Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 29, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission file number - 001-34045
Colfax Corporation
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
54-1887631
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
420 National Business Parkway, 5th Floor Annapolis Junction, Maryland
 
20701
(Address of principal executive offices)
 
(Zip Code)
 
(301) 323-9000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   þ   No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   þ  No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ     Accelerated filer ¨        Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨    Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
As of September 29, 2017, there were 123,115,844 shares of the registrant’s common stock, par value $.001 per share, outstanding.

1


TABLE OF CONTENTS

 
Page
PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
            Condensed Consolidated Statements of Income
            Condensed Consolidated Statements of Comprehensive Income (Loss)
            Condensed Consolidated Balance Sheets
            Condensed Consolidated Statement of Equity
            Condensed Consolidated Statements of Cash Flows
            Notes to Condensed Consolidated Financial Statements
                 Note 1. General
                 Note 2. Recently Issued Accounting Pronouncements
                 Note 3. Discontinued Operations
                 Note 4. Acquisitions
                 Note 5. Net Income Per Share
                 Note 6. Income Taxes
                 Note 7. Equity
                 Note 8. Inventories, Net
                 Note 9. Debt
                 Note 10. Accrued Liabilities
                 Note 11. Net Periodic Benefit Cost - Defined Benefit Plans
                 Note 12. Financial Instruments and Fair Value Measurements
                 Note 13. Commitments and Contingencies
                 Note 14. Segment Information
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
 
 
PART II - OTHER INFORMATION
 
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
 
 
SIGNATURES


1


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements


COLFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Dollars in thousands, except per share amounts
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 29, 2017
 
September 30, 2016
 
September 29, 2017
 
September 30, 2016
 
 
 
 
 
 
 
 
Net sales
$
844,509

 
$
766,521

 
$
2,426,101

 
$
2,373,345

Cost of sales
580,610

 
528,207

 
1,664,309

 
1,630,953

Gross profit
263,899

 
238,314

 
761,792

 
742,392

Selling, general and administrative expense
181,835

 
167,851

 
533,550

 
526,972

Restructuring and other related charges
7,298

 
11,752

 
23,131

 
37,998

Operating income
74,766

 
58,711

 
205,111

 
177,422

Interest expense
11,328

 
6,892

 
29,106

 
24,988

Income from continuing operations before income taxes
63,438

 
51,819

 
176,005

 
152,434

Provision for income taxes
13,816

 
11,271

 
46,128

 
40,852

Net income from continuing operations
49,622

 
40,548

 
129,877

 
111,582

Income (loss) from discontinued operations, net of taxes
2,082

 
(8,349
)
 
21,790

 
(9,210
)
Net income
51,704

 
32,199

 
151,667

 
102,372

Less: income attributable to noncontrolling interest, net of taxes
5,841

 
4,229

 
13,867

 
12,033

Net income attributable to Colfax Corporation
$
45,863

 
$
27,970

 
$
137,800

 
$
90,339

Net income (loss) per share - basic
 
 
 
 
 
 
 
Continuing operations
$
0.36

 
$
0.30

 
$
0.94

 
$
0.81

Discontinued operations
$
0.01

 
$
(0.07
)
 
$
0.18

 
$
(0.08
)
Consolidated operations
$
0.37

 
$
0.23

 
$
1.12

 
$
0.73

Net income (loss) per share - diluted
 
 
 
 
 
 
 
Continuing operations
$
0.35

 
$
0.30

 
$
0.94

 
$
0.81

Discontinued operations
$
0.02

 
$
(0.07
)
 
$
0.17

 
$
(0.08
)
Consolidated operations
$
0.37

 
$
0.23

 
$
1.11

 
$
0.73



See Notes to Condensed Consolidated Financial Statements.


2


COLFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Dollars in thousands
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 29, 2017
 
September 30, 2016
 
September 29, 2017
 
September 30, 2016
Net income
$
51,704

 
$
32,199

 
$
151,667

 
$
102,372

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation, net of tax of $(551), $462, $(1,633) and $2,898
89,771

 
(31,679
)
 
257,682

 
(185,743
)
Unrealized gain (loss) on hedging activities, net of tax of $(6,249), $(12,108), $(14,872) and $(13,807)
(7,755
)
 
9,146

 
(22,108
)
 
3,826

Amounts reclassified from Accumulated other comprehensive loss:
 
 
 
 
 
 
 
Amortization of pension and other post-retirement net actuarial loss, net of tax of $722, $454, $2,658 and $1,908
2,466

 
827

 
5,102

 
3,459

Amortization of pension and other post-retirement prior service cost, net of tax of $24, $22, $71 and $66
38

 
44

 
115

 
120

Foreign currency translation adjustment resulting from Venezuela deconsolidation

 
2,378

 

 
2,378

Other comprehensive income (loss)
84,520

 
(19,284
)
 
240,791

 
(175,960
)
Comprehensive income (loss)
136,224

 
12,915

 
392,458

 
(73,588
)
Less: comprehensive income attributable to noncontrolling interest
5,041

 
7,940

 
20,085

 
16,968

Comprehensive income (loss) attributable to Colfax Corporation
$
131,183

 
$
4,975

 
$
372,373

 
$
(90,556
)


See Notes to Condensed Consolidated Financial Statements.


3


COLFAX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
Dollars in thousands, except share amounts
(Unaudited)

 
September 29, 2017
 
December 31, 2016
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
260,414

 
$
208,814

Trade receivables, less allowance for doubtful accounts of $30,042 and $29,005
957,215

 
838,796

Inventories, net
414,556

 
364,972

Other current assets
188,221

 
175,721

Current portion of assets held for sale
494,463

 
150,275

Total current assets
2,314,869

 
1,738,578

Property, plant and equipment, net
512,561

 
537,740

Goodwill
2,527,141

 
2,350,996

Intangible assets, net
935,804

 
884,038

Other assets
547,941

 
520,031

Assets held for sale, less current portion

 
307,057

Total assets
$
6,838,316

 
$
6,338,440

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Current portion of long-term debt
$
5,861

 
$
5,406

Accounts payable
543,725

 
515,520

Customer advances and billings in excess of costs incurred
129,893

 
140,220

Accrued liabilities
336,744

 
311,326

Current portion of liabilities held for sale
272,407

 
87,183

Total current liabilities
1,288,630

 
1,059,655

Long-term debt, less current portion
1,334,627

 
1,286,738

Other liabilities
701,261

 
732,729

Liabilities held for sale, less current portion

 
165,974

Total liabilities
3,324,518

 
3,245,096

Equity:
 
 
 
Common stock, $0.001 par value; 400,000,000 shares authorized; 123,115,844 and 122,780,261 issued and outstanding
123

 
123

Additional paid-in capital
3,220,073

 
3,199,682

Retained earnings
833,200

 
685,411

Accumulated other comprehensive loss
(753,772
)
 
(988,345
)
Total Colfax Corporation equity
3,299,624

 
2,896,871

Noncontrolling interest
214,174

 
196,473

Total equity
3,513,798

 
3,093,344

Total liabilities and equity
$
6,838,316

 
$
6,338,440



See Notes to Condensed Consolidated Financial Statements.


4


COLFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
Dollars in thousands, except share amounts and as noted
(Unaudited)

 
Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Noncontrolling Interest
Total
 
Shares
$ Amount
Balance at January 1, 2017
122,780,261

$
123

$
3,199,682

$
685,411

$
(988,345
)
$
196,473

$
3,093,344

Cumulative effect of accounting change



9,989



9,989

Net income



137,800


13,867

151,667

Distributions to noncontrolling owners





(2,384
)
(2,384
)
Other comprehensive income, net of tax of $(13.8) million




234,573

6,218

240,791

Common stock-based award activity
335,583


20,391




20,391

Balance at September 29, 2017
123,115,844

$
123

$
3,220,073

$
833,200

$
(753,772
)
$
214,174

$
3,513,798



See Notes to Condensed Consolidated Financial Statements.


5


COLFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands
(Unaudited)

 
Nine Months Ended
 
September 29, 2017
 
September 30, 2016
 
 
 
 
Cash flows from operating activities:
 
 
 
Net Income
$
151,667

 
$
102,372

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization and impairment charges
101,843

 
107,101

Stock-based compensation expense
15,633

 
13,920

Non-cash interest expense
3,340

 
3,126

Deferred income tax benefit
(6,046
)
 
(1,171
)
Gain on sale of facility
(10,557
)
 

Changes in operating assets and liabilities:
 
 
 
Trade receivables, net
(96,472
)
 
(28,341
)
Inventories, net
(38,493
)
 
2,932

Accounts payable
(3,308
)
 
(23,899
)
Customer advances and billings in excess of costs incurred
(18,405
)
 
(48,167
)
Changes in other operating assets and liabilities
15,489

 
(26,019
)
Net cash provided by operating activities
114,691

 
101,854

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of fixed assets, net
(20,650
)
 
(41,671
)
Acquisitions, net of cash received
(56,931
)
 

Net cash used in investing activities
(77,581
)
 
(41,671
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Payments under term credit facility
(46,878
)
 
(28,125
)
Proceeds from borrowings on revolving credit facilities and other
594,159

 
659,469

Repayments of borrowings on revolving credit facilities and other
(911,462
)
 
(676,257
)
Proceeds from borrowings on senior unsecured notes
374,450

 

Proceeds from issuance of common stock, net
4,758

 
413

Repurchases of common stock

 
(20,812
)
Other
(8,851
)
 
(7,830
)
Net cash provided by (used in) financing activities
6,176

 
(73,142
)
 
 
 
 
Effect of foreign exchange rates on Cash and cash equivalents
7,434

 
7,150

Increase (decrease) in Cash and cash equivalents
50,720

 
(5,809
)
Cash and cash equivalents, beginning of period
221,730

 
197,469

Cash and cash equivalents, end of period
$
272,450

 
$
191,660



See Notes to Condensed Consolidated Financial Statements.


6

COLFAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



1. General
 
Colfax Corporation (the “Company” or “Colfax”) is a leading diversified industrial technology company that provides gas and fluid handling and fabrication technology products and services to customers around the world through the Howden, ESAB and Colfax Fluid Handling businesses.

On September 24, 2017 (the “Purchase Agreement Date”), the Company and CIRCOR International, Inc. a Delaware corporation (“CIRCOR” or the “Buyer”) entered into a definitive purchase agreement (the “Purchase Agreement”), pursuant to which CIRCOR has agreed to purchase certain subsidiaries and assets comprising Colfax’s fluid handling business (“Fluid Handling”) for an estimated aggregate consideration of $860 million including cash consideration of $542 million and approximately 3.3 million newly-issued shares of Buyer common stock, and the assumption of certain liabilities, including certain pension liabilities. The estimated aggregate consideration reflects the CIRCOR share price as of the close of trading on September 22, 2017, which may vary based on the trading price for CIRCOR shares on the closing date as well as other purchase price adjustments, including cash on hand. The sale is expected to close during the three months ending December 31, 2017, subject to regulatory approval and other customary closing conditions. Herein, the Company has presented its operations for the Fluid Handling business as discontinued operations in the Company’s Condensed Consolidated Financial Statements. Prior period amounts have been adjusted to present the discontinued operations on a consistent basis. See Note 3, “Discontinued Operations” for further information.

The Condensed Consolidated Financial Statements included in this quarterly report have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements.

The Condensed Consolidated Balance Sheet as of December 31, 2016 is derived from the Company’s audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the SEC’s rules and regulations for interim financial statements. The Condensed Consolidated Financial Statements included herein should be read in conjunction with the audited financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”), filed with the SEC on February 14, 2017.

During the three months ended September 29, 2017, the Company identified specific intercompany amounts within the Fabrication Technology segment that were incorrectly reported in Total assets and Total liabilities of the Consolidated Balance Sheet as of December 31, 2016. As a result, the Company has adjusted its Consolidated Balance Sheet as of December 31, 2016 as presented herein to reduce Other current assets and Accounts payable by $47.0 million. This revision did not have an overall net effect on Net cash provided by operating activities and had no effect on Net income for any prior period. The Company has corrected the issue as of September 29, 2017 in the comparative financial statements and amounts have been eliminated in the Condensed Consolidated Balance Sheet as of this date.

The Condensed Consolidated Financial Statements reflect, in the opinion of management, all adjustments, which except as discussed above, consist solely of normal recurring adjustments, necessary to present fairly the Company’s financial position and results of operations as of and for the periods indicated. Intercompany transactions and accounts are eliminated in consolidation. Certain prior period amounts have been reclassified to conform to current year presentations.

The Company makes certain estimates and assumptions in preparing its Condensed Consolidated Financial Statements in accordance with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from those estimates.

The results of operations for the three and nine months ended September 29, 2017 are not necessarily indicative of the results of operations that may be achieved for the full year. Quarterly results are affected by seasonal variations in the Company’s business. As our gas and fluid handling customers seek to fully utilize capital spending budgets before the end of the year, historically our shipments have peaked during the fourth quarter. Also, our European operations typically experience a slowdown during the July and August and December holiday seasons. General economic conditions may, however, impact future seasonal variations.


7

COLFAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

2. Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The ASU outlines a single set of comprehensive principles for recognizing revenue under U.S. GAAP and supersedes existing revenue recognition guidance. The main principle of the ASU is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company will apply the ASU and its related updates on a full retrospective basis as of January 1, 2018. To evaluate the effect the ASU will have on the Company’s financial statements and related disclosures, the Company developed a comprehensive project plan that included representatives from across the Company’s operating segments. The Company is in the final stages of validating its preliminary conclusion that the adoption of the ASU will not have a material impact on the Consolidated Financial Statements. In addition, the Company is in the process of evaluating the qualitative and quantitative disclosure guidance of the new ASU for possible enhancements to the Company’s financial statements that will enable users to better understand the nature, amount, timing, and uncertainty of revenues and cashflows arising from contracts with customers.

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330) - Simplifying the Measurement of Inventory”. The ASU requires an entity to measure inventory at the lower of cost and net realizable value, except for inventory that is measured using the last-in, first-out method or the retail inventory method. The Company adopted the ASU during the nine months ended September 29, 2017 on a prospective basis.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The ASU requires, among other things, a lessee to recognize assets and liabilities associated with the rights and obligations attributable to most leases but also recognize expenses similar to current lease accounting. The ASU also requires certain qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases, along with additional key information about leasing arrangements. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The new guidance must be adopted using a modified retrospective transition and provides for certain practical expedients. The Company is in the process of analyzing initial data gathered to evaluate the impact of adopting the ASU on its Consolidated Financial Statements, the related systems required to capture the increased reporting and disclosures associated with the ASU, and its use of practical expedients. The Company will apply the ASU and its related updates on a modified retrospective basis as of January 1, 2019.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718)”. The ASU, among other things, aims to simplify shared-based payment accounting by recording all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and eliminates the requirement that excess tax benefits be realized before they can be recognized. The effect for excess tax benefits not previously recognized is recorded as a cumulative adjustment to retained earnings pursuant to a modified retrospective adoption method. Excess tax benefits and deficiencies are accounted for as discrete items in the period the stock awards vest or otherwise are settled. Further, the guidance requires that excess tax benefits be presented as an operating activity on the statement of cash flows consistent with other income tax cash flows. The Company’s adoption of the ASU as of January 1, 2017 resulted in a cumulative catch-up adjustment that increased retained earnings by $10.0 million with a corresponding increase to U.S. deferred tax assets related to prior years’ unrecognized excess tax benefits. The Company has also elected to continue its entity-wide accounting policy to estimate the amount of awards that are expected to vest.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The ASU is effective for fiscal periods beginning after December 15, 2019 and early adoption is permitted. The ASU eliminates the probable initial recognition threshold under current U.S. GAAP and broadens the information an entity must consider when developing its expected credit loss estimates to include forward-looking information. The Company is currently evaluating the impact of adopting the ASU on its Consolidated Financial Statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 203)”. The ASU addresses eight specific cash flow issues and clarifies their presentation and classification in the Statement of Cash Flows. The ASU is effective for fiscal years beginning after December 15, 2017 and is to be applied retrospectively with early adoption permitted. The Company is currently evaluating the impact of adopting the ASU on its Consolidated Financial Statements.

In December 2016, the FASB issued ASU No. 2016-19, “Technical Corrections and Improvements”. Among other things, the ASU provides clarification on the presentation of the costs of computer software developed or obtained for internal use. The Company retrospectively adopted the ASU during the nine months ended September 29, 2017 and reclassified the carrying value

8

COLFAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

of internal-use computer software from Property, plant and equipment, net to Intangible assets, net. The carrying value of internal-use computer software was $27.6 million and $32.3 million, respectively, as of September 29, 2017 and December 31, 2016.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350)”. The ASU modifies the measurement of a goodwill impairment loss from the portion of the carrying amount of goodwill that exceeds its implied fair value to the excess of the carrying amount of a reporting unit that exceeds its fair value. This eliminates step 2 of the goodwill impairment test under current guidance. The ASU will be applied prospectively for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The Company is currently evaluating the timing of adoption.

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”. The ASU amends the current hedge accounting model and eliminates the requirement to separately measure and report hedge ineffectiveness and requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The ASU also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. Companies are required to apply amendments to cash flow and net investment hedge relationship using modified retrospective method and apply prospective method for the presentation and disclosure requirements. The ASU is effective for fiscal periods beginning after December 15, 2018 and early adoption is permitted. The Company is currently evaluating the impact of adopting the ASU on its Consolidated Financial Statements and the timing of adoption.

3. Discontinued Operations

Sale of Fluid Handling Business

As discussed previously in Note 1, “General”, the Company entered into the Purchase Agreement to sell its Fluid Handling business to CIRCOR. The sale is expected to close during the three months ending December 31, 2017, at which time, the Company expects to record a material gain. Included in the gain calculation will be a reduction of the accumulated other comprehensive loss associated with the Fluid Handling business, which was approximately $177 million as of September 29, 2017.

The accounting requirements for reporting the divested business as a discontinued operation were met during the three months ended September 29, 2017. Accordingly, the accompanying Condensed Consolidated Financial Statements for all periods presented reflect the Fluid Handling business as a discontinued operation. The Fluid Handling business had revenues of $343.7 million for the nine months period ended September 29, 2017 and $461.3 million for the year ended December 31, 2016.

In connection with the Purchase Agreement, the Company and the Buyer entered into various agreements to provide a framework for their relationship after the disposition, including a transition services agreement. The amounts to be billed for future transition services under the above agreements is not expected to be material to the Company’s results of operations.


9

COLFAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

The key components of income (loss) from discontinued operations for the three and nine months periods ended September 29, 2017 and September 30, 2016 were as follows:

 
Three Months Ended
 
Nine Month Ended
 
September 29, 2017
 
September 30, 2016
 
September 29, 2017
 
September 30, 2016
 
(In thousands)

Net sales
$
114,524

 
$
112,683

 
$
343,690

 
$
339,951

Cost of sales
77,379

 
75,590

 
224,373

 
225,310

Selling, general and administrative expense(1)
29,353

 
39,876

 
90,308

 
108,696

Divestiture-related expense, net(2)
5,675

 

 
7,275

 

Restructuring and other related items(3)
634

 
5,407

 
(7,628
)
 
11,319

Operating income (loss)
1,483

 
(8,190
)
 
29,362

 
(5,374
)
Interest income(4)
88

 
100

 
353

 
365

Income (loss) from discontinued operations before income taxes
1,571

 
(8,090
)
 
29,715

 
(5,009
)
Income taxes
(511
)
 
259

 
7,925

 
4,201

Income (loss) from discontinued operations, net of taxes
$
2,082

 
$
(8,349
)
 
$
21,790

 
$
(9,210
)
             
(1) Pursuant to the Purchase Agreement, the Company will retain its asbestos-related contingencies and insurance coverages. However, as the Company will not retain an interest in the ongoing operations of the business subject to the contingencies, the Company has classified asbestos-related activity in its Condensed Consolidated Statements of Operations as part of Income (loss) from discontinuing operations. See Note 13, “Commitments and Contingencies” for further information.
(2) Primarily related to professional and consulting fees associated with due diligence and preparation of regulatory filings, as well as employee benefit arrangements and other disposition-related activities.
(3) During the nine months ended September 29, 2017, the Company recorded a gain of approximately $12 million from the sale of a facility that was previously closed as part of restructuring activities.
(4) Interest expense has not been allocated to the discontinued operations.


10

COLFAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

The following table summarizes the major classes of assets and liabilities held for sale that were included in the Company’s Condensed Consolidated Balance Sheets as of September 29, 2017 and December 31, 2016:
 
September 29, 2017
 
December 31, 2016
 
(In thousands)
ASSETS HELD FOR SALE
 
 
 
Cash and cash equivalents
$
12,036

 
$
12,916

Trade receivables, less allowance for doubtful accounts of $11,245 and $12,506
73,864

 
74,818

Inventories, net
53,283

 
38,885

Other current assets
24,459

 
23,656

Property, plant, and equipment, net
73,907

 
66,474

Goodwill
222,422

 
212,330

Intangible assets, net
14,516

 
15,302

Other assets
19,976

 
12,951

Total assets held for sale
494,463

 
457,332

Less: current portion
494,463

 
150,275

Assets held for sale, less current portion
$

 
$
307,057

 
 
 
 
LIABILITIES HELD FOR SALE
 
 
 
Accounts payable
$
46,064

 
$
43,356

Customer advances and billings in excess of costs incurred
12,773

 
10,795

Accrued liabilities
34,442

 
33,032

Other Liabilities
179,128

 
165,974

Total liabilities held for sale
272,407

 
253,157

Less: current portion
272,407

 
87,183

Liabilities held for sale, less current portion
$

 
$
165,974


Cash provided by operating activities of discontinued operations for the nine months ended September 29, 2017 was $33.9 million. Cash used in operating activities of discontinued operations for the nine months ended September 30, 2016 was $7.3 million. Cash used in investing activities of discontinued operations was $6.0 million and $2.6 million for the nine months ended September 29, 2017 and nine months ended September 30, 2016, respectively.

4. Acquisitions

During the nine months ended September 29, 2017, the Company completed three acquisitions for net cash consideration of approximately $58 million, subject to certain purchase price adjustments. Two of the acquisitions will complement the Fabrication Technology segment and the third the Air and Gas Handling reporting segment.

On October 2, 2017, the Company acquired Siemens Turbomachinery Equipment GmbH (STE) from Siemens AG, for cash consideration of approximately €193 million, subject to purchase price adjustments. The acquisition will be integrated into the Air and Gas Handling reporting segment, broadening the segment’s range of compression solutions and expanding its product offering into smaller steam turbines. For the twelve months ended September 2017, STE had revenues of approximately €145 million.


11

COLFAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

5. Net Income Per Share from Continuing Operations

Net income per share from continuing operations was computed as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2017
 
September 30, 2016
 
September 29, 2017
 
September 30, 2016
 
(In thousands, except share data)
Computation of Net income per share from continuing operations - basic:
 
 
 
 
 
 
 
Net income from continuing operations attributable to Colfax Corporation (1)
$
43,781

 
$
36,319

 
$
116,010

 
$
99,549

Weighted-average shares of Common stock outstanding - basic
123,260,978

 
122,836,762

 
123,187,447

 
122,918,259

Net income per share from continuing operations - basic
$
0.36

 
$
0.30

 
$
0.94

 
$
0.81

Computation of Net income per share from continuing operations - diluted:
 
 
 
 
 
 
 
Net income from continuing operations attributable to Colfax Corporation (1)
$
43,781

 
$
36,319

 
$
116,010

 
$
99,549

Weighted-average shares of Common stock outstanding - basic
123,260,978

 
122,836,762

 
123,187,447

 
122,918,259

Net effect of potentially dilutive securities - stock options and restricted stock units
819,826

 
265,452

 
760,315

 
211,540

Weighted-average shares of Common stock outstanding - diluted
124,080,804

 
123,102,214

 
123,947,762

 
123,129,799

Net income per share from continuing operations - diluted
$
0.35

 
$
0.30

 
$
0.94

 
$
0.81

              
(1) Net income from continuing operations attributable to Colfax Corporation for the respective periods is calculated using Net income from continuing operations less the income attributable to noncontrolling interest, net of taxes.

The weighted-average computation of the dilutive effect of potentially issuable shares of Common stock under the treasury stock method for the three months ended September 29, 2017 and September 30, 2016 excludes approximately 2.8 million and 5.2 million of outstanding stock-based compensation awards, respectively, as their inclusion would be anti-dilutive. The weighted-average computation of the dilutive effect of potentially issuable shares of Common stock under the treasury stock method for the nine months ended September 29, 2017 and September 30, 2016 excludes approximately 2.8 million and 5.1 million of outstanding stock-based compensation awards, respectively, as their inclusion would be anti-dilutive.
 
6. Income Taxes

During the three and nine months ended September 29, 2017, Income from continuing operations before income taxes was $63.4 million and $176.0 million, respectively, while the Provision for income taxes was $13.8 million and $46.1 million, respectively. The effective tax rates were 21.8% and 26.2% for the three and nine months ended September 29, 2017, respectively. The effective tax rates differ from the U.S. federal statutory rate primarily due to international taxes, which are lower than the U.S. tax rate, offset in part by losses in certain jurisdictions where a tax benefit is not expected to be recognized in 2017. The provision for income taxes for the three and nine months ended September 29, 2017 includes $1.6 million and $2.3 million of discrete tax benefits, respectively.

During the three and nine months ended September 30, 2016, Income from continuing operations before income taxes was $51.8 million and $152.4 million, respectively, while the Provision for income taxes was $11.3 million and $40.9 million, respectively. The effective tax rates were 21.8% and 26.8% for the three and nine months ended September 30, 2016, respectively. The effective tax rate differs from the U.S. federal statutory rate primarily due to international tax rates, which are lower than the U.S. tax rate, offset in part by losses in certain jurisdictions where a tax benefit was not expected to be recognized in 2016.


12

COLFAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

7. Equity

Accumulated Other Comprehensive Loss

The following tables present the changes in the balances of each component of Accumulated other comprehensive loss including reclassifications out of Accumulated other comprehensive loss for the nine months ended September 29, 2017 and September 30, 2016. All amounts are net of tax and noncontrolling interest.
 
Accumulated Other Comprehensive Loss Components
 
Net Unrecognized Pension and Other Post-Retirement Benefit Cost
 
Foreign Currency Translation Adjustment
 
Unrealized Gain on Hedging Activities
 
Total
 
(In thousands)
Balance at January 1, 2017
$
(181,189
)
 
$
(860,789
)
 
$
53,633

 
$
(988,345
)
Other comprehensive (loss) income before reclassifications:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(5,414
)
 
284,681

 
117

 
279,384

Loss on long-term intra-entity foreign currency transactions

 
(27,855
)
 

 
(27,855
)
Loss on net investment hedges

 

 
(27,737
)
 
(27,737
)
Unrealized gain on cash flow hedges

 

 
5,551

 
5,551

Other comprehensive (loss) income before reclassifications
(5,414
)
 
256,826

 
(22,069
)
 
229,343

Amounts reclassified from Accumulated other comprehensive loss (1)
5,230

 

 

 
5,230

Net Other comprehensive (loss) income
(184
)
 
256,826

 
(22,069
)
 
234,573

Balance at September 29, 2017
$
(181,373
)
 
$
(603,963
)
 
$
31,564

 
$
(753,772
)

13

COLFAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


 
Accumulated Other Comprehensive Loss Components
 
Net Unrecognized Pension and Other Post-Retirement Benefit Cost
 
Foreign Currency Translation Adjustment
 
Unrealized Gain on Hedging Activities
 
Total
 
(In thousands)
Balance at January 1, 2016
$
(193,258
)
 
$
(528,620
)
 
$
35,163

 
$
(686,715
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
Foreign currency translation adjustment
370

 
(161,436
)
 
758

 
(160,308
)
Loss on long-term intra-entity foreign currency transactions

 
(30,353
)
 

 
(30,353
)
Loss on net investment hedges

 

 
3,482

 
3,482

Unrealized gain on cash flow hedges

 

 
327

 
327

Other comprehensive income (loss) before reclassifications
370

 
(191,789
)
 
4,567

 
(186,852
)
Amounts reclassified from Accumulated other comprehensive loss (1) (2)
3,579

 
2,378

 

 
5,957

Net Other comprehensive income (loss)
3,949

 
(189,411
)
 
4,567

 
(180,895
)
Balance at September 30, 2016
$
(189,309
)
 
$
(718,031
)
 
$
39,730

 
$
(867,610
)
 
(1) Included in the computation of net periodic benefit cost. See Note 10, “Net Periodic Benefit Cost - Defined Benefit Plans” for additional details.
(2) Represents foreign currency translation charges reclassified as a result of the deconsolidation of the Company’s Venezuelan operations which are included in Selling, general and administrative expense for the three and nine months ended September 30, 2016.

During the nine months ended September 29, 2017 and September 30, 2016, Noncontrolling interest increased by $6.2 million and $4.9 million, respectively, as a result of Other comprehensive income, primarily due to foreign currency translation adjustments.

14

COLFAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

8. Inventories, Net

Inventories, net consisted of the following:
 
September 29, 2017
 
December 31, 2016
 
(In thousands)
Raw materials
$
132,599

 
$
121,886

Work in process
55,702

 
55,845

Finished goods
261,270

 
221,866

 
449,571

 
399,597

Less: allowance for excess, slow-moving and obsolete inventory
(35,015
)
 
(34,625
)
Inventories, net
$
414,556

 
$
364,972


9. Debt

Long-term debt consisted of the following:
 
September 29, 2017
 
December 31, 2016
 
(In thousands)
Senior unsecured notes
$
408,142

 
$

Term loans
633,249

 
678,286

Trade receivables financing arrangement
52,289

 
63,399

Revolving credit facilities and other
246,808

 
550,459

Total Debt
1,340,488

 
1,292,144

Less: current portion
(5,861
)
 
(5,406
)
Long-term debt
$
1,334,627

 
$
1,286,738

    
The Company is party to a credit agreement by and among the Company, as the borrower, certain U.S. subsidiaries of the Company identified therein, as guarantors, each of the lenders party thereto and Deutsche Bank AG New York Branch, as administrative agent, swing line lender and global coordinator (the “DB Credit Agreement”). As of September 29, 2017, the weighted-average interest rate of borrowings under the DB Credit Agreement was 2.74%, excluding accretion of original issue discount and deferred financing fees, and there was $1.1 billion available on the revolving credit facility.

On April 19, 2017, the Company issued senior unsecured notes with an aggregate principal amount of €350 million (the “Euro Notes”). The Euro Notes are due in April 2025 and have an interest rate of 3.25%. The proceeds from the Euro Notes offering were used to repay borrowings under the DB Credit Agreement and bilateral credit facilities totaling €283.5 million, as well as for general corporate purposes, and are guaranteed by certain of the Company’s domestic subsidiaries (the "Guarantees"). In conjunction with the issuance, the Company recorded $6.0 million of deferred financing fees. The Euro Notes and the Guarantees have not been, and will not be, registered under the Securities Act of 1933, as amended (the "Securities Act"), or the securities laws of any other jurisdiction.

As of September 29, 2017, the Company had an original issue discount of $4.3 million and deferred financing fees of $9.8 million included in its Condensed Consolidated Balance Sheet, which will be accreted to Interest expense, primarily using the effective interest method, over the life of the applicable debt agreements.

In addition to the debt agreements discussed above, the Company is party to various bilateral credit facilities with a borrowing capacity of $216.3 million. As of September 29, 2017, outstanding borrowings under these facilities total $16 million, with a weighted average borrowing rate of 2.18%.

The Company is also party to letter of credit facilities with total capacity of $813.3 million. Total letters of credit of $416 million were outstanding as of September 29, 2017.

The Company is party to a receivables financing facility through a wholly-owned, special purpose bankruptcy-remote subsidiary which purchases trade receivables from certain of the Company’s subsidiaries on an ongoing basis and pledges them to support its obligation as borrower under the receivables financing facility. This special purpose subsidiary has a separate legal

15

COLFAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

existence from its parent and its assets are not available to satisfy the claims of creditors of the selling subsidiaries or any other member of the consolidated group. Availability of funds may fluctuate over time given changes in eligible receivable balances, but will not exceed the program limit, which is $80 million as of September 29, 2017. As of September 29, 2017, the total outstanding borrowings under the receivables financing facility were $52.3 million and the interest rate was 2.03%. The scheduled termination date for the receivables financing facility is December 19, 2017 and may be extended from time to time.

As of September 29, 2017, the Company is in compliance with the covenants under the DB Credit Agreement.

10. Accrued Liabilities

Accrued liabilities in the Condensed Consolidated Balance Sheets consisted of the following:

 
September 29, 2017
 
December 31, 2016
 
(In thousands)
Accrued payroll
$
94,469

 
$
87,045

Accrued taxes
44,632

 
35,429

Accrued asbestos-related liability
53,637

 
51,166

Warranty liability - current portion
27,649

 
29,233

Accrued restructuring liability - current portion
3,549

 
10,783

Accrued third-party commissions
15,843

 
10,432

Other
96,965

 
87,238

Accrued liabilities
$
336,744

 
$
311,326


Warranty Liability
 
The activity in the Company’s warranty liability consisted of the following:
 
Nine Months Ended
 
September 29, 2017
 
September 30, 2016
 
(In thousands)
Warranty liability, beginning of period
$
30,222

 
$
35,634

Accrued warranty expense
12,845

 
17,368

Changes in estimates related to pre-existing warranties
850

 
4,701

Cost of warranty service work performed
(17,634
)
 
(27,429
)
Acquisitions
13

 
304

Foreign exchange translation effect
1,616

 
(356
)
Warranty liability, end of period
$
27,912

 
$
30,222



16

COLFAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Accrued Restructuring Liability

The Company’s restructuring programs include a series of actions to reduce the structural costs of the Company. A summary of the activity in the Company’s restructuring liability included in Accrued liabilities and Other liabilities in the Condensed Consolidated Balance Sheets is as follows:
 
Nine Months Ended September 29, 2017
 
Balance at Beginning of Period
 
Provisions
 
Payments
 
Foreign Currency Translation
 
Balance at End of Period(3)
 
(In thousands)
Restructuring and other related charges:
 
 
 
 
 
 
 
 
 
Air and Gas Handling:
 
 
 
 
 
 
 
 
 
Termination benefits(1)
$
4,855

 
$
6,570

 
$
(9,084
)
 
$
318

 
$
2,659

Facility closure costs(2)
1,234

 
2,715

 
(3,938
)
 
(7
)
 
4

 
6,089

 
9,285

 
(13,022
)
 
311

 
2,663

Fabrication Technology:
 
 
 
 
 
 
 
 
 
Termination benefits(1)
3,712

 
4,396

 
(7,360
)
 
94

 
842

Facility closure costs(2)
981

 
5,184

 
(6,135
)
 
14

 
44

 
4,693

 
9,580

 
(13,495
)
 
108

 
886

Non-cash charges(2)
 
 
4,266

 
 
 
 
 
 
 
 
 
13,846

 
 
 
 
 
 
Corporate and Other:
 
 
 
 
 
 
 
 
 
Facility closure costs(2)
203

 

 
(148
)
 
13

 
68

 
203

 

 
(148
)
 
13

 
68

 
$
10,985

 
18,865

 
$
(26,665
)
 
$
432

 
$
3,617

Non-cash charges(2)
 
 
4,266

 
 
 
 
 
 
 
 
 
$
23,131

 
 
 
 
 
 
 
(1) Includes severance and other termination benefits, including outplacement services. The Company recognizes the cost of involuntary termination benefits at the communication date or ratably over any remaining expected future service period. Voluntary termination benefits are recognized as a liability and an expense when employees accept the offer and the amount can be reasonably estimated.
(2) Includes the cost of relocating associates, relocating equipment and lease termination expense in connection with the closure of facilities. During the nine months ended September 29, 2017, the Company recorded a $4 million non-cash impairment charge for a facility in our Fabrication Technology segment, that was previously closed as part of restructuring activities.
(3) As of September 29, 2017, $3.5 million and $0.1 million of the Company’s restructuring liability was included in Accrued liabilities and Other liabilities, respectively.

On the closing date of the sale of the Fluid Handling business, the Company will transfer all restructuring obligations of the Fluid Handling business to the Buyer, which totaled $2.3 million as of September 29, 2017 and are included in Current liabilities held for sale in the Condensed Consolidated Balance Sheets. See Note 3 - “Discontinued Operations” for further information.

The Company expects to incur charges of approximately $22 million during the remainder of 2017 related to its restructuring activities, $3 million of which is expected to be included in discontinued operations.


17

COLFAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

11. Net Periodic Benefit Cost - Defined Benefit Plans

In connection with the planned sale of the Fluid Handling business, the Buyer will assume the liability for all foreign defined benefit plans, a portion of the U.S. defined benefit plan, and certain other postretirement obligations. As of September 29, 2017, the net pension and other postretirement plan liabilities that are held for sale to the Buyer totaled $170.7 million and are classified within the Current liabilities held for sale caption of the Condensed Consolidated Balance Sheet. Net benefit cost for the Fluid Handling business is included in Net income (loss) from discontinued operations, net of taxes, within the Condensed Consolidated Statements of Income. See Note 3, “Discontinued Operations” for further information.

The following table sets forth the components of total net periodic benefit cost (income) of the Company’s defined benefit pension plans and other post-retirement employee benefit plans:
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2017
 
September 30, 2016
 
September 29, 2017
 
September 30, 2016
 
(In thousands)
Pension Benefits - U.S. Plans:
 
 
 
 
 
 
 
     Service cost
$
46

 
$
48

 
$
139

 
$
144

     Interest cost
3,892

 
4,352

 
11,637

 
13,057

     Expected return on plan assets
(5,340
)
 
(6,121
)
 
(16,019
)
 
(18,362
)
     Amortization
1,623

 
1,612

 
4,860

 
4,846

Net periodic benefit cost (income)
$
221

 
$
(109
)
 
$
617

 
$
(315
)
 
 
 
 
 
 
 
 
 Pension Benefits - Non-U.S. Plans:
 
 
 
 
 
 
 
     Service cost
$
409

 
$
821

 
$
2,407

 
$
2,512

     Interest cost
6,358

 
7,287

 
19,537

 
24,447

     Expected return on plan assets
(6,994
)
 
(6,604
)
 
(20,404
)
 
(22,804
)
     Amortization
1,728

 
417

 
3,401

 
1,261

Net periodic benefit cost
$
1,501

 
$
1,921

 
$
4,941

 
$
5,416

 
 
 
 
 
 
 
 
Other Post-Retirement Benefits:
 
 
 
 
 
 
 
     Service cost
$
10

 
$
(2
)
 
$
31

 
$
29

     Interest cost
243

 
154

 
728

 
779

     Amortization
(101
)
 
(682
)
 
(301
)
 
(554
)
Net periodic benefit cost
$
152

 
$
(530
)
 
$
458

 
$
254


Net periodic benefit cost of $2 million and $4.3 million for the three and nine months ended September 29, 2017, respectively, and $1.0 million and $4.0 million for the three and nine months ended September 30, 2016, respectively, are included in Income (loss) from discontinued operations.

18

COLFAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

12. Financial Instruments and Fair Value Measurements

The carrying values of financial instruments, including Trade receivables and Accounts payable, approximate their fair values due to their short-term maturities. The $1.3 billion estimated fair value of the Company’s debt as of September 29, 2017 and December 31, 2016, was based on current interest rates for similar types of borrowings and is in Level Two of the fair value hierarchy. The estimated fair values may not represent actual values of the financial instruments that could be realized as of the balance sheet date or that will be realized in the future.

A summary of the Company’s assets and liabilities that are measured at fair value for each fair value hierarchy level for the periods presented is as follows:
 
September 29, 2017
 
Level
One
 
Level
Two
 
Level
Three
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
 Cash equivalents
$
20,947

 
$

 
$

 
$
20,947

 Foreign currency contracts related to sales - designated as hedges

 
4,488

 

 
4,488

 Foreign currency contracts related to sales - not designated as hedges

 
1,491

 

 
1,491

 Foreign currency contracts related to purchases - designated as hedges

 
668

 

 
668

 Foreign currency contracts related to purchases - not designated as hedges

 
178

 

 
178

 Deferred compensation plans

 
6,390

 

 
6,390

 
$
20,947

 
$
13,215

 
$

 
$
34,162

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 Foreign currency contracts related to sales - designated as hedges
$

 
$
2,353

 
$

 
$
2,353

 Foreign currency contracts related to sales - not designated as hedges

 
492

 

 
492

 Foreign currency contracts related to purchases - designated as hedges

 
1,055

 

 
1,055

 Foreign currency contracts related to purchases - not designated as hedges

 
563

 

 
563

 Deferred compensation plans

 
6,390

 

 
6,390

 
$

 
$
10,853

 
$

 
$
10,853


 
December 31, 2016
 
Level
One
 
Level
Two
 
Level
Three
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
 Cash equivalents
$
24,603

 
$

 
$

 
$
24,603

 Foreign currency contracts related to sales - designated as hedges

 
992

 

 
992

 Foreign currency contracts related to sales - not designated as hedges

 
1,285

 

 
1,285

 Foreign currency contracts related to purchases - designated as hedges

 
4,224

 

 
4,224

 Foreign currency contracts related to purchases - not designated as hedges

 
120

 

 
120

 Deferred compensation plans

 
4,586

 

 
4,586

 
$
24,603

 
$
11,207

 
$

 
$
35,810

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 Foreign currency contracts related to sales - designated as hedges
$

 
$
11,280

 
$

 
$
11,280

 Foreign currency contracts related to sales - not designated as hedges

 
256

 

 
256

 Foreign currency contracts related to purchases - designated as hedges

 
469

 

 
469

 Foreign currency contracts related to purchases - not designated as hedges

 
1,004

 

 
1,004

 Deferred compensation plans

 
4,586

 

 
4,586

 
$

 
$
17,595

 
$

 
$
17,595


There were no transfers in or out of Level One, Two or Three during the nine months ended September 29, 2017.

19

COLFAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


Foreign Currency Contracts

As of September 29, 2017 and December 31, 2016, the Company had foreign currency contracts with the following notional values:
 
September 29, 2017
 
December 31, 2016
 
(In thousands)
Foreign currency contracts sold - not designated as hedges
$
123,617

 
$
85,542

Foreign currency contracts sold - designated as hedges
178,585

 
215,086

Foreign currency contracts purchased - not designated as hedges
44,736

 
40,127

Foreign currency contracts purchased - designated as hedges
61,497

 
84,604

Total foreign currency derivatives
$
408,435

 
$
425,359


The Company recognized the following in its Condensed Consolidated Financial Statements related to its derivative instruments:
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2017
 
September 30, 2016
 
September 29, 2017
 
September 30, 2016
 
(In thousands)
Contracts Designated as Hedges:
 
 
 
Foreign Currency Contracts - related to customer sales contracts:
 
 
 
 
 
 
 
  Unrealized gain (loss)
$
798

 
$
(362
)
 
$
3,515

 
$
496

  Realized gain (loss)
323

 
297

 
1,950

 
(2,075
)
Foreign Currency Contracts - related to supplier purchase contracts:
 
 
 
 
 
 
 
  Unrealized gain (loss)
306

 
403

 
945

 
(838
)
  Realized (loss) gain
(1,022
)
 
(207
)
 
(2,036
)
 
2,504

  Unrealized (loss) gain on net investment hedges(1)
(8,308
)
 
9,187

 
(27,737
)
 
3,482

Contracts Not Designated in a Hedge Relationship:
 
 
 
 
 
 
 
Foreign Currency Contracts - related to customer sales contracts:
 
 
 
 
 
 
 
  Unrealized (loss) gain
(289
)
 
157

 
(29
)
 
777

  Realized (loss) gain
(737
)
 
(521
)
 
853

 
(684
)
Foreign Currency Contracts - related to supplier purchases contracts:
 
 
 
 
 
 
 
  Unrealized (loss) gain
(104
)
 
(42
)
 
500

 
(558
)
  Realized gain (loss)
498

 
(360
)
 
243

 
(621
)
 
(1) The unrealized (loss) gain on net investment hedges is attributable to the change in valuation of Euro denominated debt.


20

COLFAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

13. Commitments and Contingencies

For further description of the Company’s litigation and contingencies, reference is made to Note 15, “Commitments and Contingencies” in the Notes to Consolidated Financial Statements in our 2016 Form 10-K. Because the Company will not retain an interest in the ongoing operations of the businesses subject to the asbestos contingencies, the Company has classified asbestos-related activity in its Condensed Consolidated Statements of Operations as a component of Income (loss) from discontinuing operations.
 
Asbestos Contingencies

Claims activity since December 31 related to asbestos claims is as follows(1):
 
Nine Months Ended
 
September 29, 2017
 
September 30, 2016
 
(Number of claims)
Claims unresolved, beginning of period
20,567

 
20,583

Claims filed(2)
3,450

 
4,022

Claims resolved(3)
(6,414
)
 
(3,092
)
Claims unresolved, end of period
17,603

 
21,513

 
(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 all asbestos claims that have been settled, dismissed or that are in the process of being settled or dismissed based upon agreements or understandings in place with counsel for the claimants.

The Company’s Condensed Consolidated Balance Sheets included the following amounts related to asbestos-related litigation:
 
September 29, 2017
 
December 31, 2016
 
(In thousands)
Long-term asbestos insurance asset(1)
$
275,109

 
$
293,289

Long-term asbestos insurance receivable(1)
79,417

 
92,269

Accrued asbestos liability(2)
53,637

 
51,166

Long-term asbestos liability(3)
308,995

 
330,194

 
(1) Included in Other assets in the Condensed Consolidated Balance Sheets.
(2) Represents current accruals for probable and reasonably estimable asbestos-related liability costs that the Company believes the subsidiaries will pay, and unpaid legal costs related to defending themselves against asbestos-related liability claims and legal action against the Company’s insurers, which is included in Accrued liabilities in the Condensed Consolidated Balance Sheets.
(3) Included in Other liabilities in the Condensed Consolidated Balance Sheets.

Following a Delaware Supreme Court ruling on September 12, 2016, the Company received a total of $30.5 million of previously unreimbursed costs funded by the Company in defense and settlement of asbestos claims from insurance companies during the nine months ended September 29, 2017. Certain matters, including potential interest which could be awarded to a specific subsidiary, are subject to further rulings from the Delaware courts. While the outcome is uncertain, none of these matters is expected to have a material adverse effect on the financial condition, results of operations or cash flows of the Company.

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 the Company’s financial condition, results of operations or cash flow.


21

COLFAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Other Litigation Matters

The Company is also involved in various other pending legal proceedings arising out of the ordinary course of the Company’s business. None of these legal proceedings are expected to have a material adverse effect on the financial condition, results of operations or cash flow of the Company. With respect to these proceedings and the litigation and claims described in the preceding paragraphs, management of the Company believes that it will either prevail, has adequate insurance coverage or has established appropriate accruals 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 adverse to the Company, there could be a material adverse effect on the financial condition, results of operations or cash flow of the Company.

14. Segment Information

Prior to the Purchase Agreement Date, the Company conducted its operations through three operating segments: Air and Gas Handling, Fluid Handling and Fabrication Technology. The Gas Handling and Fluid Handling operating segments were aggregated into a single reportable segment. Subsequent to the Purchase Agreement Date, the Company now conducts its continuing operations through the Air and Gas Handling and Fabrication Technology segments, which also represent the Company’s reportable segments.

Air and Gas Handling - a global supplier of centrifugal and axial fans, rotary heat exchangers, gas compressors, ventilation control systems and software, and aftermarket services; and

Fabrication Technology - a global supplier of welding equipment, cutting equipment, automated welding and cutting systems, and consumables.
 
Certain amounts not allocated to the two reportable segments and intersegment eliminations are reported under the heading “Corporate and other.” The Company’s management evaluates the operating results of each of its reportable segments based upon Net sales and segment operating income (loss), which represents Operating income (loss) before Restructuring and other related charges.


22

COLFAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

The Company’s segment results were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2017
 
September 30, 2016
 
September 29, 2017
 
September 30, 2016
 
(In thousands)
Net sales:
 
 
 
     Air and Gas Handling
$
362,310

 
$
320,436

 
$
989,044

 
$
1,009,598

     Fabrication Technology
482,199

 
446,085

 
1,437,057

 
1,363,747

 
$
844,509

 
$
766,521

 
$
2,426,101

 
$
2,373,345

Segment operating income (loss)(1):
 
 
 
 
 
 
 
     Air and Gas Handling
$
40,234

 
$
32,331

 
$
97,570

 
$
102,577

     Fabrication Technology
56,232

 
48,074

 
172,696

 
148,430

     Corporate and other
(14,402
)
 
(9,942
)
 
(42,024
)
 
(35,587
)
 
$
82,064

 
$
70,463

 
$
228,242

 
$
215,420

 
(1) The following is a reconciliation of Income from continuing operations before income taxes to segment operating income:
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2017
 
September 30, 2016
 
September 29, 2017
 
September 30, 2016
 
(In thousands)
Income from continuing operations before income taxes
$
63,438

 
$
51,819

 
$
176,005

 
$
152,434

Interest expense
11,328

 
6,892

 
29,106

 
24,988

Restructuring and other related charges
7,298

 
11,752

 
23,131

 
37,998

Segment operating income
$
82,064

 
$
70,463

 
$
228,242

 
$
215,420



23


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

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

The following discussion of the financial condition and results of operations of Colfax Corporation (“Colfax,” “the Company,” “we,” “our,” and “us”) should be read in conjunction with the Condensed Consolidated Financial Statements and related footnotes included in Part I. Item 1. “Financial Statements” of this Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2017 (this “Form 10-Q”) and the Consolidated Financial Statements and related footnotes included in Part II. Item 8. “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 14, 2017.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

a significant or sustained decline in commodity prices, including oil;

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

our exposure to unanticipated liabilities resulting from acquisitions;

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

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

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

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

material disruptions at any of our manufacturing facilities;

noncompliance with various laws and regulations associated with our international operations, including anti-bribery laws, export control regulations and sanctions and embargoes;

risks associated with our international operations;

24



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

our exposure to product liability claims;

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

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

the loss of key members of our leadership team;

restrictions in our principal credit facility that may limit our flexibility in operating our business;

impairment in the value of intangible assets;

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

significant movements in foreign currency exchange rates;

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

new regulations and customer preferences reflecting an increased focus on environmental, social and governance issues, including new regulations related to the use of conflict minerals;
 
service interruptions, data corruption, cyber-based attacks or network security breaches affecting our information technology infrastructure;

risks arising from changes in technology;

the competitive environment in our industry;

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

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

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

our financial performance; and

other risks and factors, listed in Item 1A. “Risk Factors” in Part I of our 2016 Form 10-K.

Any such forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ materially from those envisaged by such forward-looking statements. These forward-looking statements speak only as of the date this Form 10-Q is filed with the SEC. We do not assume any obligation and do not intend to update any forward-looking statement except as required by law. See Part I. Item 1A. “Risk Factors” in our 2016 Form 10-K for a further discussion regarding some of the reasons that actual results may be materially different from those that we anticipate.


25


Overview

On September 24, 2017, we entered into a definitive purchase agreement (the “Purchase Agreement”) with CIRCOR International, Inc., a Delaware corporation (“CIRCOR” or the “Buyer”), pursuant to which CIRCOR has agreed to purchase certain subsidiaries and assets comprising our fluid handling business (the “Business”) for  cash consideration of $542 million, 3.3 million shares of CIRCOR common stock (the “CIRCOR Shares”), and the assumption of certain liabilities, including certain pension liabilities (the “Transaction”). The CIRCOR Shares we receive are expected to represent approximately 16% of CIRCOR’s issued and outstanding shares immediately following the issuance upon closing of the Transaction (the “Closing”). The purchase price is subject to certain adjustments pursuant to the Purchase Agreement.

The Purchase Agreement contains customary representations, warranties and covenants by each party.  The covenants relate to, among other things, our conduct of the Business, and the conduct by CIRCOR of its business, during the period between the signing of the Purchase Agreement and the Closing, the parties’ efforts to obtain regulatory approvals in connection with the Transaction, CIRCOR’s efforts to obtain financing for the transaction, and our ability to compete with the Business for a limited period following the Closing.  Along with CIRCOR, we have agreed to indemnify the other for losses arising from certain breaches of the Purchase Agreement and for certain other potential liabilities, subject to certain limitations.

The Transaction is subject to customary closing conditions including, among others, the receipt of required antitrust approvals (and the expiration or termination of waiting periods required in connection therewith), the absence of any injunction or order prohibiting or restricting the consummation of the Transaction, the absence of a “Buyer Material Adverse Effect” or a “Material Adverse Effect” with respect to the Business (each as defined in the Purchase Agreement) and the accuracy of the other party’s representations and warranties, the other party’s performance and compliance with its obligations and covenants under the Purchase Agreement and the CIRCOR Shares having been approved for listing on the New York Stock Exchange. Pursuant to the Purchase Agreement, certain of our subsidiaries that are involved in asbestos litigation, as previously disclosed by us, will retain liabilities and assets, including insurance policies and rights to recovery thereunder, associated with such litigation and other asbestos-related liabilities.
 
The obligations of CIRCOR to consummate the Transaction are not conditioned on receipt of financing. However, CIRCOR is not required to consummate the Transaction until after the completion of a “Marketing Period(as defined in the Purchase Agreement). CIRCOR has obtained a debt financing commitment from Deutsche Bank AG New York Branch, Deutsche Bank Securities Inc., SunTrust Robinson Humphrey, Inc. and SunTrust Bank.

Each party may terminate the Purchase Agreement under certain circumstances. In the event that we terminate the Purchase Agreement because CIRCOR fails to consummate the Transaction as required by the Purchase Agreement after all of the conditions to CIRCOR’s obligation to close the Transaction have been satisfied (other than those conditions that, by their nature are to be satisfied at the Closing), CIRCOR will be required to pay us a reverse termination fee of $50 million.

The accounting requirements for reporting the pending sale of the Fluid Handling business as a discontinued operation were met during the third quarter of 2017. Accordingly, the results of operations for the Fluid Handling segment have been excluded from the discussion of our results of operations for all periods presented.

Based upon the above, we now report our continuing operations through the following reportable segments:

Air and Gas Handling - a global supplier of industrial centrifugal and axial fans, rotary heat exchangers, gas compressors, ventilation control systems and software, and aftermarket services; and

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

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


26


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

To operate our businesses, we employ a comprehensive set of tools that we refer to as the Colfax Business System (“CBS”). CBS is our business management system. It is a repeatable, teachable process that we use to create superior value for our customers, shareholders and associates. Rooted in our core values, it is our culture. CBS provides the tools and techniques to ensure that we are continuously improving our ability to meet or exceed customer requirements on a consistent basis.

Results of Operations

The following discussion of Results of Operations addresses the comparison of the periods presented. Our management evaluates the operating results of each of its reportable segments based upon Net sales and segment operating income, which represents Operating income before Restructuring and other related charges.

Items Affecting Comparability of Reported Results

The comparability of our operating results for the third quarter and nine months ended September 29, 2017 to the comparable 2016 period is affected by the following additional significant items:

Strategic Acquisitions

We complement our organic growth plans with strategic acquisitions. Acquisitions can significantly affect our reported results, and we report the change in our Net sales between periods both from existing and acquired businesses. Orders and order backlog are presented only for the Air and Gas Handling segment, where this information is relevant. The change in Net sales due to acquisitions for the periods presented in this filing represents the incremental sales as a result of acquisitions. We completed one acquisition in our Air and Gas Handling segment during the nine months ended September 29, 2017. We completed three acquisitions in our Fabrication Technology segment, of which one was completed in the fourth quarter of 2016, and two others during the nine months ended September 29, 2017.

Foreign Currency Fluctuations

A significant portion of our Net sales, approximately 79% and 76% for the third quarter and nine months ended September 29, 2017, respectively, is derived from operations outside the U.S., with the majority of those sales denominated in currencies other than the U.S. dollar. Because much of our manufacturing and employee costs are outside the U.S., a significant portion of our costs are also denominated in currencies other than the U.S. dollar. Changes in foreign exchange rates can impact our results of operations and are quantified when significant to our discussion. Changes in foreign exchange rates had an overall negligible impact on Net sales and Income from continuing operations before income taxes for the third quarter and nine months ended September 29, 2017. Changes in foreign exchange rates since December 31, 2016 increased net assets by approximately 8%.

Seasonality

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


27


Sales, Orders and Backlog

Our third quarter 2017 Net sales increased from third quarter 2016 levels and our year to date 2017 Net sales also increased from the comparable 2016 period. The following table presents the components of changes in our consolidated Net sales and, for our Air and Gas Handling segment, orders and order backlog:
 
 
 
 
 
Air and Gas Handling
 
Net Sales
 
Orders(1)
 
$
 
%
 
$
 
%
 
(Dollars in millions)
For the three months ended September 30, 2016
$
766.5

 
 
 
$
360.9

 
 
Components of Change:
 
 
 
 
 
 
 
Existing Businesses(2)
46.7

 
6.1
%
 
(107.6
)
 
(29.8
)%
Acquisitions(3)
13.4

 
1.7
%
 
0.1

 
 %
Foreign Currency Translation(4)
17.9

 
2.4
%
 
9.2

 
2.6
 %
 
78.0

 
10.2
%
 
(98.3
)
 
(27.2
)%
For the three months ended September 29, 2017
$
844.5

 
 
 
$
262.6

 
 
 
 
 
 
 
Air and Gas Handling
 
Net Sales
 
Orders(1)
 
Backlog at Period End
 
$
 
%
 
$
 
%
 
$
 
%
 
(Dollars in millions)
As of and for the nine months ended September 30, 2016
$
2,373.3

 
 
 
$
976.2

 
 
 
$
874.9

 
 
Components of Change:
 
 
 
 
 
 
 
 
 
 
 
Existing Businesses(2)
9.6

 
0.4
%
 
(36.4
)
 
(3.7
)%
 
(98.3
)
 
(11.2
)%
Acquisitions(3)
30.7

 
1.3
%
 
0.1

 
 %
 

 
 %
Foreign Currency Translation(4)
12.5

 
0.5
%
 
(1.9
)
 
(0.2
)%
 
6.2

 
0.7
 %
 
52.8

 
2.2
%
 
(38.2
)
 
(3.9
)%
 
(92.1
)
 
(10.5
)%
As of and for the nine months ended September 29, 2017
$
2,426.1

 
 
 
$
938.0

 
 
 
$
782.8