) the percentage of total consideration paid by new investors by approximately 0.4%, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

If the underwriters exercise in full their option to purchase additional shares, the percentage of shares of common stock held by existing stockholders will decrease to approximately 49.7% of the total number of shares of our common stock outstanding after this offering and will increase the number of shares held by new investors to 21,562,500, or 49.0% of the total number of shares of our common stock outstanding after this offering. The remaining 1.3% represents shares underlying vested restricted stock units that will be granted to certain of our current and former executive officers upon the consummation of this offering pursuant to previously adopted executive compensation plans.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following table contains selected historical financial and other data for each of the five years in the period ended December 31, 2007. The financial data for each of the five years in the period ended December 31, 2007 are derived from our consolidated financial statements, which have been audited by Ernst & Young LLP.

In reviewing the following information, it should be noted that we acquired the net assets of Zenith Pump (“Zenith”) on June 30, 2004, the net assets of Portland Valve Inc. (“Portland Valve”) on August 6, 2004, Tushaco Pump Private Limited (“Tushaco”) on August 9, 2005, Lubrication Systems Company of Texas (“LSC”) on January 31, 2007, and Fairmount Automation Inc. on November 29, 2007, and we divested our power transmission business on November 30, 2004.

You should read this information in conjunction with the consolidated financial statements and the notes to those consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

 

     Year ended December 31,  
Dollars in thousands, except per share amounts    2007     2006    2005     2004(1)     2003(1)(2)  

Statement of Operations Data:

           

Net sales

   $ 506,305     $ 393,604    $ 345,478     $ 309,653     $ 266,698  

Cost of sales

     330,714       256,806      222,353       197,907       167,104  
                                       

Gross profit

     175,591       136,798      123,125       111,746       99,594  

Selling, general and administrative expenses

     98,500       80,103      74,594       77,434       72,058  

Research and development expenses

     4,162       3,336      2,855       3,175       3,072  

Legacy asbestos (income) expense

     (50,346 )     33,816      18,112       29,412       20,132  
                                       

Operating income

     123,275       19,543      27,564       1,725       4,332  

Interest expense

     19,246       14,186      9,026       6,918       6,941  

Provision (benefit) for income taxes

     39,147       3,866      6,907       (6,010 )     8,687  
                                       

Income (loss) from continuing operations

     64,882       1,491      11,631       817       (11,296 )

Net income (loss)

     64,882       94      12,247       57,306       (15,678 )

Earnings (loss) per share from continuing operations—basic and diluted(3)

   $ 1.79     $ 0.07    $ (0.09 )   $ (0.62 )     $(0.52 )
Dollars in thousands    December 31,  
   2007     2006    2005     2004(1)     2003(1)  

Balance Sheet Data:

           

Goodwill and intangibles, net

   $ 185,353     $ 154,231    $ 149,793     $ 152,681     $ 132,395  

Asbestos insurance asset, including current portion

     305,228       297,106      261,941       193,386       158,506  

Total assets

     896,540       797,226      700,574       707,881       700,829  

Asbestos liability, including current portion

     376,233       388,920      338,535       266,668       211,643  

Total debt, including current portion

     206,493       188,720      158,454       125,051       179,938  
     Year ended December 31,  
Dollars in thousands    2007     2006    2005     2004(1)     2003(1)(2)  

Other Data:

           

EBITDA(4)(5)

   $ 138,514     $ 29,627    $ 39,610     $ 68,086     $ 6,815  

 

(1)   The disclosure of the financial data for the years ended December 31, 2004 and 2003 is not required by Commission Regulation (EC) No 809/2004 but is provided to comply with U.S. securities law.

 

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(2)   Financial data for periods prior to May 30, 2003 are presented on a combined basis. On that date, through a series of capital contributions and exchanges of equity securities by the current shareholders, entities that were previously under common ownership became subsidiaries of Colfax Corporation.
(3)   Computed based upon income from continuing operations available to holders of common stock.
(4)   EBITDA includes legacy asbestos (income) expense of $(50,346), $33,816, $18,112, $29,412 and $20,132 for the years ended December 31, 2007, 2006, 2005, 2004 and 2003, respectively, and discontinued operations expense (income) of $1,397, $(616), $(56,489) and $4,382 for the years ended December 31, 2006, 2005, 2004 and 2003, respectively.
(5)   We are presenting EBITDA because we believe that it provides useful information to investors about us, our business and our financial condition. We define EBITDA as net income before the effects of interest expense, taxes, depreciation and amortization. We believe EBITDA is useful to investors because it is one of the measures used by our board of directors and management to evaluate our business, including in our internal management reporting, budgeting and forecasting processes, in comparing our operating results across our business as well as to those of our competitors and other companies in our industry, as an internal profitability measure, as a component in evaluating our ability and the desirability of making capital expenditures and significant acquisitions, and as an element in determining executive compensation. Further, EBITDA and similar measures are widely used by investors, rating agencies and securities analysts as a key measure to compare companies in our industry and debt-service capabilities.

EBITDA is not a measurement of financial performance or liquidity under GAAP and should not be considered as an alternative to net income or any other indicator of operating performance or any other alternative to cash flow from operating activities or as a measure of liquidity derived in accordance with GAAP. Because EBITDA is calculated before recurring cash charges including interest expense and taxes and is not adjusted for capital expenditures or other recurring cash requirements of the business, it should not be considered as a measure of discretionary cash available to invest in the growth of the business. There are a number of material limitations to the use of EBITDA as an analytical tool, including the following:

 

  Ÿ  

EBITDA does not reflect our interest expense;

 

  Ÿ  

EBITDA does not reflect our tax expense or the cash requirements to pay our taxes; and

 

  Ÿ  

although depreciation and amortization are non-cash expenses in the period recorded, the assets being depreciated and amortized may have to be replaced in the future, and EBITDA does not reflect the cash requirements for such replacement.

We compensate for these limitations by relying primarily on our GAAP financial measures and by using EBITDA only supplementally. We believe that consideration of EBITDA, together with a careful review of our GAAP financial measures, is the most informed method of analyzing our company.

The following table reconciles net income (loss) to EBITDA:

 

    Year ended December 31,  
Dollars in thousands   2007   2006   2005   2004     2003  

Net income (loss)

  $64,882   $94   $12,247   $57,306     $ (15,678 )

Interest expense

  19,246   14,186   9,026   6,918       6,941  

Provision (benefit) for income taxes

  39,147   3,866   6,907   (6,010 )     8,687  

Depreciation and amortization

  15,239   11,481   11,430   9,872       6,865  
                         

EBITDA

  $138,514   $29,627   $39,610   $68,086       $6,815  
                         

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read together with “Selected Consolidated Financial and Other Data,” “Risk Factors” and the financial statements and related notes included elsewhere in this prospectus. The following discussion includes forward-looking statements. For a discussion of important factors that could cause actual results to differ materially from the results referred to in the forward-looking statements, see “Special Note Regarding Forward-Looking Statements.”

Overview

We are a global supplier of a broad range of fluid handling products, including pumps, fluid handling systems and specialty valves. We believe that we are a leading manufacturer of rotary positive displacement pumps, which include screw pumps, gear pumps and progressive cavity pumps. We have a global manufacturing footprint, with production facilities in Europe, North America and Asia, as well as worldwide sales and distribution channels. Our products serve a variety of applications in five strategic markets: commercial marine, oil and gas, power generation, global navy and general industrial. We design and engineer our products to high quality and reliability standards for use in critical fluid handling applications where performance is paramount. We also offer customized fluid handling solutions to meet individual customer needs based on our in-depth technical knowledge of the applications in which our products are used. Our products are marketed principally under the Allweiler, Fairmount, Houttuin, Imo, LSC, Portland Valve, Tushaco, Warren and Zenith brand names. We believe that our brands are widely known and have a premium position in our industry. Allweiler, Houttuin, Imo and Warren are among the oldest and most recognized brands in the markets in which we participate, with Allweiler dating back to 1860.

We believe that one of our most significant competitive advantages comes through a comprehensive set of tools and processes we employ 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.

Key Factors and Risks Affecting Our Reported Results

Our growth and financial performance are driven by many factors, principally our ability to serve increasingly global markets, fluctuations in the relationship of foreign currencies to the U.S. dollar, our estimates concerning the availability of insurance proceeds to cover asbestos litigation expenses and liabilities, the amounts of asbestos litigation expenses and liabilities, the general economic conditions within our five strategic markets, our ability to pass through cost increases through pricing, the impact of sales mix and our ability to continue to grow through acquisitions. These key factors have impacted our results of operations in the past and are likely to affect them in the future.

Global Operations

For the year ended December 31, 2007, approximately 66% of our sales were derived from operations outside of the U.S. As measured by sales, we manufacture most of our products outside of the United States. We sell our products through over 300 direct sales and marketing associates and more than 450 authorized distributors in 79 countries. Accordingly, we are affected by levels of industrial activity and economic and political factors in countries throughout the world. Our ability to grow and our financial performance will be affected by our ability to address a variety of challenges and opportunities that are a consequence of our global operations, including efficiently utilizing our global sales, manufacturing and distribution capabilities, the expansion of market opportunities in Asia, successfully completing global strategic acquisitions and engineering innovative new product applications for end users in a variety of geographic markets. However, we believe that our geographic, end market and product diversification limits the impact that any one country or economy could have on our consolidated results.

 

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Foreign Currency Fluctuations

A significant portion of our sales, approximately 66% for the year ended December 31, 2007, is denominated in currencies other than the U.S. dollar, especially the Euro and the Swedish Krona. 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 the relationship of these currencies to the U.S. dollar may impact our profitability. In some markets, sales are denominated in currencies other than the local currency for that business, which may result in both margin fluctuations and transaction gains and losses.

Asbestos Liabilities and Related Insurance Assets

Two of our subsidiaries are each one of many defendants in a large number of lawsuits that claim

personal injury as a result of exposure to asbestos from products manufactured with components that are alleged to have contained asbestos. See “—Asbestos-Related Litigation” for further information. Our financial results have been, and will likely in the future be, affected by our actual and estimated asbestos liabilities and the availability of insurance to cover these liabilities and related defense costs. Assessing asbestos liabilities and insurance assets requires judgments concerning matters such as the uncertainty of litigation, anticipated outcome of settlements, the number and cost of pending and future claims and the outcome of legal action against our insurance carriers and their continued solvency.

We have projected our subsidiaries’ future asbestos-related liability costs with regard to pending and future unasserted claims, and we record this liability on our balance sheet as a long term and short term liability. We also record an asset representing projected insurance recoveries for asbestos liabilities. See “—Critical Accounting Policies—Asbestos Liabilities and Insurance Assets” for a description of the factors used to project the asbestos-related liabilities and insurance coverage recorded on our balance sheet. Our insurance asset is recorded at the amount of insurance recoveries that are deemed probable. For one of our subsidiaries the expected recovery percentage is 87.5% of the liability and defense costs. For the other subsidiary the expected recovery percentage is 67% of the liability and defense costs after exhaustion of primary and umbrella layers of insurance. See “—Critical Accounting Policies—Asbestos Liabilities and Insurance Assets.”

We record all asbestos-related costs in Legacy asbestos (income) expense which is comprised of changes in the projected asbestos liability, changes in the probable insurance recovery of the projected asbestos-related liability, changes in the probable recovery of asbestos liability and defense costs paid in prior periods, actual defense costs expensed in the period, as well as legal costs related to the actions against two of our subsidiaries’ respective insurers and a former parent company of one of the subsidiaries.

In 2004 the primary insurance carrier of one of our subsidiaries ceased payments alleging that its policies were exhausted. See “—Asbestos-Related Litigation” for further information. As a result, in 2004, the subsidiary began making substantially all of the payments required to cover liability and defense costs for the asbestos-related lawsuits while pursuing a lawsuit against the insurers. We began recording an insurance receivable for any amounts we paid above an estimated asset recovery percentage for a given period. In 2007, certain of the insurance carriers agreed to settle with the subsidiary by reimbursing the subsidiary for amounts the subsidiary paid for liability and defense costs in the past as well as entering into formal agreements detailing the payment of future liability and defense costs in an agreed to allocation for that insurer. See “—Asbestos-Related Litigation.” We have begun applying such reimbursements for past costs toward paying down the receivables and have taken into income amounts reimbursed which were not part of the receivable. See “—Liquidity and Capital Resources—Comparative Cash Flows.”

Economic Conditions in Strategic Markets

Our organic growth and profitability strategy focuses on five strategic markets: commercial marine, oil and gas, power generation, global navy and general industrial. Demand for our products depends on the level of

 

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new capital investment and planned maintenance by our customers. The level of capital expenditures depends, in turn, on the general economic conditions within that market. While demand within each of these strategic markets can be cyclical, the diversity of these markets limits the impact of a downturn in any one of these markets on our consolidated results.

Pricing

We believe our customers place a premium on quality, reliability, availability, design and application engineering support. Our highly engineered fluid handling products typically produce higher margins than products with commodity-like qualities. However, we are sensitive to price movements in our raw materials supply base. Our largest material purchases are for components and raw materials consisting of steel, iron, copper and aluminum. Historically, we have been successful in passing raw material price increases on to our customers. While we seek to take actions to manage this risk, including commodity hedging where appropriate, such increased costs may adversely impact earnings. Our 2008 pricing strategy includes passing through raw material price increases to our customers as well as identifying additional price increase opportunities.

Sales and Cost Mix

Our profit margins vary in relation to the relative mix of many factors, including the type of product, the geographic location in which the product is manufactured, the end market for which the product is designed and the percentage of total revenue represented by aftermarket sales and services. Aftermarket business, including spare parts and other value added services, is generally a higher margin business and a significant component of our profitability.

Strategic Acquisitions

We complement our organic growth with strategic acquisitions. Acquisitions significantly affect our reported results and can make period to period comparisons of results difficult. As a consequence, we report our sales growth between periods both from existing and acquired businesses. We intend to continue to pursue acquisitions of complementary businesses that will broaden our product portfolio, expand our geographic footprint or enhance our position within our strategic markets.

Outlook

We believe that we are well positioned to continue to grow organically by enhancing our product offerings and expanding our customer base in each of our strategic markets. During 2007, we experienced strong demand in the majority of our strategic markets, and we expect favorable market conditions to continue throughout 2008 as follows:

 

  Ÿ  

In the commercial marine industry, we expect growth in international trade and high demand for crude oil to continue to create demand for container ships and tankers.

 

  Ÿ  

We expect activity within the global oil and gas market to remain favorable as capacity constraints and increased global demand keep oil and gas prices elevated.

 

  Ÿ  

In the power generation industry, we expect activity in Asia and the Middle East to be robust as economic growth continues to drive significant investment in energy infrastructure projects.

 

  Ÿ  

In the global navy industry, we expect that sovereign nations outside of the U.S. will continue to expand their fleets as they address national security concerns. In the U.S., we expect Congress to continue to appropriate funds for new ship construction for the next generation of naval vessels as older classes are decommissioned. We also expect increased demand for integrated fluid handling systems and solutions for both new ship platforms and existing ship classes that reduce operating costs and improve efficiency as the U.S. Navy seeks to man vessels with fewer personnel.

 

  Ÿ  

In the general industrial market, we expect that the continued economic development of regions throughout the world will continue to drive increased capital investment and will benefit local suppliers as well as international exporters of fluid handling equipment.

 

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Our global manufacturing sales and distribution network allows us to target fast growing regions throughout the world. Our greenfield production facility in Wuxi, China that we opened during 2005 became fully operational during 2006. In addition, our Indian business demonstrated strong growth and expanded our presence in the South Asia region. We intend to leverage our investments in India and China to substantially grow our market share in these emerging markets and plan to continue to invest in sales and marketing resources to increase our overall coverage.

We will also continue to target aftermarket opportunities in our strategic markets as we generally are able to generate high margins on aftermarket parts and service. For the year ended December 31, 2007, aftermarket sales and services represented approximately 25% of our revenues.

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

Key Performance Measures

The discussion of our results of operations that follows focuses on some of the key financial measures that we use to evaluate our business. We evaluate growth using several measures described below, including net sales, orders and order backlog. Our sales growth is affected by many factors, particularly the impact of acquisitions, the impact of fluctuating foreign exchange rates and growth in our existing businesses. To facilitate the comparison between reporting periods, we describe the impact of each of these three factors on our sales growth below in tabular format under the heading “Sales and Orders.”

Orders and order backlog are highly indicative of our future revenue and thus a key measure of anticipated performance. Orders consist of orders for products or services from our customers. Order backlog consists of unfilled orders.

Asbestos-Related Litigation

Two of our subsidiaries are each one of many defendants in a large number of lawsuits that claim personal injury as a result of exposure to asbestos from products manufactured with components that are alleged to have contained asbestos. Such components were acquired from third-party suppliers and were not manufactured by any of our subsidiaries nor were the subsidiaries producers or direct suppliers of asbestos. The manufactured products that are alleged to have contained asbestos generally were provided to meet the specifications of the subsidiaries’ customers, including the U.S. Navy.

In 2003, one of our subsidiaries brought an action in the New Jersey Superior Court, Mercer County, against a large number of its insurers and its former parent to resolve a variety of disputes concerning insurance coverage for the asbestos personal injury claims asserted against it. In 2004, its primary insurance carrier ceased payments alleging that its policies were exhausted. The subsidiary requested proof of exhaustion which the primary carrier refused to provide. Thereafter, most of the subsidiary’s excess and umbrella carriers also refused to provide payments for a variety of reasons, including reliance upon the lack of evidence of exhaustion and other timing and allocation defenses. The insurance companies have not contested coverage. As a result, in 2004, the subsidiary began making substantially all of the payments required to cover liability and defense costs for the asbestos-related lawsuits while pursuing a lawsuit against the insurers. In addition, in this lawsuit, the subsidiary alleges that its former parent is responsible for any coverage that would have been provided by any insurance company that is insolvent.

 

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In 2007, certain of the insurance carriers agreed to settle with the subsidiary by reimbursing the subsidiary for amounts the subsidiary paid for liability and defense costs in the past as well as entering into formal agreements detailing the payment of future liability and defense costs in an agreed to allocation for that insurer. In addition, a number of non-settling insurance carriers have made payments of significant amounts for liability and defense costs paid by the subsidiary in the past and continue to pay a share of liability and defense costs as they are incurred. As a result, the subsidiary’s insurance carriers are once again paying a portion of the subsidiary’s current asbestos-related costs and have reimbursed a significant portion of the costs incurred while coverage was being disputed. We believe that costs will continue to be paid by these insurance carriers. Trial currently is scheduled for September 2008. Although impossible to predict with certainty, we believe that all or substantially all of the insurers that are defendants in the coverage litigation will be ordered to provide coverage in accordance with their policies.

To date, our other subsidiary involved in asbestos litigation has had all of its liability and defense costs, covered in full by its primary and umbrella insurance carrier, subject to approximately $7.5 million in deductibles under its primary policies. The subsidiary has a substantial amount of excess insurance available to it from solvent carriers. The subsidiary is currently in litigation in the Delaware Chancery Court with its primary and umbrella insurer and with a third-party company concerning the availability of insurance under certain policies issued to the then-parent of both the subsidiary and the third-party company. While coverage for the claims is not in dispute, the third-party company is seeking a partition of the insurance policy limits for its sole benefit. We believe that this action is without merit. The subsidiary has also brought an action against all of its insurers in Massachusetts Superior Court. In that action, the subsidiary primarily seeks declaratory relief regarding the excess insurers’ obligations to fund in full the defense and settlement of the asbestos lawsuits following the exhaustion of the underlying umbrella policies.

Seasonality

We experience seasonality in our fluid handling business. As our customers seek to fully-utilize capital spending budgets before the end of the year, our shipments generally peak during the fourth quarter. Also, our European operations typically experience a slowdown during the July and August holiday season.

Results of Operations

Items Affecting Comparability of Reported Results

The comparability of our operating results for the years ended December 31, 2007, 2006 and 2005 is affected by the following significant items:

Acquisitions

Acquisitions significantly affect our reported results and can make period to period comparisons of results difficult. As a consequence, we disclose our sales growth between periods both from existing and acquired businesses.

In August 2005, we acquired Tushaco Pumps Private Limited (“Tushaco”), a leading manufacturer of rotary positive displacement pumps in India. The acquisition of Tushaco provided us with an established presence to serve the South Asian market. Tushaco’s manufacturing and design experience also enables us to utilize its products as a low cost supplier to our other operations and to optimize our global engineering resources.

In January 2007, we completed the acquisition of Lubrication Systems Company of Texas (“LSC”), a manufacturer of fluid handling systems, including oil mist lubrication and oil purification systems. LSC strengthens our presence in the oil and gas end market, particularly in the downstream refinery segment, broadens our overall lubrication portfolio, and presents the opportunity to expand its product application to other markets.

 

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Most recently, in November 2007, we acquired Fairmount Automation, Inc. (“Fairmount”), an original equipment manufacturer of mission critical programmable automation controllers in fluid handling applications primarily for the U.S. Navy. In addition to strengthening our existing position with the U.S. Navy, we intend to leverage Fairmount’s experienced engineering talent and technology expertise to develop a portfolio of fluid handling solutions with diagnostic and prognostic capabilities for industrial applications.

Foreign Currency Fluctuations

A significant portion of our sales, approximately 66% for the year ended December 31, 2007, is denominated in currencies other than the U.S. dollar, most notabley the Euro and the Swedish Krona. 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 and is quantified, when significant, in our discussion of the results of our operations.

Legacy Asbestos (Income) Expense

Legacy asbestos (income) expense includes all asbestos-related costs and is comprised of changes in the projected asbestos liability, changes in the probable insurance recovery of the projected asbestos-related liability, changes in the probable recovery of asbestos liability and defense costs paid in prior periods, actual defense costs expensed in the period, as well as legal costs related to the actions against two of our subsidiaries’ respective insurers and a former parent company of one of the subsidiaries. See “—Asbestos-Related Litigation” above and “—Critical Accounting Estimates—Asbestos Liabilities and Insurance Assets” below for a further discussion of legacy asbestos expenses.

The table below presents legacy asbestos (income) expense for the periods indicated:

     Year Ended December 31,  
(Amounts in millions)    2007     2006     2005  

Legacy asbestos (income) expense

   $ (50.3 )   $ 33.8     $ 18.1  

Legacy asbestos (income) expense as a percent of sales

     (9.9 )%     8.6 %     5.2 %

Legacy asbestos (income) expense for the year ended December 31, 2007 decreased $84.1 million from $33.8 million for the year ended December 31, 2006 period to $(50.3) million in the current period. This decrease resulted primarily from revaluation of the insurance asset and from recording a receivable due from our insurers for past cost paid by us, offset to a small degree by the increased cost of litigation against those insurers, as well as a $8.5 million gain related to cash settlements received from certain insurers related to insurance policies which were not included in our 15 year estimate of asbestos-related liability cost. More specifically, the insurance asset for one of our subsidiaries was increased from 75% to 87.5% of the expected liability based upon a series of court rulings in the Superior Court of New Jersey, Mercer County. These court rulings, which occurred in late 2007 as a result of grants of partial summary judgment on two motions, determined that New Jersey law applies and that payments made for asbestos-related liability and defense cost paid below deductibles levels eroded policy limits in certain primary policies. These decisions allowed us to determine that the principles outlined in the case of Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312 (N.J. 1998), or Carter-Wallace, would be used to allocate responsibility among the insurers. We increased the insurance asset according to the calculation outlined by these principles.

We had historically recorded an insurance receivable for any amounts we paid above an estimated asset recovery percentage for a given period. In early 2008, the Superior Court of New Jersey, Mercer County, granted a partial summary judgment ruling that the principles outlined in Carter-Wallace would be used to allocate shares among insurers and directed a Special Allocation Master to determine the specific portion of past and future cost attributable to each of the subsidiaries’ insurance polices. These rulings and the receipt in the fourth quarter of 2007 of approximately $49.4 million of past cost from our insurers, allowed us to determine the probable amount of insurance available for past costs. As a result,

 

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in the fourth quarter of 2007, the subsidiary recorded an insurance receivable of $44.7 million for all past liability and defense cost for which recovery is probable. See “—Asbestos-Related Litigation” above and “—Critical Accounting Estimates—Asbestos Liabilities and Insurance Assets” below for a further discussion of recent developments in asbestos litigation.

For the year ended December 31, 2006, legacy asbestos expense increased $15.7 million to $33.8 million from $18.1 million for the year ended December 31, 2005. This increase was due to $7.5 million of increased liability costs and $8.2 million of increased legal costs related to pursuing actions against our asbestos insurers.

Discontinued Operations

On November 30, 2004, the Company sold substantially all assets and operating liabilities related to its Power Transmission business to Altra Holdings, Inc., pursuant to an agreement dated October 25, 2004 for $175.8 million after final purchase price adjustments. As such, the Power Transmission business unit is classified in these financial statements as a discontinued operation.

As a result of the divestiture of the Power Transmission business, a net gain of approximately $49.7 million, inclusive of a $15.6 million write-off in goodwill, was recorded in 2004. A further gain of approximately $0.3 million was recorded in 2005 primarily associated with the sale of retained real estate. In addition, in 2005, income from discontinued operations of approximately $0.4 million was recorded as a result of exiting a cross currency swap related to the divested business. In 2006 a loss of approximately $1.4 million was recorded as a result of settlement of claims made by the purchaser against amounts that were held in escrow.

Other Post-Employment Benefit Settlement

During the years ended December 31, 2006 and 2005, we settled portions of our other post-employment benefits liability that we had retained as part of the sale of the power transmission business in 2004 resulting in gains of $9.1 million and $0.3 million, respectively.

Legacy Legal Expenses

During the years ended December 31, 2006 and 2005, we established reserves to settle legal matters related to divested businesses of $8.1 million and $3.1 million, respectively.

Cross Currency Swap

During the year ended December 31, 2005 we recorded a $2.1 million gain related to the settlement of a cross currency swap.

Sales and Orders

Our sales growth is affected my many factors including acquisitions, the impact of fluctuating foreign exchange rates and growth in our existing businesses. To facilitate the comparison between reporting periods, we disclose the impact of each of these three factors. Growth due to acquisitions includes incremental sales due to an acquisition during the period; or incremental sales due to reporting a full year’s sales for an acquisition that occurred in the prior year. The impact of foreign currency translation is the difference between sales from existing businesses valued at current year foreign exchange rates and the same sales valued at prior year foreign exchange rates. Sales growth from existing businesses excludes both the impact of acquisitions and foreign exchange rate fluctuations, thus providing a measure of growth due to factors such as price, mix, and volume.

Orders and order backlog are highly indicative of our future revenue and thus a key measure of anticipated performance. Orders consist of orders for products or services from our customers. Order backlog consists of unfilled orders. The components of order growth are presented on the same basis as sales growth.

 

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The following tables present components of our sales and order growth, as well as sales by fluid handling product for the periods indicated:

 

     Sales     Orders     Backlog at
Period End
(Amounts in millions)    $    %     $    %    

Year Ending December 31, 2005

   $ 345.5      $ 370.4      $ 118.3
                        

Components of Growth:

            

Existing businesses

     40.7    11.8 %     65.6    17.7 %  

Acquisitions

     4.8    1.4 %     4.4    1.2 %  

Foreign currency translation

     2.6    0.8 %     1.9    0.5 %  
                            

Total growth

     48.1    13.9 %     71.9    19.4 %  
                    

Year Ending December 31, 2006

   $ 393.6      $ 442.3      $ 179.3
                        

Components of Growth:

            

Existing businesses

     53.3    13.5 %     77.7    17.6 %  

Acquisitions

     31.3    8.0 %     27.2    6.1 %  

Foreign currency translation

     28.1    7.1 %     34.3    7.8 %  
                            

Total growth

     112.7    28.6 %     139.2    31.5 %  
                    

Year Ending December 31, 2007

   $ 506.3      $ 581.5      $ 292.8
                        

 

(Amounts in millions)    2007    2006    2005

Net sales by product:

        

Pumps, including aftermarket parts and service

     441.7      360.0      313.2

Systems, including installation service

     48.4      16.1      14.6

Valves

     9.5      11.3      12.8

Other

     6.7      6.2      4.9
                    

Total net sales

   $ 506.3    $ 393.6    $ 345.5
                    

As detailed above, for the year ended December 31, 2007, sales increased by $112.7 million, or 28.6% over the year ended December 31, 2006. Of this growth, sales from existing businesses contributed 13.5%, the acquisition of LSC on January 31, 2007 and Fairmont on November 29, 2007 contributed 8.0% and currency translation accounted for 7.1%. The currency translation amount was due primarily to the weakening of the U.S. dollar against the Euro during the year ended December 31, 2007. Sales growth from existing businesses was primarily attributable to increased volume and demand in the commercial marine and oil and gas end markets. By product, pump sales increased $81.7 million, or 22.7% during the year ended December 31, 2007. System sales grew $32.3 million due primarily to the acquisition of LSC.

Orders for the year ended December 31, 2007 of $581.5 million increased $139.2 million, or 31.5%, over the year ended December 31, 2006. Backlog, which consists of unfilled orders, as of December 31, 2007 of $292.8 million increased $113.5 million, or 63.3%, as compared to $179.3 million at December 31, 2006. Order growth from existing businesses was primarily attributable to strong growth in our strategic end markets, most notably the oil and gas, commercial marine and power generation markets.

Sales for the year ended December 31, 2006 of $393.6 million were $48.1 million, or 13.9%, higher than the $345.5 million recorded in the prior year. Of the $48.1 million increase, $40.7 million was from existing businesses attributable to increased volume and demand in the general industrial, commercial marine, power generation and oil and gas end markets, $4.8 million was due to the acquisition of Tushaco on August 9, 2005 and $2.6 million was due to the positive impact of foreign exchange rates. By product, pump sales grew $46.8 million, or 14.9%. System sales grew $1.5 million, or 10.3%.

 

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Orders for the year ended December 31, 2006 of $442.3 million increased $71.9 million, or 19.4%, as compared to $370.4 million for the year ended December 31, 2005. Backlog of $179.3 million at December 31, 2006 increased $61.0 million, or 51.6%, compared to $118.3 million at December 31, 2005. Both increased orders and backlog were attributable primarily to strong growth in our strategic end markets, especially the oil and gas, power generation and commercial marine end-markets.

Gross Profit

The following table presents our gross profit figures for the periods indicated:

 

     Year Ended December 31,  
(Amounts in millions)    2007     2006     2005  

Gross profit

   $ 175.6     $ 136.8     $ 123.1  

Gross profit margin

     34.7 %     34.8 %     35.6 %

Gross profit of $175.6 million for the year ended December 31, 2007 increased $38.8 million, or 28.4%, from $136.8 million in 2006. Of the $38.8 million increase, $16.6 million was attributable to growth from existing businesses, $13.2 million was due to the acquisition of LSC on January 31, 2007 and Fairmont on November 29, 2007 and $9.0 million was due to the impact of foreign exchange rates. Gross profit margin was 34.7% for the year ended December 31, 2007 consistent with 34.8% for the year ended December 31, 2006.

For the year ended December 31, 2006, gross profit increased by $13.7 million, or 11.1%, to $136.8 million from $123.1 million in the prior year. Of the $13.7 million increase, $11.1 million was attributable to growth from existing businesses, $1.7 million was due to the acquisition of Tushaco on August 9, 2005 and $0.9 million was due to the impact of foreign exchange rates. Gross profit margin declined from 35.6% to 34.8%, largely as a result of product mix. A significant portion of our growth in the year ended December 31, 2006 was from fluid handling products that are used in commercial marine applications and which have a lower gross profit margin than the average for our other products.

Selling, General and Administrative Expenses (“SG&A”)

The following table presents our selling, general and administrative expenses for the periods indicated:

 

     Year Ended December 31,  
(Amounts in millions)    2007     2006     2005  

SG&A expenses

   $ 98.5     $ 80.1     $ 74.6  

SG&A expenses as a percent of sales

     19.5 %     20.4 %     21.6 %

Selling, general and administrative expenses increased $18.4 million to $98.5 million for the year ended December 31, 2007 compared to $80.1 million for the year ended December 31, 2006. Of the $18.4 million increase, $7.2 million was due to the acquisitions of LSC and Fairmont and $4.8 million was due to the impact of foreign exchange rates. The remaining increase was primarily due to increased variable selling expenses of approximately $8.9 million in 2007 and the recognition of a one-time $9.1 million gain on the settlement of other post-employment benefits during 2006, offset by legacy legal expenses of $8.3 million incurred during 2006.

For the year ended December 31, 2006, selling, general and administrative expenses increased $5.5 million to $80.1 million compared to $74.6 million for the year ended December 31, 2005. The increase was primarily due to $8.4 million of legacy legal expenses incurred during 2006 and a $4.0 million increase in variable selling expenses, especially commissions, driven by higher sales volume. These increases were offset in part by a one-time $9.1 million gain in 2006 on the settlement of the other post-employment benefits liability retained as part of the sale of the power transmission business in 2004. Also contributing to the increase was the recognition of a $2.1 million gain on the settlement of a cross currency swap agreement in 2005. Legacy legal

 

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expense relates to reserves established at one of our subsidiaries to settle legal matters related to businesses that were divested prior to our acquisition of the subsidiary. Selling, general and administrative expenses as a percent of sales decreased since costs that are primarily fixed in nature such as administrative salaries, rent and depreciation grew only marginally, approximately 3.0%, compared to the 13.9% growth in sales. Expansion of our Asian operations, through our Tushaco and Wuxi operations, increased total selling, general and administrative expenses by approximately $2.3 million from 2005 to 2006.

Operating Income

The table below presents operating income data for the periods indicated:

 

     Year Ended December 31,  
(Amounts in millions)    2007     2006     2005  

Operating income

   $ 123.3     $ 19.5     $ 27.6  

Operating margin

     24.4 %     5.0 %     8.0 %

Operating income for the year ended December 31, 2007 increased $103.8 million to $123.3 million from $19.5 million for the year ended December 31, 2006. This increase was primarily due to an $84.1 million decrease in legacy asbestos expenses and a $38.8 million increase in gross profit offset in part by an $18.4 million increase in selling, general and administrative expenses. Operating margin increased from 5.0% for the year ended December 31, 2006 to 24.4% for the year ended December 31, 2007.

For the year ended December 31, 2006, operating income declined approximately $8.1 million to $19.5 million from $27.6 million for the year ended December 31, 2005. This decline was primarily due to a $15.7 million increase in legacy asbestos expenses and a $5.5 million increase in selling, general and administrative expenses offset in part by a $13.7 million increase in gross profit. Operating margin decreased from 8.0% in 2005 to 5.0% in 2006.

Interest Expense

For a description of our outstanding indebtedness, please refer to “—Liquidity and Capital Resources” below.

Interest expense of $19.2 million for the year ended December 31, 2007 was approximately $5.0 million higher than the year ended December 31, 2006. Approximately $3.3 million of the increase was due to higher debt levels in 2007 due to borrowings incurred to fund the acquisition of LSC. An increase in the weighted average interest rate on our variable rate borrowings from 6.85% in 2006 to 7.42% in 2007 contributed approximately $1.2 million to the increase in interest expense. The remaining increase in interest expense was primarily due to a decrease in the fair value of an interest rate collar.

Interest expense of $14.2 million for the year ended December 31, 2006 was approximately $5.2 million higher than 2005. The increase in interest expense in 2006 was primarily due to higher debt levels during the year, due to borrowings incurred to pre-fund our domestic defined benefit pension obligation of $18.8 million and cash paid for asbestos claims of $32.7 million. An increase in the weighted average interest rate on our variable rate borrowings from 5.68% in 2005 to 6.85% in 2006 contributed approximately $2.0 million to the increase in interest expense, excluding the $0.4 million favorable impact of an increase in the fair value of our $90.0 million notional value interest rate collar. Please see “—Quantitative and Qualitative Disclosures about Market Risk” below for a further discussion of the interest rate collar.

Provision for Income Taxes

Our effective tax rate can be affected by changes in the mix of earnings in the countries with differing statutory rates, changes in the valuation of deferred tax assets and liabilities and changes in tax law. Notably,

 

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under APB 23, we must recognize U.S. deferred income taxes for foreign earnings considered not permanently reinvested in the local jurisdiction in the year that it is considered to be not permanently reinvested. The tax effect of significant unusual items or changes in tax law is reflected in the period in which they occur.

The effective income tax rate for the year ended December 31, 2007 was 37.6% as compared to an effective tax rate of 72.2% for the year ended December 31, 2006. Our effective tax rate for the year ended December 31, 2007 was higher than the U.S. federal statutory rate of 35% primarily due to state taxes and the inclusion of foreign earnings included in U.S. taxable income offset by deferred tax benefits recognized by our German subsidiary as a result of the German tax rate reduction from approximately 38% to 29.0% to be effective on January 1, 2008.

For the year ended December 31, 2006, our effective income tax rate was 72.2% as compared to an effective tax rate of 37.3% for the year ended December 31, 2005. Our 2006 effective tax rate was significantly higher than the U.S. federal statutory rate of 35% primarily due to state taxes and the inclusion of undistributed foreign earnings of a foreign subsidiary that was considered not permanently reinvested as a deferred tax expense in accordance with APB 23. Deferred income taxes for 2005 also included a deferred tax expense for undistributed foreign earnings in accordance with APB 23. However, these amounts were offset by the net reduction of certain valuation allowances and other tax reserves.

Liquidity and Capital Resources

Overview

Historically, we have financed our capital and working capital requirements through a combination of cash flows from operating activities and borrowings under our credit facility. We expect that our primary ongoing requirements for cash will be for working capital, funding for potential acquisitions, capital expenditures, pension plan funding and asbestos liabilities. If additional funds are needed for strategic acquisitions or other corporate purposes, we believe we could raise additional funds in the form of debt or equity.

Borrowings

Our existing credit facility at December 31, 2007 consists of a $50.0 million revolver, a Term B loan of $176.7 million that bears interest at LIBOR plus 2.25%, or 7.1% at December 31, 2007, and a Term C loan of €19.5 million that bears interest at EURIBOR plus 2.25%, or 7.0% at December 31, 2007.

The $50.0 million revolver contains a $25.0 million letter of credit sub-facility and a Euro sub-facility in which Euro borrowing capacity is limited to $30.0 million. The annual commitment fee on the revolver is 0.5% and the administrative agent receives a fee of $0.2 million per annum. Interest rate margins for the revolver are based on our leverage ratio calculated at each quarter-end. At December 31, 2007, the USD Prime and Swing Line based revolvers bear interest at Prime plus 1.50%, or 8.75%. At December 31, 2007, the USD LIBOR-based revolver bears interest at LIBOR plus 2.50% and the Euro revolver bears interest at EURIBOR plus 2.00%. There was no outstanding balance on the Euro, USD LIBOR, USD Prime and Swing Line based revolvers at December 31, 2007.

On January 3, 2007, we amended our credit facility to increase the borrowings under the Term B loan by $55.0 million. Approximately $28.5 million of the proceeds were subsequently used to fund the acquisition of LSC, $24.5 million of the proceeds were used to pay down our revolver debt, and the remaining proceeds were used for other general corporate purposes. Additionally, in August 2007, we amended the revolving credit facility to extend the maturity date from May 30, 2008 to May 30, 2010.

The Term B loan, as amended on January 3, 2007, has approximately $0.4 million due on a quarterly basis on the last day of each March, June, September and December beginning with March 31, 2007 and ending

 

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September 30, 2011, and one installment of approximately $170.0 million payable on December 19, 2011. The Term C loan, as amended on January 3, 2007, has approximately €0.1 million due on a quarterly basis on the last day of each March, June, September and December beginning with March 31, 2007 and ending September 30, 2011, and one installment of approximately €18.4 million payable on December 19, 2011.

On December 31, 2007, there was $205.3 million outstanding on the Term B and Term C loans, no outstanding balance on the revolving lines of credit, and $18.7 million on the letter of credit sub-facility. The weighted average interest rate at December 31, 2007 was 7.4%.

Outstanding borrowings under these credit facilities will be paid in part from the proceeds of this offering. Upon the completion of this offering, we expect to enter into a new credit facility consisting of a $150.0 million revolver and a term loan of $100.0 million, and draw down amounts sufficient to pay any outstanding balance on our existing credit facility after the application of proceeds from this offering. The $150.0 million revolver will contain a $50.0 million letter of credit sub-facility, a $25.0 million Swingline loan sub-facility, and a Euro sub-facility for which Euro borrowing capacity is limited to the loan value of foreign collateral. Both the term loan and the revolver will initially bear interest at either LIBOR plus 2.50% or at the Base Rate (the higher of the Bank of America prime rate or the Federal Funds rate plus 0.50%) plus 1.50%. Thereafter, interest rate margins for the credit facility will be calculated based on our consolidated leverage ratio. Each Swingline loan will bear interest at the Base Rate plus the interest rate margin calculated for the credit facility, and borrowings under the Euro sub-facility will bear interest at LIBOR plus the interest rate margin calculated for the credit facility. The term loan and revolver will bear interest, upon our election, at either the Base Rate or LIBOR plus the interest rate margin calculated for the credit facility. The annual commitment fee on the revolver will be 0.5% and the administrative agent will initially receive a fee of $50,000. We expect to have sufficient funds available to meet our ongoing liquidity requirements for at least the next 12 months.

Comparative Cash Flows

The table below presents selected cash flow data for the periods indicated:

 

     Year Ended December 31,  
(Amounts in millions)    2007     2006     2005  

Net cash provided by (used in) operating activities

   $ 74.5     $ (17.4 )   $ (7.8 )
                        

Purchases of fixed assets

     (13.7 )     (10.2 )     (7.1 )

Net cash paid for acquisitions

     (33.0 )     —         (11.4 )

Other sources, net

     0.2       0.1       0.1  
                        

Net cash used in investing operations

   $ (46.5 )   $ (10.1 )   $ (18.4 )
                        

Proceeds and repayments of borrowings, net

     14.7       26.9       35.6  

Payment of deferred stock issuance costs

     (1.2 )     —         —    

Payments made for loan costs

     (1.4 )     —         (0.4 )

Dividends paid

     —         —         (18.7 )

Redemption of stock

     —         —         (82.0 )

Other uses, net

     (0.4 )     (0.3 )     (0.4 )
                        

Net cash provided by (used in) financing activities

   $ 11.7     $ 26.6     $ (65.9 )
                        

Cash flows from operating activities can fluctuate significantly from period to period as working capital needs, the timing of payments for items such as pension funding decisions and other items impact reported cash flows. Changes in significant operating cash flow items are discussed below.

 

  Ÿ  

In all periods presented, cash paid for asbestos liabilities (excluding cash received from settlements with our asbestos insurance carriers), including both the disposition of claims and legal expenses

 

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related to litigation against our insurers, was a significant cash outflow. Excluding the impact of cash paid for asbestos liabilities, all periods presented above would have had positive cash flow from operations.

 

  Ÿ  

For the years ended December 31, 2007, 2006 and 2005 net cash (received) paid for asbestos liabilities, net of insurance settlements received, was $(22.5) million, $32.7 million and $21.1 million, respectively. Of these amounts, $16.1 million, $9.0 million and $2.3 million related to litigation costs against our insurers paid in 2007, 2006 and 2005, respectively. During 2007, we received approximately $65.5 million from certain insurers of which $49.4 million represents reimbursement of past costs while $16.1 million represents settlement in full for future costs not yet incurred by the subsidiary.

 

  Ÿ  

Funding requirements of our defined benefit plans, including both pensions and other post-employment benefits, can vary significantly among periods due to changes in the fair value of plan assets and actuarial assumptions. For the years ended December 31, 2007, 2006 and 2005, cash contributions for defined benefit plans were $6.7 million, $11.0 million and $23.7 million, respectively.

 

  Ÿ  

Changes in net working capital also affected the operating cash flows for the years presented. We define net working capital as trade receivables plus inventories less accounts payable, excluding the effects of acquisitions and foreign currency translation.

 

  Ÿ  

Net working capital increased $6.3 million from December 31, 2006 to December 31, 2007. This increase was primarily due to increases in inventories and trade receivables due to growth in sales volume.

 

  Ÿ  

Net working capital increased $13.8 million from December 31, 2005 to December 31, 2006. Net trade receivables increased primarily due to higher fourth quarter sales volume in 2006. Net inventories and accounts payable increased primarily to support the sales backlog at the end of 2006.

 

  Ÿ  

Net working capital as a percentage of sales is a key ratio that we use to measure working capital efficiency. For the years ended December 31, 2007, 2006 and 2005, net working capital as a percentage of sales was 17.3%, 20.7% and 20.5%, respectively.

 

  Ÿ  

LSC produced operating cash flows of approximately $5.5 million for the year ended December 31, 2007.

Investing activities consist primarily of purchases of fixed assets and cash paid for acquisitions.

 

  Ÿ  

In all years presented, capital expenditures were invested in new and replacement machinery, equipment and information technology. We expect capital spending of approximately $13.6 million in 2008. We target capital expenditures at approximately 2.0% to 2.5% of revenues.

 

  Ÿ  

In January 2007, we acquired LSC for a purchase price of $29.7 million, net of cash acquired.

 

  Ÿ  

In November 2007, we acquired Fairmont for a purchase price of $3.3 million, net of cash acquired.

 

  Ÿ  

During the year ended December 31, 2005, we acquired Tushaco for $11.4 million, net of cash acquired.

Financing cash flows consist primarily of borrowings and repayments of indebtedness, payment of dividends to shareholders and redemptions of stock.

 

  Ÿ  

On January 3, 2007, we amended the credit facility to increase borrowings under the Term B loan by $55.0 million. Approximately $28.5 million of the proceeds were subsequently used to fund the acquisition of LSC, $24.5 million of the proceeds were used to pay down our revolver debt, and the remaining proceeds were used for other general corporate purposes.

 

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  Ÿ  

In November 2007, $10.0 million of cash received from settlements with our asbestos insurers was used to pay down the revolver. In addition, the Term C loan was paid down by €7.0 million.

 

  Ÿ  

During 2007, we have paid deferred stock issuance costs of $1.2 million for costs incurred related to this offering.

 

  Ÿ  

During the year ended December 31, 2005, $100.0 million of proceeds from the 2004 sale of the power transmission business were used towards the $82.0 million redemption of preferred stock and an $18.7 million dividend payment. The remaining cash proceeds of $73.3 million were used to retire domestic senior term debt in the amount of $47.8 million, reduce the amount outstanding on our revolving credit facility by $22.5 million and pay transaction associated fees in the amount of $3.0 million.

 

  Ÿ  

We paid loan costs during the years ended December 31, 2007 and 2005 of $1.4 million and $0.4 million, respectively.

Dividends of $12.2 million, $13.7 million and $9.2 million declared on December 31, 2007, May 15, 2007 and December 31, 2005 have not been paid because those payments were restricted by our credit facility.

Contractual Obligations

The following table is a summary of contractual obligations as of December 31, 2007 (in millions):

 

Payments Due by Period

   Total    Less Than
One Year
   1-3 Years    3-5 Years    More Than
5 Years
              

Term Loan B

   $176.7    $1.8    $3.6    $171.3    $—  

Term Loan C

   28.6    0.4    0.8    27.4    —  

Interest Payments on Long-Term Debt(1)

   57.6    14.8    29.0    13.8    —  

Capital Leases

   1.2    0.5    0.6    0.1    —  

Operating Leases

   10.0    3.8    4.7    1.5    —  
                        

Total

   $274.1    $21.3    $38.7    $214.1    $—  
                        

 

(1)   Variable interest payments are estimated using static rates of 7.13% and 7.02% for the Term B and C loans, respectively.

We have cash funding requirements associated with our pension and other post-retirement benefit plans, which are estimated to be approximately $3.2 million for the year ending December 31, 2008. We have no binding purchase obligations as of December 31, 2007.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that provide liquidity, capital resources, market or credit risk support that expose us to any liability that is not reflected in our consolidated financial statements other than outstanding letters of credit of $18.7 million at December 31, 2007 and future operating lease payments of $10.0 million.

Effects of This Offering on Liquidity and Contractual Obligations

We estimate that we will receive approximately $111.3 million in net proceeds from the sale of 7,825,947 shares of common stock, based upon the midpoint of the price range set forth on the cover page of this prospectus. We intend to use approximately $38.2 million of the proceeds we receive from this offering to pay indebtedness outstanding under our credit facility. As of December 31, 2007, we had approximately $205.3 million principal amount, along with accrued interest, outstanding under our credit facility. We also intend to use

 

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$35.1 million of the proceeds of this offering to pay declared but unpaid dividends to existing preferred stockholders and approximately $3.7 million of the proceeds to pay an additional dividend to be declared payable to existing preferred stockholders. We will also use an estimated $22.5 million of the proceeds of this offering to pay amounts due, as a result of this offering, to participants in our 2001 Employee Appreciation Rights Plan and our 2006 Executive Stock Rights Plan, which are bonus plans for certain executive officers. This estimate is subject to final reevaluation as of the effective date of this offering. See “Management—Compensation Discussion and Analysis” for additional information concerning these plans. We intend to use the balance of the net proceeds, if any, for working capital and other general corporate purposes.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in interest rates, foreign currency exchange rates and commodity prices that could impact our results of operations and financial condition. We address our exposure to these risks through our normal operating and financing activities.

Information concerning market risk for the year ended December 31, 2007 is discussed below.

Interest Rate Risk

We are subject to exposure from changes in interest rates based on our financing activities. Under our credit facility, all of our borrowings at December 31, 2007 are variable rate facilities based on LIBOR or EURIBOR. A hypothetical increase in the interest rate of 1.00% on our variable rate debt during 2007 would have increased our interest cost by approximately $2.2 million. In order to mitigate this risk, on July 1, 2005 we entered into an interest rate collar with an aggregate notional value of $90.0 million whereby we exchanged our LIBOR-based variable rate interest for a ceiling of 4.75% and a floor of approximately 3.40%. The LIBOR-based interest can vary between the ceiling and floor based on market conditions. The fair value of the collar agreement, based on third-party quotes, was approximately $0.1 million and $0.8 million as of December 31, 2007 and 2006 respectively. We have not elected hedge accounting for the collar agreement, and therefore movements in the fair value are recognized in income as a component of interest expense. The collar agreement expires on July 1, 2008.

Exchange Rate Risk

We have manufacturing sites throughout the world and sell our products globally. As a result, we are exposed to movements in the exchange rates of various currencies against the U.S. dollar and against the currencies of other countries in which we manufacture and sell products and services. During 2007 approximately 66% of our sales were derived from operations outside the U.S., with approximately 63% generated from our European operations. In particular, we have more sales in European currencies than we have expenses in those currencies. Therefore, when European currencies strengthen or weaken against the U.S. dollar, operating profits are increased or decreased, respectively. The Euro-denominated Term C loan at December 31, 2007 provides a natural hedge to a portion of our European net asset position. To assist with the matching of revenues and expenses and assets and liabilities in foreign currencies, we may periodically enter into derivative instruments such as cross currency swaps or forward contracts. To illustrate the potential impact of changes in foreign currency exchange rates, income before taxes and discontinued operations for 2007, assuming a 10% increase in average foreign exchange rates compared to the U.S. dollar, 2007 income before income taxes would have increased by $4.9 million.

Commodity Price Risk

We are exposed to changes in the prices of raw materials used in our production processes. Commodity futures contracts are periodically used to manage such exposure. As of December 31, 2007, we had copper futures contracts with a notional value of $3.1 million. The fair value of the contract as of December 31, 2007

 

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was a liability of $0.2 million. As of December 31, 2007, we had a nickel futures contract with a notional value of $1.1 million. The fair value of the contract was a liability of $0.2 million, as of December 31, 2007. We have not elected hedge accounting for futures contracts, and therefore movements in the fair value are recorded to cost of sales.

Critical Accounting Estimates

The methods, estimates and judgments we use in applying our critical accounting policies have a significant impact on the results we report in our financial statements. We evaluate our estimates and judgments on an ongoing basis. Our estimates are based upon our historical experience, our evaluation of business and macroeconomic trends, and information from other outside sources as appropriate. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what our management anticipates and different assumptions or estimates about the future could change our reported results.

We believe the following accounting policies are the most critical in that they are important to the financial statements and they require the most difficult, subjective or complex judgments in the preparation of the financial statements. For a detailed discussion on the application of these and other accounting policies, see Note 1 of the Consolidated Financial Statements.

Asbestos Liabilities and Insurance Assets

Two of our subsidiaries are each one of many defendants in a large number of lawsuits that claim personal injury as a result of exposure to asbestos from products manufactured with components that are alleged to have contained asbestos. Such components were acquired from third-party suppliers, and were not manufactured by any of our subsidiaries nor were the subsidiaries producers or direct suppliers of asbestos. The manufactured products that are alleged to have contained asbestos generally were provided to meet the specifications of the subsidiaries’ customers, including the U.S. Navy.

In most instances, the subsidiaries settle asbestos claims for amounts management considers reasonable given the facts and circumstances of each claim. The annual average settlement payment per asbestos claimant has fluctuated during the past several years, and management expects such fluctuations to continue in the future based upon, among other things, the number and type of claims settled in a particular period and the jurisdictions in which such claims arose. To date, the majority of settled claims have been dismissed for no payment.

Claims activity related to asbestos is as follows(1):

 

     Year ended December 31,  
     2007     2006     2005  

Claims unresolved at the beginning of the period

     50,020       59,217       65,165  

Claims filed(2)

     6,861       5,992       8,540  

Claims resolved(3)

     (19,327 )     (15,189 )     (14,488 )
                        

Claims unresolved at the end of the period

     37,554       50,020       59,217  
                        

Average cost of resolved claims (4)

   $ 5,232     $ 6,194     $ 8,896  

 

(1)   Excludes claims filed by one legal firm that have been “administratively dismissed.”
(2)   Claims filed include all asbestos claims for which notification has been received or a file has been opened.
(3)   Claims resolved include asbestos claims that have been settled or dismissed or that are in the process of being settled or dismissed based upon agreements or understandings in place with counsel for the claimants.
(4)   Average cost of settlement to resolve claims in whole dollars. These amounts exclude claims in Mississippi for which the majority of claims have historically been without merit and have been resolved for no payment. These amounts also exclude any potential insurance recoveries.

 

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We have projected each subsidiary’s future asbestos-related liability costs with regard to pending and future unasserted claims based upon the Nicholson methodology. The Nicholson methodology is the standard approach used by most experts and has been accepted by numerous courts. This methodology is based upon risk equations, exposed population estimates, mortality rates, and other demographic statistics. In applying the Nicholson methodology for each subsidiary we performed: 1) an analysis of the estimated population likely to have been exposed or claim to have been exposed to products manufactured by the subsidiaries based upon national studies undertaken of the population of workers believed to have been exposed to asbestos; 2) the use of epidemiological and demographic studies to estimate the number of potentially exposed people that would be likely to develop asbestos-related diseases in each year; 3) an analysis of the subsidiaries’ recent claims history to estimate likely filing rates for these diseases; and 4) an analysis of the historical asbestos liability costs to develop average values, which vary by disease type, jurisdiction and the nature of claim, to determine an estimate of costs likely to be associated with currently pending and projected asbestos claims. Our projections based upon the Nicholson methodology estimate both claims and the estimated cash outflows related to the resolution of such claims for periods up to and including the endpoint of asbestos studies referred to in item 2) above. It is our policy to record a liability for asbestos-related liability costs for the longest period of time that we can reasonably estimate.

Projecting future asbestos-related liability costs is subject to numerous variables that are difficult to predict, including the number of claims that might be received, the type and severity of the disease alleged by each claimant, the latency period associated with asbestos exposure, dismissal rates, costs of medical treatment, the financial resources of other companies that are co-defendants in the claims, funds available in post-bankruptcy trusts, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, and the impact of potential changes in legislative or judicial standards, including potential tort reform. Furthermore, any projections with respect to these variables are subject to even greater uncertainty as the projection period lengthens. These trend factors have both positive and negative effects on the dynamics of asbestos litigation in the tort system and the related best estimate of our asbestos liability, and these effects do not move in linear fashion but rather change over multiple year periods. Accordingly our management monitors these trend factors over time and periodically assesses whether an alternative forecast period is appropriate. Taking these factors into account and the inherent uncertainties, we believe that we can reasonably estimate the asbestos-related liability for pending and future claims that will be resolved in the next 15 years and have recorded that liability as our best estimate. While it is reasonably possible that the subsidiaries will incur costs after this period, we do not believe the reasonably possible loss or range of reasonably possible loss is estimable at the current time. Accordingly, no accrual has been recorded for any costs which may be paid after the next 15 years. Defense costs associated with asbestos-related liabilities as well as costs incurred related to litigation against the subsidiaries’ insurers are expensed as incurred.

We assessed the subsidiaries’ existing insurance arrangements and agreements, determined the applicability of insurance coverage for existing and expected future claims, analyzed publicly available information bearing on the current creditworthiness and solvency of the various insurers and employed such insurance allocation methodologies as we believed appropriate to ascertain the probable insurance recoveries for asbestos liabilities. The analysis took into account self-insurance reserves, policy exclusions, pending litigation, liability caps and gaps in our coverage, allocation agreements, indemnity arrangements with third-parties, existing and potential insolvencies of insurers as well as how legal and defense costs will be covered under the insurance policies. Each subsidiary has separate, substantial primary, excess and umbrella insurance coverage resulting from the independent corporate history of each entity. In our evaluation of the insurance asset, in addition to the criteria listed above, we used differing insurance allocation methodologies for each subsidiary based upon the state law that will or is likely to apply for that subsidiary.

For the one subsidiary, although presently no cost sharing or allocation agreement is in place with our excess insurers, we believe that based upon application of an insurance allocation methodology, which is used in certain states, including Florida and Massachusetts, and in accordance with prevailing law, that recovery is probable from such insurers for approximately 67% of the liability and defense costs after the exhaustion of primary and umbrella layers of insurance. This allocation methodology, known as the “all sums” approach,

 

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allows the policyholder to select any policy year triggered by the claim. Under this methodology each policy provides indemnity for all amounts that the insured becomes legally obligated to pay as damages, subject to the terms, conditions and limitations of the policy language. We use this allocation methodology because it is the most likely methodology based upon the corporate history of the subsidiary and that of its primary insurer which are domiciled in either Florida or Massachusetts. The primary and umbrella insurer historically has paid all liability and legal defense costs. In 2006, this insurer asserted that certain insurance policies contained deductibles. As a result, we established a reserve of $7.5 million as a reduction of our asbestos insurance asset at December 31, 2007 and as a reduction of our long-term asbestos insurance asset at December 31, 2006, for the probable and reasonably estimable liability we expect related to these deductibles under the primary insurance policies. On April 1, 2008, the subsidiary’s primary and umbrella insurer notified it that one of the policy years representing approximately 7% of that insurer’s primary policy obligations were close to exhaustion. The subsidiary is investigating this claim and is notifying its excess insurers of potential obligations for payment. To the extent the claim of exhaustion for that year is valid, we believe the subsidiary has adequate coverage such that it will not affect the expected recovery percentage.

For the other subsidiary it was determined by court ruling in the fourth quarter of 2007, that the allocation methodology mandated by the New Jersey courts will apply. This allocation methodology, referred to as the Carter-Wallace methodology, was applied in the New Jersey Supreme Court in the case of Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312 (N.J. 1998), which provides that the loss is allocated to each insurance policy year based on the proportion of the policyholder’s total triggered coverage that was purchased in that year. Based upon this ruling and upon a series of other favorable rulings regarding interpretation of certain policy provisions related to deductibles, the number of occurrences and the resulting calculation, we increased our expected recovery percentage to 87.5% from 75% of all liability costs recorded after September 28, 2007 and revalued our insurance asset at that date. For the period between December 31, 2005 and September 28, 2007, we had estimated that recovery was probable for 75% of all liability costs paid and 85% of defense costs paid. Prior to December 31, 2005, we had estimated that recovery was probable for two-thirds of all liabilities paid.

For this subsidiary, until June 2004, based upon an interim agreement, the subsidiary’s primary insurers paid at least two-thirds of liability costs and all defense costs. In 2003, the subsidiary brought legal action against a large number of its insurers and its former parent to resolve a variety of disputes concerning insurance for asbestos bodily injury claims asserted against it. Although none of these defendant insurance companies contested coverage, they disputed the timing, reasonableness and allocation of payments. One of the primary insurers and one of the excess insurers stopped or severely reduced payments alleging that its policies were exhausted and the subsidiary began paying various amounts of its liability and defense costs during 2004. We historically had recorded a receivable for any amounts paid above the expected insurance recovery percent for that period which we considered recovery probable. As of December 31, 2007, based upon (i) application of the New Jersey allocation model, (ii) court records indicating the Court was likely to order insurers to reimburse the subsidiary for past costs and (iii) the receipt of $58.0 million in cash from certain insurers during the fourth quarter of 2007, we recorded a receivable for all past liability and defense cost for which we believe recovery is probable.

In 2007, certain insurance carriers agreed to settle with this subsidiary by reimbursing the subsidiary for amounts it paid for liability and defense costs as well as entering into formal agreements detailing the payments of future liability and defense costs in an agreed to allocation. In addition, a number of non-settling insurance carriers have paid significant amounts for liability and defense costs paid by the subsidiary in the past and continue to pay a share of costs as they are incurred. The subsidiary received approximately $65.5 million for the year ended December 31, 2007, of which approximately $49.4 million represents reimbursement of past cost, which reduced our outstanding insurance receivables, and approximately $16.1 million represents settlement in full for future costs not yet incurred by the subsidiary. Of the $16.1 million, approximately $7.6 million relates to insurance policies which are triggered within our 15 year-estimate of asbestos-related liability and as such were recorded as a reduction to the insurance asset, while, approximately $8.5 million relates to insurance policies which were not included in our 15 year estimate of asbestos-related liability cost and, as such, were recorded as

 

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income in Legacy asbestos (income) expense. Subsequent to December 31, 2007, the subsidiary received an additional $1.7 million in reimbursement of past cost from an insurer and another $0.9 million from an insurer previously considered insolvent. Presently certain insurers are paying approximately 36.8% of costs for current asbestos-related liability and defense cost.

Based on the analysis referred to above, we have established reserves of $376.2 million and $388.9 million as of December 31, 2007 and 2006, respectively, for the probable and reasonably estimatable asbestos-related liabilities we believe the subsidiaries will pay through the next 15 years, and have also established recoverables of $305.2 million and $297.1 million as of December 31, 2007 and 2006, respectively, for the insurance recoveries that are deemed probable during the same time period. Net of these recoverables, the subsidiaries’ expected cash outlay on a non-discounted basis for asbestos-related bodily injury claims over the next 15 years was estimated to be $71.0 million and $91.8 million as of December 31, 2007 and 2006, respectively. We have recorded the reserves for the asbestos liabilities as “Accrued asbestos liability” and “Long-term asbestos liability” and the related insurance recoveries as “Asbestos insurance asset” and “Long-term asbestos insurance asset” in the accompanying consolidated balance sheets. In addition we have recorded a receivable for liability and defense costs we had previously paid in the amount of $44.7 million and $41.1 million as of December 31, 2007 and 2006, respectively, for which insurance recovery is deemed probable. These amounts are included in “Asbestos insurance receivable” in the accompanying consolidated balance sheets.

The (income) expense related to these liabilities and legal defense was $(65.2) million, $21.8 million and $14.3 million, net of estimated insurance recoveries, for the years ended December 31, 2007, 2006 and 2005, respectively. Legal costs related to the subsidiaries’ action against their asbestos insurers were $14.9 million, $12.0 million and $3.8 million for the years ended December 31, 2007, 2006 and 2005, respectively. All of these amounts are included in the consolidated statements of operations and comprehensive income (loss) in “Legacy asbestos (income) expense.”

Management’s analyses are based on currently known facts and a number of assumptions. However, projecting future events, such as new claims to be filed each year, the average cost of resolving each claim, coverage issues among layers of insurers, the method in which losses will be allocated to the various insurance policies, interpretation of the effect on coverage of various policy terms and limits and their interrelationships, the continuing solvency of various insurance companies, the amount of remaining insurance available, as well as the numerous uncertainties inherent in asbestos litigation could cause the actual liabilities and insurance recoveries to be higher or lower than those projected or recorded which could materially affect our financial condition, results of operations or cash flow.

Retirement Benefits

Pension obligations and other post-retirement benefits are actuarially determined and are affected by several assumptions, including the discount rate, assumed annual rates of return on plan assets, and per capita cost of covered health care benefits. Changes in discount rate and differences from actual results for each assumption will affect the amounts of pension expense and other post-retirement expense recognized in future periods. These assumptions may also have an effect on the amount and timing of future cash contributions.

Impairment of Goodwill and Indefinite-Lived Intangible Assets

Goodwill represents the costs in excess of the fair value of net assets acquired associated with our acquisitions.

We evaluate the recoverability of goodwill and indefinite-lived intangible assets annually on December 31 or more frequently if events or changes in circumstances, such as a decline in sales, earnings, or cash flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. Goodwill is considered to be impaired when the net book value of a reporting unit exceeds its

 

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estimated fair value. Estimated fair values for each reporting unit are established based upon the average of actual and projected EBITDA for the next two years (net income before income taxes, interest, depreciation and amortization) multiplied by related industry valuation multiples for recent transactions between unrelated parties. The determination of EBITDA is based on our actual results, budgets, and strategic plans. Related industry valuation multiples of EBITDA are obtained by us from investment bankers. This data is gathered from recent change of control transactions involving entities with comparable operations and economic characteristics within our industry. This valuation methodology is consistent with the objective of measuring fair value, and is commonly used by the investment banking community as one estimate of fair value. If valuation based upon EBITDA multiples demonstrates any possibility of impairment, we utilize other valuation techniques, such as discounted cash flows, or multiples of earnings or revenues, to further define estimated fair value. If the carrying amount of a reporting unit exceeds its implied fair value, then the second step of the goodwill impairment test would be performed to measure the amount of impairment loss, if any. The analysis indicated no impairment to be present for the years ended December 31, 2007, 2006 and 2005.

However, actual results could differ from our estimates and projections, which would affect the assessment of impairment. As of December 31, 2007, we have goodwill of $169.0 million that is subject to at least annual review of impairment.

Income Taxes

We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion of the deferred tax asset will not be realized. In evaluating the need for a valuation allowance, we take into account various factors, including the expected level of future taxable income and available tax planning strategies. If actual results differ from the assumptions made in the evaluation of our valuation allowance, we record a change in valuation allowance through income tax expense in the period such determination is made.

The determination of our provision for income tax requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items. We establish reserves when, despite the belief that the tax return positions are fully supportable, we believe that certain positions may be successfully challenged. When facts and circumstances change, the reserves are adjusted through the provision for income taxes. We adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) on January 1, 2007. FIN 48 prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.

Revenue Recognition

We recognize revenues and costs from product sales when all of the following criteria are met: persuasive evidence of an arrangement exists, the fee is fixed or determinable, product delivery has occurred or services have been rendered, there are no further obligations to customers, and collectibility is probable. Product delivery occurs when title and risk of loss transfer to the customer. Our shipping terms vary based on the contract. If any significant obligations to the customer with respect to such sale remain to be fulfilled following shipment, typically involving obligations relating to installation and acceptance by the buyer, revenue recognition is deferred until such obligations have been fulfilled. Any customer allowances and discounts (primarily volume discounts) are recorded as a reduction in reported revenues at the time of sale because these allowances reflect a reduction in the purchase price for the products purchased. These allowances and discounts are estimated based on historical experience and known trends. Revenue related to service agreements is recognized as revenue over the term of the agreement.

 

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For long-term contracts, revenue is generally recognized based on the percentage-of-completion method calculated on the units of delivery basis or the cost-to-cost basis. The percentage of completion method requires estimates of total expected contract revenue and costs. We follow this method when we can make reasonably dependable estimates of the revenue and cost applicable to various stages of the contract. Revisions in profit estimates are reflected in the period in which the facts that gave rise to the revision become known and have historically been insignificant. Percentage of completion revenue was approximately 2.9%, 3.8% and 2.2% of consolidated revenues for the years ended December 31, 2007, 2006 and 2005, respectively. Service revenues are recognized as services are performed.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. These allowances are based on recent trends of certain customers estimated to be a greater credit risk as well as general trends of the entire pool of customers. The allowance for doubtful accounts was $1.8 million and $1.7 million as of December 31, 2007 and 2006, respectively. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

The foregoing criteria are used for all classes of customers including original equipment manufacturers, distributors, government contractors and other end users.

Recent Pronouncements

In June 2006, the FASB issued FIN 48 to create a single model to address accounting for uncertainty in tax positions. The Interpretation applies to all tax positions accounted for in accordance with SFAS No. 109 and requires a recognition threshold and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on classification, interest and penalties, accounting in interim periods and transition, and significantly expands income tax disclosure requirements. The Interpretation is effective for public reporting companies for fiscal years beginning after December 15, 2006. As a result of the implementation of Interpretation No. 48, we recognized an increase in the net liability for unrecognized tax benefits of $6.7 million, which was accounted for as a decrease to the January 1, 2007 opening retained deficit.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which provides a definition of fair value, establishes a framework for measuring fair value, and requires additional disclosures about fair value measurements. This Statement applies to value measurements that are already required or permitted by other accounting standards, except for measurements of share-based payments and measurements that are similar to, but not intended to be, fair value and does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 for financial assets and liabilities, and for fiscal years beginning after November 15, 2008 for non-financial assets and liabilities. We are currently evaluating the effects of implementing the provisions of this Statement.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The pronouncement also establishes presentation and disclosure requirements to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the effects of the adoption of SFAS No. 159.

 

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BUSINESS

Our Company

We are a global supplier of a broad range of fluid handling products, including pumps, fluid handling systems and specialty valves. We believe that we are a leading manufacturer of rotary positive displacement pumps, which include screw pumps, gear pumps and progressive cavity pumps. We have a global manufacturing footprint, with production facilities in Europe, North America and Asia, as well as worldwide sales and distribution channels. Our products serve a variety of applications in five strategic markets: commercial marine, oil and gas, power generation, global navy and general industrial. We design and engineer our products to high quality and reliability standards for use in critical fluid handling applications where performance is paramount. We also offer customized fluid handling solutions to meet individual customer needs based on our in-depth technical knowledge of the applications in which our products are used. Our products are marketed principally under the Allweiler, Fairmount, Houttuin, Imo, LSC, Portland Valve, Tushaco, Warren and Zenith brand names. We believe that our brands are widely known and have a premium position in our industry. Allweiler, Houttuin, Imo and Warren are among the oldest and most recognized brands in the markets in which we participate, with Allweiler dating back to 1860.

We serve a global customer base across multiple markets through a combination of direct sales and marketing associates and third-party distribution channels. Our customer base is highly diversified and includes commercial, industrial, marine and governmental customers such as Alfa Laval, Cummins, General Dynamics, Hyundai Heavy Industries, Siemens, Solar Turbines, Thyssenkrupp, the U.S. Navy and various sovereign navies around the world. We have a large installed base, which, combined with the critical nature of the applications in which our products are used, leads to a tendency for our customers to replace “like for like” products. This tendency leads to significant aftermarket demand for replacement parts as well as for spare parts and maintenance service.

We employ a comprehensive set of tools that we refer to as 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.

We have an experienced management team that has established a focused industrial manufacturing business with strong market positions within the fluid handling industry. We believe we are well positioned to continue to grow by enhancing our product offerings and expanding our customer base in each of our strategic markets. We also have successfully completed and integrated several acquisitions and expect to continue to pursue acquisitions of complementary businesses that will broaden our product portfolio, expand our geographic footprint or enhance our position in our strategic markets.

Our History

Our business began with an initial investment by our founders in 1995 with the intention to acquire, manage and create a world-class industrial manufacturing company. We sought to acquire businesses with leading market positions and brands that exhibit strong cash flow generation potential. With our management expertise and the introduction of CBS into our acquired businesses, we pursue growth and improvements in operating margins.

In August 1997, we acquired Imo and Warren, manufacturers of screw pumps and specialty centrifugal pumps. The Imo Pump brand name dates back to 1931, when Bengt Ingestrom, an entrepreneur, and Carl Montelius, the inventor of the 3-screw pump, established Imo Pump. Their last names formed the acronym Imo. Warren was founded in 1897 and is among the oldest pump manufacturers in the U.S. Our acquisition of Imo and Warren formed the foundation of what is now Colfax Corporation.

 

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In April 1998, we acquired Allweiler AG (“Allweiler”), the largest European manufacturer of screw pumps and a leader in specialty centrifugal and progressive cavity pumps in Europe. The Allweiler brand name dates to 1860 and is a leading brand name for screw pumps in Europe. The Allweiler acquisition included Houttuin, a Dutch manufacturer of 2-screw pumps.

Since the acquisition of Allweiler, we have completed additional acquisitions that have broadened our fluid handling product portfolio and geographic footprint. In June 2004, we acquired the assets of Zenith, a leading manufacturer of precision metering pumps for the general industrial market.

In August 2004, we acquired the net assets of Portland Valve, a manufacturer of specialty valves used primarily for naval applications.

In August 2005, we acquired Tushaco, a leading manufacturer of rotary positive displacement pumps in India. The acquisition of Tushaco provided us with an established presence to serve the South Asian market. Tushaco’s manufacturing and design experience also enables us to utilize its products as a low cost supplier to our other operations and to optimize our global engineering resources.

In January 2007, we acquired LSC, a manufacturer of fluid handling systems. LSC designs, manufactures, installs and maintains oil mist lubrication and oil purification systems in refineries, petrochemical plants and other processing facilities.

In November 2007, we acquired Fairmount, an original equipment manufacturer of mission critical programmable automation controllers in fluid handling applications primarily for the U.S. Navy. In addition to strengthening our existing position with the Navy, we intend to leverage Fairmount’s experienced engineering talent and technology expertise to develop a portfolio of fluid handling solutions with diagnostic and prognostic capabilities for use in industrial applications.

In addition to our acquisitions, in 2005 we opened a greenfield production facility in Wuxi, China to manufacture and assemble complete products and systems for our customers in China and other Asian markets and to supply low cost components and parts for our existing operations.

Our Industry

Based on industry data supplied by The Freedonia Group, Elsevier, European Industrial Forecasting and the Hydraulic Institute, we estimate the worldwide fluid handling market, which we define as industrial pumps, valves, and gaskets and seals, to have been $119 billion in 2006. Within this market, we primarily compete in the estimated $3.5 billion global rotary positive displacement pump market, a sub-section of the estimated $11 billion positive displacement pump market. We are also a competitor in the estimated $18 billion centrifugal pump market and the estimated $57 billion valve market.

We believe that there are over 10,000 companies competing in the worldwide fluid handling industry. The fluid handling industry’s customer base is broadly diversified across many sectors of the economy, and we believe customers place a premium on quality, reliability, availability and design and application engineering support. Because products in the fluid handling industry often are used as components in critical applications, we believe the most successful industry participants are those that have the technical capabilities to meet customer specifications, offer products with reputations for quality and reliability and can provide timely delivery and strong aftermarket support.

 

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We currently serve markets that have a need for highly engineered, critical fluid handling solutions and are global in scope. Our strategic markets include:

 

Strategic Markets

  

Applications

Commercial Marine

   Fuel oil transfer; oil transport; water and wastewater handling

Oil and Gas

   Crude oil gathering; pipeline services; unloading and loading; rotating equipment lubrication; lube oil purification

Power Generation

   Fuel unloading, transfer, burner and injection; rotating equipment lubrication

Global Navy

   Fuel oil transfer; oil transport; water and wastewater handling; firefighting; fluid control

General Industrial

   Machinery lubrication; hydraulic elevators; chemical processing; pulp and paper processing; food and beverage processing

Our Competitive Strengths

Strong Market Positions, Broad Product Portfolio and Leading Brands.    We believe that we are a leading manufacturer of rotary positive displacement pumps, which include screw pumps, gear pumps and progressive cavity pumps. We offer a broad portfolio of fluid handling products that fulfill critical needs of customers across numerous industries. Our brands are among the oldest and most recognized in the markets in which we participate.

Strong Application Expertise.    We believe that our reputation for quality and technical expertise positions us as a premium supplier of fluid handling products. With over 140 years of experience, we have significant expertise in designing and manufacturing fluid handling products that are used in critical applications, such as lubricating power generation turbines, transporting crude oil through pipelines and transferring heavy fuel oil in commercial marine vessels.

Extensive Global Sales, Distribution and Manufacturing Network.    We sell our products through over 300 direct sales and marketing associates and more than 450 authorized distributors in 79 countries. We believe that our global reach within the highly fragmented, worldwide fluid handling industry provides us with an ability to better serve our customers. Our European, North American and Asian manufacturing capabilities provide us with the ability to optimize material sourcing, transportation and production costs and lower foreign currency risk.

We Use CBS to Continuously Improve Our Business.    CBS is our business system designed to encourage a culture of continuous improvement in all aspects of our operations and strategic planning. 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.

Large Installed Base Generating Aftermarket Sales and Service.    With a history dating back to 1860, we have a significant installed base across numerous industries. Because of the critical applications in which our products are used and the high quality and reliability of our products, we believe there is a tendency to replace “like for like” products. This tendency leads to significant aftermarket demand for replacement products as well as for spare parts and for repair and maintenance service. In the year ended December 31, 2007, we estimate that approximately 25% of our revenues were derived from aftermarket sales and services.

Broad and Diverse Customer Base.    Our customer base spans numerous industries and is geographically diverse. Approximately 66% of our sales in 2007 were derived from operations outside of the U.S. In addition, no single customer represented more than 3% of our sales during this period.

 

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Management Team with Extensive Industry Experience and Focus on Strategic Development.    We are led by a senior management team with an average of over 20 years of experience in industrial manufacturing. John A. Young, our President and Chief Executive Officer, is one of our founders and played a key role in developing the acquisition strategy that has formed our company. Since 1995, as part of this strategy, we have acquired 12 companies and divested businesses that do not fit within our long-term growth strategy. We believe that we have extensive experience in acquiring and effectively integrating attractive acquisition targets.

Our Growth Strategy

We intend to continue to increase our sales, expand our geographic reach, broaden our product offerings and improve our profitability through the following strategies:

 

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Apply CBS to Drive Profitable Sales Growth and Increase Shareholder Value.    The core element of our management philosophy is CBS, which we implement in each of our businesses. CBS is a strategic planning and execution methodology designed to achieve world-class excellence in all aspects of our business. CBS focuses our organization on continuous improvement and performance goals by empowering our associates to develop innovative strategies to meet customer needs. Rather than a static process, CBS continues to evolve as we benchmark ourselves against best-in-class industrial companies.

 

      Beyond the traditional application of cost control, overhead rationalization, global process optimization, and implementation of lean manufacturing techniques, we utilize CBS to identify strategic opportunities to enhance future sales growth. The foremost principle of CBS is the Voice of the Customer, which drives our activities to continuously improve customer service, product quality, delivery and cost. The Voice of the Customer is instrumental in the development of new products, services and solutions by utilizing a formal interview process with the end users of our products to identify “pain points” or customer needs. By engaging end users in the discussion, rather than solely relying on salespeople or channel partners for anecdotal input, we see the real issues and opportunities. We then prioritize these opportunities with the intention of implementing novel or breakthrough ideas that uniquely solve end-user needs. By continuing to apply the methodology of CBS to our existing businesses as well as to future acquisitions, we believe that we will be able to continue to introduce innovative new products and solutions, improve operating margins and increase the asset utilization of our businesses, and in doing so create profitable sales growth, generate excess cash flow to fund future acquisitions and increase shareholder value.

 

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Execute Market Focused Strategies.    We have aligned our marketing and sales organization into market focused teams designed to coordinate global activity around five strategic markets: commercial marine, oil and gas, power generation, global navy and general industrial. These markets have a need for highly engineered, critical fluid handling solutions and are attractive due to their ongoing capital expenditure requirements, growth rates and global nature. We intend to use our application expertise, highly engineered and specialized products, broad product portfolio and recognized product brands to generate high margin incremental revenue.

Commercial Marine—We provide complete fluid handling packages to shipbuilders throughout the world primarily for use in engine room applications. Our products are widely recognized for their superior reliability and lower total cost of ownership. The increased rate of commercial marine vessel construction in recent years has expanded our large installed base of fluid handling products and has generated increased aftermarket revenues. In addition to supplying our products for new vessels, we intend to continue to grow our aftermarket sales and services by optimizing our channels to improve market coverage. We also intend to expand our global reach by utilizing our Chinese and Indian operations to offer locally manufactured products, to reduce production costs and to provide local customer service and support for the Asia Pacific region, an area where the majority of the commercial marine vessels are constructed.

 

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Oil and Gas—We provide a broad portfolio of fluid handling products for many oil and gas applications around the world. In particular, we have a strong presence in oil field tank farms, pipelines and refineries and also in Floating Production Storage and Offloading (FPSO) installations. We intend to continue to execute our strategy in the global crude oil transport market by targeting applications where our products can replace less efficient fluid handling alternatives. For example, through a Voice of the Customer driven process, we identified an opportunity to lower maintenance and energy costs and increase up time by replacing reciprocating pumps in pipeline applications with our 3-screw product. We also intend to leverage our position as a leading supplier of 2-screw pumps to develop complex turnkey systems to capture the growing need for fluid handling solutions that can undertake the difficult task of handling varying mixtures of heavy crude oil, natural gas and water at the same time. Additionally, we expect to continue to extend LSC’s presence within the refinery market through increased market coverage and intend to broaden LSC’s core lubrication offerings for new applications. We are also adding resources to the fast growing oil and gas markets around the world, including Asia and developing nations.

Power GenerationWe provide fluid handling products used in critical lubrication and fuel injection services for fossil fuel, hydro and nuclear power plants around the world. We believe that we have in-depth knowledge of fuel injection and lubrication applications, strong product brand names and a reputation for reliability in the power generation industry. Within this market we intend to continue our growth as a provider of turnkey systems by utilizing our expertise in power generation applications to develop innovative solutions. For example, in 2006 we were contracted by an international power generation equipment supplier to design, build and install a €2.2 million lube oil skid system for a nuclear power plant in Finland. We were chosen to provide the turnkey solution for this project as a result of our engineering capabilities and technical expertise. We also intend to leverage our global presence to strengthen our relationships with large original equipment manufacturers of power generation equipment to establish us as a critical supplier.

Global Navy—For over 90 years we have supplied our specialty centrifugal and screw pumps to sovereign navies around the world, including the U.S. Navy and most of the major navies in Europe. With the acquisitions of Portland Valve and Fairmount, we have broadened our offering to include specialty valves and advanced control systems, respectively. We intend to continue to design, manufacture and sell high value fluid handling systems in order to meet the evolving requirements and standards of the navies around the world. For example, we recently received a $27.0 million contract to design a proprietary automated fire suppression system for the next-generation U.S. Navy destroyer. We also received a $16.5 million order to supply SMART valves designed as an integrated system solution with intelligence and diagnostic capabilities for the new destroyer platform. Our engineers are also working with the U.S. Navy to incorporate electronics and advanced control algorithms into our products. We are also focused on expanding our repair and service capabilities as work is outsourced to private shipyards. As part of this strategy, we have established a waterfront repair and service facility in San Diego, California to complement our Portland, Maine facility in order to provide more responsive aftermarket support to the U.S. Navy.

General Industrial—We provide fluid handling solutions for a broad array of general industrial applications, including machinery lubrication, commercial construction, chemical processing, pulp and paper processing and food and beverage processing, among others. We intend to continue to apply our application and engineering expertise to supply our customers with a portfolio of products that can solve their most critical fluid handling needs. We also intend to grow our presence in the general industrial market by targeting new applications for our existing products, deploying regionally focused strategies and leveraging our global presence and sales channels to sell our solutions worldwide.

 

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  Ÿ  

Target Fast Growing Regions by Leveraging Our Global Manufacturing, Sales and Distribution Network.    We intend to continue to leverage our strong global presence and worldwide network of distributors to capitalize on growth opportunities by selling regionally developed and marketed products and solutions throughout the world. As our customers have become increasingly global in scope, we have likewise increased our global reach to serve our customers by maintaining a local presence in numerous markets and investing in sales, marketing and manufacturing capabilities globally. Because we believe that the Asia Pacific market, in particular China, provides an attractive opportunity for future growth, in 2005, we opened a greenfield production facility in Wuxi, China to manufacture parts and assemble products primarily for shipyards and ship owners in China and other Asian countries. In addition, our acquisition of Tushaco established our presence in the fast growing Indian market.

 

      To further enhance our focus on serving our customers, we have developed the Colfax Sales Office (“CSO”), a web-based selection, configuration, quotation, order entry and aftermarket tool to streamline the quote-to-order process. As of December 31, 2007, we have installed CSO in our Imo operations in North America and our Allweiler operations in Bottrop, Germany. We intend to install CSO across all of our operations. We believe that CSO, when fully installed, will significantly increase the speed of supplying quotes to our customers and will reduce our selling costs and increase our manufacturing efficiency. This is expected to be accomplished by eliminating many manual front-end processes and establishing an integrated, automated platform across brands to capture sales that otherwise would be lost due to increased response times.

 

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Develop New Products, Applications and Technologies.    We will continue to engineer our key products to meet the needs of new and existing customers and also to improve our existing product offerings to strengthen our market position. We intend to develop technological, or “SMART,” solutions, which incorporate advanced electronics, sensors and controls, through the use of our Voice of the Customer process to solve specific customer needs. We believe our SMART solutions will reduce our customers’ total cost of ownership by providing real-time diagnostic capabilities to minimize downtime, increase operational efficiency and avoid unnecessary costs. For example, through a Voice of the Customer process, we identified an opportunity to assist shipowners in meeting stricter environmental standards by developing an integrated fluid handling system with sensors designed to proactively alert the ship engineer of a leak. This solution helps our customers avoid incurring large fines during routine port inspections. With the recent acquisition of Fairmount, we also intend to leverage their portfolio of advanced controls into our broader industrial offerings to develop innovative SMART fluid handling solutions.

 

      To further align our product innovation efforts across our operations, we have established a global engineering center of excellence located at our office in Mumbai, India, which will collaborate with our global operations to design new products, modify existing solutions, identify opportunities to reduce manufacturing costs and increase the efficiency of our existing product lines. We also believe that we will be able to reallocate select engineering functions to our engineering center thereby freeing resources to spend time on higher value work.

 

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Grow Our Offerings of Systems and Solutions.    We will continue to provide high value added fluid handling solutions by utilizing our engineering and application expertise and our brand recognition and sales channels to drive incremental revenue. We intend to establish regional system manufacturing capabilities to address our customers’ desire to purchase turnkey modules and their preference for outsourced assembly. For example, our position as a leading supplier of 2-screw pumps, combined with our engineering and application expertise, recently provided us the ability to design, build, install and commission three system packages to transport heavy crude oil for a Middle Eastern customer. By offering complete turnkey systems, we not only captured a greater share of the overall project value, but also demonstrated our technical capabilities which led to a follow-on order in 2007.

 

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Continue to Pursue Strategic Acquisitions that Complement our Platform.    We believe that the fragmented nature of the fluid handling industry presents substantial consolidation and growth opportunities for companies with access to capital and the management expertise to execute a disciplined acquisition and integration program. We have successfully applied this strategy since our inception and plan to continue to seek companies that:

 

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enhance our position in our five strategic markets;

 

  Ÿ  

have recognized, leading brands and strong industry positions;

 

  Ÿ  

present opportunities to expand our product lines and services;

 

  Ÿ  

have a reputation for high quality products;

 

  Ÿ  

will broaden our global manufacturing footprint;

 

  Ÿ  

complement or augment our existing worldwide sales and distribution networks; or

 

  Ÿ  

present opportunities to provide operational synergies and improve the combined business operations by implementing CBS.

We believe that we can identify a number of attractive acquisition candidates in the future and that strategic acquisition growth will give us the opportunity to gain a competitive advantage relative to smaller operators through greater purchasing power, a larger international sales and distribution network and a broader portfolio of products and services.

Our Products

We design, manufacture and distribute fluid handling products that transfer or control liquids in a variety of applications. We market our products principally under the Allweiler, Fairmount, Houttuin, Imo, LSC, Portland Valve, Tushaco, Warren and Zenith brands and also sell replacement parts and perform repair services for our manufactured products.

Our primary products include:

 

Fluid Handling Products

  

Principal Brands

  

Principal End Uses

Pumps

   Allweiler, Houttuin, Imo, Warren, Tushaco and Zenith    Commercial marine, oil and gas, machinery lubrication, power generation, global navy and commercial construction

Fluid Handling Systems

   Allweiler, Fairmount, Houttuin, Imo, LSC and Warren    Commercial marine, oil and gas, power generation and global navy

Specialty Valves

   Portland Valve    Global navy

 

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Pumps

At the most basic level, pumps are used to transfer liquids. For such transfer to occur, pumps require energy by a driver such as an electric motor. With their broad application across numerous industry segments, pumps can be classified by specific standards, technology, type or design. Within this broad product segment, we focus on rotary positive displacement and specialty centrifugal pumps. Rotary positive displacement and specialty centrifugal pumps operate differently, but both are designed to effectively transport specific liquid mediums. Rotary pumps generally are used on liquids that have oil-like characteristics, while centrifugal pumps generally are used on water-like liquids; however, special designs provide numerous common opportunities.

Rotary Positive Displacement Pumps—We believe we are a leading manufacturer of rotary positive displacement pumps with a broad product portfolio and globally recognized brands. Rotary positive displacement pumps consist of a casing containing screws, gears, vanes or similar components that are actuated by the relative rotation of that component to the casing, which results in the physical movement of the liquid from the inlet to the discharge at a constant rate. The U.S. Hydraulic Institute accredits 11 basic types of rotary positive displacement pumps, of which we manufacture five (3-Screw, 2-Screw, Progressive Cavity, Gear and Peristaltic). The following table summarizes the range of our rotary positive displacement pump products.

 

Product

   Max Flow
(GPM)
   Max
Pressure
(PSI)
  

Fluids

Handled

  

Major Markets

Served

  

Product

Features

3-Screw

   5,300    4,500   

•     Viscous oils

•     Viscous chemicals

  

•     Oil & Gas

•     Power Generation

•     Commercial Marine

•     Global Navy

  

•     High efficiency

•     Quiet operation

•     High pressure capability

2-Screw

   12,000    1,500   

•     Viscous oils

•     Corrosive fluids

•     Fibrous liquids

  

•     Oil & Gas

•     Commercial Marine

•     Power Generation

  

•     Large capacity

•     High efficiency

•     Contaminant handling

Progressive

Cavity

   3,750    1,500   

•     Sewage sludge

•     Viscous liquids

  

•     General Industrial

  

•     Broad fluid type transfer

•     Solids content handling

Gear

   1,500    300   

•     Polymer fiber

•     Adhesives

•     Diesel fuel

  

•     General Industrial

  

•     Multiple applications

•     High speed

•     Precision pumping

Peristaltic

   350    230   

•     Viscous fluids

•     Corrosive liquids

  

•     General Industrial

  

•     Sealless design (no leaks)

•     Easy to maintain

•     Simple design

 

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Specialty Centrifugal Pumps—Centrifugal pumps use the kinetic energy imparted by rotating an impeller inside a configured casing to create pressure. While traditionally used to transport large quantities of thin liquids, our centrifugal pumps use specialty designs and materials to offer customers high quality, reliability and customized solutions for a wide range of viscosities and applications. We position our specialty centrifugal pumps for applications where customers clearly recognize our brand value or in markets where centrifugal and rotary pumps are complimentary. The table below sets forth the range of our primary specialty centrifugal products.

 

Fluids

Handled

   Max
Flow

(GPM)
   Max
Pressure
(PSI)
  

Major

Markets Served

  

Product

Features

Water

   10,500    150   

•     Commercial Marine

•     Global Navy

  

•     Extended operation

•     Sealless design (no leaks)

•     Ability to package with rotary pumps

Lube Oil

   7,000    150   

•     Commercial Marine

•     Power Generation

  

•     Application specific design

•     Easy installation

•     Extended operation

Thermal Oil

   5,500    240   

•     General Industrial

  

•     ATEX certified

•     ISO 2858 compliant

•     Flexible design

Aggressive

Liquids

   150,000    240   

•     General Industrial

  

•     Custom configuration

•     Sealless design (no leaks)

•     ATEX certified

•     ISO 2858 compliant

Fluid Handling Systems

We manufacture complete fluid handling systems used primarily in the oil and gas, power generation, commercial marine and global navy markets. We offer turnkey systems and support, including design, manufacture, installation, commission and service. Our systems include:

 

  Ÿ  

oil mist lubrication systems, which are used in rotating equipment in oil refineries and other process industries;

 

  Ÿ  

custom designed packages used in crude oil pipeline applications;

 

  Ÿ  

lubrication and fuel forwarding systems used in power generation turbines; and

 

  Ÿ  

complete packages for commercial marine engine rooms.

Through the acquisition of Fairmount, we are able to integrate advanced programmable logic controls with our specialty valves to create SMART fluid handling systems for naval application. We are currently working together on several contracts for the U.S. Navy next-generation destroyer, including a $27.0 million contract to design a proprietary automated fire suppression system and a $16.5 million contract to supply SMART valves.

Specialty Valves

Our specialty valves are used primarily in naval applications. Our valve business has specialized machining, welding and fabrication capabilities that enable it to serve as a prime contractor to the U.S. Navy. In addition to designing and manufacturing valves, we also offer repair and retrofit services for products manufactured by other valve suppliers through our aftermarket support centers located in Portland, Maine and San Diego, California.

 

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Manufacturing

We manufacture and assemble our products at more than 16 locations worldwide, including in Europe, North America and Asia. This global manufacturing reach enables us to serve our customers wherever they choose to do business. Each of our manufacturing sites offers machining, fabrication and assembly capabilities that gives us the flexibility to source some of our products from multiple facilities. We believe that this flexibility enables us to minimize the impact of a manufacturing disruption if one of our facilities was to be damaged as a result of a natural disaster or otherwise. Our manufacturing facilities also benefit from the use of shared technology and collaboration across production lines, enabling us to increase operational efficiencies through the use of common suppliers and the duplication of production processes.

Twelve of our manufacturing facilities are certified as compliant with ISO 9001:2001 manufacturing standards, which are international quality standards developed by the International Organization for Standardization. ISO 9001:2001 refers to a quality management system which demonstrates the ability to consistently provide products that meet customer and applicable regulatory requirements and aim to enhance customer satisfaction. We believe that these certifications are recognitions of our commitment to and efforts in implementing and maintaining a quality management system in the design, manufacturing and sales of our fluid handling products.

Customers

Our business is geographically diversified, with 47% of net sales for 2007 derived from customers in Europe, 29% from customers in North and South America, 16% from customers in Asia and 8% from customers in other areas. Our customer base is highly diversified and includes commercial, industrial and government customers. Our business is not dependent on any single customer or a few customers, the loss of which would have a material adverse effect on the respective market, or on us as a whole. In 2007, no single customer represented more than 3% of sales.

Direct Sales

We provide our products directly to customers in each of the markets we serve through our approximately 100 direct field sales associates in 12 countries. A significant percentage of our direct sales associates have technical backgrounds, including degrees in engineering. In 2007, direct sales represented approximately 70% of our overall sales.

Indirect Sales

In addition to our direct sales force, we provide products to our customers through over 100 independent representatives that cover over 30 countries. We have established and maintain long-term relationships with distributors and original equipment manufacturers in key markets. Approximately 30% of our sales in 2007 were to distributors, while 27% of our sales in the same period were through original equipment manufacturers.

We believe that our worldwide presence enables us to provide timely and responsive support and service to our customers, many of whom operate internationally, and to capitalize on growth opportunities in both developed and emerging areas around the world.

Competition

Our products and services are marketed on a worldwide basis. We believe that the principal elements of competition in our markets are:

 

  Ÿ  

the ability to meet customer specifications;

 

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  Ÿ  

application expertise and design and engineering capabilities;

 

  Ÿ  

product quality and brand name;

 

  Ÿ  

timeliness of delivery;

 

  Ÿ  

price; and

 

  Ÿ  

quality of aftermarket sales and support.

The markets we serve are highly fragmented and competitive. Because we compete in selected niches of the fluid handling industry, there is not any single company that competes directly with us across all of our markets. As a result, we have many different competitors in each of our strategic markets. In the commercial marine market, we compete primarily with Naniwa Pump Manufacturing Co., Ltd., Shinko Industries, Ltd., Shin Shin Machinery Group Co., Ltd. and Taiko Kikai Industries Co., Ltd. In the oil and gas market, we compete primarily with Joh. Heinr. Bornemann GmbH, Leistritz Pumpen GmbH, Netzsch Mohnopumpen GmbH and Robbins & Myers, Inc. In the power generation market, we compete primarily with Buffalo Pumps (a subsidiary of Ampco-Pittsburgh Corporation), KSB Group and Sulzer Ltd. In the global navy market, we compete primarily with Buffalo Pumps, Carver Pump Company, Curtiss-Wright Corporation and Tyco International, Inc.

Research and Development

We closely integrate research and development with marketing, manufacturing and product engineering in meeting the needs of our customers. Our business product engineering teams work to continuously enhance our existing products and develop new product applications for our growing base of customers that require custom solutions. We believe these capabilities provide a significant competitive advantage in the development of high quality fluid handling systems. Our product engineering teams focus on:

 

  Ÿ  

lowering the cost of manufacturing our existing products;

 

  Ÿ  

redesigning existing product lines to increase their efficiency or enhance their performance; and

 

  Ÿ  

developing new product applications.

With the acquisition of Fairmount, we have significantly expanded our engineering capabilities with the addition of 24 system and electrical engineers. We intend to combine our new capabilities for design of proprietary programmable automation controllers with our fluid handling application expertise to build a portfolio of SMART solutions for use in our end markets.

In addition to our existing 180-person engineering team and research and development capabilities, we have also established an engineering center of excellence located at our Mumbai, India office to align our product innovation efforts across our global operations. We anticipate hiring additional local engineers who will collaborate with global business operations to design new products or modify existing solutions based on Voice of the Customer feedback. We also expect to increase our capacity of specialized engineering capabilities by reallocating certain engineering functions to our Indian engineering center, thereby freeing resources for higher value work.

We have approximately 77 employees in research and development. Expenditures for research and development for the years ended December 31, 2007, December 31, 2006 and December 31, 2005 were $4.2 million, $3.3 million and $2.9 million, respectively.

Intellectual Property

We rely on a combination of intellectual property rights, including patents, trademarks, copyrights, trade secrets and contractual provisions to protect our intellectual property. As of December 31, 2007, we owned

 

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approximately 65 active U.S. and foreign patents and had approximately eight patent applications pending across all of our product lines. Although we highlight recent additions to our patent portfolio as part of our marketing efforts, we do not consider any one patent or trademark or any group thereof essential to our business as a whole or to any of our business operations. We also rely on proprietary product knowledge and manufacturing processes in our operations.

Our products are marketed under various trade names and registered U.S. and foreign trademarks. We have rights to a number of trade names, service marks and trademarks, including Colfax, Allweiler, Fairmount, Houttuin, Imo, LSC, Portland Valve, Tushaco, Warren and Zenith. We have rights to these names and marks in the United States and, where we believe appropriate, in foreign markets in which we operate or compete.

Although we are involved in disputes concerning intellectual property ownership rights from time to time, we have no knowledge of or any present infringement or any present claims of ownership of patents or trademarks that would materially affect our business. We intend to continue to pursue registration and protection of all of our intellectual property rights. We also intend to continue to vigorously defend our intellectual property and proprietary rights against infringement or other threats to the greatest extent possible under applicable law.

Raw Materials and Backlog

We obtain raw materials, component parts and supplies from a variety of sources, generally from more than one supplier. Our principal raw materials are metals, plastics, castings, motors and bearings. Our suppliers and sources of raw materials are based in both the United States and other countries, and we believe that our sources of raw materials are adequate for our needs for the foreseeable future. The loss of any one supplier would not have a material adverse effect on our business or result of operations.

Manufacturing turnaround time is generally sufficiently short so as to permit us to manufacture to order for most of our products, which helps to limit inventory costs. Therefore, backlog generally is a function of requested customer delivery dates and may range from two months to several years based on the actual requested dates.

Properties

We have 16 principal production facilities in seven countries. We have seven in the United States, one in China, one in France, three in Germany, one in the Netherlands, one in Sweden and two in India. The following table lists our primary facilities as of December 31, 2007, indicating the location, square footage, whether the facilities are owned or leased, and principal use.

 

Location

   Sq. Footage    Owned/Leased    Principal Use

Richmond, Virginia

   10,200    Leased    Corporate Headquarters

Hamilton, New Jersey

   2,200    Leased    Subsidiary Headquarters

Columbia, Kentucky

   75,000    Owned    Production

Warren, Massachusetts

   147,000    Owned    Production

Monroe, North Carolina

   170,000    Owned    Production

Sanford, North Carolina

   32,000    Owned    Production

Aberdeen, North Carolina

   20,000    Owned    Production

Houston, Texas

   25,000    Leased    Production

Portland, Maine

   61,000    Leased    Production

Tours, France

   33,000    Leased    Production

Bottrop, Germany

   55,000    Owned    Production

Gottmadingen, Germany

   38,000    Leased    Production

Radolfzell, Germany

   350,000    Owned    Production

Utrecht, Netherlands

   50,000    Owned    Production

Stockholm, Sweden

   130,000    Owned    Production

Daman, India

   32,000    Owned    Production

Vapi, India

   16,000    Leased    Production

Wuxi, China

   60,000    Leased    Production

 

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Associates

The following table indicates our worldwide associate base as of the periods indicated:

 

     January 31,
2008
   December 31,
        2007    2006    2005

United States

   702    701    548    492

Europe

   1,093    1,096    1,034    1,039

Asia

   264    262    216    173
                   

Total

   2,059    2,059    1,798    1,704
                   

There are approximately 42 associates in the United States covered by a collective bargaining agreement with the International Union of Electronic, Electrical, Salaried, Machine and Furniture Workers-Communications Workers of America (IUE-CWA). The contract with the union expires December 7, 2008 and provides for wage increases ranging from 3% to a maximum of 3.5% per year. In addition, in Germany, Sweden and the Netherlands, by law, some of our associates are represented by trade unions in these jurisdictions, which subjects us to arrangements very similar to collective bargaining agreements. To date, we have not experienced any work stoppages or strikes that have had a material adverse impact on operations. We consider our relations with our associates to be good.

Government Contracts

Sales to U.S. government defense agencies constituted approximately 6% of our revenue in 2007, with the majority of the U.S. government revenue being generated by our Warren brand. We are subject to business and cost accounting regulations associated with our U.S. government defense contracts. Violations can result in civil, criminal or administrative proceedings involving fines, compensatory and treble damages, restitution, forfeitures, and suspension or debarment from U.S. government defense contracts.

Legal Proceedings

Two of our subsidiaries are each one of many defendants in a large number of lawsuits that claim personal injury as a result of exposure to asbestos from products manufactured with components that are alleged to have contained asbestos. Such components were acquired from third-party suppliers, and were not manufactured by any of our subsidiaries nor were the subsidiaries producers or direct suppliers of asbestos. The manufactured products that are alleged to have contained asbestos generally were provided to meet the specifications of the subsidiaries’ customers, including the U.S. Navy. Of the approximately 37,500 pending claims, approximately 15,400 of such claims have been brought in various state courts in Mississippi; approximately 4,200 of such claims have been brought in the Supreme Court of New York County, New York; approximately 400 of such claims have been brought in the Superior Court, Middlesex County, New Jersey; and approximately 1,900 claims have been filed in state courts in Michigan and the U.S. District Court, Eastern and Western Districts of Michigan. The remaining pending claims have been filed in state and federal courts in Alabama, California, Kentucky, Louisiana, Pennsylvania, Rhode Island, Texas, Virginia, the U.S. Virgin Islands and Washington.

One of our subsidiaries is a defendant in a lawsuit in the Supreme Court of British Columbia alleging breach of contract arising from the sale of a steam turbine delivered by our former Delaval Turbine Division and claiming damages in excess of $6.0 million (Canadian). In 2002, the plaintiff amended its complaint to add claims for negligence. We believe that there are legal and factual defenses to the claim and intend to defend the action vigorously. A trial date has been set for November 2008.

On June 3, 1997, one of our subsidiaries was served with a complaint in a case brought in the Superior Court of New Jersey which alleges damages in excess of $10.0 million incurred as a result of losses under a government contract bid transferred in connection with the sale of our former Electro-Optical Systems business.

 

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The Electro-Optical Systems business was sold in a transaction that closed on June 2, 1995. The sales contract provided certain representations and warranties as to the status of the business at the time of sale. The complaint alleges that the subsidiary failed to provide notice of a “reasonably anticipated loss” under a bid that was pending at the time of the transfer of the business and therefore a representation was breached. In the third quarter of 2004 this case was tried and the jury rendered a verdict of $2.1 million for the plaintiffs. Plaintiffs have argued that they are entitled to a refund of their attorney’s fees and costs of trial as a matter of law and contract. The subsidiary believes it is not obligated to pay these costs. In November 2006 the Court entered an Amended Final Judgment in favor of the plaintiffs in the amount of $8.9 million, including prejudgment interest. This amount is recorded in “Other liabilities” in the accompanying consolidated balance sheets. The judgment is secured by a letter of credit under our existing credit facility. Both the subsidiary and the plaintiff appealed. On January 28, 2008, the Appellate Division of the New Jersey Superior Court affirmed the total award and ordered a new trial on certain portions of the plaintiffs’ claim. The subsidiary petitioned for reconsideration of the decision which was denied on February 28, 2008. The subsidiary intends to seek certification from the Supreme Court of New Jersey for appeal. The subsidiary believes that there are legal and factual defenses to the claims and intends to continue to defend the action vigorously.

We were a defendant in an action brought by the landlord of one of our subsidiaries for rent. In March 2006, a jury found in part for the landlord, awarding the landlord $1.6 million for rent and $1.2 million in attorney’s fees. On April 2, 2008 the Court of Appeals for the 5th District of Texas at Dallas affirmed the trial court’s judgment. The Company is reviewing the decision to determine the appropriateness of an appeal to the Supreme Court of Texas.

In addition to the litigation and matters noted above, we and our subsidiaries are from time to time subject to, and are presently involved in, litigation or other legal proceedings arising out of the ordinary course of business. These matters primarily involve claims for damages arising out of the use of the subsidiaries’ products, some of which include claims for punitive as well as compensatory damages. None of these legal proceedings are expected to have a material adverse effect on our financial condition, results of operations or cash flow. With respect to these proceedings and the litigation and claims described in the preceding paragraphs, our management believes that we will either prevail, have adequate insurance coverage or have established appropriate reserves to cover potential liabilities. Any costs that management estimates may be paid related to these proceedings or claims are accrued when the liability is considered probable and the amount can be reasonably estimated. There can be no assurance, however, as to the ultimate outcome of any of these matters, and if all or substantially all of these legal proceedings were to be determined adversely to us, there could be a material adverse effect on our financial condition, results of operations or cash flow.

We are self-insured for a portion of our product liability and certain other liability exposures. Depending on the nature of the liability claim, we are responsible for up to $0.2 million per occurrence under the retention program for worker’s compensation and $0.5 million per occurrence under the retention program for product liability with a $4.0 million aggregate with respect to domestic liability and $3.0 million with respect to foreign liability. We also have a $0.1 million per occurrence stop-loss limit under our group medical plan.

 

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MANAGEMENT

Executive Officers, Directors and Key Employees

The following table sets forth information with respect to our current executive officers, directors, key employees and those who will become executive officers and directors upon consummation of the offering. With the exception of Mitchell P. Rales and Steven M. Rales, who are brothers, there are no family relationships among any of the individuals listed below.

 

Name

   Age   

Position

John A. Young

   42    President and Chief Executive Officer and Director

G. Scott Faison

   46    Senior Vice President, Finance and Chief Financial Officer

Thomas M. O’Brien

   57    Senior Vice President, General Counsel and Secretary

Michael K. Dwyer

   50    Senior Vice President, General Manager—Asia Pacific

Steven W. Weidenmuller

   44    Senior Vice President, Human Resources

Joseph B. Niemann

   46    Senior Vice President, Marketing and Strategic Planning

William E. Roller

   45    Senior Vice President, General Manager—Americas

Mario E. DiDomenico

   57    Senior Vice President, General Manager—Engineered Products

Dr. Michael Matros

   42    Senior Vice President, General Manager—Allweiler

Mitchell P. Rales

   51    Chairman of the Board of Directors

Steven M. Rales(1)

   57    Director

Patrick W. Allender

   61    Director Nominee

C. Scott Brannan

   49    Director Nominee

Joseph O. Bunting III

   47    Director Nominee and Vice President

Thomas S. Gayner

   47    Director Nominee

Clay Kiefaber

   52    Director Nominee

Rajiv Vinnakota

   36    Director Nominee

 

(1)   Steven M. Rales has submitted his resignation as a director effective immediately prior to the effective time of the registration statement.

The address for each person listed on the table above is: c/o Colfax Corporation, 8730 Stony Point Parkway, Suite 150, Richmond, Virginia 23235, United States.

Each director is elected at each annual meeting of the shareholders for a term of one year.

Each officer serves at the pleasure of the board and is subject to removal by the board with or without cause.

John A. Young is the President and Chief Executive Officer and a Director of our company. Prior to becoming President in 2000, Mr. Young was Vice President, Chief Financial Officer and Treasurer of our company since its founding in 1995.

G. Scott Faison became the Senior Vice President, Finance and Chief Financial Officer in January of 2005. He has served as Corporate Controller and Assistant Treasurer since joining us in November 1997.

Thomas M. O’Brien has served as our Senior Vice President, General Counsel and Secretary since January 1998. Mr. O’Brien served as Assistant General Counsel at Imo from 1995-1998. He has been a member of the legal department at Imo since 1985.

Michael K. Dwyer joined our company in 1998 as Vice President, Colfax Business System and Global Sourcing. In 2004, Mr. Dwyer became Senior Vice President, General Manager—Asia Pacific.

 

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Steven W. Weidenmuller joined us in 2002 as Senior Vice President, Human Resources. Prior to joining our company, Mr. Weidenmuller was Vice President of Human Resources of Tropicana International, a subsidiary of PepsiCo, Inc., the leading producer of juice in the world, where he was employed from 1997 to 2002.

Joseph B. Niemann joined us in 2006 as Senior Vice President of Marketing and Strategic Planning. Prior to joining our company, Mr. Niemann was Vice President, Marketing & eBusiness of Emerson Climate Technologies, a subsidiary of Emerson Electric Company, where he was employed from 1990 to 2005.

William E. Roller has served as our Senior Vice President, General Manager—Americas since June 1999. Subsequently, Mr. Roller added to his responsibilities the role of General Manager of both Zenith and LSC following the acquisitions of those businesses.

Mario E. DiDomenico joined our company in 1998 with the acquisition of Imo. Since that time he has served as the Manager of Operations for Warren Pump, Vice President—2 Screw Pumps and subsequently as Senior Vice President, General Manager—Engineered Products. He has been with Imo Industries in increasingly responsible manufacturing roles since 1990.

Dr. Michael Matros joined Allweiler in 1996 as a project manager in Research and Development. From 1996 until 2006, Dr. Matros has held several positions at Allweiler with increasing responsibilities, including Director of Research and Development and the Plant Manager of our Allweiler facility in Radolfzell, Germany. In April 2006, Dr. Matros was appointed to his current position as Senior Vice President, General Manager—Allweiler. In November 2006, Dr. Matros was appointed as a member of the management board at our German subsidiary, Allweiler AG.

Mitchell P. Rales has served as the Chairman of the Executive Committee of Danaher Corporation since 1990. For more than the past five years, Mitchell Rales has been a principal in a number of private business entities with interests in manufacturing companies and publicly traded securities.

Steven M. Rales has served as the Chairman of the Board of Directors of Danaher Corporation since 1984. Steven M. Rales has submitted his resignation as a director effective immediately prior to the effective time of the registration statement. For more than the past five years, Steven Rales has been a principal in a number of private business entities with interests in manufacturing companies and publicly traded securities.

Patrick W. Allender is the former Executive Vice President and Chief Financial Officer of Danaher Corporation, where he served from 1987 until 2006. Mr. Allender is a director of the Brady Corporation where he is a member of the audit and compensation committees.

C. Scott Brannan is a partner of Aronson & Company. Prior to joining Aronson & Company in 2003, Mr. Brannan served as Director of International Finance of our company for one year. Mr. Brannan is a certified public accountant.

Joseph O. Bunting, III has served as Vice President of our company since 1997. Mr. Bunting has submitted his resignation as Vice President effective upon consummation of this offering. For more than the past five years, Mr. Bunting has been an officer, member or director in a number of private business entities with interests in manufacturing companies and publicly traded securities and which are affiliated with Mitchell Rales and Steven Rales.

Thomas S. Gayner is Executive Vice President and Chief Investment Officer of Markel Corporation. Since 1990, Mr. Gayner has served as President of Markel Gayner Asset Management, Inc. Mr. Gayner served as a director of Markel Corporation from 1998 to 2003. Mr. Gayner currently serves on the board of directors of The Washington Post Company. Mr. Gayner also serves on the board of directors of The Davis Funds in New York City.

Clay Kiefaber served as Group President of Masco Corporation from 2006 to 2007. Prior to serving as Group President, Mr. Kiefaber was Group Vice President of Masco Builder Cabinet Group and President of Merillat Industries, both companies of which are subsidiaries of Masco Corporation. Mr. Kiefaber joined Merillat Industries in 1989.

Rajiv Vinnakota has been the Managing Director and President of The SEED Foundation, a non-profit educational organization, since 1997. Prior to co-founding SEED, Mr. Vinnakota was an associate at Mercer Management Consulting.

 

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Board Composition

Upon completion of this offering, we will have an authorized board of directors consisting of 8 members, a majority of whom will be independent. Our board of directors has determined that each of Patrick Allender, C. Scott Brannan, Thomas Gayner, Clay Kiefaber and Rajiv Vinnakota meets the definition of “independent director” under the New York Stock Exchange listing standards.

Our certificate of incorporation provides that the authorized number of directors may be changed only by resolution of the board of directors.

Board Committees

Upon completion of this offering, our board of directors will have a standing audit committee, a standing compensation committee and a standing nominating and corporate governance committee, the principal functions of which are detailed below.

Our board may establish other committees from time to time to facilitate the management of the business and affairs of our company.

Audit Committee

The audit committee will be responsible, among its other duties and responsibilities, for overseeing our accounting and financial reporting processes, the audits of our financial statements, the qualifications of our independent registered public accounting firm, and the performance of our internal audit function and independent registered public accounting firm. The audit committee will review and assess the qualitative aspects of our financial reporting, our processes to manage business and financial risks, and our compliance with significant applicable legal, ethical and regulatory requirements. The audit committee will be directly responsible for the appointment, compensation, retention and oversight of our independent registered public accounting firm. The members of our audit committee are expected to be C. Scott Brannan, who will serve as chair of the committee, Patrick Allender and Thomas Gayner. Our board of directors has determined that C. Scott Brannan will qualify as an “audit committee financial expert,” as that term is defined under the SEC rules implementing Section 407 of the Sarbanes-Oxley Act of 2002. Our board of directors has determined that each member of our audit committee will be independent within the meaning of the independent director guidelines of the New York Stock Exchange and each member of our audit committee will be independent under the requirements of Rule 10A-3 of the Securities Exchange Act.

Compensation Committee

The compensation committee will be responsible, among its other duties and responsibilities, for approving the compensation and benefits of our chief executive officer and other executive officers, monitoring compensation arrangements applicable to our chief executive officer and other executive officers in light of their performance, effectiveness and other relevant considerations and adopting and administering our equity incentive plans. To date, the compensation of our executive officers has primarily been determined by our full board of directors. For a discussion of the role of Mr. Young, our chief executive officer, and the limited role of compensation consultants in compensation decisions during our last fiscal year, see the “Compensation Discussion and Analysis” below.

The members of our compensation committee are expected to be Clay Kiefaber, who will serve as chair of the committee, Thomas Gayner and Rajiv Vinnakota.

Nominating and Corporate Governance Committee

The nominating and corporate governance committee will be responsible for recommending candidates for election to the board of directors. The committee also will be responsible, among its other duties and responsibilities, for making recommendations to the board of directors or otherwise acting with respect to

 

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corporate governance policies and practices, including board size and membership qualifications, new director orientation, committee structure and membership, succession planning for our chief executive officer and other key executive officers, and communications with stockholders. The members of our nominating and corporate governance committee are expected to be Patrick Allender, who will serve as chair of the committee, C. Scott Brannan and Rajiv Vinnakota.

We believe that the composition of each of these three standing committees will satisfy the requirements for independence under the listing standards of the New York Stock Exchange and the applicable SEC rules and regulations.

Board Compensation

To date, none of our directors have received compensation for their services as a director of our company.

Upon effectiveness of this offering, our board of directors has approved the following compensation to be paid to our non-employee directors, other than our non-executive chairman of the board, for their service on the board of directors:

 

  Ÿ  

an initial equity award of $100,000 in restricted stock units, to be awarded upon the consummation of this offering, which award will vest in three equal installments on the first three anniversaries of the date of grant and which award will be deferred in full until termination of each director’s service on the board;

 

  Ÿ  

an annual cash retainer of $35,000;

 

  Ÿ  

an annual equity award of $60,000 in restricted stock units, to be awarded in connection with our annual shareholders meeting, which award will vest in three equal installments on the first three anniversaries of the date of grant;

 

  Ÿ  

the chairman of the audit committee will be entitled to an annual retainer of $15,000, and the chairmen of each other committee of the board, including the compensation committee and governance committee, will be entitled to receive an annual retainer of $10,000;

Our non-executive chairman of the board will be entitled to receive an annual cash retainer of $1 and will not receive any other cash fees or the initial or annual equity awards described above. In addition, each of the directors will be entitled to reimbursement of their reasonable out-of-pocket expenses incurred in connection with board service, including travel expenses.

The board of directors has also approved a share ownership policy for our directors upon the consummation of this offering. As approved, each director will be required to have economic ownership of our common stock (including shares issued upon exercise of stock options and shares underlying restricted stock units) equal to five times the annual cash retainer within five years of joining the board of directors. If the initial and annual restricted stock unit grants are retained, each director will be in compliance with this requirement after the first annual grant of restricted stock units is made in connection with our 2009 annual shareholders meeting.

In addition, the board of directors has adopted a Director Deferred Compensation Plan which permits non-employee directors to receive, at their discretion, deferred stock units, or DSUs, in lieu of their annual cash retainers and meeting fees. A director who elects to receive DSUs receives a number of units determined by dividing the cash fees earned during, and deferred for, the quarter by the closing price of our common stock on the date of the grant, which is the last trading day of the quarter. A non-employee director also may convert restricted stock unit grants to DSUs under the plan. DSUs granted to our directors convert to shares of our common stock after termination of service from the board of directors, based upon a schedule elected by the

 

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director in advance. In the event that a director elects to receive DSUs, the director will receive dividend equivalent rights on such DSUs to the extent dividends are issued on our common stock. Dividend equivalents are deemed reinvested in additional DSUs (or fractions thereof).

Compensation Discussion and Analysis

The following discussion and analysis of compensation arrangements of our named executive officers for 2007 (as set forth in the Summary Compensation Table below) should be read together with the compensation tables and related disclosures set forth below. This discussion contains forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that we adopt may differ materially from the currently planned programs summarized in this discussion.

Executive Compensation Philosophy and Objectives

To date, our executive compensation philosophy has been to offer our executive officers, including our named executive officers, compensation that is competitive and that meets our goals of attracting, keeping, incentivizing and rewarding highly skilled management so that we can achieve our financial and strategic objectives and continue to grow our company.

Utilizing this philosophy, our executive compensation program has been designed to:

 

  Ÿ  

be competitive and flexible to reflect the industry in which we operate;

 

  Ÿ  

continually focus on, and reward our executives for, achievement of company financial and strategic objectives, both over the short and longer-term; and

 

  Ÿ  

consistently apply our compensation program to each of our named executive officers, including our CEO, Mr. Young, as well as all of our management, in all of our locations (although our specific programs may vary slightly between the United States and our other international locations, as required by local law or practice).

Setting of Executive Compensation

Other than as set forth below under “Elements of Our Executive Compensation Program—Base Salary,” to date the compensation awarded to our named executive officers has been determined solely by the full board of directors, including Mitchell Rales, Steven Rales and Mr. Young, based upon their collective experience and reasoned business judgment, with recommendations from our CEO, Mr. Young, for each of the named executive officers other than himself.

Other than the philosophy and compensation objectives discussed above, which have been informally followed by the board, the board has not formally adopted any policies with respect to long-term versus currently-paid compensation, cash versus non-cash compensation, or any other compensation policies. In addition, the board has historically looked at each compensation element individually such that decisions regarding one element have not affected decisions regarding other elements. This is because each element of our compensation program has a different purpose:

 

  Ÿ  

base salaries—must be competitive in order to attract and keep our executive talent;

 

  Ÿ  

annual bonus plan—designed to reward our executive officers for annual improvements in key areas of company operational and financial performance; and

 

  Ÿ  

long-term cash incentive plans—designed to reward our executive officers for growing our company over the longer-term and positioning it for a liquidity event, either through a sale or pursuant to an initial public offering.

 

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It is currently anticipated that, upon completion of this offering, our newly-formed compensation committee will review our executive compensation program and, as it deems necessary, modify or expand our program to arrive at what we believe to be fair and competitive compensation for our executive officers, including the named executive officers, as a public company.

Elements of Our Executive Compensation Program

As discussed above, prior to this offering, the elements of our executive compensation program have been base salary, an annual cash bonus, and long-term cash incentives. In addition, as part of our transition from a private to a public company, we recently entered into employment agreements with Messrs. Young, Faison, Dwyer and O’Brien, as discussed under “—Changes to Our Compensation Program in Connection With This Offering.”

Base Salary.    As noted above, one of our guiding compensation objectives is to be flexible in order to reflect the competitive environment we encounter in recruiting and retaining senior management. Base salaries are reviewed annually with this objective in mind.

Named Executive Officers, Other Than Mr. Young.    The annual base salary increases, if any, awarded to our named executive officers in fiscal 2007, as well as all of our associates generally, are determined from a “merit pool” recommended by Mr. Young and approved by the board. Each year, Mr. Young develops a “merit pool,” or aggregate percentage increase in base salary amounts for Colfax associates generally, that is recommended to the board. Mr. Young bases his recommendation on his subjective review of publicly available compensation compilation and survey data comprised of average percentages by which base salaries paid to employees of industrial and other companies in the U.S., as well as the other geographic locations where we have associates, are expected to increase. The component companies which form the basis for this compilation data are not disclosed as part of this survey information and thus are not known to Mr. Young, the board or Colfax. The survey data reviewed by Mr. Young indicated that average base salaries were to increase by 4% for 2007. Thus, based on the board’s review of this information and Mr. Young’s recommendation, the board approved a merit pool of 4.0% for fiscal 2007.

Once the merit pool was determined, Mr. Young further recommended to the board the base salaries for each named executive officer, other than himself. Mr. Young makes these recommendations based upon his subjective judgment and business experience. These base salaries recommended by Mr. Young, and approved by the board, are set forth in the “Salary” column of the Summary Compensation Table below.

Mr. Young.    In determining Mr. Young’s base salary increase for fiscal 2007, the board performed a more comprehensive review of CEO base salaries. In order to provide the board with survey data specific to compensation paid to CEOs, we retained Watson Wyatt Worldwide to develop a survey of comparable industrial public companies, with similar revenue and products to Colfax, using publicly available compensation information from public company proxy statements. The peer group of companies included in the Watson Wyatt survey consisted of Gardner Denver, Inc., IDEX Corporation, Graco Inc., Robbins & Myers, Inc., Altra and The Gorman Rupp Company. In reviewing this survey information, the board determined to increase Mr. Young’s base salary to $375,000.

Annual Cash Bonus.    For 2007, each of our named executive officers was entitled to participate in our 2007 Management Incentive Plan, or our annual cash bonus plan. As stated above, we believe the annual cash bonus plan incentivizes our named executive officers to achieve annual improvements in what we view as key company financial and operational metrics, thus resulting in continued growth for Colfax from year to year.

Financial and Operational Targets.    Consistent with prior years, a substantial percentage of the funding for the 2007 annual bonus plan was determined by the achievement of financial performance targets based on the board-approved corporate budget for the year. For each named executive officer other than Mr. Dwyer and Dr. Matros, the achievement of financial performance targets represented 70% of the funding for

 

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the annual bonus, and the financial performance targets consisted of sales, EBITDA (as adjusted to remove the impact of legacy asbestos income and expense as well as discontinued operations) and working capital turns (each as adjusted to negate the effects of foreign currency exchange rates). The board chose these metrics, as it has in recent years, as we believe these are the three performance metrics which most influence and support our growth and, as a result, shareholder value.

For each of Mr. Dwyer and Dr. Matros, the achievement of financial performance targets represented 75% of the funding of his annual bonus. The financial performance targets applicable to Mr. Dwyer and Dr. Matros included each of the performance metrics discussed above which are applicable to our “corporate” named executive officers; however, the board believed that the financial metrics for Mr. Dwyer’s and Dr. Matros’ potential annual bonus should be based primarily on the business unit that each oversees, and not the company as a whole. Thus, 65% of each of Mr. Dwyer’s and Dr. Matros’ potential bonus was based on the achievement of sales, EBITDA (as adjusted) and working capital turns with respect to their respective business units (which, for Mr. Dwyer only, was adjusted to negate the effects of foreign currency exchange rates due to the fact that Mr. Dwyer’s business unit includes more than one currency type). The additional 10% of each of Mr. Dwyer’s and Dr. Matros’ potential bonus was based on achievement of the company-wide sales target for the year.

The remaining 30% (or 25%, in the case of Mr. Dwyer and Dr. Matros) of the annual bonus plan was based on board-approved personal objectives for each named executive officer, as discussed below.

The following table outlines the annual bonus plan goal structure and respective weighting for each of the named executive officers, other than Mr. Dwyer and Dr. Matros, during 2007:

 

Measure

   Weighting  

Sales

   17.5 %

EBITDA (as adjusted)

   35.0 %

Working capital turns

   17.5 %

Personal objectives

   30.0 %

The following table outlines the annual bonus plan goal structure and respective weighting for Mr. Dwyer and Dr. Matros during fiscal 2007:

 

Measure

   Weighting  

Sales—business unit

   15.0 %

EBITDA (as adjusted)—business unit

   35.0 %

Working capital turns—business unit

   15.0 %

Sales—Colfax consolidated

   10.0 %

Personal objectives

   25.0 %

The board placed a greater emphasis on EBITDA (as adjusted) as compared to the other performance metrics as we believe profitability is the primary driver of our growth. With respect to the financial and operational performance metrics, the annual bonus plan is strictly formulaic in nature, and neither the board nor any executive officer exercised any discretion with respect to the targets, or the resulting payments, in fiscal 2007.

The “target goal” relating to each financial or operations performance metric, including the business units specific to Mr. Dwyer and Dr. Matros, represented our internal budget amount for 2007. The board then set “threshold goals” and “maximum goals” based upon their collective experience and business judgment, balancing our interests with the purpose of the program: to reward the named executive officers for improvements in each of the key metrics, including rewarding each of Mr. Dwyer and Dr. Matros for improvements in the metrics for the respective business unit he oversees. To determine the actual bonus paid to each named executive officer, the actual

 

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financial performance is multiplied by each named executive officer’s target bonus (as set forth in footnote 1 to the Summary Compensation Table below) and the corresponding weighting for the measure. The 2007 financial performance goals for each of the named executive officers, other than Mr. Dwyer and Dr. Matros (other than with respect to the 10% of each of Mr. Dwyer’s and Dr. Matros’ potential bonus based on the company-wide sales target) are set forth below:

 

  Measure

(weighting)

   Target
Goal
   Threshold
Goal
   Threshold
Payment
    Maximum
Goal
   Maximum
Payment
 

Sales (17.5%)(1)

   $467.7 million    $440.4 million    65 %   $514.5 million    250 %

EBITDA (as adjusted) (35.0%)

   $74.9 million    $66.2 million    65 %   $89.9 million    250 %

Working Capital Turns (17.5%)

   4.64                4.27               20 %   5.10                200 %

 

(1)   For both Mr. Dwyer’s and Dr. Matros’ 2007 annual bonus, company-wide sales represented 10% of the potential bonus.

We are not disclosing the specific sales, EBITDA (as adjusted) and working capital turns targets applicable to the business units overseen by Mr. Dwyer and Dr. Matros as they are highly confidential to our business and we do not currently intend to disclose such information either as projections or as actual results upon completion of this offering. We believe that doing so would be competitively harmful to us, as it would provide our competitors with strategic information specific to our regional operations, thus providing our competitors in these regions insight into our plans and projections for the region. The actual achievement of the financial performance targets for fiscal 2007 for Mr. Dwyer and Dr. Matros was as follows:

 

Mr. Dwyer

 

Dr. Matros

Ÿ 94% of the sales target;

 

•     101% of the sales target;

Ÿ 200% of the EBITDA (as adjusted) target; and

 

•     118% of the EBITDA (as adjusted) target; and

Ÿ 111% of working capital turns target.

 

•     98% of working capital turns target.

For each of the named executive officers other than Mr. Dwyer and Dr. Matros, actual results for 2007 were as follows:

 

  Ÿ  

$474.8 million in sales (102% of target);

 

  Ÿ  

$83.9 million in EBITDA (as adjusted) (112% of target); and

 

  Ÿ  

4.81 in working capital turns (104% of target).

Individual Performance Objectives.    As stated above, 30% of each named executive officer’s annual bonus (or 25%, with respect to Mr. Dwyer and Dr. Matros) is determined by achievement of board-approved individual performance objectives. The board includes individual performance objectives as part of the annual bonus plan to ensure that more targeted, non-financial company objectives over which the executive has primary control are part of the individual’s total annual bonus for the year. We do not view these individual performance objectives as material to an understanding of this portion of our annual bonus plan as there are several individual objectives established for each named executive officer and, individually, no one factor materially affects the total potential amount of the bonus award.

The actual bonus award paid to each named executive officer pursuant to the 2007 annual bonus plan is disclosed in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table below.

 

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Long-Term Incentives.    In each of 2001 and 2006, our board of directors implemented long-term cash incentive plans as a direct means to motivate our senior management, or those most responsible for the overall growth and direction of our company, with the purpose of growing and increasing the value of our company and positioning it for an initial public offering or other liquidity event, such as a sale of our company. Each of the named executive officers, other than Dr. Matros, participates in the Colfax Corporation 2001 Employee Appreciation Rights Plan (the “2001 Plan”). Each of the named executive officers participates in the 2006 Executive Stock Rights Plan (the “2006 Plan”). Initially, our board of directors approved the 2001 Plan as we were starting to grow as a company. Accordingly, the 2001 Plan was designed to allow our senior management to share in the growth of our company and to attract new executive talent to our company. More recently, our board approved the 2006 Plan as a means of re-emphasizing this upside potential.

Generally, each of these plans provides the named executive officers with the opportunity to receive a certain percentage, in cash (or, with respect to the 2001 Plan only, in equity, in the sole discretion of the board of directors), of the increase in value of our company from the date of grant of the award until the date of the liquidity event. The board of directors has determined that this offering will qualify as a liquidity event under both the 2001 Plan and the 2006 Plan. As a result, each of the named executive officers will receive payouts under the plans, as applicable, in conjunction with this offering and thereafter the plans will terminate.

For the 2001 Plan, the percentage interest of participation for each participating named executive officer was determined solely in the discretion of the board of directors, based on their reasoned business judgment. For the 2006 Plan, while the board determined the percentage interest for each named executive officer based on its discretion, the board also took into account, in their subjective judgment, the level of the officer’s responsibility with the company, his term of service with the company and his contributions to date. The 2001 Plan rights fully vested on the third anniversary of the grant date, subject to the participating named executive officer’s continued employment and thus each such named executive officer is fully vested in his percentage interest under the 2001 Plan. The 2006 Plan rights vest if a liquidity event occurs prior to the 10 year expiration of the term of the plan. As stated above, the board has determined that this offering will constitute a liquidity event pursuant to the plans and thus each named executive officer will vest in his rights.

For further discussion of each of these plans, including the estimated payouts pursuant to this offering, see “Potential Payments Upon Termination or Change in Control” below.

Changes to Our Compensation Program in Connection With This Offering

Adoption of 2008 Omnibus Incentive Plan.    The board of directors and shareholders unanimously approved the Colfax Corporation 2008 Omnibus Incentive Plan on April 21, 2008.

The board of directors adopted the new incentive plan because it believes that the new plan will more appropriately facilitate implementation of our future compensation programs as a public company. Prior to this offering, we have not adopted any comprehensive equity or cash award plans and we believe such a plan will be necessary for us to compensate our executives and associates generally as a public company. This is due, in part, to the limitations of Section 162(m) of the Internal Revenue Code, as we discuss below. Thus, the plan was approved by the board with a view to providing the newly established compensation committee with maximum flexibility to structure an executive compensation program that provides a wide range of potential incentive awards to our named executive officers, and associates generally, on a going-forward basis, and to preserve to the maximum extent possible our deductibility of performance-based compensation pursuant to Section 162(m).

For example, pursuant to the plan, the compensation committee has the discretion to determine the portion of each named executive officer’s total compensation that will consist of awards under the plan, the mix of short-term and long-term incentives represented by the awards, the allocation of the awards between equity and cash-based incentives, the forms of the equity awards, and the service-based requirements or performance goals that the officer will have to satisfy to receive the awards. The compensation philosophy and objectives

 

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adopted by the committee will likely determine the structure of the future awards granted by the committee pursuant to the plan.

Upon the effectiveness of this offering, the board of directors has approved the grant of stock options and performance-based restricted stock units under the 2008 Omnibus Incentive Plan to each of the named executive officers, with an aggregate grant value as follows:

 

      Grant Value($)

Mr. Young

   900,000

Mr. Faison

   275,000

Mr. Dwyer

   200,000

Mr. O’Brien

   200,000

Dr. Matros

   200,000

The aggregate grant value of each officer’s award was determined by the board in its collective experience and business judgment. The board approved these grants in recognition of each officer’s dedication and efforts in completing this offering, as well as to incentivize each officer to continue their efforts in our early stages as a public company. Each officer’s aggregate equity grant value will be awarded 50% in stock options and 50% in performance-based restricted stock units. The board chose to divide this initial equity grant equally between options and performance-based restricted stock units as it desired to emphasize both retention and increased performance among the executives, as discussed below. In addition, the board believes that stock options are inherently performance-based as the options will only increase in value if the price of our common stock increases in the future.

The equity awards will be effective on the effective date of this offering and will be based on the initial public offering price per share. Thus, the actual number of stock options to be granted to each executive will be determined by dividing 50% of the grant value above (for example, for Mr. Young, $450,000) by 40% of the value of our common stock on the date of effectiveness of the offering. Similarly, the actual number of performance-based restricted stock units to be granted to each executive will be determined by dividing 50% of the grant value above by the offering price.

To reinforce retention objectives, the options will vest in equal installments over a three year period based on continued service. The performance-based restricted stock units will be earned, if at all, based on our earnings per share growth over a three-year period. The board chose earnings per share as the performance metric due to its belief that earnings per share growth represents a strong indicator of growth in shareholder value, particularly as a newly-public company. In addition, any performance shares earned upon conclusion of the three-year performance period will be subject to an additional two-year service based vesting period, to further reinforce our retention emphasis.

For a more detailed discussion of the 2008 Omnibus Incentive Plan, see “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table” below.

Execution of Employment Agreements.    We recently entered into employment agreements with each of Messrs. Young, Faison, Dwyer and O’Brien. The employment agreements are substantially the same, other than each officer’s title (which will remain the same as set forth in the Summary Compensation Table below), base salary amounts and annual incentive plan participation. The material terms of the employment agreements are summarized under “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table” below.

The terms of each employment agreement were specifically negotiated between the board of directors and each executive. We determined to enter into these employment agreements at this time, in anticipation of this offering, as we desire to keep our senior management team intact due to the fact that this team has been

 

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instrumental in our ability to consummate this offering and we believe they are well-suited to continue to manage and grow the company in the future. We also desired to provide these executives with some certainty of employment and benefits at this significant stage of the company’s growth.

With respect to the benefits payable to each executive upon a change in control of Colfax, the benefits are only paid upon a “double trigger,” meaning a change in control event must occur and the executive must either be terminated without cause by Colfax (or its successor) or the executive must resign for good reason. In entering into these arrangements, we wanted to have the continued dedication of these executive officers, notwithstanding the possibility of a change in control, and to retain such officer in our employ after any such transaction. We believe that, should the possibility of a change in control arise, Colfax should be able to receive and rely upon our officers’ advice as to the best interests of the Company and without the concern that such officer might be distracted by the personal uncertainties and risks created by a potential change in control. In the event, however, that such officer is actually terminated within a certain period of time following the change in control, which such termination may be out of their control (i.e., by the successor company or management), we believe that the officers should be compensated for their efforts in positioning Colfax for the acquisition event.

Effect of Accounting and Tax Treatment on Compensation Decisions

Section 162(m) of the Internal Revenue Code imposes a limit on the amount of compensation that we may deduct in any one year with respect to certain “covered employees,” unless certain specific and detailed criteria are satisfied. Performance-based compensation, as defined in the Internal Revenue Code, is fully deductible if the programs are approved by stockholders and meet other requirements. We believe that future grants of awards under our new 2008 Omnibus Incentive Plan will qualify as performance-based for purposes of satisfying the conditions of Section 162(m), thus permitting us to receive a federal income tax deduction in connection with such awards. However, as part of our current compensation objectives, we seek to maintain flexibility in compensating our executives, as discussed above and, as a result, the board has not adopted a policy requiring that all compensation be deductible. Our newly formed compensation committee will assess the impact of Section 162(m) on our compensation practices and determine what further action, if any, is appropriate.

Compensation Tables and Disclosures

Summary Compensation Table

 

Name and Principal Position

   Year    Salary
($)
    Non-Equity
Incentive Plan
Compensation
($)(1)
   Change in Pension
Value and
Nonqualified
Deferred
Compensation
Earnings ($)(2)
   All Other
Compensation
($)(3)
   Total ($)

John A. Young

   2007    375,000     326,250    736    59,307    761,293

President and Chief Executive Officer

                

G. Scott Faison

   2007    214,000     121,552    590    33,158    369,300

Senior Vice President, Finance and Chief Financial Officer

                

Michael K. Dwyer

   2007    219,500     139,602    575    92,236    451,913

Senior Vice President, General Manager—Asia Pacific

                

Thomas M. O’Brien

   2007    247,000     140,296    22,213    37,169    446,678

Senior Vice President, General Counsel and Secretary

                

Dr. Michael Matros

   2007    272,477 (4)   138,283    624    28,276    439,660

Senior Vice President, General Manager—Allweiler

                

 

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(1)   Amounts represent the payouts pursuant to our 2007 Management Incentive Bonus Plan. For a discussion of the performance metrics on which this plan is based, including the weighting for each performance metric and the actual percentage achievement of the financial performance targets, see the “Compensation Discussion and Analysis” above. To determine the actual bonus paid to each named executive officer, the actual financial performance was multiplied by each named executive officer’s 2007 target bonus and the corresponding weighting for the measure. For fiscal 2007, each named executive officer’s target bonus, expressed as a percentage of base salary, was as follows:

 

Ÿ Mr. Young:

   60 %  

Ÿ Mr. Faison:

   40 %  

Ÿ Mr. Dwyer:

   40 %  

Ÿ Mr. O’Brien:

   40 %  

Ÿ Dr. Matros:

   35 %  

 

       For Dr. Matros, amount represents €93,888 or $138,283 in U.S. dollars, calculated based on the conversion rate in effect on December 31, 2007.

 

(2)   Amounts represent solely the aggregate change in the actuarial present value of the officer’s accumulated benefit under the respective pension benefit plan from the pension plan measurement date used for financial statement reporting purposes in fiscal 2006 as compared to fiscal 2007. For Dr. Matros, amount represents €424 or $624 in U.S. dollars calculated based on the conversion rate in effect on December 31, 2007.
(3)   Amounts set forth in this column consist of the following:

 

Name

  Supplemental
Long-Term
Disability
Premiums ($)
  Company
Car ($)(a)
  Company
401(k)/Deferred
Compensation
Plan Match and
Contribution ($)(b)
  Annual
Physical
($)
  Overseas
Housing
($)(c)(d)
  Tax
Equalization
Payments
($)(d)
    Tax
Preparation
Services
($)(d)
  Accident
Insurance ($)
 

Mr. Young

  1,808   15,600   36,699   5,200   —     —       —     —    

Mr. Faison

  2,270   12,000   18,888   —     —     —       —     —    

Mr. Dwyer

  2,707   12,000   18,599   —     19,650   36,600 (e)   2,680   —    

Mr. O’Brien

  3,429   12,000   21,740   —     —     —       —     —    

Dr. Matros

  —     17,639   10,310   —     —     —       —     327 (f)

 

  (a)   For each named executive officer other than Dr. Matros, amounts represent a cash car allowance provided to each officer. For Dr. Matros, amount represents the annual cost of a car lease, including insurance, maintenance and gas in the amount of €11,976 or $17,639 in U.S. dollars, calculated based on the conversion rate in effect on December 31, 2007.
  (b)   For each named executive officer other than Dr. Matros, amounts represent the aggregate company match and company contribution made by Colfax during 2007 to such officer’s 401(k) plan account and Excess Benefit Plan (nonqualified deferred compensation) account. See the Nonqualified Deferred Compensation Table and accompanying narrative below for additional information on the Excess Benefit Plan. For Dr. Matros, amount represents the contribution made by Allweiler AG during 2007 pursuant to a Joint Support Fund Agreement between Allweiler AG and Dr. Matros. The “joint support fund” is similar to a U.S. defined contribution, or 401(k), plan. The aggregate amount required to be contributed to Dr. Matros’ account by Allweiler AG during 2007 was €7,000, or $10,310 in U.S. dollars, calculated based on the conversion rate in effect on December 31, 2007.
  (c)   Amounts represent the aggregate housing lease payments made by Colfax on behalf of Mr. Dwyer in connection with his overseas service.
  (d)   Amounts represent payments made to or on the behalf of Mr. Dwyer by Colfax in connection with his overseas service.
  (e)   Amount represents estimate as of January 4, 2008. Actual amount will not be known until filing of Mr. Dwyer’s tax return for fiscal 2007.

 

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  (f)   Amounts represent €222, or $327 in U.S. dollars, calculated based on the conversion rate in effect on December 31, 2007. For additional information on this benefit, see “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table—Dr. Matros’ Service Contract” and “Potential Payments upon Termination or Change in Control” below.
(4)   This amount represents amounts paid in 2007 based on an annual base salary of €185,000, or $272,477 in U.S. dollars, calculated on the conversion rate in effect as of December 31, 2007.

Grants of Plan-Based Awards

The following table sets forth information with respect to grants of plan-based awards to our named executive officers during 2007:

 

Name

   Estimated Possible Payouts Under
Non-Equity Incentive Plan
Awards(1)
   Threshold
($)
   Target
($)
   Maximum
($)

John A. Young

   92,250    225,000    474,750

G. Scott Faison

   35,096    85,600    180,616

Michael Dwyer

   39,510    87,800    191,404

Thomas M. O’Brien

   40,508    98,800    208,468

Dr. Michael Matros

   42,541    94,535    206,086

 

(1)   Amounts represent the possible payouts under our 2007 Management Incentive Bonus Plan. For a discussion of the performance metrics and actual results and payouts under the plan for fiscal 2007, see the “Compensation Discussion and Analysis” and the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table above, respectively.

Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table

Employment Agreements

As discussed in the “Compensation Discussion and Analysis” above, we recently entered into an employment agreement with each of Messrs. Young, Faison, Dwyer and O’Brien. The employment agreements are substantially the same, other than each officer’s title (which is as set forth in the Summary Compensation Table above), base salary amounts and annual incentive plan participation. The material terms of each officer’s employment agreement are set forth below.

The initial term of each employment agreement ends December 31, 2009, with automatic two-year term extensions thereafter, unless the board of directors or the executive provides written notice to terminate the automatic extension provision. Notwithstanding the foregoing, in the event we do not consummate our initial public offering by December 31, 2008, the employment agreements will terminate. In addition, in the event we undergo a “change in control” (as described below) during any two-year term of the employment agreement, the agreements will be automatically extended to the second anniversary of the change in control event.

Pursuant to the agreements, Messrs. Young, Faison, Dwyer and O’Brien are entitled to a base salary of no less than $440,600, $247,000, $240,280 and $268,880, respectively, with such salaries to be reviewed at least annually by the compensation committee of the board. Effective upon the consummation of this offering, the base salaries of each of Messrs. Young and Faison will increase to $565,500 and $282,000, respectively. Each officer’s base salary may not be reduced below the amount previously in effect without the written agreement of the executive. In addition, each of Messrs. Young, Dwyer and O’Brien is entitled to participate in our annual cash incentive program in a target amount equal to 75%, 50%, 45% and 45%, respectively, of his base salary then in effect.

 

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In the event the executive’s employment is terminated by Colfax without “cause” or resigns for “good reason” (each term as described below), each executive is entitled to the following severance payments or benefits:

 

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a lump sum payment equal to one times (x) the executive’s base salary in effect and (y) his target annual incentive compensation for the year of termination (or, if greater, the average of the two highest actual annual incentive payments made to the executive during the last three years);

 

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a lump sum payment equal to the executive’s pro rata annual incentive compensation for the year of termination; and

 

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continuation of health care coverage for the executive and his family for one year after termination.

In the event the executive terminates employment without “cause” or for “good reason” within three months prior to a “change in control event” (as described below), or two years after a “change in control”, each executive is entitled to the following severance payments or benefits:

 

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a lump sum payment equal to two times (x) the executive’s base salary in effect and (y) his target annual incentive compensation for the year of termination (or, if greater, the average of the two highest actual incentive payments made to the executive during the last three years);

 

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continuation of health care coverage for the executive and his family for two years after termination; and

 

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all equity awards will immediately vest, with any performance objectives applicable to performance-based equity awards deemed to have been met at the greater of (i) the target level at the date of termination, and (ii) actual performance at the date of termination.

In each case described above, the executive’s right to the severance payments and benefits is conditioned on the executive’s execution of a waiver and release agreement in favor of Colfax. In addition, each employment agreement contains standard confidentiality covenants, non-disparagement covenants, non-competition covenants (for a period of one year following a termination of employment or, if the termination of employment occurs three months prior to a change in control event or two years after a change in control, two years) and non-solicitation covenants (for a period of two years following a termination of employment or, if the termination of employment occurs three months prior to a change in control event or two years after a change in control, three years).

In the event that any payment or benefit to the executives pursuant to the employment agreements or otherwise constitute excess parachute payments under Section 280G of the Internal Revenue Code such that they would trigger the excise tax provisions of the Internal Revenue Code, such payments are to be reduced so that the excise tax provisions are not triggered, but only upon determination by the executive that the after-tax value of the termination benefits calculated with the restriction described above exceed the value of those calculated without such restriction.

Each agreement further provides that, in the event it is determined that the willful actions of the executive have resulted in a material misstatement or omission in any report or statement filed by Colfax with the Securities and Exchange Commission, or material fraud against Colfax, Colfax is entitled to recover all or any portion of any award or payment made to the executive.

For purposes of the employment agreements, the following terms generally have the following meanings:

 

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“cause” means conviction of a felony or a crime involving moral turpitude, willful commission of any act of theft, fraud, embezzlement or misappropriation against Colfax or its subsidiaries or willful and continued failure of the executive to substantially perform his duties;

 

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“change in control” means:

 

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a transaction or series of transactions pursuant to which any person acquires beneficial ownership of more than 50% of the voting power of the common stock of Colfax then outstanding;

 

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during any two-year consecutive period, individuals who at the beginning of the period constitute the board of directors (together with any new directors approved by at least two-thirds of the directors at the beginning of the period or subsequently approved) cease to constitute a majority of the board of directors of Colfax;

 

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a merger, sale of all or substantially all of the assets of Colfax or certain acquisitions of the assets or stock by Colfax of another entity in which there is a change in control of Colfax; and

 

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a liquidation or dissolution of Colfax;

 

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“change in control event” means the earlier to occur of a “change in control” or the execution of an agreement by Colfax providing for a change in control; and

 

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“good reason” means:

 

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the assignment of duties to the executive which are materially inconsistent with his position with Colfax;

 

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a reduction in the executive’s base salary, or the setting or payment of the executive’s target annual incentive compensation, in each case in an amount materially less than as required under the employment agreement;

 

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the requirement for the executive to relocate his principal place of business at least 35 miles from his current place of business;

 

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Colfax’s failure to obtain agreement from any successor to fully assume its obligations to the executive under the terms of the agreement; and

 

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any other failure by Colfax to perform its material obligations under, or breach of Colfax of any material provision of, the employment agreement.

Mr. Dwyer’s Letter Agreement

Pursuant to a letter dated December 28, 2007 (which modified and superseded a letter agreement dated April 29, 2005), we executed a letter of understanding with Mr. Dwyer with respect to his salary and benefits while serving overseas as Senior Vice President, General Manager—Asia Pacific, as requested by the company. The employment period covered by the letter agreement is for one year, until December 31, 2008, unless terminated sooner in our discretion.

Pursuant to the letter agreement, Mr. Dwyer’s base salary for fiscal 2007 was $219,500, which salary was to be reviewed annually. In addition, during the period of his overseas assignment, Mr. Dwyer is entitled to receive the following benefits:

 

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reasonable reimbursement for business transportation expenses;

 

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company-provided housing in Hong Kong, paid directly to the landlord;

 

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participation in the Colfax tax equalization program and tax preparation assistance; and

 

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up to three trips annually to and from the U.S. for Mr. Dwyer and/or his family.

Mr. Dwyer’s letter agreement will remain in effect along with his employment agreement until December 31, 2008. Thereafter, Mr. Dwyer and Colfax will be subject only to the employment agreement.

Dr. Matros’ Service Contract

Pursuant to a service contract and resolution of the advisory board of Allweiler AG effective November 14, 2006, Dr. Matros was appointed as a member of the management board of Allweiler AG, the German subsidiary of Colfax. Dr. Matros’ appointment is for a term of three years, until December 31, 2009, with an automatic extension for one year, until December 31, 2010 unless Dr. Matros receives notice no later than October 31, 2009 that his appointment has been revoked.

 

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Under the service contract, Dr. Matros is entitled to an initial annual salary of €185,000, which is equal to $272,477 U.S. Dollars, calculated on the conversion rate in effect as of December 31, 2007. In addition, Dr. Matros is entitled to receive a performance-related annual bonus. For fiscal 2007, the service contract provided that his annual target bonus was 35% of his annual salary. Dr. Matros’ base salary and target bonus are to be reviewed annually.

Consistent with what we believe to be customary practice for German companies and executives, the service contract further provides that Dr. Matros is entitled to a company car for business and personal use; however, Dr. Matros is required to bear the cost of any tax associated with such personal use. In addition, Dr. Matros is entitled to a medical exam once every two years, with Allweiler required to pay the difference between the actual cost of the exam and any insurance policy maintained by Dr. Matros. Dr. Matros did not take advantage of this benefit in fiscal 2007.

The service contract further provides for limited payments and benefits upon certain termination events. In addition, Allweiler is required to maintain an accident insurance policy for the benefit of Dr. Matros providing for coverage in the event of his death or disability. For a discussion of these provisions, and a quantification of the estimated payments to be made to Dr. Matros upon such events, see “Potential Payments upon Termination or Change in Control” below.

2008 Omnibus Incentive Plan

Our board of directors unanimously approved the Colfax Corporation 2008 Omnibus Incentive Plan on April 21, 2008 (referred to as the “new equity plan”). The stockholders approved the plan on April 21, 2008.

The granting of awards under the new equity plan will generally be within the discretion of the compensation committee of our board of directors. For a discussion of the awards to be made under the new equity plan to each of the named executive officers in connection with the effectiveness of this offering, see the “Compensation Discussion and Analysis—Adoption of 2008 Omnibus Incentive Plan” above. Other than with respect to these awards, it is not possible as of the date of this prospectus to determine the nature or amount of the awards that may be subject to future grants to our officers, employees and other participants in the new equity plan. The new equity plan is not the exclusive means of providing incentive compensation to executives and other employees eligible to participate in the new equity plan, and we reserve the right to pay incentive compensation to them under another plan or without regard to any plan in appropriate circumstances.

Purpose and Eligibility.    The purpose of the new equity plan is to enhance our ability to attract, retain and motivate highly qualified officers, employees, non-employee directors and other persons to serve us and our affiliates and to expend maximum effort to improve our business results and earnings, by providing to such officers, employees, non-employee directors and other persons with an opportunity to acquire or increase a direct proprietary interest in our operations and future success through ownership of our common stock.

Awards may be granted under the plan to officers, directors, including non-employee directors, other employees, advisors, consultants or other service providers of ours or our subsidiaries or other affiliates, and to any other individuals who are approved by the board of directors as eligible to participate in the plan. Only our employees or employees of our subsidiaries are eligible to receive incentive stock options.

Effective Date and Term.    The new equity plan was effective as of the date of board approval, or April 21, 2008, and will expire at the close of a ten-year term unless earlier terminated by our board of directors.

Administration, Amendment and Termination.    Our board of directors will have the power and authority to administer the new equity plan. In accordance with the terms of the plan, the board of directors will delegate this power and authority to the compensation committee. The compensation committee will have the authority to interpret the terms and intent of the new equity plan, determine eligibility and terms of awards for participants and make all other determinations necessary or advisable for the administration of the new equity plan. To the extent permitted by law, the board or compensation committee may delegate authority under the plan to a member of the board of directors.

 

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The compensation committee may amend, suspend or terminate the new equity plan at any time with respect to any shares of common stock as to which awards have not been made. No such action may amend the new equity plan without the approval of stockholders if the amendment is required to be submitted for stockholder approval by applicable law, rule or regulation, including rules of the New York Stock Exchange.

Awards

Awards under the new equity plan may be made in the form of:

 

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stock options, which may be either incentive stock options or non-qualified stock options;

 

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stock appreciation rights;

 

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restricted stock;

 

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restricted stock units;

 

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dividend equivalent rights;

 

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performance shares;

 

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performance units;

 

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other stock-based awards, including unrestricted shares; or

 

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any combination of the foregoing.

Any of the foregoing awards may be made subject to attainment of performance goals over a performance period of one or more years.

An “incentive stock option” is an option that meets the requirements of Section 422 of the Internal Revenue Code, and a “non-qualified stock option” is an option that does not meet those requirements. A “stock appreciation right,” or “SAR,” is a right to receive upon exercise, in the form of common stock, cash or a combination thereof, the excess of the fair market value of one share of common stock on the exercise date over the grant price of such SAR. “Restricted stock” is an award of common stock on which are imposed restrictions over restricted periods that subject the shares to a substantial risk of forfeiture, as defined in Section 83 of the Internal Revenue Code. “Restricted stock units” are awards that represent a conditional right to receive shares of common stock in the future and that may be made subject to the same types of restrictions and risk of forfeiture as restricted stock. “Dividend equivalent rights” are awards entitling the recipient to receive credits, which may be paid currently in cash or common stock or which may be deemed to be reinvested in additional shares, that are based on cash distributions that would have been paid on the shares specified in the rights if the shares had been issued to and held by the recipient. “Performance shares” are awards of common stock, the value for which at the time the common stock is payable is determined by the extent to which the applicable performance criteria have been met. “Performance units” are similar to performance shares except that the award is a performance-based right to receive shares of common stock in the future, subject to one or more other restrictions. “Unrestricted shares” are awards of shares of common stock that are free of restrictions other than those imposed under federal or state securities laws.

Shares Subject to New Equity Plan.    Subject to adjustment as described below, the number of shares of our common stock that will be available for issuance under the new equity plan will be the number of shares that is the lesser of (i) 6,500,000 shares of our common stock, or (ii) the number of shares of our common stock which, when added to the number of shares of common stock issued and outstanding following consummation of this offering, will equal 10% of our issued and outstanding shares of common stock. Shares issued under the new equity plan may be authorized as unissued shares or treasury shares.

Any shares covered by an award, or portion of an award, granted under the new equity plan that are forfeited or canceled, expire or settle in cash will be deemed not to have been issued for purposes of determining the maximum number of shares available for issuance under the new equity plan.

If any stock option is exercised by tendering shares to us, or if we withhold shares to satisfy tax withholding obligations in connection with such an exercise, as full or partial payment in connection with the exercise of a stock option under the new equity plan, only the number of shares issued net of the shares tendered will be deemed issued for purposes of determining the maximum number of shares available for issuance under the new equity plan. Shares issued under the new equity plan through the settlement, assumption or substitution

 

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of outstanding awards or obligations to grant future awards resulting from the acquisition of another entity will not reduce the maximum number of shares available for issuance under the new equity plan. In the case of a SAR, only the actual number of shares issued upon exercise of the SAR will be deemed issued for purposes of determining the maximum number of shares available for issuance.

The new equity plan has a number of additional limitations on the shares reserved for issuance or amount of awards that may be granted. A maximum of 750,000 shares may be issued pursuant to incentive stock options. From and after the transition period set forth in Treasury regulations promulgated under Internal Revenue Code Section 162(m), no participant may be awarded options or SARs for more than 750,000 shares in any calendar year. A maximum of 750,000 shares of awards other than options or SARs may be awarded to any participant in any calendar year. The foregoing limitations are subject to adjustment as described below.

Terms and Conditions of Awards

Terms and Conditions of Options.    An option granted under the new equity plan will be exercisable only to the extent that it is vested on the date of exercise. No option may be exercisable more than ten years from the option grant date. The compensation committee may include in the option agreement the period during which an option may be exercised following termination of employment or service.

The exercise price per share under each option granted under the new equity plan may not be less than 100%, or 110% in the case of an incentive stock option granted to a 10% stockholder, of the fair market value of the common stock on the option grant date. For so long as the common stock remains listed on the New York Stock Exchange, the fair market value of the common stock will be the closing price of the common stock as reported on the New York Stock Exchange on the option grant date. If there is no closing price reported on the option grant date, the fair market value will be deemed equal to the closing price as reported on the New York Stock Exchange for the last preceding date on which sales of the common stock were reported. If the shares of common stock are listed on more than one established stock exchange, the fair market value will be the closing price of a share of common stock reported on the exchange selected by the board of directors. If the common stock is not at the time listed or admitted to trading on a stock exchange, fair market value will be the mean between the highest bid and lowest asked prices or between the high and low sale prices of the common stock. If the common stock is not listed on any stock exchange or traded in the over-the-counter market, fair market value will be as determined in good faith by the board of directors in a manner consistent with Section 409A of the Internal Revenue Code.

Except upon the occurrence of a merger or other transaction described below, no amendment or modification may be made to an outstanding option which reduces the option price, either by lowering the option price or by canceling the outstanding option and granting a replacement option with a lower option price.

Payment of the option price for shares purchased pursuant to the exercise of an option may be made in cash or in cash equivalents acceptable to us or, to the extent permitted by law and at the discretion of the compensation committee, through a broker-assisted cashless exercise, the tender to us of shares of common stock or by a combination of cash payment, cashless exercise, or tender of shares or any other method that is approved by the compensation committee.

Each option will become vested and exercisable at such times and under such conditions as the compensation committee may approve consistent with the terms of the new equity plan.

In the case of incentive stock options, the aggregate fair market value of the common stock determined on the option grant date with respect to which such options are exercisable for the first time during any calendar year may not exceed $100,000.

Incentive stock options are non-transferable during the optionee’s lifetime. Awards of non-qualified stock options are generally non-transferable, except for transfers by will or the laws of descent and distribution.

 

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The compensation committee may, in its discretion, determine that an award of non-qualified stock options also may be transferred to family members by gift or other transfers deemed not to be for value.

The compensation committee may impose restrictions on any shares of common stock acquired pursuant to the exercise of an option as it deems advisable, including minimum holding period requirements or restrictions under applicable federal securities laws, under the requirements of any stock exchange or market upon which the shares of common stock are then listed or traded, or under any blue sky or state securities laws applicable to the shares of common stock.

Terms and Conditions of Stock Appreciation Rights.    SARs may be granted in conjunction with all or a part of any option or other award granted under the new equity plan, or without regard to any option or other award. The compensation committee will determine at the SAR grant date or thereafter the time or times at which and the circumstances under which an SAR may be exercised in whole or in part, the time or times at which and the circumstances under which an SAR will cease to be exercisable, the method of exercise, the method of settlement, the form of consideration payable in settlement, whether or not an SAR will be in tandem or in combination with any other grant, and any other terms and conditions of any SAR. Exercisability of SARs may be subject to future service requirements, to the achievement of one or more of the performance objectives that are described below under “—Corporate Performance Objectives” or to such other terms and conditions as the compensation committee, in its sole discretion, may impose.

Upon exercise of an SAR, the holder will be entitled to receive, in the specified form of consideration, the excess of the fair market value of one share of common stock on the exercise date over the grant price of such SAR, as determined by the compensation committee. The grant price of an SAR may not be less than the fair market value of a share of common stock on the grant date. Except upon the occurrence of a merger or other transaction described below, no amendment or modification may be made to an outstanding SAR which would be considered a repricing under the rules of the stock exchange under which the stock is listed without the consent of the shareholders.

Awards of SARs are generally nontransferable, except for transfers by will or the laws of descent and distribution.

Terms and Conditions of Restricted Stock and Restricted Stock Units.    Subject to the provisions of the new equity plan, the compensation committee will determine the terms and conditions of each award of restricted stock and restricted stock units, including the restricted period for all or a portion of the award, the restrictions applicable to the award and the purchase price, if any, for the common stock subject to the award. Unless otherwise determined by the compensation committee, to the extent permitted or required by law as determined by the compensation committee, holders of shares of restricted stock will have the right during the restricted period to exercise full voting rights with respect to those shares and the right to receive any dividends declared or paid with respect to the shares. Awards of restricted stock and restricted stock units may be subject to satisfaction of individual performance objectives or one or more of the performance objectives that are described below under “—Corporate Performance Objectives.”

The restrictions and the restricted period may differ with respect to each participant. An award will be subject to forfeiture if events specified by the compensation committee occur before the lapse of the restrictions.

Awards of restricted stock and restricted stock units are generally nontransferable during the restricted period or before satisfaction of any other restrictions applicable to the awards.

Terms and Conditions of Dividend Equivalent Rights.    The compensation committee is authorized to grant dividend equivalents to a participant in connection with an award under the new equity plan, or without regard to any other award. Dividend equivalents will entitle the participant to receive cash or common stock equal in value to dividends paid, or other periodic payments made, with respect to a specified number of shares

 

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of common stock. Dividend equivalents may be paid or distributed when accrued or will be deemed to have been reinvested in additional common stock or in awards under the new equity plan, and will be subject to such risks of forfeiture as the compensation committee may specify. Dividend equivalents are generally nontransferable, except for transfers by will or the laws of descent and distribution.

Terms and Conditions of Performance Units and Performance Shares.    The compensation committee may award performance shares and performance units in such amounts and upon such terms as the compensation committee may determine. Each performance share will have an initial value that is equal to the fair market value of a share of common stock on the date of grant. Each performance unit will have an initial value set by the compensation committee. The compensation committee may set performance goals in its discretion which, depending on the extent to which they are met, will determine the value or number of performance units or performance shares that will be paid out to a participant. The compensation committee may, in its sole discretion, pay earned performance units or performance shares in the form of cash or in shares of common stock equal to the value of the earned performance units or performance shares. Any shares of common stock issued based upon performance units or performance shares may be granted subject to any restrictions that the compensation committee deems appropriate.

Terms and Conditions of Other Stock-Based Awards.    The compensation committee may also grant other types of equity-based or equity-related awards, including the grant or offer for sale of unrestricted shares, in such amounts and subject to such terms and conditions as the compensation committee may determine. Any such awards may involve the transfer of actual shares of common stock to participants, or payment in cash or otherwise of amounts based on the value of the shares of common stock. Any other stock-based awards granted by the compensation committee may be subject to performance goals established by the compensation committee in its discretion.

Effect of Corporate Transactions

Adjustment of Shares Subject to New Equity Plan.    In the event of any increase or decrease in the number of outstanding shares of our stock, or in the event such shares are changed into or exchanged for a different number or kind of shares or other securities of ours on account of any recapitalization, reclassification, stock split, reverse split, combination of shares, exchange of shares, stock dividend or other distribution payable in capital stock, the compensation committee will adjust, among other award terms, the number and kind of shares or property that may be delivered in connection with awards and the exercise price, grant price or purchase price relating to any award in such manner as the compensation committee determines to be necessary to prevent dilution or enlargement of the rights of participants.

Effect of Corporate Transactions.    Subject to the exceptions described below, upon the occurrence of a “corporate transaction,” as defined in the new equity plan, all outstanding shares of restricted stock and all stock units will become immediately vested, and the shares of stock subject to outstanding stock units will be delivered immediately before the occurrence of the corporate transaction. In addition, either of the following two actions will be taken:

 

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15 days before the scheduled completion of the corporate transaction, all options and stock appreciation rights will become immediately exercisable and will remain exercisable for a period of 15 days, or

 

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instead of providing for accelerated vesting in awards under the new equity plan in connection with the corporate transaction, the compensation committee may provide that awards, whether or not exercisable, will be terminated and the holders of awards will receive a cash payment, or the delivery of shares of stock, other securities or a combination of cash, stock and securities equivalent to such cash payment, equal to the value of the award.

 

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These actions will not apply to any corporate transaction to the extent that provision is made in writing in connection with the corporate transaction for the assumption or continuation of the outstanding awards, or for the substitution of such outstanding awards for similar awards relating to the stock of the successor entity, or a parent or subsidiary of the successor entity, with appropriate adjustments to the number of shares of stock that would be delivered and the exercise price, grant price or purchase price relating to any such award. If an award is assumed or substituted in connection with a corporate transaction and the holder is terminated without cause within a year following a change in control, the award will fully vest and may be exercised in full, to the extent applicable, beginning on the date of such termination and for the one-year period immediately following such termination or for such longer period as the compensation committee shall determine.

A “corporate transaction” means:

 

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the dissolution or liquidation of our company or a merger, consolidation, or reorganization of our company with one or more other entities in which we are not the surviving entity;

 

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a sale of substantially all of our assets to another person or entity; or

 

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any transaction which results in any person or entity, other than persons who are stockholders or affiliates immediately prior to the transaction, owning 50% or more of the combined voting power of all classes of our stock.

If we are the surviving entity in any reorganization, merger, or consolidation of our company with one or more other entities that does not constitute a corporate transaction, any option or stock appreciation right outstanding under the new equity plan will apply to the securities to which a holder of the number of shares of our stock subject to the option or stock appreciation right would have been entitled immediately following the transaction, with a corresponding proportionate adjustment of the exercise price. In such an event, stock units will be adjusted so as to apply to the securities that a holder of the number of shares of our stock subject to the stock units would have been entitled to receive immediately following the transaction.

The compensation committee may provide in any agreement under the new equity plan for different provisions to apply to an award under the plan than those described above.

Corporate Performance Objectives. Section 162(m) of the Internal Revenue Code limits public companies to an annual deduction for federal income tax purposes of $1,000,000 for compensation paid to their chief executive officer and the three most highly compensated executive officers determined at the end of each year. Performance-based compensation is excluded from this limitation. The new equity plan is designed to permit the compensation committee to grant awards that qualify as performance-based for purposes of satisfying the conditions of Section 162(m) at such time as the new equity plan becomes subject to Section 162(m).

Section 162(m) requires that, to qualify as performance-based, the compensation must be paid solely on account of the attainment of one or more pre-established, objective performance goals. In the case of compensation attributable to new equity plan awards other than options, the performance goal requirement is deemed satisfied if the vesting of such awards is subject to the achievement of performance goals based on objective business criteria. To establish performance objectives for these awards, the compensation committee will exclusively use business criteria specified in the new equity plan. The performance objectives may be stated either on an absolute or relative basis and may be based on one or more of such business criteria. The business criteria are:

 

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net earnings or net income;

 

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operating earnings;

 

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pre-tax earnings;

 

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earnings per share;

 

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share price, including growth measures and total stockholder return;

 

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earnings before interest and taxes;

 

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earnings before interest, taxes, depreciation and amortization;

 

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sales or revenue growth, whether in general, by type of product or service, or by type of customer;

 

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gross or operating margins;

 

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return measures, including return on assets, capital, investment, equity, sales or revenue;

 

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cash flow, including operating cash flow, free cash flow, cash flow return on equity and cash flow return on investment;

 

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productivity ratios;

 

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expense targets;

 

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market share;

 

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financial ratios as provided in credit agreements of Colfax Corporation and its subsidiaries;

 

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working capital targets;

 

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completion of acquisitions of businesses or companies;

 

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completion of divestitures and asset sales; and

 

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any combination of any of the foregoing business criteria.

The business criteria may be used to measure the performance of our company, any subsidiary or affiliate of our company as a whole or any business unit of our company, any subsidiary or affiliate of our company or any combination thereof, as the compensation committee deems appropriate. The compensation committee also may compare the performance measures listed above against the performance of a group of comparative companies, or a published or special index that the compensation committee, in its sole discretion, deems appropriate. We may use the share price performance measure as compared to various stock market indices. The compensation committee also has the authority to provide for accelerated vesting of any award based on the achievement of performance goals pursuant to the performance measures listed above.

Pension Benefits

Named Executive Officers, other than Dr. Matros

Each of our named executive officers, other than Dr. Matros, participated in the Retirement Plan for Salaried U.S. Employees of Imo Industries, Inc. and Affiliates. This plan was acquired by us in connection with our acquisition of Imo Industries in August 1997 and was subsequently frozen to new participants and benefit accruals in January 1999. At such time, active employees participating in the plan received a benefit enhancement equal to 20% of their respective “base” benefits (as discussed below) as of January 31, 1999. Our board of directors determined to cease participation in the plan because it was determined that our enhanced defined contribution plan, or 401(k) plan, was more aligned with the company’s strategy.

In order to participate in the pension plan, the participating named executive officers were required to be at least 21 years of age or have one year of service with Imo Industries (or its affiliates). Normal retirement age under the plan is age 65. Pursuant to the plan, each officer’s accrued monthly pension benefit is based on the sum of the “base” and “excess” compensation for each year of service under the plan, as follows:

 

Base

  

Excess

1.15% of Final Average Salary    0.65% of Final Average Salary above the Covered Compensation Limit

 

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“Final Average Salary” is defined under the plan to mean the average of the highest five consecutive salaries over the prior 10 year period, with “salary” to be comprised of base salary, bonuses and any overtime pay, subject to annual limitations imposed by Section 401(a)(17) of the Internal Revenue Code. The Covered Compensation Limit is determined by the IRS based on an average of Social Security taxable wage bases for certain years. For 1999 (the year in which the plan was frozen) and prior years, the Covered Compensation limit was $72,600 or less.

There is no provision in the plan for early retirement with unreduced benefits. The plan does provide for early retirement with reduced benefits subject to the executive’s attainment of age 55 and completion of ten years of service. Only Mr. O’Brien is eligible for early retirement under the plan. His early retirement benefits, if he were to elect to retire early, are to be calculated based on the “rule of 75” formula within the pension plan. Pursuant to this formula, participants with age plus years of service totaling at least 75 may retire early with the reduction in benefits split equally between the “base” and “excess” portions of the benefit formula. Thus, for each full year below age 65, there would be a reduction in the “base” benefit of 3% and the “excess” benefit would be reduced based on the applicable early retirement factor. The “early retirement factor,” which is a specific percentage based on the age at which a participant starts to receive benefit payments, reduces the monthly benefit to account for the additional years during which the participant will receive payments.

The normal form of benefits payment pursuant to the pension plan is a single life annuity (or, if married, an actuarially equivalent 50% joint and survivor annuity, which entitles the surviving spouse to continue receiving 50% of the monthly benefit after the participant’s death). The plan also provides for the participating named executive officer to select a single life annuity, a 66 2/3%, 75% or 100% joint and survivor annuity, a 5-, 10-, or 15-year period certain and life annuity (which provides reduced monthly payments for the participant’s life with a guarantee of at least 5, 10 or 15 years of payments, as applicable), or a Social Security adjustment annuity with respect to certain early retirement benefits (which provides increased monthly benefit payments before the participant’s Social Security benefits begin and reduced payments thereafter). No lump sum option is available unless the total value of the accumulated benefit is less than $5,000.

Dr. Matros

Dr. Matros is entitled to participate in a pension plan provided by Allweiler AG. In order to participate in the plan, employees of Allweiler AG must be employed for a qualifying period of 10 years. The pension amount available to each participant under the plan is based on the participant’s years of service and his or her “allowable income.” For purposes of the plan, “allowable income” generally means the monthly average of the participant’s base salary during the last year of service to Allweiler AG. Bonus payments are not included in “allowable income” unless such payments, during the last three years of service of the participant, represented more than 50% of the compensation paid to the participant during the last year of service, in which case “allowable income” means base salary plus 50% of the bonus payments during the last three years of service to Allweiler AG.

The normal monthly pension formula under the plan is 0.17% of the allowable retirement income multiplied by the allowable years of service for each participant. However, for executives such as Dr. Matros, the amount of the monthly pension benefit under the plan is 0.6% of the allowable retirement income, but not exceeding the contribution ceiling under the German statutory pension insurance, multiplied by the allowable years of service, with a minimum of €255.65 per month.

The normal retirement age under the German pension plan is age 63. Early retirement is permissible under the plan; provided, however, that the monthly pension amount is to be reduced by 0.5% for each month remaining until the participant attained age 63, up to a maximum reduction of 12%. All pension amounts under the plan are paid monthly.

Disability pension are permissible under the plan in the event a participant becomes “totally occupationally disabled,” as such term is defined under Section 43 of the German Social Security Code VI.

 

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Disability pensions are only granted upon application in writing by the participant. Upon death of a participant, his or her spouse is generally entitled to receive a pension amount equal to 60% of the pension that the participant would have received at the time of death or that the participant would have received upon disability. In addition, the participant’s children, generally under the age of 18, are entitled to receive a pension amount equal to 20% (or 30%, if no spousal pension is paid) of the pension that the participant would have received at the time of death or that the participant would have received upon disability; provided, however, the aggregate spousal and children pensions cannot exceed the participant’s aggregate pension on which they are based.

 

Name

 

Plan Name(1)

  Number of Years Credited
Service(#)(2)
  Present Value of
Accumulated Benefit
($)(3)
  Payments During Last Fiscal
Year($)

John A. Young

  Retirement Plan for Salaried U.S. Employees of IMO Industries, Inc. and Affiliates   1   12,780  

G. Scott Faison

  Retirement Plan for Salaried U.S. Employees of IMO Industries, Inc. and Affiliates   1   10,475  

Michael Dwyer

  Retirement Plan for Salaried U.S. Employees of IMO Industries, Inc. and Affiliates   1   10,395  

Thomas M. O’Brien

  Retirement Plan for Salaried U.S. Employees of IMO Industries, Inc. and Affiliates   14   301,664  

Dr. Michael Matros

  Allweiler AG Company Pension Plan   11   38,412  

 

(1)   The Retirement Plan for Salaried U.S. Employees of Imo Industries, Inc. and Affiliates was frozen to new participants or benefit accruals in January 1999.
(2)   Represents the number of years of credited service for each applicable named executive officer under the applicable plan, computed as of the same pension plan measurement date used for financial statement reporting purposes with respect to our 2007 financial statements. The number of years of credited service represents each officer’s actual years of credited service.
(3)   Amounts represent the actuarial present value of each named executive officer’s accumulated benefit under the applicable plan, computed as of the date used for financial statement reporting purposes with respect to our 2007 financial statements and assuming the normal retirement age as set forth in the plan, or age 65 (for each officer other than Dr. Matros) and 63 (for Dr. Matros), respectively. For a discussion of the assumptions used to determine the accumulated present value, see Note 11 to our 2007 audited financial statements.

Nonqualified Deferred Compensation

In 2005, we established the Colfax Corporation Excess Benefit Plan to provide certain senior-level employees, including each of the named executive officers other than Dr. Matros, with an opportunity to defer a stated percentage of their base compensation or their annual bonus compensation without regard to the compensation limits imposed by the Internal Revenue Code for our 401(k) plan. We established the Excess Benefit Plan to allow our senior-level executives to contribute toward retirement on a tax-effective basis in a manner that is consistent with other Colfax employees who are not limited by the Internal Revenue Code limits. The plan is “unfunded,” meaning there is no asset segregated for the exclusive benefit of the named executive officers.

 

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The Excess Benefit Plan allows the named executive officers to defer up to 50% of their base salaries and up to 50% of their bonus compensation. These deferral limits are the same as that of other employees who participate in our qualified 401(k) plan. In addition, we match up to 3% of all excess deferrals by the named executive officers and provide a 3% company contribution, each of which are the same percentage match and contribution, respectively, as provided under the 401(k) plan. Each of the participating named executive officers is fully vested in his deferral account, including company match contributions.

Deferrals under the Excess Benefit Plan may be invested in 13 different equity and fixed income reference investment funds which are selected periodically by the plan trustee to best match the funds offered in the qualified 401(k) plan. Each participating named executive officer can allocate his deferrals among these fund investment options and may change his election at any time by making a change of election with the plan administrator. Colfax invests its match and contribution amounts in the same investment options in the same amounts and allocations as the reference funds selected by the officer.

Simultaneously with the officer’s election to participate in the Excess Benefit Plan, the executive must elect the time of payment of his account balance upon termination of service. Because each of the named executive officers are likely “key employees” for purposes of Section 409A of the Internal Revenue Code, the executive is generally permitted to choose either (i) the last day of the month in which the six-month anniversary of termination occurs, or (ii) the later of January 31 of any of the five calendar years following the year of termination and the last day of the month in which the six-month anniversary of termination occurs. If no election is made, the benefit will be paid in a lump sum on the last day of the month which occurs six months after the executive’s termination date.

In addition, at the time of electing his timing of payment, the executive must also elect the form of payment of his account balance. The executive may select a lump sum payment or annual installments over a period of two to ten years. If no form of payment election is made, the form of payment will be a lump sum. The named executive officer may elect to change his timing or form of payment, provided, generally, that (i) the election may not take effect until 12 months after the election, (ii) the election may not be made less than 12 months prior to the date of the first scheduled payment under the current election and (iii) the first payment with respect to the subsequent election is deferred for a period of not less than five years from the date such payment would otherwise have been made.

Upon death or disability, the executive (or his beneficiary) is to be paid a lump sum payment equal to the executive’s account balance within 60 days after the year of death or the last day of the month in which the six-month anniversary of the executive’s disability occurs, respectively.

Notwithstanding the above, in the event the executive’s account balance at the time of his termination is less than $10,000, payment of the account balance upon termination will be made in a lump sum on or before the later of (i) December 31 of the calendar year of termination, or (ii) the date 2.5 months after the executive’s termination from service.

 

Name

  Executive
Contributions in Last
FY($)(1)
  Registrant
Contributions in Last
FY($)(2)
  Aggregate Earnings
in Last FY($)
  Aggregate
Withdrawals/
Distributions($)
  Aggregate Balance
at Last
FYE($)(3)

John A. Young

  21,199   23,199   4,698   —     90,563

G. Scott Faison

  5,388   5,388   374   —     18,357

Michael Dwyer

  2,650   5,099   503   —     14,150

Thomas M. O’Brien

  1,240   8,240   23   —     17,695

Dr. Michael Matros

  —     —     —     —     —  

 

(1)   With respect to each applicable named executive officer, amounts represent deferred salary that are reported in the “Salary” column of the Summary Compensation Table above.

 

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(2)   All amounts reported in this column for each applicable named executive officer are reported in the “All Other Compensation” column of the Summary Compensation Table above.
(3)   With respect to each applicable named applicable executive officer’s aggregate balance, the following amounts are reported in the Summary Compensation Table above: $44,398, Mr. Young; $10,776, Mr. Faison; $7,749, Mr. Dwyer; and $9,480, Mr. O’Brien.

Potential Payments Upon Termination or Change in Control

2001 and 2006 Plans.     For a general description of our 2001 Plan and 2006 Plan, including why our board of directors implemented such plans and the determination of each executive’s “percentage interest”, see the “Compensation Discussion and Analysis—Long-Term Cash Incentives” above.

2001 Plan.    Pursuant to the 2001 Plan, upon the consummation of this offering, each named executive officer, other than Dr. Matros, is entitled to receive a bonus payment, in cash or equity as determined by the board, equal to (i) the “net enterprise value” of Colfax as of the date of this offering, multiplied by (ii) the executive’s percentage interest.

In accordance with the terms of the 2001 Plan, the board has determined that the bonuses to be paid to each participating named executive officer upon the consummation of this offering will be paid both in restricted stock units and in cash.

The number of restricted stock units to be received by each participating named executive officer, assuming an initial offering price of $16.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, upon the consummation of this offering is estimated to be as follows:

 

Mr. Young

   77,446

Mr. Faison

   38,723

Mr. Dwyer

   30,979

Mr. O’Brien

   46,468

The cash amount payable to each participating named executive officer under the plan, assuming an initial offering price of $16.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, upon the consummation of this offering is estimated to be as follows:

 

Mr. Young

   $ 1,239,136

Mr. Faison

   $ 619,568

Mr. Dwyer

   $ 495,654

Mr. O’Brien

   $ 743,481

The 2001 Plan will terminate as a consequence of this offering.

2006 Plan.    Pursuant to the 2006 Plan, upon the consummation of this offering, each named executive officer will be entitled to receive a cash bonus payment equal to (i) the “stock appreciation pool” as of the date of the realization event, multiplied by (ii) the executive’s percentage interest. The “stock appreciation pool” is generally defined as the increase in the estimated or actual value of the common equity held by Colfax stockholders as of the offering, over the initial estimated value attributable to the common equity held by Colfax stockholders as of the date of grant, as determined in the sole discretion of the board of directors.

 

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Pursuant to the 2006 Plan, the amount payable to each named executive officer under the plan, assuming an initial offering price of $16.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, upon the consummation of this offering is estimated to be as follows:

 

Mr. Young

   $ 2,608,174

Mr. Faison

   $ 1,304,087

Mr. Dwyer

   $ 1,304,087