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 March 29, 2019
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.001 per share
CFX
New York Stock Exchange
5.75% Tangible Equity Units
CFXA
New York Stock Exchange
As of March 29, 2019, there were 117,558,414 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 Operations
            Condensed Consolidated Statements of Comprehensive (Loss) Income
            Condensed Consolidated Balance Sheets
            Condensed Consolidated Statements 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. Acquisition
                 Note 5. Revenue
                 Note 6. Net (Loss) Income Per Share
                 Note 7. Income Taxes
                 Note 8. Equity
                 Note 9. Inventories, Net
                 Note 10. Leases
                 Note 11. Debt
                 Note 12. Accrued Liabilities
                 Note 13. Net Periodic Benefit Cost - Defined Benefit Plans
                 Note 14. Financial Instruments and Fair Value Measurements
                 Note 15. Commitments and Contingencies
                 Note 16. 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 OPERATIONS
Dollars in thousands, except per share amounts
(Unaudited)

 
Three Months Ended
 
March 29, 2019
 
March 30, 2018
 
 
 
 
Net sales
$
1,007,668

 
$
880,925

Cost of sales
649,378

 
610,305

Gross profit
358,290

 
270,620

Selling, general and administrative expense
318,144

 
200,519

Restructuring and other related charges
15,386

 
7,929

Operating income
24,760

 
62,172

Pension settlement loss
43,774

 

Interest expense, net
29,121

 
9,588

Loss on short term investments

 
14,719

(Loss) income from continuing operations before income taxes
(48,135
)
 
37,865

(Benefit) provision for income taxes
(3,578
)
 
5,986

Net (loss) income from continuing operations
(44,557
)
 
31,879

Loss from discontinued operations, net of taxes
(3,445
)
 
(2,837
)
Net (loss) income
(48,002
)
 
29,042

Less: income attributable to noncontrolling interest, net of taxes
4,021

 
4,507

Net (loss) income attributable to Colfax Corporation
$
(52,023
)
 
$
24,535

Net (loss) income per share - basic and diluted
 
 
 
Continuing operations
$
(0.36
)
 
$
0.22

Discontinued operations
$
(0.03
)
 
$
(0.02
)
Consolidated operations
$
(0.39
)
 
$
0.20




See Notes to Condensed Consolidated Financial Statements.


2


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

 
Three Months Ended
 
March 29, 2019
 
March 30, 2018
Net (loss) income
$
(48,002
)
 
$
29,042

Other comprehensive income (loss):
 
 
 
Foreign currency translation, net of tax of $(365) and $(843)
26,402

 
81,675

Unrealized gain (loss) on hedging activities, net of tax of $1,878 and $(2,933)
5,352

 
(5,134
)
Amounts reclassified from Accumulated other comprehensive income:
 
 
 
Amortization of pension and other post-retirement net actuarial (loss) gain, net of tax of $(1,926) and $203
(9,614
)
 
957

Amortization of pension and other post-retirement prior service cost, net of tax of $0 and $0
32

 
1

Other comprehensive income
22,172

 
77,499

Comprehensive (loss) income
(25,830
)
 
106,541

Less: comprehensive income attributable to noncontrolling interest
8,140

 
10,559

Comprehensive (loss) income attributable to Colfax Corporation
$
(33,970
)
 
$
95,982



See Notes to Condensed Consolidated Financial Statements.


3


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

 
March 29, 2019
 
December 31, 2018
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
242,418

 
$
245,019

Trade receivables, less allowance for doubtful accounts of $41,538 and $35,152
1,153,056

 
989,418

Inventories, net
739,535

 
496,535

Other current assets
273,648

 
227,469

Total current assets
2,408,657

 
1,958,441

Property, plant and equipment, net
647,608

 
503,344

Goodwill
3,852,431

 
2,576,617

Intangible assets, net
2,871,424

 
1,012,913

Lease asset - right of use
197,607

 

Other assets
524,680

 
552,557

Total assets
$
10,502,407

 
$
6,603,872

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Current portion of long-term debt
$
136,208

 
$
6,334

Accounts payable
705,873

 
640,667

Customer advances and billings in excess of costs incurred
155,193

 
147,307

Accrued liabilities
574,354

 
405,037

Total current liabilities
1,571,628

 
1,199,345

Long-term debt, less current portion
4,037,146

 
1,192,408

Non-current lease liability
152,601

 

Other liabilities
999,316

 
735,173

Total liabilities
6,760,691

 
3,126,926

Equity:
 
 
 
Common stock, $0.001 par value; 400,000,000 shares authorized; 117,558,414 and 117,275,217 issued and outstanding
118

 
117

Additional paid-in capital
3,421,063

 
3,057,982

Retained earnings
955,183

 
991,838

Accumulated other comprehensive loss
(798,864
)
 
(780,177
)
Total Colfax Corporation equity
3,577,500

 
3,269,760

Noncontrolling interest
164,216

 
207,186

Total equity
3,741,716

 
3,476,946

Total liabilities and equity
$
10,502,407

 
$
6,603,872



See Notes to Condensed Consolidated Financial Statements.


4



COLFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS 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, 2018
117,275,217

$
117

$
3,057,982

$
991,838

$
(780,177
)
$
207,186

$
3,476,946

Cumulative effect of accounting change



15,368

(15,368
)


Net (loss) income



(52,023
)

4,021

(48,002
)
Distributions to noncontrolling owners





(2,170
)
(2,170
)
Noncontrolling interest share repurchase


(22,409
)

(21,372
)
(48,940
)
(92,721
)
Other comprehensive loss, net of tax of $(413)




18,053

4,119

22,172

Issuance of Tangible Equity Units


377,814




377,814

Common stock-based award activity
283,197

1

7,676




7,677

Balance at March 29, 2019
117,558,414

$
118

$
3,421,063

$
955,183

$
(798,864
)
$
164,216

$
3,741,716


 
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



24,535


4,507

29,042

Distributions to noncontrolling owners





(721
)
(721
)
Other comprehensive loss, net of tax of $(3,573)




71,447

6,052

77,499

Common stock-based award activity
231,908


8,160




8,160

Balance at March 30, 2018
123,477,735

$
123

$
3,236,334

$
876,177

$
(508,077
)
$
236,687

$
3,841,244


See Notes to Condensed Consolidated Financial Statements.


5


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

 
Three Months Ended
 
March 29, 2019
 
March 30, 2018
 
 
 
 
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(48,002
)
 
$
29,042

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization and impairment charges
44,832

 
36,987

Stock-based compensation expense
5,238

 
5,595

Non-cash interest expense
1,821

 
1,120

Loss on short term investments

 
14,719

Deferred income tax benefit
(9,185
)
 
(591
)
Loss (gain) on sale of property, plant and equipment
218

 
(7,148
)
Pension settlement loss
43,774

 

Changes in operating assets and liabilities:
 
 
 
Trade receivables, net
1,876

 
(17,896
)
Inventories, net
(36,131
)
 
(42,436
)
Accounts payable
(45,749
)
 
(18,836
)
Customer advances and billings in excess of costs incurred
7,238

 
27,391

Changes in other operating assets and liabilities
(38,218
)
 
(30,604
)
Net cash used in operating activities
(72,288
)
 
(2,657
)
Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(24,356
)
 
(11,097
)
Proceeds from sale of property, plant and equipment
1,283

 
9,034

Acquisitions, net of cash received
(3,147,835
)
 
(50,964
)
Proceeds from sale of business, net

 
(1,048
)
Net cash used in investing activities
(3,170,908
)
 
(54,075
)
Cash flows from financing activities:
 
 
 
Payments under term credit facility
(502,813
)
 
(18,750
)
Proceeds from borrowings under notes and term credit facility
2,725,000

 

Proceeds from borrowings on revolving credit facilities and other
1,233,735

 
173,886

Repayments of borrowings on revolving credit facilities and other
(477,045
)
 
(99,600
)
Payment of deferred debt issuance costs
(24,280
)
 

Proceeds from tangible equity units, net
377,814

 

Proceeds from issuance of common stock, net
2,439

 
2,565

Payment for noncontrolling interest share repurchase
(92,721
)
 

Other
(3,103
)
 
(690
)
Net cash provided by financing activities
3,239,026

 
57,411

Effect of foreign exchange rates on Cash and cash equivalents
1,569

 
5,648

(Decrease) increase in Cash and cash equivalents
(2,601
)
 
6,327

Cash and cash equivalents, beginning of period
245,019

 
262,019

Cash and cash equivalents, end of period
$
242,418

 
$
268,346


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 technology company that provides air and gas handling, fabrication technology, and medical device products and services to customers around the world under the Howden, ESAB, and DJO brands.

On February 22, 2019, Colfax completed the purchase of DJO Global, Inc. (“DJO”, “DJO Acquisition”) pursuant to the previously disclosed Agreement and Plan of Merger (the “Merger Agreement”), dated November 19, 2018. Colfax paid an aggregate purchase price of $3.15 billion, subject to certain adjustments set forth in the Merger Agreement (the “Purchase Price”). DJO is a global leader in orthopedic solutions, providing orthopedic devices, reconstructive implants, software and services spanning the full continuum of patient care, from injury prevention to rehabilitation.

On December 11, 2017, the Company completed the sale of its Fluid Handling business (“Fluid Handling”). 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, 2018 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, 2018 (the “2018 Form 10-K”), filed with the SEC on February 21, 2019.

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.

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 months ended March 29, 2019 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 2019

Standards Adopted
 
Description
 
Effective 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 adopted ASU No. 2016-02, “Leases (Topic 842)”, as of January 1, 2019, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption and in comparative periods that approximates the results of a full retrospective approach without restating prior periods. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed historical lease classification to be carried forward. Additionally, the Company elected the practical expedient to consolidate less significant non-lease components into the lease component for all asset classes. The Company made an accounting policy election, as permitted by Topic 842 to only record a right-of-use asset and related liability for leases with an initial term in excess of 12 months. The Company will recognize those lease payments in the Consolidated Statement of Operations on a straight-line basis over the lease term. The Company recognized a right-of-use asset of $197.6 million, with corresponding related lease liabilities of $197.6 million on the condensed consolidated balance sheet. For more information, refer to Note 10, “Leases”.
 
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 was applied retrospectively as of January 1, 2019. As a result of this new accounting guidance, $15.4 million of tax benefit formerly booked to Other Comprehensive Income was reclassified to retained earnings.

 
January 1, 2019

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 adoption of the ASU did not have a material impact on the consolidated financial statements, as such, no adjustment was recorded.
 
January 1, 2019


8

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 No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
 
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 this ASU on its consolidated financial statements.
 
January 1, 2020

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


9

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 International, Inc. (“CIRCOR”) on December 11, 2017. The key components of Loss from discontinued operations for the three months ended March 29, 2019 and March 30, 2018 were as follows:
 
Three Months Ended
 
March 29, 2019
 
March 30, 2018
 
(In thousands)

Selling, general and administrative expense(1)
$
2,307

 
$
2,471

Divestiture-related expense, net(2)
126

 
1,075

Loss from discontinued operations before income taxes
(2,433
)
 
(3,546
)
Income tax expense (benefit)
1,012

 
(709
)
Loss from discontinued operations, net of taxes
$
(3,445
)
 
$
(2,837
)
             
(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 Operations as part of Loss from discontinued operations. See Note 15, “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.

The Company did not have material cash flows for discontinued operations during the three months ended March 29, 2019 and March 30, 2018.


10

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

4. Acquisition

On February 22, 2019, Colfax completed the purchase of DJO Global, Inc. (“DJO”, “DJO Acquisition”) pursuant to the previously disclosed Agreement and Plan of Merger (the “Merger Agreement”), dated November 19, 2018. Colfax paid an aggregate net purchase price of $3.15 billion, subject to certain adjustments set forth in the Merger Agreement (the “Purchase Price”). See Note 8, “Equity” and Note 11, “Debt” for a discussion of the respective financing components of the DJO Acquisition.

DJO is a global leader in orthopedic solutions, providing orthopedic devices, reconstructive implants, software and services spanning the full continuum of patient care, from injury prevention to rehabilitation. DJO has approximately 5,000 employees across 18 locations around the world. The acquisition is expected to evolve the Company to higher margins, faster growth, and lower cyclicality, while providing opportunities for significant bolt-on and adjacent acquisitions over time. The value included as Goodwill for this acquisition is reflective of these expected benefits in conjunction with anticipated synergies as the Company uses Colfax Business System (“CBS”) to drive further operating improvement, margin expansion, and long-term growth. CBS is the Company’s business management system, combining a comprehensive set of tools and repeatable, teachable processes, that the Company uses to create superior value for its customers, shareholders and associates.
 
During the three months ended March 29, 2019, the Company incurred $53.3 million of advisory, legal, audit, valuation and other professional service fees in connection with the DJO Acquisition, which are included in Selling, general and administrative expense in the Condensed Consolidated Statement of Operations. As of March 29, 2019,$0.7 million related to these expenses were included in Accrued liabilities in the Condensed Consolidated Balance Sheet.

The DJO Acquisition was accounted for using the acquisition method of accounting and accordingly, the Condensed Consolidated Financial Statements include the financial position and results of operations from the date of acquisition. The following unaudited proforma financial information presents Colfax’s consolidated financial information assuming the acquisition had taken place on January 1, 2018. These amounts are presented in accordance with GAAP, consistent with the Company’s accounting policies.
 
Three Months Ended
 
March 29, 2019
 
March 30, 2018
 
(Unaudited, in thousands)
Net sales
$
1,176,834

 
$
1,173,554

Net income (loss) attributable to Colfax Corporation
(10,478
)
 
(6,894
)

The following table summarizes the Company’s best initial estimate of the aggregate fair value of the assets acquired and liabilities assumed at the date of acquisition. These amounts, including inventories, deferred taxes, intangible assets, useful lives of the intangible assets, and property, plant and equipment, are determined based upon certain valuations and studies that have yet to be finalized. Accordingly, the assets acquired and liabilities assumed, as detailed below, are subject to adjustment once the detailed analyses are completed, which could be material. Substantially all of the Goodwill recognized is not expected to be deductible for income tax purposes.
 
February 22, 2019
 
(In thousands)
Trade receivables
$
160,967

Inventories
211,991

Property, plant and equipment
171,500

Goodwill
1,245,612

Intangible assets
1,864,000

Accounts payable
(107,144
)
Other assets and liabilities, net
(399,907
)
Total
3,147,019

Less: net assets attributable to noncontrolling interest
(1,862
)
Consideration, net of cash acquired
$
3,145,157



11

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

The following table summarizes preliminary Intangible assets acquired, excluding Goodwill, as of February 22, 2019:
 
Intangible
Asset
(In thousands)
Weighted-Average Amortization Period (Years)
 
 
 
Trademarks
$
606,000

Indefinite
Customer relationships
954,000

14
Acquired technology
304,000

12
Intangible assets
$
1,864,000

 

5. Revenue

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

Three Months Ended

March 29, 2019
 
March 30, 2018
 
Fabrication Technology
 
Air and Gas Handling
 
Medical Technology
 
Fabrication Technology
 
Air and Gas Handling
 
(in thousands)
Point in time
$
560,384

 
$
124,587

 
123,535

 
$
533,013

 
$
213,406

Over time

 
199,162

 

 
260

 
134,246

Total
$
560,384

 
$
323,749

 
$
123,535

 
$
533,273

 
$
347,652


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 the performance period of the contract based on progress to date.

As of March 29, 2019, the Air and Gas Handling business had $893.0 million of remaining performance obligations, which is also referred to as total backlog. Of that total backlog, the Company expects to recognize approximately 68% as revenue in 2019 and an additional 32% thereafter.

As of March 29, 2019 and December 31, 2018, there were $150.7 million and $168.3 million, respectively, of revenues in excess of billings and $83.4 million and $68.1 million, respectively, of billings in excess of revenues on long-term contracts in the Condensed Consolidated Balance Sheets.

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.

For contracts within the Medical Technology segment, the Company further disaggregates revenue into three primary sales channels. The Dealers & Distributors channel, comprising 41% of Medical Technology revenue for the three months ended March 29, 2019, represents products sold to independent dealers, distributors and retailers. The Insurance channel represents products sold to patients who qualify for medical reimbursement and comprises 17% of Medical Technology revenue for the three months ended March 29, 2019. The Direct channel, comprising 41% of Medical Technology revenue for the three months ended March 29, 2019 represents products sold directly to orthopedic groups, hospitals, and consumers. The remaining 1% of products are sold through other channels.

Given the nature of the Fabrication Technology and Medical Technology businesses, the total amount of unsatisfied performance obligations with an original contract duration of greater than one year as of March 29, 2019 is immaterial.

The nature of the Company’s contracts gives rise to certain types of variable consideration, including rebates, liquidated damages, implicit price concessions, 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.

12

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


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, 2018 and 2017, total contract liabilities were $140.0 million and $133.3 million, respectively. During the three months ended March 29, 2019 and March 30, 2018, revenue recognized that was included in the contract liability balance at the beginning of the year was $80.1 million and $57.3 million, respectively. Of this total, 55% and 70%, respectively, was related to long-term contracts which have met the criteria for over time recognition. As of March 29, 2019 and March 30, 2018, total contract liabilities were $148.5 million and $161.8 million, respectively.

6. Net (Loss) Income Per Share from Continuing Operations

Net (loss) income per share from continuing operations was computed as follows:
 
Three Months Ended
 
March 29, 2019
 
March 30, 2018
 
(In thousands, except share data)
Net (loss) income from continuing operations attributable to Colfax Corporation (1)
$
(48,578
)
 
$
27,372

Weighted-average shares of Common stock outstanding - basic
133,713,815

 
123,560,338

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

 
520,460

Weighted-average shares of Common stock outstanding - diluted
133,713,815

 
124,080,798

Net (loss) income per share from continuing operations - basic and diluted
$
(0.36
)
 
$
0.22

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

For the three months ended March 29, 2019, the weighted-average shares of Common stock outstanding- basic includes the impact of 18.4 million shares related to the issuance of Colfax’s tangible equity units. See Note 8, “Equity” for details.

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 March 30, 2018 excludes 3.0 million of outstanding stock-based compensation awards as their inclusion would be anti-dilutive.
 
7. Income Taxes

During the three months ended March 29, 2019, Loss from continuing operations before income taxes was $48.1 million, while the income tax benefit was $3.6 million. The effective tax rate was 7.4% for the three months ended March 29, 2019. The effective tax rate for the three months ended March 29, 2019 differed from the 2019 U.S. federal statutory rate of 21% mainly due to losses in certain jurisdictions where a tax benefit is not expected to be recognized in 2019, and a $6.7 million unfavorable discrete U.S. income tax expense due to a change in valuation allowance as a result of the DJO Acquisition.

During the three months ended March 30, 2018, Income from continuing operations before income taxes was $37.9 million, while the Provision for income taxes was $6.0 million and the effective tax rate was 15.8%. The effective tax rate differs from the 2018 U.S. federal statutory rate of 21% mainly due to a net discrete tax benefit of $6.1 million primarily associated with a South American jurisdiction 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.


13

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

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.

There were no repurchases made during the three months ended March 29, 2019. As of March 29, 2019, 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 three months ended March 29, 2019 and March 30, 2018. 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, 2019
$
(80,794
)
 
$
(752,989
)
 
$
38,238

 
$
(795,545
)
Other comprehensive (loss) income before reclassifications:
 
 
 
 
 
 
 
Foreign currency translation adjustment
824

 
8,803

 
10

 
9,637

Gain on long-term intra-entity foreign currency transactions

 
12,621

 

 
12,621

Gain on net investment hedges

 

 
5,453

 
5,453

Unrealized loss on cash flow hedges

 

 
(76
)
 
(76
)
Other comprehensive (loss) income before reclassifications
824

 
21,424

 
5,387

 
27,635

Amounts reclassified from Accumulated other comprehensive loss (1)
(9,582
)
 

 

 
(9,582
)
Noncontrolling interest share repurchase

 
(21,372
)
 

 
(21,372
)
Net Other comprehensive (loss) income
(8,758
)
 
52

 
5,387

 
(3,319
)
Balance at March 29, 2019
$
(89,552
)
 
$
(752,937
)
 
$
43,625

 
$
(798,864
)

14

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, 2018
$
(84,338
)
 
$
(525,324
)
 
$
30,138

 
$
(579,524
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(322
)
 
60,658

 
32

 
60,368

Gain on long-term intra-entity foreign currency transactions

 
15,309

 

 
15,309

Loss on net investment hedges

 

 
(7,230
)
 
(7,230
)
Unrealized gain on cash flow hedges

 

 
2,043

 
2,043

Other comprehensive income (loss) before reclassifications
(322
)
 
75,967

 
(5,155
)
 
70,490

Amounts reclassified from Accumulated other comprehensive loss (1)
957

 

 

 
957

Net Other comprehensive income (loss)
635

 
75,967

 
(5,155
)
 
71,447

Balance at March 30, 2018
$
(83,703
)
 
$
(449,357
)
 
$
24,983

 
$
(508,077
)
 
(1) Included in the computation of net periodic benefit cost. The 2019 amount includes a $(10.3) million impact due to a non-U.S. pension plan settlement. See Note 13, “Net Periodic Benefit Cost - Defined Benefit Plans” for additional details.

Tangible equity unit (“TEU”) offering

On January 11, 2019, the Company issued $460 million in tangible equity units. The Company offered 4 million of its 5.75% tangible equity units at the stated amount of $100 per unit. An option to purchase up to an additional 600,000 tangible equity units at the stated amount of $100 per unit was exercised in full at settlement. Total cash of $447.7 million was received upon closing.
The proceeds from the issuance of the TEUs were allocated to equity and debt based on the relative fair value of the respective components of each TEU as follows:
 
TEU prepaid stock purchase contracts
 
TEU amortizing notes
 
Total
 
(In millions, except per unit amounts)

Fair value per unit
$
84.39

 
$
15.61

 
$
100.00

Gross proceeds
388.2

 
71.8

 
460.0

Less: Issuance costs
10.4

 
1.9

 
12.3

Net proceeds
$
377.8

 
$
69.9

 
$
447.7


The $377.8 million fair value of the prepaid stock purchase contracts is recorded in Additional paid-in capital in the Condensed Consolidated Balance Sheets. The fair value of the $69.9 million of TEU amortizing notes due January 2022 has both a short-term and a long-term component. $47.3 million is recorded in Long-term debt, less current portion, while $22.6 million is recorded in Current portion of long-term debt in the Condensed Consolidated Balance Sheets. The Company deferred certain debt issuance costs associated with the debt component of the TEUs. These amounts offset the debt liability balance in the Condensed Consolidated Balance Sheets and are being amortized over its term.
TEU prepaid stock purchase contracts
Unless previously settled at the holder’s option, for each purchase contract the Company will deliver to holders on January 15, 2022 (subject to postponement in certain limited circumstances, the “mandatory settlement date”) a number of shares of common stock. The number of shares of common stock issuable upon settlement of each purchase contract (the “settlement rate”) will be determined using the arithmetic average of the volume average weighted price for the 20 consecutive trading days beginning on,

15

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

and including, the 21st scheduled trading day immediately preceding January 15, 2022 (“the Applicable Market Value”) with reference to the following settlement rates:

if the Applicable Market Value of the common stock is greater than the threshold appreciation price of $25.00, then the holder will receive 4.0000 shares of common stock for each purchase contract (the “minimum settlement rate”);
if the Applicable Market Value of the common stock is greater than or equal to the reference price of $20.81, but less than or equal to the threshold appreciation price of $25.00, then the holder will receive a number of shares of common stock for each purchase contract having a value, based on the Applicable Market Value, equal to $100; and
if the Applicable Market Value of the common stock is less than the reference price of $20.81, then the holder will receive 4.8054 shares of common stock for each purchase contract (the “maximum settlement rate”).
TEU amortizing notes
Each TEU amortizing note has an initial principal amount of $15.6099, bears interest at a rate of 6.50% per annum and has a final installment payment date of January 15, 2022. On each January 15, April 15, July 15 and October 15, commencing on April 15, 2019, the Company pays equal quarterly cash installments of $1.4375 per TEU amortizing note (except for the April 15, 2019 installment payment, which was $1.5014 per TEU amortizing note), which will constitute a payment of interest and a partial repayment of principal, and which cash payment in the aggregate per year will be equivalent to 5.75% per year with respect to the $100 stated amount per unit. The TEU amortizing notes are the direct, unsecured and unsubordinated obligations of the Company and rank equally with all of the existing and future other unsecured and unsubordinated indebtedness of the Company.
Earnings per share
Unless the 4.6 million stock purchase contracts are redeemed by the Company or settled earlier at the unit holder’s option, they are mandatorily convertible into shares of Colfax common stock at not less than 4.0 shares per purchase contract or more than 4.8054 shares per purchase contract on January 15, 2022. This corresponds to not less than 18.4 million shares and not more than 22.1 million shares at the maximum. The 18.4 million minimum shares are included in the calculation of weighted-average shares of Common stock outstanding - basic. The difference between the minimum and maximum shares represents potentially dilutive securities. The Company includes them in its calculation of weighted-average shares of Common stock outstanding - diluted on a pro rata basis to the extent the average Applicable Market Value is higher than the reference price but is less than the conversion price.

Repurchase of noncontrolling interest shares
During the three months ended March 29, 2019, a South Africa consolidated subsidiary of the Company completed the repurchase of nearly all the noncontrolling interest shares of one of its subsidiaries under a general offer.  As of March 29, 2019, the Company owns 99.8% of this subsidiary. The amount paid to its noncontrolling shareholders was $92.7 million, which was financed by additional debt. See Note 11, “Debt” for more information. The difference between the cash paid and the book value of the noncontrolling interest repurchased was recorded in Additional paid-in capital on the Company’s Condensed Consolidated Balance Sheets.

9. Inventories, Net

Inventories, net consisted of the following:
 
March 29, 2019
 
December 31, 2018
 
(In thousands)
Raw materials
$
183,023

 
$
165,738

Work in process
103,919

 
88,860

Finished goods
501,812

 
283,067

 
788,754

 
537,665

Less: allowance for excess, slow-moving and obsolete inventory
(49,219
)
 
(41,130
)
Inventories, net
$
739,535

 
$
496,535


10. Leases

The Company leases certain office spaces, warehouses, facilities, vehicles, and equipment. Leases with an initial term of twelve months or less are not recorded on the balance sheet. Most leases include renewal options, which can extend the lease term into the future. The Company determines the lease term by assuming options that are reasonably certain of being renewed will be exercised. Certain of the Company’s leases include rental payments adjusted for inflation. The right-of-use lease asset and lease liability are recorded on our Condensed Consolidated Balance Sheet, with the current lease liability being included in Accrued liabilities. Operating lease expense approximated cash paid for leases during the three months ended March 29, 2019.

Quantitative information regarding the Company’s leases is as follows:
 
Three Months Ended March 29, 2019
 
(In thousands)
Operating lease expense
$
10,721

 
 
 
As of March 29, 2019
Maturities of lease liabilities is as follows:
(In thousands)
2019
$
37,856

2020
40,834

2021
31,700

2022
23,362

2023
19,232

Thereafter
74,739

Total
227,723

Less: present value discount
(30,116
)
Present value of lease liabilities
$
197,607

 
 
Weighted-average remaining lease term (in years):
 
  Operating leases
8.2

Weighted-average discount rate:
 
  Operating leases
3.3
%


16

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

11. Debt

Long-term debt consisted of the following:
 
March 29, 2019
 
December 31, 2018
 
(In thousands)
Term loans
$
1,705,403

 
$
485,959

Euro senior notes
388,491

 
395,420

TEU amortizing notes
70,171

 

2024 and 2026 notes
987,674

 

Revolving credit facilities and other
1,021,615

 
317,363

Total debt
4,173,354

 
1,198,742

Less: current portion
(136,208
)
 
(6,334
)
Long-term debt
$
4,037,146

 
$
1,192,408

    
New Term Loan Facilities and New Revolving Credit Facility

On December 17, 2018, the Company entered into a credit agreement (the “New Credit Facility”) 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, JPMorgan Chase Bank, N.A., as administrative agent, Credit Suisse Loan Funding LLC, as syndication agent, and the co-documentation agents named therein. The New Credit Facility consists of a revolving credit facility which totals $1.3 billion in commitments (the “New Revolver”) and a Term A-1 loan in an aggregate amount of $1.2 billion (the “Five Year Term Loan”), each of which matures in five years, and a Term A-2 loan in an aggregate amount of $500 million, which matures in two years (the “Two Year Term Loan” and, together with the Five years Term Loan, the “New Term Loan Facilities”). The New Revolver contains a $50 million swing line loan sub-facility.

The initial credit extensions under the New Credit Facility were only made available to the Company on the date of consummation of the DJO Acquisition, which occurred on February 22, 2019. See Note 4, “Acquisition” for details.

The New Term Loan Facilities and the New Revolver bear interest, at the Company’s election, at either the base rate (as defined in the New Credit Facility) or the Eurocurrency rate (as defined in the New Credit Facility), in each case, plus the applicable interest rate margin. The New Term Loan Facilities and the New Revolver initially bear interest either at the Eurocurrency rate plus 1.75% or at the base rate plus 0.75%, and in future quarters will bear interest either at the Eurocurrency rate or the base rate plus the applicable interest rate margin based upon either, whichever results in the lower applicable interest rate margin (subject to certain exceptions), Colfax’s total leverage ratio and the Company’s corporate family credit rating as determined by Standard & Poor’s and Moody’s (ranging from 1.25% to 2.00%, in the case of the Eurocurrency margin, and 0.25% to 1.00%, in the case of the base rate margin). Each swing line loan denominated in dollars bears interest at the base rate plus the applicable interest rate margin and each swing line loan denominated in any other currency available under the New Credit Facility bears interest at the Eurocurrency rate plus the applicable interest rate margin.

Certain of the Company’s U.S. subsidiaries have agreed to guarantee Colfax’s obligations under the New Credit Facility.

The New Credit Facility contains customary covenants limiting the ability of Colfax and its subsidiaries to, among other things, incur debt or liens, merge or consolidate with others, dispose of assets, make investments or pay dividends. In addition, the New Credit Facility contains financial covenants requiring Colfax to maintain (subject to certain exceptions) (i) a maximum total leverage ratio, calculated as Consolidated Total Debt (as defined in the New Credit Facility) divided by EBITDA (as defined in the New Credit Facility) of, initially, 6.00:1.00, with a step-down to 5.50:1.00 at the end of the second and third fiscal quarters following the consummation of the DJO Acquisition, 4.75:1.00 at the end of the fourth and fifth fiscal quarters, 4.25:1.00 at the end of the sixth fiscal quarter, 4.00:1.00 at the end of the seventh fiscal quarter, and 3.50:1.00 at the end of the eighth fiscal quarter, and (ii) a minimum interest coverage ratio of 3.00:1:00. The New Credit Facility also contains a “springing” collateral provision, which will require the obligations under the New Credit Facility to be secured by substantially all personal property of Colfax and its U.S. subsidiaries, subject to customary exceptions, within an agreed period of time if Colfax’s total leverage ratio under the New Credit Facility is greater than or equal to 3.75:1.00 for two consecutive fiscal quarters following the fourth fiscal quarter ending after consummation of the DJO Acquisition. The New Credit Facility contains various events of default (including failure to comply with the covenants under the New Credit Facility and related agreements) and upon an event of default the lenders may,

17

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

subject to various customary cure rights, require the immediate payment of all amounts outstanding under the New Term Loan Facilities and the New Revolver.

As of March 29, 2019, the Company is in compliance with the covenants under the New Credit Facility.

The proceeds of the loans under the New Credit Facility were used by the Company to repay in full its preexisting credit agreement (the “DB 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, as well as to pay a portion of the consideration paid by the Company in connection with the DJO Acquisition and other related fees.

In conjunction with the New Credit Facility, the Company recorded a charge to Interest expense, net in the Condensed Consolidated Statement of Operations for the three months ended March 29, 2019 of $0.8 million to write-off certain original issue discount and deferred financing fees associated with the DB Credit Agreement. In association with the New Credit Facility, the Company recorded an aggregate $12.8 million in deferred financing fees in its Condensed Consolidated Balance Sheet, which will be accreted to Interest expense, net primarily using the effective interest method, over the life of the New Credit Facility.

As of March 29, 2019, the weighted-average interest rate of borrowings under the New Credit Facility was 4.21%, excluding accretion of original issue discount and deferred financing fees, and there was $465.0 million available on the revolving credit facility.

Euro Senior Notes

On April 19, 2017, the Company issued senior unsecured notes with an aggregate principal amount of €350 million (the “Euro Senior Notes”). The Euro Senior Notes are due in April 2025 and have an interest rate of 3.25%. The proceeds from the Euro Senior 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 Senior 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.

TEU Amortizing Notes

On January 11, 2019, the Company issued $460 million in tangible equity units. The Company offered 4 million of its 5.75% tangible equity units at the stated amount of $100 per unit. An option to purchase up to an additional 600,000 tangible equity units at the stated amount of $100 per unit was exercised in full at settlement. Total cash of $447.7 million was received upon closing, comprised of $377.8 million TEU prepaid stock purchase contracts and $69.9 million of TEU amortizing notes due January 2022. The proceeds were used to finance a portion of the purchase price for the DJO Acquisition and for general corporate purposes. For more information, refer to Note 8, “Equity.”

2024 Notes and 2026 Notes

On February 5, 2019, two tranches of senior notes with aggregate principal amounts of $600 million (the “2024 Notes”) and $400 million (the “2026 Notes”) were issued by CFX Escrow Corporation, an unaffiliated special purpose finance entity established to issue the notes and incorporated in the State of Delaware, to finance a portion of the DJO Acquisition. The 2024 Notes are due on February 15, 2024 and have an interest rate of 6.0%. The 2026 Notes are due on February 15, 2026 and have an interest rate of 6.375%. Upon closing of the DJO Acquisition, the Company assumed all of CFX Escrow Corporation’s obligations under the 2024 Notes and 2026 Notes. Each tranche of notes is guaranteed by certain of the Company’s domestic subsidiaries.

Other Indebtedness

In addition to the debt agreements discussed above, the Company is party to various bilateral credit facilities with a borrowing capacity of $271.2 million. As of March 29, 2019, outstanding borrowings under these facilities were $69.0 million, and had a weighted average borrowing rate of 3.75%.


18

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

Additionally, as discussed in Note 8, “Equity”, the Company repurchased noncontrolling interest shares during the three months ended March 29, 2019. Based on local requirements, the Company was required to enter into a debt arrangement to enact the repurchases. As of March 29, 2019, the outstanding balance of $91.2 million was included in Current portion of long-term debt on the Company’s Condensed Consolidated Balance Sheets and is expected to be repaid during the three months ending June 28, 2019.

The Company is also party to letter of credit facilities with total capacity of $757.2 million. Total letters of credit of $355.9 million were outstanding as of March 29, 2019.

In total, the Company has deferred financing fees of $30.9 million included in its Condensed Consolidated Balance Sheet, which will be accreted to Interest expense, net, primarily using the effective interest method, over the life of the applicable debt agreements as of March 29, 2019.

12. Accrued Liabilities

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

 
March 29, 2019
 
December 31, 2018
 
(In thousands)
Accrued payroll
$
123,803

 
$
110,563

Accrued taxes
75,122

 
67,273

Accrued asbestos-related liability
58,556

 
56,045

Warranty liability - current portion
39,802

 
36,581

Accrued restructuring liability - current portion
29,986

 
28,600

Accrued third-party commissions
28,383

 
18,631

Lease liability - current portion
45,006

 

Other
173,696

 
87,344

Accrued liabilities
$
574,354

 
$
405,037


Warranty Liability
 
The activity in the Company’s warranty liability consisted of the following:
 
Three Months Ended
 
March 29, 2019
 
March 30, 2018
 
(In thousands)
Warranty liability, beginning of period
$
37,705

 
$
34,177

Accrued warranty expense
4,832

 
6,026

Changes in estimates related to pre-existing warranties
406

 
308

Cost of warranty service work performed
(5,433
)
 
(5,525
)
Acquisition-related liability
2,514

 

Foreign exchange translation effect
(51
)
 
522

Warranty liability, end of period
$
39,973

 
$
35,508



19

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:
 
Three Months Ended March 29, 2019
 
Balance at Beginning of Period
 
Acquisitions
 
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)
$
22,700

 
$

 
$
3,781

 
$
(7,285
)
 
$
61

 
$
19,257

Facility closure costs(2)
1,311

 

 
774

 
(818
)
 
(391
)
 
876

 
24,011

 

 
4,555

 
(8,103
)
 
(330
)
 
20,133

Fabrication Technology:
 
 
 
 
 
 
 
 
 
 
 
Termination benefits(1)
5,494

 

 
2,695

 
(4,672
)
 
(156
)
 
3,361

Facility closure costs(2)
662

 

 
1,460

 
(2,031
)
 
31

 
122

 
6,156

 

 
4,155

 
(6,703
)
 
(125
)
 
3,483

Non-cash charges(2)
 
 

 
133

 
 
 
 
 
 
 
 
 


 
4,288

 
 
 
 
 
 
Medical Technology:
 
 
 
 
 
 
 
 
 
 
 
Termination benefits(1)

 
5,922

 
1,952

 
(832
)
 
(3
)
 
7,039

Facility closure costs(2)

 

 
4,591

 
(4,591
)
 

 

 

 
5,922

 
6,543

 
(5,423
)
 
(3
)
 
7,039

Total
$
30,167

 
$
5,922

 
$
15,253

 
$
(20,229
)
 
$
(458
)
 
$
30,655

Non-cash charges(2)
 
 
 
 
133

 
 
 
 
 
 
 
 
 
 
 
$
15,386

 
 
 
 
 
 
 
(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. During the three months ended March 29, 2019, the Company recorded a $133 thousand non-cash impairment charge for facilities in our Fabrication Technology segment as part of Corporate approved restructuring activities.
(3) As of March 29, 2019, $30.0 million and $0.7 million of the Company’s restructuring liability was included in Accrued liabilities and Other liabilities, respectively.




20

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

13. Net Periodic Benefit Cost - Defined Benefit Plans

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
 
March 29, 2019
 
March 30, 2018
 
(In thousands)
Pension Benefits - U.S. Plans:
 
 
 
     Service cost
$
34

 
$
41

     Interest cost
1,798

 
1,811

     Expected return on plan assets
(2,660
)
 
(2,639
)
     Amortization
776

 
915

Net periodic benefit cost
$
(52
)
 
$
128

 
 
 
 
 Pension Benefits - Non-U.S. Plans:
 
 
 
     Service cost
$
529

 
$
629

     Interest cost
3,929

 
3,882

     Expected return on plan assets
(3,499
)
 
(4,675
)
     Settlement loss
43,774

 

     Amortization
126

 
268

Net periodic benefit cost
$
44,859

 
$
104

 
 
 
 
Other Post-Retirement Benefits:
 
 
 
     Service cost
$
1

 
$
7

     Interest cost
122

 
123

     Amortization
(37
)
 
(22
)
Net periodic benefit cost
$
86

 
$
108


During the three months ended March 29, 2019, the Company settled a non-U.S. pension plan, Howden Group Pension Plan (HGPP), in connection with a third-party buyout arrangement. As a result of the settlement, the Company is no longer responsible for any liabilities under HGPP and a loss of $43.8 million was recognized.

14. 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 $4.2 billion and $1.2 billion estimated fair value of the Company’s debt as of March 29, 2019 and December 31, 2018, respectively, 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.


21

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:
 
March 29, 2019
 
Level
One
 
Level
Two
 
Level
Three
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
 Cash equivalents
$
6,485

 
$

 
$

 
$
6,485

 Foreign currency contracts related to sales - designated as hedges

 
629

 

 
629

 Foreign currency contracts related to sales - not designated as hedges

 
173

 

 
173

 Foreign currency contracts related to purchases - designated as hedges

 
503

 

 
503

 Foreign currency contracts related to purchases - not designated as hedges

 
261

 

 
261

 Deferred compensation plans

 
7,790

 

 
7,790

 
$
6,485

 
$
9,356

 
$

 
$
15,841

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

 
$
2,154

 
$

 
$
2,154

 Foreign currency contracts related to sales - not designated as hedges

 
61

 

 
61

 Foreign currency contracts related to purchases - designated as hedges

 
381

 

 
381

 Foreign currency contracts related to purchases - not designated as hedges

 
818

 

 
818

 Deferred compensation plans

 
7,790

 

 
7,790

 
$

 
$
11,204

 
$

 
$
11,204


 
December 31, 2018
 
Level
One
 
Level
Two
 
Level
Three
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
 Cash equivalents
$
5,388

 
$

 
$

 
$
5,388

 Foreign currency contracts related to sales - designated as hedges

 
283

 

 
283

 Foreign currency contracts related to sales - not designated as hedges

 
326

 

 
326

 Foreign currency contracts related to purchases - designated as hedges

 
1,146

 

 
1,146

 Foreign currency contracts related to purchases - not designated as hedges

 
325

 

 
325

 Deferred compensation plans

 
7,154

 

 
7,154

 
$
5,388

 
$
9,234

 
$

 
$
14,622

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

 
$
2,452

 
$

 
$
2,452

 Foreign currency contracts related to sales - not designated as hedges

 
133

 

 
133

 Foreign currency contracts related to purchases - designated as hedges

 
210

 

 
210

 Foreign currency contracts related to purchases - not designated as hedges

 
557

 

 
557

 Deferred compensation plans

 
7,154

 

 
7,154

 
$

 
$
10,506

 
$

 
$
10,506


There were no transfers in or out of Level One, Two or Three during the three months ended March 29, 2019.


22

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

Foreign Currency Contracts

As of March 29, 2019 and December 31, 2018, the Company had foreign currency contracts with the following notional values:
 
March 29, 2019
 
December 31, 2018
 
(In thousands)
Foreign currency contracts sold - not designated as hedges
$
34,404

 
$
43,510

Foreign currency contracts sold - designated as hedges
157,577

 
125,011

Foreign currency contracts purchased - not designated as hedges
74,448

 
75,102

Foreign currency contracts purchased - designated as hedges
64,441

 
45,211

Total foreign currency derivatives
$
330,870

 
$
288,834


The Company recognized the following in its Condensed Consolidated Financial Statements related to its derivative instruments:
 
Three Months Ended
 
March 29, 2019
 
March 30, 2018
 
(In thousands)
Contracts Designated as Hedges:
 
Foreign Currency Contracts - related to customer sales contracts:
 
 
 
  Unrealized gain
$
1,232

 
$
2,419

  Realized loss
(4,145
)
 
(792
)
Foreign Currency Contracts - related to supplier purchase contracts:
 
 
 
  Unrealized (loss) gain
(229
)
 
149

  Realized gain
971

 
155

Unrealized gain (loss) on net investment hedges(1)
5,453

 
(7,230
)
Contracts Not Designated in a Hedge Relationship:
 
 
 
Foreign Currency Contracts - related to customer sales contracts:
 
 
 
  Unrealized (loss) gain
(29
)
 
914

  Realized (loss) gain
(658
)
 
1,147

Foreign Currency Contracts - related to supplier purchases contracts:
 
 
 
  Unrealized loss
(355
)
 
(1,018
)
  Realized gain (loss)
267

 
(528
)
 
(1) The unrealized gain (loss) on net investment hedges is attributable to the change in valuation of Euro denominated debt.

15. Commitments and Contingencies

For further description of the Company’s litigation and contingencies, reference is made to Note 17, “Commitments and Contingencies” in the Notes to Consolidated Financial Statements in the 2018 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 from discontinued operations, net of taxes.
 

23

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

Asbestos Contingencies

Claims activity since December 31 related to asbestos claims is as follows:
 
Three Months Ended
 
March 29, 2019
 
March 30, 2018
 
(Number of claims)
Claims unresolved, beginning of period
16,417

 
17,737

Claims filed(1)
1,056

 
1,069

Claims resolved(2)
(711
)
 
(739
)
Claims unresolved, end of period
16,762

 
18,067

 
(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:
 
March 29, 2019
 
December 31, 2018
 
(In thousands)
Long-term asbestos insurance asset(1)
$
278,183

 
$
278,662

Long-term asbestos insurance receivable(1)
64,828

 
62,523

Accrued asbestos liability(2)
58,556

 
56,045

Long-term asbestos liability(3)
282,298

 
288,962

 
(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.


24

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

16. Segment Information

Prior to the DJO Acquisition, the Company conducted its operations through two operating segments: Air and Gas Handling and Fabrication Technology. Subsequent to the DJO Acquisition, the Company conducts its continuing operations through three operating segments: Air and Gas Handling, Fabrication Technology, and Medical Technology segments, which also represent the Company’s 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, cutting equipment, automated welding and cutting systems, and consumables.

Medical Technology - a leading provider of orthopedic solutions, providing orthopedic devices, software and services spanning the full continuum of patient care, from injury prevention to rehabilitation.
 
Certain amounts not allocated to the three 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
 
March 29, 2019
 
March 30, 2018
 
(In thousands)
Net sales:
 
     Air and Gas Handling
$
323,749

 
$
347,652

     Fabrication Technology
560,384

 
533,273

Medical Technology
123,535

 

 
$
1,007,668

 
$
880,925

Segment operating income(1):
 
 
 
     Air and Gas Handling
$
29,430

 
$
23,382

     Fabrication Technology
70,605

 
64,138

Medical Technology
10,682

 

     Corporate and other
(70,571
)
 
(17,419
)
 
$
40,146

 
$
70,101

 
(1) Following is a reconciliation of (Loss) income from continuing operations before income taxes to segment operating income:
 
Three Months Ended
 
March 29, 2019
 
March 30, 2018
 
(In thousands)
(Loss) income from continuing operations before income taxes
$
(48,135
)
 
$
37,865

Loss on short term investments

 
14,719

Pension settlement loss
43,774

 

Interest expense, net
29,121

 
9,588

Restructuring and other related charges
15,386

 
7,929

Segment operating income
$
40,146

 
$
70,101


25


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 March 29, 2019 (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, 2018 (the “2018 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 21, 2019.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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;

26



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;

difficulties and delays in integrating the DJO acquisition or fully realizing projected cost savings and benefits of the DJO acquisition;

risks about the strategic options undertaken for our Air and Gas Handling segment and risks as to the timing and considerations for such strategic options; and

other risks and factors, listed in Item 1A. “Risk Factors” in Part I of our 2018 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 2018 Form 10-K for a further discussion regarding some of the reasons that actual results may be materially different from those that we anticipate.


27


Overview

In February 2019, we completed our acquisition of DJO Global Inc. (“DJO”) for $3.15 billion in cash. The acquisition of DJO has transformed Colfax by creating a new growth platform: Medical Technology.

Subsequent to the DJO acquisition, we now conduct our operations through three segments: Air and Gas Handling, Fabrication Technology, and Medical Technology, 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.

Medical Technology - a leading provider of orthopedic solutions, providing orthopedic devices, software and services spanning the full continuum of patient care, from injury prevention to rehabilitation.

Concurrent with our announcement of the DJO acquisition, we also announced that we are exploring strategic options for the Air and Gas Handling business, including a potential divestiture. We have hired advisors to assist in the process but cannot predict the outcome.

Certain amounts not allocated to the three 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 three months ended March 29, 2019, the Argentina operation represented approximately 1% of our Total assets and Net sales. The devaluation of the peso resulted in a loss of $0.8 million recognized in the Fabrication Technology segment operating income during the first quarter of 2019.

Integral to our operations is Colfax Business System (CBS). CBS is our business management system, combining a comprehensive set of tools and 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, and Adjusted EBITA as defined in the “Non-GAAP Measures” section.

Items Affecting Comparability of Reported Results

The comparability of our operating results for the first quarter of 2019 to the comparable 2018 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

28


acquisitions for the periods presented in this filing represents the incremental sales as a result of acquisitions. During the first quarter of 2019, we completed the acquisition of DJO, which represents a strategic evolution of Colfax that creates a new growth platform in the high-margin orthopedic solutions market. This acquisition is the natural next step to make our company less cyclical and provide consistent, growing cash flows to execute our strategy for compounding value creation. During the last three quarters of 2018, we completed one acquisition in our Fabrication Technology segment and two acquisitions in our Air & Gas Handling segment. 

Foreign Currency Fluctuations

A significant portion of our Net sales, approximately 70% for the first quarter of 2019, 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. Applying first quarter of 2019 foreign exchange rates to first quarter of 2018 results decreased first quarter of 2018 Net sales and Net income by 6% and 14%, respectively. Since December 31, 2018, changes in foreign exchange rates had a negligible impact on net assets as of March 29, 2019.

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. Sales in our Medical Technology segment typically peak in the fourth quarter. General economic conditions may, however, impact future seasonal variations.

Non-GAAP Measures

Adjusted EBITA

Adjusted EBITA, a non-GAAP performance measure, is included in this report because it is a key metric used by management to assess our operating performance. Adjusted EBITA excludes Restructuring and other such charges, acquisition-related intangible asset amortization, and other non-cash acquisition-related charges and strategic transaction costs. Adjusted EBITA assists Colfax management in comparing its operating performance over time because certain items may obscure underlying business trends and make comparisons of long-term performance difficult, as they are of a nature and/or size that occur with inconsistent frequency or relate to discrete restructuring plans that are fundamentally different from the ongoing productivity improvements of the Company. Colfax management also believes that presenting these measures allows investors to view its performance using the same measures that the Company uses in evaluating its financial and business performance and trends.

Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information calculated in accordance with GAAP. Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures. The following tables set forth a reconciliation of Net (loss) income from continuing operations, the most directly comparable GAAP financial measure, to Adjusted EBITA.


29


 
Three Months Ended
 
March 29, 2019
 
March 30, 2018
 
(Dollars in millions)
Net (loss) income from continuing operations (GAAP)
$
(44.6
)
 
$
31.9

(Benefit) provision for income taxes
(3.6
)
 
6.0

Loss on short term investments(1)

 
14.7

Interest expense, net
29.1

 
9.6

Pension settlement loss
43.8

 

Restructuring and other related charges
15.4

 
7.9

Strategic transaction costs(2)
55.8

 

Acquisition-related amortization and other non-cash charges(3)
30.8

 
20.7

Adjusted EBITA (non-GAAP)
$
126.7

 
$
90.8

Adjusted EBITA margin (non-GAAP)
12.6
%
 
10.3
%
 
(1) Includes the change in fair value of the CIRCOR shares received as partial consideration for the Fluid Handling business sale.
(2) Includes costs incurred for the acquisition of DJO and costs associated with the strategic review of the Air & Gas Handling business.
(3) Includes amortization of acquired intangibles and fair value charges on acquired inventory.

The following tables show Adjusted EBITA by segment for the first quarter of 2019 and first quarter of 2018.
 
Three Months Ended March 29, 2019
 
Air and Gas Handling
 
 Fabrication Technology
 
Medical Technology
 
Corporate and other
 
Total Colfax Corporation
 
(Dollars in millions)
Operating income (loss) (GAAP)
$
24.9

 
$
66.3

 
$
4.1

 
$
(70.6
)
 
$
24.8

Restructuring and other related charges
4.6

 
4.3

 
6.5

 

 
15.4

Segment operating income (loss)
29.5

 
70.6

 
10.6

 
(70.6
)
 
40.2

Strategic transaction costs
0.1

 

 

 
55.7

 
55.8

Acquisition-related amortization and other non-cash charges
7.0

 
8.7

 
15.0

 

 
30.8

Adjusted EBITA (non-GAAP)
$
36.5

 
$
79.3

 
$
25.7

 
$
(14.8
)
 
$
126.7

Adjusted EBITA margin (non-GAAP)
11.3
%
 
14.2
%
 
20.8
%
 
%
 
12.6
%

 
Three Months Ended March 29, 2018
 
Air and Gas Handling
 
 Fabrication Technology
 
Medical Technology
 
Corporate and other
 
Total Colfax Corporation
 
(Dollars in millions)
Operating income (loss) (GAAP)
$
17.9

 
$
61.7

 
$

 
$
(17.4
)
 
$
62.2

Restructuring and other related charges
5.5

 
2.4

 

 

 
7.9

Segment operating income (loss)
23.4

 
64.1

 

 
(17.4
)
 
70.1

Acquisition-related amortization and other non-cash charges
10.4

 
10.3

 

 

 
20.7

Adjusted EBITA (non-GAAP)
$
33.8

 
$
74.4

 
$

 
$
(17.4
)
 
$
90.8

Adjusted EBITA margin (non-GAAP)
9.7
%
 
14.0
%
 
%
 
%
 
10.3
%


30


Total Company

Sales, Orders and Backlog

Net sales for the first quarter of 2019 increased 14% as compared with the first quarter of 2018. 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)
 
Backlog at Period End
 
$
 
%
 
$
 
%
 
$