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

FORM
10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 27, 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)
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
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      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     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     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  
As of September 27, 2019, there were 117,756,730 shares of the registrant’s common stock, par value $.001 per share, outstanding.



TABLE OF CONTENTS

 
Page
PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
            Condensed Consolidated Statements of Operations
            Condensed Consolidated Statements of Comprehensive Loss
            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 Income (Loss) Per Share from Continuing Operations
                 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
                 Note 17. Subsequent Events
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
 
Nine Months Ended
 
September 27, 2019
 
September 28, 2018
 
September 27, 2019
 
September 28, 2018
 
 
 
 
 
 
 
 
Net sales
$
846,519

 
$
524,022

 
$
2,439,085

 
$
1,618,152

Cost of sales
478,377

 
352,749

 
1,433,872

 
1,070,371

Gross profit
368,142

 
171,273

 
1,005,213

 
547,781

Selling, general and administrative expense
290,500

 
129,558

 
846,288

 
403,370

Restructuring and other related charges
9,781

 
6,659

 
47,197

 
19,643

Operating income
67,861

 
35,056

 
111,728

 
124,768

Pension settlement loss
33,616

 

 
33,616

 

Interest expense, net
31,828

 
11,611

 
86,820

 
33,455

Loss on short-term investments

 

 

 
10,128

Income (loss) from continuing operations before income taxes
2,417

 
23,445

 
(8,708
)
 
81,185

Provision (benefit) for income taxes
(1,353
)
 
6,787

 
6,840

 
(4,076
)
Net income (loss) from continuing operations
3,770

 
16,658

 
(15,548
)
 
85,261

Income (loss) from discontinued operations, net of taxes
9,024

 
18,544

 
(486,265
)
 
20,762

Net income (loss)
12,794

 
35,202

 
(501,813
)
 
106,023

Less: income attributable to noncontrolling interest, net of taxes
2,320

 
3,892

 
8,970

 
11,721

Net income (loss) attributable to Colfax Corporation
$
10,474

 
$
31,310

 
$
(510,783
)
 
$
94,302

Net income (loss) per share - basic
 
 
 
 
 
 
 
Continuing operations
$
0.02

 
$
0.14

 
$
(0.14
)
 
$
0.69

Discontinued operations
$
0.06

 
$
0.13

 
$
(3.63
)
 
$
0.09

Consolidated operations
$
0.08

 
$
0.27

 
$
(3.77
)
 
$
0.78

Net income (loss) per share - diluted
 
 
 
 
 
 
 
Continuing operations
$
0.02

 
$
0.14

 
$
(0.14
)
 
$
0.69

Discontinued operations
$
0.06

 
$
0.13

 
$
(3.63
)
 
$
0.09

Consolidated operations
$
0.08

 
$
0.26

 
$
(3.77
)
 
$
0.77

    

See Notes to Condensed Consolidated Financial Statements.


2


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

 
Three Months Ended
 
Nine Months Ended
 
September 27, 2019
 
September 28, 2018
 
September 27, 2019
 
September 28, 2018
Net income (loss)
$
12,794

 
$
35,202

 
$
(501,813
)
 
$
106,023

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation, net of tax of $1,787, $(2,689), $1,375 and $1,880, respectively
(135,157
)
 
(46,437
)
 
(128,620
)
 
(187,235
)
Unrealized gain on hedging activities, net of tax of $4,411, $252, $4,102 and $3,352, respectively
11,757

 
136

 
13,413

 
7,156

Amounts reclassified from Accumulated other comprehensive income:
 
 
 
 
 
 
 
Amortization of pension and other post-retirement net actuarial gain (loss), net of tax of $(5,960), $165, $(7,679) and $641, respectively
(12,206
)
 
670

 
(21,166
)
 
2,503

Amortization of pension and other post-retirement prior service cost

 
1

 
32

 
2

Other comprehensive loss
(135,606
)
 
(45,630
)
 
(136,341
)
 
(177,574
)
Comprehensive loss
(122,812
)
 
(10,428
)
 
(638,154
)
 
(71,551
)
Less: comprehensive (loss) income attributable to noncontrolling interest
(3,384
)
 
(4,524
)
 
5,272

 
(9,483
)
Comprehensive loss attributable to Colfax Corporation
$
(119,428
)
 
$
(5,904
)
 
$
(643,426
)
 
$
(62,068
)


See Notes to Condensed Consolidated Financial Statements.


3


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

 
September 27, 2019
 
December 31, 2018
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
127,065

 
$
77,153

Trade receivables, less allowance for doubtful accounts of $40,864 and $26,844
576,139

 
386,588

Inventories, net
584,351

 
359,655

Other current assets
198,232

 
137,801

Current portion of assets held for sale
2,013,345

 
997,244

Total current assets
3,499,132

 
1,958,441

Property, plant and equipment, net
478,806

 
327,155

Goodwill
2,784,249

 
1,497,832

Intangible assets, net
2,262,377

 
628,300

Lease asset - right of use
159,999

 

Other assets
406,709

 
463,525

Assets held for sale, less current portion

 
1,740,705

Total assets
$
9,591,272

 
$
6,615,958

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Current portion of long-term debt
$
29,654

 
$
5,020

Accounts payable
376,406

 
291,233

Customer advances and billings in excess of costs incurred
16,566

 
16,827

Accrued liabilities
431,333

 
274,017

Current portion of liabilities held for sale
651,718

 
612,248

Total current liabilities
1,505,677

 
1,199,345

Long-term debt, less current portion
4,002,365

 
1,192,408

Non-current lease liability
123,238

 

Other liabilities
827,054

 
651,864

Liabilities held for sale, less current portion

 
95,395

Total liabilities
6,458,334

 
3,139,012

Equity:
 
 
 
Common stock, $0.001 par value; 400,000,000 shares authorized; 117,756,730 and 117,275,217 issued and outstanding
118

 
117

Additional paid-in capital
3,434,617

 
3,057,982

Retained earnings
496,423

 
991,838

Accumulated other comprehensive loss
(949,150
)
 
(780,177
)
Total Colfax Corporation equity
2,982,008

 
3,269,760

Noncontrolling interest
150,930

 
207,186

Total equity
3,132,938

 
3,476,946

Total liabilities and equity
$
9,591,272

 
$
6,615,958



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 income, 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

Net (loss) income



(469,234
)

2,629

(466,605
)
Distributions to noncontrolling owners





(2,970
)
(2,970
)
Noncontrolling interest share repurchase


(565
)

410

(211
)
(366
)
Other comprehensive loss, net of tax of $(1,981)




(20,794
)
(2,113
)
(22,907
)
Common stock-based award activity
108,945


7,481




7,481

Balance at June 28, 2019
117,667,359

118

3,427,979

485,949

(819,248
)
161,551

3,256,349

Net income



10,474


2,320

12,794

Distributions to noncontrolling owners





(7,237
)
(7,237
)
Other comprehensive loss, net of tax of $193




(129,902
)
(5,704
)
(135,606
)
Common stock-based award activity
89,371


6,638




6,638

Balance at September 27, 2019
117,756,730

$
118

$
3,434,617

$
496,423

$
(949,150
)
$
150,930

$
3,132,938



See Notes to Condensed Consolidated Financial Statements.



















5


COLFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (CONTINUED)
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



24,535


4,507

29,042

Distributions to noncontrolling owners





(721
)
(721
)
Other comprehensive income, 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

Net income



38,457


3,322

41,779

Distributions to noncontrolling owners





(3
)
(3
)
Other comprehensive loss, net of tax of $11,718




(190,603
)
(18,840
)
(209,443
)
Common stock repurchases
(4,604,974
)
(4
)
(143,898
)



(143,902
)
Common stock-based award activity
53,153


7,765




7,765

Balance at June 29, 2018
118,925,914

119

3,100,201

914,634

(698,680
)
221,166

3,537,440

Net income



31,310


3,892

35,202

Distributions to noncontrolling owners





(182
)
(182
)
Other comprehensive loss, net of tax of $(2,272)




(37,214
)
(8,416
)
(45,630
)
Common stock repurchases
(1,844,451
)
(2
)
(56,096
)



(56,098
)
Common stock-based award activity
117,986


7,590




7,590

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.

6


COLFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands
(Unaudited)
 
Nine Months Ended
 
September 27, 2019
 
September 28, 2018
 
 
 
 
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(501,813
)
 
$
106,023

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Held for sale impairment loss
481,000

 

Depreciation, amortization and other impairment charges
190,577

 
110,597

Stock-based compensation expense
17,005

 
18,867

Non-cash interest expense
5,674

 
3,332

Loss on short-term investments

 
10,128

Deferred income tax benefit
(18,673
)
 
(21,730
)
Gain on sale of property, plant and equipment
(140
)
 
(8,211
)
Loss on sale of business

 
4,337

Pension settlement loss
77,390

 

Changes in operating assets and liabilities:
 
 
 
Trade receivables, net
29,071

 
(51,722
)
Inventories, net
(54,256
)
 
(56,951
)
Accounts payable
(98,920
)
 
6,486

Income taxes
(39,909
)
 
(12,019
)
Customer advances and billings in excess of costs incurred
33,149

 
18,970

Changes in other operating assets and liabilities
(54,406
)
 
(27,299
)
Net cash provided by operating activities
65,749

 
100,808

Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(100,383
)
 
(40,247
)
Proceeds from sale of property, plant and equipment
7,474

 
17,758

Acquisitions, net of cash received
(3,136,777
)
 
(83,846
)
Sale of short-term investments, net

 
139,480

Proceeds from sale of business, net

 
18,626

Net cash (used in) provided by investing activities
(3,229,686
)
 
51,771

Cash flows from financing activities:
 
 
 
Payments under term credit facility
(533,437
)
 
(93,750
)
Proceeds from borrowings under notes and term credit facility
2,725,000

 

Proceeds from borrowings on revolving credit facilities and other
1,780,085

 
911,772

Repayments of borrowings on revolving credit facilities and other
(1,136,186
)
 
(722,573
)
Payment of debt issuance costs
(24,402
)
 

Proceeds from tangible equity units, net
377,814

 

Proceeds from issuance of common stock, net
4,787

 
4,648

Payment for noncontrolling interest share repurchase
(93,087
)
 

Payments for common stock repurchases

 
(200,000
)
Other
(9,680
)
 
(1,038
)
Net cash provided by (used in) financing activities
3,090,894

 
(100,941
)
Effect of foreign exchange rates on Cash and cash equivalents
(5,216
)
 
(27,757
)
(Decrease) increase in Cash and cash equivalents
(78,259
)
 
23,881

Cash and cash equivalents, beginning of period
245,019

 
262,019

Cash and cash equivalents, end of period
$
166,760

 
$
285,900

See Notes to Condensed Consolidated Financial Statements.

7

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 May 15, 2019, the Company entered into a definitive equity and asset purchase agreement (the “Purchase Agreement”) with Granite Holdings US Acquisition Co., a Delaware corporation, and Brillant 3047, GmbH, a company organized under the laws of Germany (collectively, the “Purchaser”), which are affiliates of KPS Capital Partners, LP (“KPS”), pursuant to which the Purchaser agreed to purchase certain subsidiaries and assets comprising Colfax’s Air and Gas Handling business. On September 30, 2019, Colfax completed the sale of its Air and Gas Handling business to the Purchaser for an aggregate purchase price of $1.8 billion, including $1.67 billion of cash paid at closing, subject to certain adjustments pursuant to the Purchase Agreement, and the assumption of certain liabilities and minority interests. Accordingly, the accompanying Condensed Consolidated Financial Statements for all periods presented reflect the Air and Gas Handling business as a discontinued operation. See Note 3, “Discontinued Operations”, for further information.

On February 22, 2019, Colfax completed the purchase of DJO Global, Inc. (“DJO”) 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 and the remaining asbestos and environmental activity 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 and nine months ended September 27, 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 businesses, and European operations typically experience a slowdown during the July, August and December holiday seasons. General economic conditions may, however, impact future seasonal variations.


8

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 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 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 recognizes those lease payments in the Consolidated Statement of Operations on a straight-line basis over the lease term. The Company has recognized a right-of-use asset of $160 million, with corresponding related lease liabilities 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 U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”) related to items stranded in accumulated other comprehensive income. The guidance was applied retrospectively as of January 1, 2019. As a result of this accounting guidance, $15.4 million of tax benefit formerly booked to Other Comprehensive Income was reclassified to retained earnings.

 
January 1, 2019


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 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 GAAP and broadens the information an entity must consider when developing its expected credit loss estimates to include forward-looking information. The standard applies to most financial assets held at amortized costs, as well as certain other instruments. Under the current expected credit loss (CECL) model, entities must estimate losses over the entire contractual term of the asset from the date of initial recognition. In determining expected losses, consideration must be given to historical loss experience, current conditions, and reasonable and supportable forecasts incorporating forward looking information.
 
The Company notes that certain financial assets, which are not reserved for currently, are now in the scope of this ASU. The Company has selected a compliant methodology and is in the process of performing a quantitative assessment of the materiality of the adoption of this ASU. The Company does not intend to early adopt this new guidance.
 
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.
 
This accounting standard update impacts disclosures only. The Company is currently evaluating the impact of this ASU on its consolidated financial statement disclosures 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.

 
This accounting standard update impacts disclosures only. The Company is currently evaluating the impact of this ASU on its consolidated financial statement disclosures and the timing of adoption.

 
January 1, 2021



10

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





3. Discontinued Operations

Sale of Air and Gas Handling Business

As discussed previously in Note 1, “General,” the Company entered into the Purchase Agreement to sell its Air and Gas Handling business to the Purchaser, and the sale subsequently closed in the Company’s fiscal fourth quarter on September 30, 2019.

The accounting requirements for reporting a business to be divested as a discontinued operation were met as of the end of the second quarter of 2019. Accordingly, the accompanying Condensed Consolidated Financial Statements for all periods presented reflect the Air and Gas Handling business as a discontinued operation. The Air and Gas Handling business had revenues of $998.8 million for the nine months ended September 27, 2019 and $1,473.7 million for the year ended December 31, 2018.

The total consideration for the sale was $1.8 billion, including $1.67 billion in cash paid at closing, subject to certain adjustments pursuant to the purchase agreement, and the assumption of certain liabilities and minority interests.

Based on the purchase price and the carrying value of the net assets being sold, the Company recorded an impairment loss of $481 million in the second quarter of 2019, which is included in Loss from discontinued operations, net of taxes in the Condensed Consolidated Statement of Operations. The impairment loss included a $449 million goodwill impairment charge and a $32 million valuation allowance charge on assets held for sale relating to the initial estimated cost to sell the business. An accumulated other comprehensive loss of approximately $350 million associated with the Air and Gas Handling business was included in the determination of the goodwill impairment charge, which is mostly attributable to the recognition of cumulative foreign currency translation effects from the long-term strengthening of the U.S. Dollar.

The Company reduced the valuation allowance by $8.5 million for amounts paid during the third quarter of 2019. As of September 27, 2019, the remaining valuation allowance for the estimated cost to sell the disposal group was $23.5 million. The Company also performed an impairment assessment of the assets held for sale as of September 27, 2019 and concluded there was no further impairment.

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



























11

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




 
The key components of Income (loss) from discontinued operations, net of taxes related to the Air and Gas Handling business for the three and nine months ended September 27, 2019 and September 28, 2018 were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 27, 2019
 
September 28, 2018
 
September 27, 2019
 
September 28, 2018
 
(In thousands)
Net sales
$
338,885

 
$
351,351

 
$
998,793

 
$
1,063,434

Cost of sales
230,692

 
251,695

 
689,004

 
782,232

Selling, general and administrative expense
65,117

 
65,275

 
194,562

 
196,766

Restructuring and other related charges
4,987

 
9,257

 
13,354

 
21,148

Held for sale impairment loss

 

 
481,000

 

Divestiture-related expense(1)
4,481

 

 
11,692

 

Operating income (loss)
33,608

 
25,124

 
(390,819
)
 
63,288

Interest expense (income)(2)
12,779

 
(1,726
)
 
38,899

 
(4,302
)
Pension settlement loss

 

 
43,774

 

Income (loss) from discontinued operations before income taxes
20,829

 
26,850

 
(473,492
)
 
67,590

Income tax expense
9,809

 
5,610

 
5,387

 
15,566

Income (loss) from discontinued operations, net of taxes
$
11,020

 
$
21,240

 
$
(478,879
)
 
$
52,024

(1) Primarily related to professional and consulting fees associated with the divestiture including seller due diligence and preparation of regulatory filings, as well as other disposition-related activities.
(2) The Company reclassified the portion of its interest expense associated with its Term Loan Facilities that is associated with the mandatory repayment using net proceeds from the sale of the business.

Total income attributable to noncontrolling interest related to the Air and Gas Handling business, net of taxes was $1.5 million, $3.5 million, $5.9 million, and $10.0 million for the three months ended September 27, 2019 and September 28, 2018 and the nine months ended September 27, 2019 and September 28, 2018, respectively.





























12

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





The following table summarizes the major classes of assets and liabilities held for sale that were included in the Company’s consolidated balance sheets as of September 27, 2019 and December 31, 2018:
 
September 27, 2019
 
December 31, 2018
 
(In thousands)
ASSETS HELD FOR SALE
 
 
 
Cash and cash equivalents
$
39,695

 
$
167,866

Trade receivables, less allowance for doubtful accounts of $8,783 and $8,308
520,379

 
602,830

Inventories, net
155,877

 
136,880

Other current assets
61,079

 
89,668

Property, plant, and equipment, net
184,035

 
176,189

Goodwill
599,544

 
1,078,785

Intangible assets, net
365,728

 
384,613

Other assets
110,508

 
101,118

Valuation allowance on assets held for sale
(23,500
)
 

Total assets held for sale
2,013,345

 
2,737,949

Less: current portion
2,013,345

 
997,244

Total assets held for sale, less current portion
$

 
$
1,740,705

 
 
 
 
LIABILITIES HELD FOR SALE
 
 
 
Current portion of long-term debt
$
1,137

 
$
1,314

Accounts payable
256,955

 
349,434

Customer advances and billings in excess of costs incurred
158,324

 
130,480

Accrued liabilities
140,354

 
131,020

Other liabilities
94,948

 
95,395

Total liabilities held for sale
651,718

 
707,643

Less: current portion
651,718

 
612,248

Total liabilities held for sale, less current portion
$

 
$
95,395



Cash provided by operating activities of discontinued operations related to the sale of the Air and Gas Handling business for the nine months ended September 27, 2019 and September 28, 2018 was $18.0 million and $71.7 million, respectively. Cash used in investing activities of discontinued operations related to the sale of the Air and Gas Handling business was $27.5 million and $35.3 million for the nine months ended September 27, 2019 and September 28, 2018, respectively.


Sale of Fluid Handling Business

The Company sold its Fluid Handling business to CIRCOR International, Inc. (“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 was collected as of June 29, 2018.

During the second quarter of 2018, the Company sold its CIRCOR Shares for $139.5 million, net of $5.8 million of underwriters' fees. The related loss of $10.1 million on the disposition of the shares was recorded in Loss on short-term investments in the Consolidated Statements of Operations for the nine months ended September 28, 2018 and was reflected in the Company’s continuing operations.







13

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





The key components of Loss from discontinued operations related to the Fluid Handling business for the three and nine months ended September 27, 2019 and September 28, 2018 were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 27, 2019
 
September 28, 2018
 
September 27, 2019
 
September 28, 2018
 
(In thousands)
Selling, general and administrative expense(1)
$
2,637

 
$
2,668

 
$
7,645

 
$
7,262

Divestiture-related expense, net(2)

 
1,013

 

 
3,371

Operating loss
(2,637
)
 
(3,681
)
 
(7,645
)
 
(10,633
)
Loss on disposal

 

 

 
(4,337
)
Loss from discontinued operations before income taxes
(2,637
)
 
(3,681
)
 
(7,645
)
 
(14,970
)
Income tax (benefit) expense(3)
(641
)
 
(985
)
 
(259
)
 
16,292

Loss from discontinued operations, net of taxes
$
(1,996
)
 
$
(2,696
)
 
$
(7,386
)
 
$
(31,262
)
             
(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.
(3) 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 was recognized during the three months ended June 29, 2018.

The Company did not have material cash flows for discontinued operations related to the sale of the Fluid Handling business during the nine months ended September 27, 2019 and September 28, 2018.


14

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”) 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 and nine months ended September 27, 2019, the Company incurred $0.7 million and $56.7 million, respectively, 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 September 27, 2019, there was $0.8 million related to these expenses 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
 
Nine Months Ended
 
September 27, 2019
 
September 28, 2018
 
September 27, 2019
 
September 28, 2018
 
(Unaudited, in thousands)
Net sales
$
846,519

 
$
818,073

 
$
2,608,251

 
$
2,509,669

Net income (loss) from continuing operations attributable to Colfax Corporation
7,676

 
(3,025
)
 
72,857

 
39,582



15

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





The following table summarizes the Company’s current 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
$
160,234

Inventories
208,619

Property, plant and equipment
170,601

Goodwill
1,301,451

Intangible assets
1,737,000

Accounts payable
(108,540
)
Other assets and liabilities, net
(337,402
)
Total
3,131,963

Less: net assets attributable to noncontrolling interest
(1,861
)
Consideration, net of cash acquired
$
3,130,102


The following table summarizes preliminary Intangible assets acquired, excluding Goodwill, as of February 22, 2019:
 
Intangible
Asset
 
Weighted-Average Amortization Period
 
(In thousands)
 
(Years)
Trademarks
$
479,000

 
16
Customer relationships
954,000

 
14
Acquired technology
304,000

 
12
Intangible assets
$
1,737,000

 
 



16

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




5. Revenue

The Company’s Fabrication Technology segment formulates, develops, manufactures and supplies consumable products and equipment. Substantially all revenue from the Fabrication Technology business is recognized at a point in time. The Company disaggregates its Fabrication Technology revenue into the following product groups:

Three Months Ended
 
Nine Months Ended
 
September 27, 2019
 
September 28, 2018
 
September 27, 2019
 
September 28, 2018
 
(In thousands)
Equipment
$
162,531

 
$
143,130

 
$
525,148

 
$
441,994

Consumables
376,697

 
380,892

 
1,167,199

 
1,176,158

Total
$
539,228


$
524,022

 
$
1,692,347

 
$
1,618,152



Contracts with customers in the consumables product grouping generally have a shorter fulfillment period than equipment contracts.

The Company’s Medical Technology segment provides products and services spanning the full continuum of patient care, from injury prevention to rehabilitation. The Company’s Medical Technology sales are primarily derived from three sales channels including dealers and distributors, insurance, and direct to consumers and hospitals. Substantially all its revenue from the Medical Technology business is recognized at a point in time. The Company disaggregates its Medical Technology revenue into the following product groups:
 
Three Months Ended September 27, 2019
 
Nine Months Ended September 27, 2019
 
(In thousands)
Prevention & Rehabilitation
$
221,314

 
$
533,986

Reconstructive
85,977

 
212,752

Total
$
307,291

 
$
746,738


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 September 27, 2019 is immaterial.

The nature of the Company’s contracts gives rise to certain types of variable consideration, including rebates, 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.

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 $13.0 million and $17.3 million, respectively. During the three and nine months ended September 27, 2019, revenue recognized that was included in the contract liability balance at the beginning of the year was $4.8 million and $13.0 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 $0.9 million and $17.3 million, respectively. As of September 27, 2019 and September 28, 2018, total contract liabilities were $15.6 million and $19.5 million, respectively.


17

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




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

Net income (loss) per share from continuing operations was computed as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 27, 2019
 
September 28, 2018
 
September 27, 2019
 
September 28, 2018
 
(In thousands, except share data)
Computation of Net income (loss) per share from continuing operations:
 
 
 
 
 
 
 
Net income (loss) from continuing operations attributable to Colfax Corporation (1)
$
2,901

 
$
16,231

 
$
(18,636
)
 
$
83,520

Weighted-average shares of Common stock outstanding - basic
136,121,017

 
117,709,725