Document
COLFAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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 28, 2018
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 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 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 ¨
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 28, 2018, there were 117,199,449 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 (Loss) Income
            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. Revenue
                 Note 6. Net Income Per Share
                 Note 7. Income Taxes
                 Note 8. Equity
                 Note 9. Inventories, Net
                 Note 10. Debt
                 Note 11. Accrued Liabilities
                 Note 12. Net Periodic Benefit Cost - Defined Benefit Plans
                 Note 13. Financial Instruments and Fair Value Measurements
                 Note 14. Commitments and Contingencies
                 Note 15. 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 28, 2018
 
September 29, 2017
 
September 28, 2018
 
September 29, 2017
 
 
 
 
 
 
 
 
Net sales
$
875,373

 
$
844,509

 
$
2,681,586

 
$
2,426,101

Cost of sales
604,444

 
580,610

 
1,852,603

 
1,664,309

Gross profit
270,929

 
263,899

 
828,983

 
761,792

Selling, general and administrative expense
194,833

 
181,835

 
600,136

 
533,550

Restructuring and other related charges
15,916

 
7,298

 
40,791

 
23,131

Operating income
60,180

 
74,766

 
188,056

 
205,111

Interest expense, net
9,885

 
11,328

 
29,153

 
29,106

Loss on short term investments

 

 
10,128

 

Income from continuing operations before income taxes
50,295

 
63,438

 
148,775

 
176,005

Provision for income taxes
12,397

 
13,816

 
11,490

 
46,128

Net income from continuing operations
37,898

 
49,622

 
137,285

 
129,877

(Loss) income from discontinued operations, net of taxes
(2,696
)
 
2,082

 
(31,262
)
 
21,790

Net income
35,202

 
51,704

 
106,023

 
151,667

Less: income attributable to noncontrolling interest, net of taxes
3,892

 
5,841

 
11,721

 
13,867

Net income attributable to Colfax Corporation
$
31,310

 
$
45,863

 
$
94,302

 
$
137,800

Net income (loss) per share - basic
 
 
 
 
 
 
 
Continuing operations
$
0.29

 
$
0.36

 
$
1.04

 
$
0.94

Discontinued operations
$
(0.02
)
 
$
0.01

 
$
(0.26
)
 
$
0.18

Consolidated operations
$
0.27

 
$
0.37

 
$
0.78

 
$
1.12

Net income (loss) per share - diluted
 
 
 
 
 
 
 
Continuing operations
$
0.29

 
$
0.35

 
$
1.03

 
$
0.94

Discontinued operations
$
(0.03
)
 
$
0.02

 
$
(0.26
)
 
$
0.17

Consolidated operations
$
0.26

 
$
0.37

 
$
0.77

 
$
1.11



See Notes to Condensed Consolidated Financial Statements.


2


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

 
Three Months Ended
 
Nine Months Ended
 
September 28, 2018
 
September 29, 2017
 
September 28, 2018
 
September 29, 2017
Net income
$
35,202

 
$
51,704

 
$
106,023

 
$
151,667

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation, net of tax of $(2,689), $(551), $1,880 and $(1,633)
(46,437
)
 
89,771

 
(187,235
)
 
257,682

Unrealized gain (loss) on hedging activities, net of tax of $252, $(6,249), $3,352 and $(14,872)
136

 
(7,755
)
 
7,156

 
(22,108
)
Amounts reclassified from Accumulated other comprehensive income:
 
 
 
 
 
 
 
Amortization of pension and other post-retirement net actuarial loss, net of tax of $165, $722, $641 and $2,658
670

 
2,466

 
2,503

 
5,102

Amortization of pension and other post-retirement prior service cost, net of tax of $0, $24, $0 and $71
1

 
38

 
2

 
115

Other comprehensive (loss) income
(45,630
)
 
84,520

 
(177,574
)
 
240,791

Comprehensive (loss) income
(10,428
)
 
136,224

 
(71,551
)
 
392,458

Less: comprehensive (loss) income attributable to noncontrolling interest
(4,524
)
 
5,041

 
(9,483
)
 
20,085

Comprehensive (loss) income attributable to Colfax Corporation
$
(5,904
)
 
$
131,183

 
$
(62,068
)
 
$
372,373



See Notes to Condensed Consolidated Financial Statements.


3


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

 
September 28, 2018
 
December 31, 2017
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
285,900

 
$
262,019

Short term investments

 
149,608

Trade receivables, less allowance for doubtful accounts of $28,805 and $31,488
953,881

 
970,199

Inventories, net
484,242

 
429,627

Other current assets
227,249

 
258,379

Total current assets
1,951,272

 
2,069,832

Property, plant and equipment, net
494,377

 
552,802

Goodwill
2,524,134

 
2,538,544

Intangible assets, net
941,246

 
1,017,203

Other assets
535,200

 
531,316

Total assets
$
6,446,229

 
$
6,709,697

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Current portion of long-term debt
$
6,385

 
$
5,766

Accounts payable
563,730

 
587,129

Customer advances and billings in excess of costs incurred
148,635

 
145,853

Accrued liabilities
350,130

 
358,632

Total current liabilities
1,068,880

 
1,097,380

Long-term debt, less current portion
1,135,624

 
1,055,305

Other liabilities
763,403

 
829,748

Total liabilities
2,967,907

 
2,982,433

Equity:
 
 
 
Common stock, $0.001 par value; 400,000,000 shares authorized; 117,199,449 and 123,245,827 issued and outstanding
117

 
123

Additional paid-in capital
3,051,695

 
3,228,174

Retained earnings
945,944

 
846,490

Accumulated other comprehensive loss
(735,894
)
 
(574,372
)
Total Colfax Corporation equity
3,261,862

 
3,500,415

Noncontrolling interest
216,460

 
226,849

Total equity
3,478,322

 
3,727,264

Total liabilities and equity
$
6,446,229

 
$
6,709,697



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 December 31, 2017
123,245,827

$
123

$
3,228,174

$
846,490

$
(574,372
)
$
226,849

$
3,727,264

Cumulative effect of accounting change, net of tax of $2,808



5,152

(5,152
)


Net income



94,302


11,721

106,023

Distributions to noncontrolling owners





(906
)
(906
)
Other comprehensive income, net of tax of $5,873




(156,370
)
(21,204
)
(177,574
)
Common stock repurchases
(6,449,425
)
(6
)
(199,994
)



(200,000
)
Common stock-based award activity
403,047


23,515




23,515

Balance at September 28, 2018
117,199,449

$
117

$
3,051,695

$
945,944

$
(735,894
)
$
216,460

$
3,478,322



See Notes to Condensed Consolidated Financial Statements.


5


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

 
Nine Months Ended
 
September 28, 2018
 
September 29, 2017
 
 
 
 
Cash flows from operating activities:
 
 
 
Net income
$
106,023

 
$
151,667

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization and impairment charges
110,597

 
101,843

Stock-based compensation expense
18,867

 
15,633

Non-cash interest expense
3,332

 
3,340

Loss on short term investments
10,128

 

Deferred income tax benefit
(21,730
)
 
(6,046
)
Gain on sale of property, plant and equipment
(8,211
)
 
(10,557
)
Loss on sale of business
4,337

 

Changes in operating assets and liabilities:
 
 
 
Trade receivables, net
(51,722
)
 
(96,472
)
Inventories, net
(56,951
)
 
(38,493
)
Accounts payable
6,486

 
(3,308
)
Customer advances and billings in excess of costs incurred
18,970

 
(18,405
)
Changes in other operating assets and liabilities
(39,318
)
 
15,489

Net cash provided by operating activities
100,808

 
114,691

Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(40,247
)
 
(36,756
)
Proceeds from sale of property, plant and equipment
17,758

 
16,106

Acquisitions, net of cash received
(83,846
)
 
(56,931
)
Sale of business, net
18,626

 

Sale of short term investments, net
139,480

 

Net cash provided by (used in) investing activities
51,771

 
(77,581
)
Cash flows from financing activities:
 
 
 
Payments under term credit facility
(93,750
)
 
(46,878
)
Proceeds from borrowings on revolving credit facilities and other
911,772

 
594,159

Repayments of borrowings on revolving credit facilities and other
(722,573
)
 
(911,462
)
Proceeds from borrowings on senior unsecured notes

 
374,450

Proceeds from issuance of common stock, net
4,648

 
4,758

Common stock repurchases
(200,000
)
 

Other
(1,038
)
 
(8,851
)
Net cash (used in) provided by financing activities
(100,941
)
 
6,176

Effect of foreign exchange rates on Cash and cash equivalents
(27,757
)
 
7,434

Increase in Cash and cash equivalents
23,881

 
50,720

Cash and cash equivalents, beginning of period
262,019

 
221,730

Cash and cash equivalents, end of period
$
285,900

 
$
272,450



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 air and gas handling and fabrication technology products and services to customers around the world under the Howden and ESAB brands.

On December 11, 2017, the Company completed the sale of its Fluid Handling business (“Fluid Handling”) to CIRCOR International, Inc., a Delaware corporation (“CIRCOR” or “the Buyer”), pursuant to a definitive purchase agreement (the Purchase Agreement) signed on September 24, 2017. Accordingly, the accompanying Condensed Consolidated Financial Statements for all periods presented reflect the Fluid Handling business as a discontinued operation. 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, 2017 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, 2017 (the “2017 Form 10-K”), filed with the SEC on February 16, 2018.

The Condensed Consolidated Financial Statements reflect, in the opinion of management, all adjustments, which 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 28, 2018 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 air and gas handling customers seek to fully utilize capital spending budgets before the end of the year, usually our shipments peak during the fourth quarter. Also, our European operations typically experience a slowdown during the July, 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

Accounting Guidance Implemented in 2018

Standards Adopted
 
Description
 
Effective Date
Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers

 
The standard 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 standard 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 applied the ASU and its related updates on a full retrospective basis as of January 1, 2018. The adoption of the ASU did not have a material impact on the consolidated financial statements; therefore, no cumulative catch-up adjustment was recorded for prior periods. See Note 5, “Revenue”, for additional information.

 
January 1, 2018

ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
 
The standard requires various changes to the measurement and disclosure of equity investments. For the Company, the most relevant change under ASU 2016-01 is the elimination of the available-for-sale classification for equity securities with readily determinable fair values. The adoption of the standard as of January 1, 2018 resulted in a reclassification of a $5.2 million gain, net of tax, on short term investments from Accumulated other comprehensive loss to Retained earnings on the Company’s Condensed Consolidated Financial Statements. Additionally, as a result of the adoption of this ASU, any changes in fair value of the Company’s Short term investments is included in Loss on short term investments in the Condensed Consolidated Statement of Income.     

 
January 1, 2018

ASU No. 2016-15, Statement of Cash Flows (Topic 203)
 
The guidance addresses eight specific cash flow issues and clarifies their presentation and classification in the Statement of Cash Flows. The Company has retrospectively adopted the standard on its consolidated financial statements as of January 1, 2018. The adoption of the ASU did not have a material impact on the consolidated financial statements. As such, no retrospective adjustment was recorded.

 
January 1, 2018

ASU 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory
 
The standard eliminates the exception that the tax effects of an intra-entity transfer (sales) are deferred until the transferred asset is sold to a third party or recovered through use. The resulting impact is the recognition of tax expense in the seller’s jurisdiction and any deferred tax asset in the buyer’s jurisdiction in the period the transfer occurs. The new guidance does not apply to intra entity sales of inventory whose tax effects will continue to be deferred until the inventory is sold to a third party. The Company adopted the ASU as of January 1, 2018 using a modified retrospective approach and concluded the ASU had no material impact on the consolidated financial statements; therefore, no cumulative catch-up adjustment was recorded.

 
January 1, 2018

ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost
 
The standard requires that the service cost component of net benefit costs of pension and post-retirement benefit plans be reported in the same line item as other compensation costs. Other components of net periodic pension cost and net periodic post-retirement benefit cost are required to be presented in the income statement separately from the service cost component, and only the service cost is eligible for capitalization. The Company adopted the ASU as of January 1, 2018 retrospectively for the presentation requirements and prospectively for the capitalization of the service cost. The adoption of the ASU did not have a material impact on the consolidated financial statements. No adjustment was recorded as a result of the adoption.

 
January 1, 2018


8

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

Standards Adopted
 
Description
 
Effective Date
ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs pursuant to SEC Staff Accounting Bulletin No. 118
(“SAB 118”)
 
The standard addresses the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 U.S. Tax Cut and Jobs Act (“Tax Act”). SAB 118 allows registrants to include a provisional amount to account for the implications of the Tax Act where a reasonable estimate can be made and requires the completion of the accounting no later than one year from the date of enactment of the Tax Act or December 22, 2018. In its financial statements for the year ended December 31, 2017, the Company included a provisional estimate of approximately $52 million for the transition tax, payable over 8 years. Generally, the foreign earnings subject to the transition tax can be distributed without additional U.S. tax; however, if distributed, the amount could be subject to foreign taxes and U.S. state and local taxes. The Company also recorded a provisional tax benefit estimate of approximately $55 million for the re-measurement of its U.S. deferred tax assets and liabilities to a 21% effective tax rate. The Company continues to evaluate the implications of the Tax Act and have not made any adjustments to the provisional amounts recorded in the prior year. Additionally, the Company filed its 2017 U.S. income tax return in the fourth quarter of 2018. The Company does not anticipate significant provision to return adjustments related to changes in tax basis in temporary differences, tax pools, earnings and profits, or other elements of the income tax effects of the Tax Act that will be recorded in the fourth quarter of 2018 that were previously estimated in the financial statements as of December 31, 2017.
 
December 31, 2017


9

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


New Accounting Guidance to be Implemented
Standards Pending Adoption
 
Description
 
Anticipated Impact
 
Effective/Adoption Date
ASU 2016-02, Leases (Topic 842)

 
The standard requires 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 standard 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 new guidance can be adopted using a modified retrospective transition and provides for certain practical expedients.
 
The Company is analyzing and updating data previously collected to evaluate the impact of adopting the ASU on its consolidated financial statements, and further assessing the related systems required to support increased reporting and disclosures requirements. The Company will adopt the package of practical expedients for all leases commenced before January 1, 2019. The adoption of the guidance will result in the recording of an operating lease asset and liability, which are estimated to be less than 3% of Total assets. The impacts on the consolidated statements of income or consolidated statements of cash flows are expected to be immaterial.
 
January 1, 2019

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.
 
January 1, 2020

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 Company is currently evaluating the impact of adopting the ASU on its consolidated financial statements and the timing of adoption.

 
January 1, 2019

ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
 
The standard provides entities the option to reclassify to retained earnings the tax effects resulting from the Tax Act related to items stranded in accumulated other comprehensive income. The new guidance may be applied retrospectively to each period in which the effect of the Tax Act is recognized in the period of adoption.
 
The Company is currently evaluating the impact of this ASU on its consolidated financial statements and the timing of adoption.

 
January 1, 2019


10

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

Standards Pending Adoption
 
Description
 
Anticipated Impact
 
Effective/Adoption Date
Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income
 
The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income (GILTI), states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for a current tax expense related to GILTI in the year the tax is incurred.
 
The Tax Act subjects the Company to tax on the GILTI earned by certain of its foreign subsidiaries. The Company has included an estimate of GILTI in determining its annual effective tax rate; however, given the complexity of the GILTI provisions, the Company is still evaluating the effects of the GILTI provisions and has not yet determined its accounting policy.

 
December 31, 2018

ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement 
 
The ASU modifies the disclosure requirements for fair value measurements.
 
The Company is currently evaluating the impact of this ASU on its consolidated financial statements and the timing of adoption.

 
January 1, 2020
ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans
 
The ASU modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.

 
The Company is currently evaluating the impact of this ASU on its consolidated financial statements and the timing of adoption.

 
January 1, 2021



11

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

3. Discontinued Operations

Sale of Fluid Handling Business

The Company sold its Fluid Handling business to CIRCOR on December 11, 2017. After certain post-closing adjustments, total consideration for the sale was $860.6 million, consisting of $551.0 million of cash, 3.3 million shares of CIRCOR common stock (“CIRCOR Shares”), and assumption of $168.0 million of net retirement liabilities. All cash consideration has been collected.

During the three months ended June 29, 2018, the Company sold its CIRCOR Shares for $139.5 million, net of $5.8 million of underwriters' fees.

The key components of (Loss) income from discontinued operations for the three and nine months ended September 28, 2018 and September 29, 2017 were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2018
 
September 29, 2017
 
September 28, 2018
 
September 29, 2017
 
(In thousands)

Net sales
$

 
$
114,524

 
$

 
$
343,690

Cost of Sales

 
77,379

 

 
224,373

Selling, general and administrative expense(1)
2,668

 
29,353

 
7,262

 
90,308

Divestiture-related expense, net(2)
1,013

 
5,675

 
3,371

 
7,275

Restructuring and other related items(3)

 
634

 

 
(7,628
)
Operating (loss) income
(3,681
)
 
1,483

 
(10,633
)
 
29,362

Interest income(4)

 
88

 

 
353

Loss on disposal

 

 
(4,337
)
 

(Loss) income from discontinued operations before income taxes
(3,681
)
 
1,571

 
(14,970
)
 
29,715

Income tax (benefit) expense (5)
(985
)
 
(511
)
 
16,292

 
7,925

(Loss) income from discontinued operations, net of taxes
$
(2,696
)
 
$
2,082

 
$
(31,262
)
 
$
21,790

             
(1) Pursuant to the Purchase Agreement, the Company retained its asbestos-related contingencies and insurance coverages. However, as the Company did 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 Income as part of (Loss) income from discontinued operations. See Note 14, “Commitments and Contingencies” for further information.
(2) Primarily related to professional and consulting fees associated with the divestiture including 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.
(4) Interest expense has not been allocated to the discontinued operations.
(5) Income tax expense for the nine months ended September 28, 2018 includes incremental tax expense due to changes in the estimated gain allocation by jurisdiction which were recognized during the three months ended June 29, 2018.

The Company did not have material cash flows for discontinued operations during the nine months ended September 28, 2018. Cash provided by operating activities of discontinued operations for the nine months ended September 29, 2017 was $33.9 million. Cash used in investing activities of discontinued operations was $6.0 million for the nine months ended September 29, 2017. There are no material items in the accompanying Condensed Consolidated Statements of Income that had been eliminated in consolidation prior to the disposal.


12

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

4. Acquisitions

During the nine months ended September 28, 2018, the Company completed two acquisitions in the Air & Gas Handling segment for net cash consideration of $35.9 million. During the same period, the Company also completed an acquisition in the Fabrication Technology segment for net cash consideration of $38.2 million. All three acquisitions are subject to certain purchase price adjustments.

On October 1, 2018, the Company acquired Gas Control Equipment Group AB (“GCE”) for cash consideration of $216.1 million, subject to purchase price adjustments. The acquisition will be integrated into the Fabrication Technology reporting segment, improving scale and customer reach in Europe, and increasing presence in specialty gas applications. For the twelve months ended September 28, 2018, GCE had revenues of approximately $120 million.

5. Revenue

The Company accounts for revenue in accordance with Topic 606, “Revenue from Contracts with Customers,” which the Company adopted on January 1, 2018, using the full retrospective method. Accordingly, the Company recognizes revenue when control of promised goods or services is transferred to the customer. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled in exchange for transferring the goods or services. The nature of the Company’s contracts gives rise to certain types of variable consideration, including rebates and other discounts. The Company includes estimated amounts of variable consideration in the transaction price to the extent that it is probable there will not be a significant reversal of revenue. Estimates are based on historical or anticipated performance and represent the Company’s best judgment at the time. Any estimates are evaluated on a quarterly basis until the uncertainty is resolved.

The Company provides a variety of products and services to its customers. Most of the Company’s contracts consist of a single, distinct performance obligation or promise to transfer goods or services to a customer. For contracts that include multiple performance obligations, the Company allocates the total transaction price to each performance obligation using the Company’s best estimate of the standalone selling price of each identified performance obligation.

A majority of revenue recognized by the Company relates to contracts with customers for standard or off-the-shelf products. As control typically transfers to the customer upon shipment of the product in these circumstances, revenue is generally recognized at that point in time. For service contracts, the Company recognizes revenue ratably over the period of performance as the customer simultaneously receives and consumes the benefits of the services provided.

The following tables disaggregate the Company’s revenue by segment and timing of transfer:

Three Months Ended

September 28, 2018
 
September 29, 2017

Fabrication Technology
 
Air and Gas Handling
 
Fabrication Technology
 
Air and Gas Handling

(in thousands)
Point in time
$
524,023

 
$
100,019

 
$
479,947

 
$
155,530

Over time

 
251,331

 
2,252

 
206,780

Total
$
524,023

 
$
351,350

 
$
482,199

 
$
362,310


 
Nine Months Ended
 
September 28, 2018
 
September 29, 2017
 
Fabrication Technology
 
Air and Gas Handling
 
Fabrication Technology
 
Air and Gas Handling
 
(in thousands)
Point in time
$
1,617,893

 
$
415,180

 
$
1,432,605

 
$
492,213

Over time
260

 
648,253

 
4,452

 
496,831

Total
$
1,618,153

 
$
1,063,433

 
$
1,437,057

 
$
989,044



13

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

In certain contracts, particularly within the Air and Gas Handling segment, the Company is engaged to engineer and build highly-customized, large-scale products and systems. In these circumstances, the Company produces an asset with no alternative use and has a right to payment for performance completed to date. As a result, revenue is recognized over time based on progress to date. To measure progress, the Company uses an input method based on costs incurred relative to total estimated costs. Under this method, contract revenues are recognized over the performance period of the contract. The amount recognized is directly proportionate to the costs incurred as a percentage of total estimated costs for the entirety of the contract. This method requires estimates to determine the appropriate cost and revenue recognition. Significant management judgments and estimates, including estimated costs to complete projects, must be made and used in connection with revenue recognized during each period. Current estimates may be revised as additional information becomes available. The revisions are recorded in income in the period in which they are determined using the cumulative catch-up method of accounting.

As of September 28, 2018, the Air and Gas Handling business had $835.6 million of remaining performance obligations, which is also referred to as total backlog. Of that total backlog, the Company expects to recognize approximately 43% as revenue in 2018 and an additional 57% thereafter.

Given the nature of these long-term contracts, the Company is often paid at various points throughout the process, based on the contractual terms. The Company applies the available practical expedient involving the existence of a significant financing component. As the Company generally does not receive payments greater than one year in advance or arrears of revenue recognition, the Company does not consider any arrangements to include financing components.

Any recognized revenues in excess of customer billings are recorded as a component of Trade receivables. Billings to customers in excess of recognized revenues are recorded as a component of Customer advances and billings in excess of costs incurred. For long-term contracts, amounts are billed as work progresses, based on the specified timeline included in the contractual terms. Each contract is evaluated individually to determine the net asset or net liability position. As of September 28, 2018 and December 31, 2017, there were $185.2 million and $203.9 million, respectively, of revenues in excess of billings and $77.2 million and $94.2 million, respectively, of billings in excess of revenues on long-term contracts in the Condensed Consolidated Balance Sheets. For contracts recognized at a point in time, revenue recognition and billing typically occur simultaneously.

The Company’s Fabrication Technology business formulates, develops, manufactures and supplies consumable products and equipment. Substantially all revenue from the Fabrication Technology business is recognized at a point in time. As a result, of the total amount of remaining unsatisfied performance obligations, the majority relate to ship and bill arrangements. Given the nature of this business, the total amount of unsatisfied performance obligations with an original contract duration of greater than one year as of September 28, 2018 is immaterial.

In some circumstances for both over time and point in time contracts, customers are billed in advance of revenue recognition, resulting in contract liabilities. As of December 31, 2017 and 2016, total contract liabilities were $133.3 million and $137.6 million, respectively. During the three and nine months ended September 28, 2018, revenue recognized that was included in the contract liability balance at the beginning of the year was $5.9 million and $103.8 million, respectively. Of this total 16.1% and 67.5%, respectively, was related to long-term contracts which have met the criteria for over time recognition. During the three and nine months ended September 29, 2017, revenue recognized that was included in the contract liability balance at the beginning of the year was $9.0 million and $106.7 million, respectively. Of this total 49.2% and 71.2%, respectively, was related to long-term contracts which have met the criteria for over time recognition. As of September 28, 2018 and September 29, 2017, total contract liabilities were $143.7 million and $121.9 million, respectively.

The period of benefit for the Company’s incremental costs of obtaining a contract would generally have less than a one-year duration; therefore, the Company applies the practical expedient available and expenses costs to obtain a contract when incurred.


14

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

6. 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 28, 2018
 
September 29, 2017
 
September 28, 2018
 
September 29, 2017
 
(In thousands, except share data)
Computation of Net income per share from continuing operations:
 
 
 
 
 
 
 
Net income from continuing operations attributable to Colfax Corporation (1)
$
34,006

 
$
43,781

 
$
125,564

 
$
116,010

Weighted-average shares of Common stock outstanding - basic
117,709,725

 
123,260,978

 
121,283,339

 
123,187,447

Net income per share from continuing operations - basic
$
0.29

 
$
0.36

 
$
1.04

 
$
0.94

Computation of Net income per share from continuing operations - diluted:
 
 
 
 
 
 
 
Net income from continuing operations attributable to Colfax Corporation (1)
$
34,006

 
$
43,781

 
$
125,564

 
$
116,010

Weighted-average shares of Common stock outstanding - basic
117,709,725

 
123,260,978

 
121,283,339

 
123,187,447

Net effect of potentially dilutive securities - stock options and restricted stock units
747,211

 
819,826

 
518,179

 
760,315

Weighted-average shares of Common stock outstanding - diluted
118,456,936

 
124,080,804

 
121,801,518

 
123,947,762

Net income per share from continuing operations - diluted
$
0.29

 
$
0.35

 
$
1.03

 
$
0.94

              
(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 and nine months ended September 28, 2018 and September 29, 2017 excludes 3.5 million and 2.8 million of outstanding stock-based compensation awards, respectively, as their inclusion would be anti-dilutive.
 
7. Income Taxes

During the three and nine months ended September 28, 2018, Income from continuing operations before income taxes was $50.3 million and $148.8 million, respectively, while the income tax expense was $12.4 million and $11.5 million, respectively. The effective tax rates were 24.6% and 7.7% for the three and nine months ended September 28, 2018, respectively. The effective tax rate for the three months ended September 28, 2018 differed from the 2018 U.S. federal statutory rate of 21% mainly due to international taxes which are higher than the U.S. tax rate, losses in certain jurisdictions where a tax benefit is not expected to be recognized in 2018, and U.S. tax on certain foreign earnings including GILTI, offset in part by net discrete tax benefits of $6.8 million, primarily attributed to the expected realization of certain U.S. tax credits. The effective tax rate for the nine months ended September 28, 2018 differed from the 2018 U.S. federal statutory rate of 21% mainly due to net discrete tax benefits of $33.7 million, including the effective settlement of uncertain tax positions, an enacted tax rate change in a foreign jurisdiction, valuation allowance reversals, and the expected realization of certain U.S. tax credits, offset in part by international taxes, which are higher than the U.S. tax rate, losses in certain jurisdictions where a tax benefit is not expected to be recognized in 2018, and U.S. tax on certain foreign earnings including GILTI.

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 rate differed from the 2017 U.S. federal statutory rate of 35% primarily due to international tax rates, which were 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

15

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

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.

8. Equity

Share Repurchase Program

On February 12, 2018, the Company’s Board of Directors authorized the repurchase of up to $100 million of the Company’s Common stock from time-to-time on the open market or in privately negotiated transactions. The Board of Directors increased the repurchase authorization by an additional $100 million on June 6, 2018. On July 19, 2018, the Board of Directors increased the repurchase authorization by an additional $100 million. The timing, amount and method of shares repurchased is determined by management based on its evaluation of market conditions and other factors.

During the nine months ended September 28, 2018, the Company repurchased 6,449,425 shares of the Company’s Common stock in open market transactions for $200.0 million. As of September 28, 2018, the remaining stock repurchase authorization provided by the Company’s Board of Directors was $100.0 million.

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 28, 2018 and September 29, 2017. All amounts are net of tax and noncontrolling interest, if any.
 
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, 2018
$
(84,338
)
 
$
(525,324
)
 
$
30,138

 
$
(579,524
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
Foreign currency translation adjustment
835

 
(173,041
)
 
(466
)
 
(172,672
)
Gain on long-term intra-entity foreign currency transactions

 
6,777

 

 
6,777

Gain on net investment hedges

 

 
9,210

 
9,210

Unrealized loss on cash flow hedges

 

 
(2,191
)
 
(2,191
)
Other comprehensive income (loss) before reclassifications
835

 
(166,264
)
 
6,553

 
(158,876
)
Amounts reclassified from Accumulated other comprehensive loss (1)
2,506

 

 

 
2,506

Net Other comprehensive income (loss)
3,341

 
(166,264
)
 
6,553

 
(156,370
)
Balance at September 28, 2018
$
(80,997
)
 
$
(691,588
)
 
$
36,691

 
$
(735,894
)

16

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, 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

Gain 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
)
 
(1) Included in the computation of net periodic benefit cost. See Note 12, “Net Periodic Benefit Cost - Defined Benefit Plans” for additional details.

9. Inventories, Net

Inventories, net consisted of the following:
 
September 28, 2018
 
December 31, 2017
 
(In thousands)
Raw materials
$
147,408

 
$
141,827

Work in process
102,447

 
74,704

Finished goods
278,024

 
254,479

 
527,879

 
471,010

Less: customer progress payments

 
(2,308
)
Less: allowance for excess, slow-moving and obsolete inventory
(43,637
)
 
(39,075
)
Inventories, net
$
484,242

 
$
429,627


10. Debt

Long-term debt consisted of the following:
 
September 28, 2018
 
December 31, 2017
 
(In thousands)
Senior unsecured notes
$
401,661

 
$
414,862

Term loans
522,963

 
615,095

Revolving credit facilities and other
217,385

 
31,114

Total debt
1,142,009

 
1,061,071

Less: current portion
(6,385
)
 
(5,766
)
Long-term debt
$
1,135,624

 
$
1,055,305

    
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

17

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

administrative agent, swing line lender and global coordinator (the “DB Credit Agreement”). As of September 28, 2018, the weighted-average interest rate of borrowings under the DB Credit Agreement was 3.73%, excluding accretion of original issue discount and deferred financing fees, and there was $1.2 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 28, 2018, the Company had an original issue discount of $2.0 million and deferred financing fees of $7.5 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 $273.9 million. As of September 28, 2018, outstanding borrowings under these facilities were $90.0 million, and had a weighted average borrowing rate of 3.23%.

The Company is also party to letter of credit facilities with total capacity of $752.6 million. Total letters of credit of $375.8 million were outstanding as of September 28, 2018.

As of September 28, 2018, the Company is in compliance with the covenants under the DB Credit Agreement.

11. Accrued Liabilities

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

 
September 28, 2018
 
December 31, 2017
 
(In thousands)
Accrued payroll
$
105,202

 
$
98,132

Accrued taxes
36,640

 
53,939

Accrued asbestos-related liability
54,580

 
50,311

Warranty liability - current portion
37,297

 
32,428

Accrued restructuring liability - current portion
12,962

 
12,509

Accrued third-party commissions
16,520

 
14,014

Other
86,929

 
97,299

Accrued liabilities
$
350,130

 
$
358,632


Warranty Liability
 
The activity in the Company’s warranty liability consisted of the following:
 
Nine Months Ended
 
September 28, 2018
 
September 29, 2017
 
(In thousands)
 
 
Warranty liability, beginning of period
$
34,177

 
$
30,222

Accrued warranty expense
17,114

 
12,845

Changes in estimates related to pre-existing warranties
1,727

 
850

Cost of warranty service work performed
(17,565
)
 
(17,634
)
Acquisitions
4,933

 
13

Foreign exchange translation effect
(1,624
)
 
1,616

Warranty liability, end of period
$
38,762

 
$
27,912


18

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 28, 2018
 
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)
$
12,038

 
$
18,708

 
$
(20,488
)
 
$
(151
)
 
$
10,107

Facility closure costs(2)
(217
)
 
2,749

 
(2,271
)
 
(261
)
 

 
11,821

 
21,457

 
(22,759
)
 
(412
)
 
10,107

Non-cash charges(2)
 
 
(309
)
 
 
 
 
 
 
 
 
 
21,148

 
 
 
 
 
 
Fabrication Technology:
 
 
 
 
 
 
 
 
 
Termination benefits(1)
660

 
8,655

 
(6,485
)
 
(18
)
 
2,812

Facility closure costs(2)
42

 
5,236

 
(5,236
)
 
1

 
43

 
702

 
13,891

 
(11,721
)
 
(17
)
 
2,855

Non-cash charges(2)
 
 
5,734

 
 
 
 
 
 
 
 
 
19,625

 
 
 
 
 
 
Corporate and Other:
 
 
 
 
 
 
 
 
 
Facility closure costs(2)
84

 
18

 
(102
)
 

 

 
84

 
18

 
(102
)
 

 

Total
$
12,607

 
$
35,366

 
$
(34,582
)
 
$
(429
)
 
$
12,962

Non-cash charges(2)
 
 
5,425

 
 
 
 
 
 
 
 
 
$
40,791

 
 
 
 
 
 
 
(1) Includes severance and other termination benefits, including outplacement services.
(2) Includes the cost of relocating associates, relocating equipment and lease termination expense in connection with the closure of facilities.
(3) As of September 28, 2018, $13.0 million of the Company’s restructuring liability was included in Accrued liabilities.

The Company expects to incur charges of approximately $30 million during the remainder of 2018 related to its restructuring activities.

19

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

12. Net Periodic Benefit Cost - Defined Benefit Plans

In connection with the sale of the Fluid Handling business, the Buyer assumed the Fluid Handling liability for all foreign defined benefit plans specific to the Fluid Handling business, a portion of the U.S. defined benefit plan, and certain other postretirement obligations. Net benefit cost for the Fluid Handling business is included in (Loss) income 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 of the Company’s defined benefit pension plans and other post-retirement employee benefit plans:
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2018
 
September 29, 2017
 
September 28, 2018
 
September 29, 2017
 
(In thousands)
Pension Benefits - U.S. Plans:
 
 
 
 
 
 
 
     Service cost
$
20

 
$
46

 
$
101

 
$
139

     Interest cost
1,155

 
3,892

 
4,776

 
11,637

     Expected return on plan assets
(2,969
)
 
(5,340
)
 
(8,247
)
 
(16,019
)
     Amortization
606

 
1,623

 
2,434

 
4,860

Net periodic benefit cost
$
(1,188
)
 
$
221

 
$
(936
)
 
$
617

 
 
 
 
 
 
 
 
 Pension Benefits - Non-U.S. Plans:
 
 
 
 
 
 
 
     Service cost
$
643

 
$
409

 
$
1,889

 
$
2,407

     Interest cost
4,529

 
6,358

 
14,079

 
19,537

     Expected return on plan assets
(5,278
)
 
(6,994
)
 
(16,397
)
 
(20,404
)
     Amortization
250

 
1,728

 
776

 
3,401

Net periodic benefit cost
$
144

 
$
1,501

 
$
347

 
$
4,941

 
 
 
 
 
 
 
 
Other Post-Retirement Benefits:
 
 
 
 
 
 
 
     Service cost
$
6

 
$
10

 
$
19

 
$
31

     Interest cost
124

 
243

 
370

 
728

     Amortization
(22
)
 
(101
)
 
(66
)
 
(301
)
Net periodic benefit cost
$
108

 
$
152

 
$
323

 
$
458


During the three and nine months ended September 29, 2017, net periodic benefit cost of $2.0 million and $4.3 million, respectively, are included in (Loss) income from discontinued operations, net of taxes.

13. 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 $1.1 billion estimated fair value of the Company’s debt as of September 28, 2018 and December 31, 2017, 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.


20

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

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 28, 2018
 
Level
One
 
Level
Two
 
Level
Three
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
 Cash equivalents
$
29,760

 
$

 
$

 
$
29,760

 Foreign currency contracts related to sales - designated as hedges

 
357

 

 
357

 Foreign currency contracts related to sales - not designated as hedges

 
564

 

 
564

 Foreign currency contracts related to purchases - designated as hedges

 
735

 

 
735

 Foreign currency contracts related to purchases - not designated as hedges

 
405

 

 
405

 Deferred compensation plans

 
8,039

 

 
8,039

 
$
29,760

 
$
10,100

 
$

 
$
39,860

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

 
$
2,145

 
$

 
$
2,145

 Foreign currency contracts related to sales - not designated as hedges

 
65

 

 
65

 Foreign currency contracts related to purchases - designated as hedges

 
172

 

 
172

 Foreign currency contracts related to purchases - not designated as hedges

 
1,467

 

 
1,467

 Deferred compensation plans

 
8,039

 

 
8,039

 
$

 
$
11,888

 
$

 
$
11,888


 
December 31, 2017
 
Level
One
 
Level
Two
 
Level
Three
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
 Cash equivalents
$
24,083

 
$

 
$

 
$
24,083

 Short term investments

 
149,608

 

 
149,608

 Foreign currency contracts related to sales - designated as hedges

 
3,287

 

 
3,287

 Foreign currency contracts related to sales - not designated as hedges

 
43

 

 
43

 Foreign currency contracts related to purchases - designated as hedges

 
493

 

 
493

 Foreign currency contracts related to purchases - not designated as hedges

 
1,038

 

 
1,038

 Deferred compensation plans

 
6,374

 

 
6,374

 
$
24,083

 
$
160,843

 
$

 
$
184,926

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

 
$
1,257

 
$

 
$
1,257

 Foreign currency contracts related to sales - not designated as hedges

 
740

 

 
740

 Foreign currency contracts related to purchases - designated as hedges

 
1,332

 

 
1,332

 Foreign currency contracts related to purchases - not designated as hedges

 
449

 

 
449

 Deferred compensation plans

 
6,374

 

 
6,374

 
$

 
$
10,152

 
$

 
$
10,152


There were no transfers in or out of Level One, Two or Three during the nine months ended September 28, 2018.


21

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

Foreign Currency Contracts

As of September 28, 2018 and December 31, 2017, the Company had foreign currency contracts with the following notional values:
 
September 28, 2018
 
December 31, 2017
 
(In thousands)
Foreign currency contracts sold - not designated as hedges
$
37,782

 
$
37,143

Foreign currency contracts sold - designated as hedges
122,612

 
174,194

Foreign currency contracts purchased - not designated as hedges
115,311

 
103,975

Foreign currency contracts purchased - designated as hedges
45,293

 
59,055

Total foreign currency derivatives
$
320,998

 
$
374,367


The Company recognized the following in its Condensed Consolidated Financial Statements related to its derivative instruments:
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2018
 
September 29, 2017
 
September 28, 2018
 
September 29, 2017
 
(In thousands)
Contracts Designated as Hedges:
 
 
 
Foreign Currency Contracts - related to customer sales contracts:
 
 
 
 
 
 
 
  Unrealized gain
$
2

 
$
798

 
$
1,286

 
$
3,515

  Realized gain (loss)
42

 
323

 
(4,350
)
 
1,950

Foreign Currency Contracts - related to supplier purchase contracts:
 
 
 
 
 
 
 
  Unrealized (loss) gain
(195
)
 
306

 
(465
)
 
945

  Realized (loss) gain
(365
)
 
(1,022
)
 
1,428

 
(2,036
)
  Unrealized gain (loss) on net investment hedges(1)
671

 
(8,308
)
 
9,210

 
(27,737
)
Contracts Not Designated in a Hedge Relationship:
 
 
 
 
 
 
 
Foreign Currency Contracts - related to customer sales contracts:
 
 
 
 
 
 
 
  Unrealized (loss) gain
(476
)
 
(289
)
 
1,173

 
(29
)
  Realized (loss) gain
(596
)
 
(737
)
 
(49
)
 
853

Foreign Currency Contracts - related to supplier purchases contracts:
 
 
 
 
 
 
 
  Unrealized gain (loss)
174

 
(104
)
 
(1,631
)
 
500

  Realized gain
397

 
498

 
73

 
243

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

14. Commitments and Contingencies

For further description of the Company’s litigation and contingencies, reference is made to Note 16, “Commitments and Contingencies” in the Notes to Consolidated Financial Statements in the 2017 Form 10-K. Because the Company did not retain an interest in the ongoing operations of the divested Fluid Handling business, the retained asbestos-related activity has been classified in its Condensed Consolidated Statements of Operations as a component of (Loss) income from discontinued operations, net of taxes.
 

22

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

Asbestos Contingencies

Claims activity since December 31 related to asbestos claims is as follows:
 
Nine Months Ended
 
September 28, 2018
 
September 29, 2017
 
(Number of claims)
Claims unresolved, beginning of period
17,737

 
20,567

Claims filed(1)
2,982

 
3,450

Claims resolved(2)
(4,450
)
 
(6,414
)
Claims unresolved, end of period
16,269

 
17,603

 
(1) Claims filed include all asbestos claims for which notification has been received or a file has been opened.
(2) 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 28, 2018
 
December 31, 2017
 
(In thousands)
Long-term asbestos insurance asset(1)
$
269,268

 
$
284,454

Long-term asbestos insurance receivable(1)
77,837

 
73,489

Accrued asbestos liability(2)
54,580

 
50,311

Long-term asbestos liability(3)
288,689

 
310,326

 
(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.

Management’s analyses are based on currently known facts and assumptions. 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.

Other Litigation Matters

The Company is also involved in 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.


23

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

15. Segment Information

The Company 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, which represents Operating income before Restructuring and other related charges.

The Company’s segment results were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2018
 
September 29, 2017
 
September 28, 2018
 
September 29, 2017
 
(In thousands)
Net sales:
 
 
 
     Air and Gas Handling
$
351,350

 
$
362,310

 
$
1,063,433

 
$
989,044

     Fabrication Technology
524,023

 
482,199

 
1,618,153

 
1,437,057

 
$
875,373

 
$
844,509

 
$
2,681,586

 
$
2,426,101

Segment operating income(1):
 
 
 
 
 
 
 
     Air and Gas Handling
$
34,380

 
$
40,234

 
$
84,435

 
$
97,570

     Fabrication Technology
55,635

 
56,232

 
190,865

 
172,696

     Corporate and other
(13,919
)
 
(14,402
)
 
(46,453
)
 
(42,024
)
 
$
76,096

 
$
82,064

 
$
228,847

 
$
228,242

 
(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 28, 2018
 
September 29, 2017
 
September 28, 2018
 
September 29, 2017
 
(In thousands)
Income from continuing operations before income taxes
$
50,295

 
$
63,438

 
$
148,775

 
$
176,005

Loss on short term investments

 

 
10,128

 

Interest expense, net
9,885

 
11,328

 
29,153

 
29,106

Restructuring and other related charges
15,916

 
7,298

 
40,791

 
23,131

Segment operating income
$
76,096

 
$
82,064

 
$
228,847

 
$
228,242


24


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

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

The following discussion of the financial condition and results of operations of Colfax Corporation (“Colfax,” “the Company,” “we,” “our,” and “us”) should be read in conjunction with the Condensed Consolidated Financial Statements and related footnotes included in Part I. Item 1. “Financial Statements” of this Quarterly Report on Form 10-Q for the quarterly period ended September 28, 2018 (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, 2017 (the “2017 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 16, 2018.

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 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, including risks from trade protection measures and other changes in trade relations;

25



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, including the effects of the U.S. Tax Cuts and Jobs Act;

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 2017 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 2017 Form 10-K for a further discussion regarding some of the reasons that actual results may be materially different from those that we anticipate.


26


Overview

We conduct our continuing operations through the Air and Gas Handling and Fabrication Technology segments, which also represent our 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 consumable products and equipment for use in the cutting, joining and automated welding of steels, aluminum and other metals and metal alloys.

We sold our Fluid Handling business to CIRCOR International (“CIRCOR”), Inc., a Delaware corporation on December 11, 2017. Total consideration for the sale was $860.6 million, consisting of $551.0 million of cash, 3.3 million shares of CIRCOR common stock (“CIRCOR Shares”), and assumption of $168.0 million of net retirement liabilities. All cash consideration has been collected. During the second quarter of 2018, we sold the CIRCOR Shares for net cash proceeds of $139.5 million. See Note 3, “Discontinued Operations” for further information.

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

We have sales, engineering, administrative and 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.

During the third quarter of 2018, Argentina became a highly inflationary economy, resulting in the remeasurement of our Argentinian operations into Brazilian real, the functional currency of its direct parent. Gains and losses from the re-measurement are reflected in current earnings. Future impacts to earnings of applying highly inflationary accounting for Argentina on our Consolidated Financial Statements will be dependent upon movements in the applicable exchange rates. As of and for the nine months ended September 28, 2018, the Argentina operation represented less than 1% of the Company’s Total assets and Net sales. The devaluation of the peso resulted in a loss of $1.2 million recognized in the Fabrication Technology segment operating income during the third quarter of 2018.

Integral to our operations is Colfax Business System (CBS). CBS is our business management system, including a comprehensive set of tools, and is a repeatable, teachable processes that we use to create superior value for our customers, shareholders and associates. Rooted in our core values, it is our culture. We believe that our management team’s access to, and experience in, the application of CBS is one of our primary competitive strengths.

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 28, 2018 to the comparable 2017 periods 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. During the nine months ended September 28, 2018, the Company completed three acquisitions: one in our Fabrication Technology segment and

27


two in our Air & Gas Handling segment. During the nine months ended September 29, 2017, we completed three acquisitions: two in our Fabrication Technology segment and one in our Air and Gas Handling segment.

Foreign Currency Fluctuations

A significant portion of our Net sales, approximately 79% and 80% for the third quarter and nine months ended September 28, 2018, respectively, were 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. Changes in foreign exchange during the third quarter of 2018 decreased Net sales and Income from continuing operations before income taxes by approximately 4% when compared with the third quarter of 2017. Changes in foreign exchange during the nine months ended September 28, 2018 increased Net sales and Income from continuing operations before income taxes by approximately 1% when compared with the same period in 2017. The changes in foreign exchange rates since December 31, 2017 decreased net assets by approximately 5% as of the nine months ended September 28, 2018.

Seasonality

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


28


Total Company

Sales, Orders and Backlog

Net sales for the third quarter and nine months ended September 28, 2018 increased as compared with the third quarter and nine months ended September 29, 2017. 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 29, 2017
$
844.5

 
 
 
$
262.6

 
 
Components of Change: