COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
☑ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20172020
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 No. 001-34045
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COLFAX CORPORATION
(Exact name of registrant as specified in its charter)
|
| | | | | | | |
DELAWAREDelaware | 54-1887631 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification Number) |
| | |
| 420 National Business Parkway, | 5th Floor | 20701 |
Annapolis Junction, Maryland | (Zip Code)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:
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| | | | | | | |
| TITLE OF EACH CLASS | Trading Symbol(s) | NAME OF EACH EXCHANGE ON WHICH REGISTERED |
| Common Stock, par value $0.001 per share | The CFX | New York Stock Exchange |
| 5.75% Tangible Equity Units | CFXA | New York Stock Exchange |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ☑ No ¨☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act. Yes ¨ ☐No þ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ ☑No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ☑ No ¨☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ☑ Accelerated filer ¨☐Non-accelerated filer ¨ (Do not check if a smaller reporting company) ☐Smaller reporting company ¨☐Emerging growth company ¨☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No þ☑
The aggregate market value of common shares held by non-affiliates of the Registrant on June 30, 2017July 3, 2020 was $3.509$2.823 billion based upon the aggregate price of the registrant’s common shares as quoted on the New York Stock Exchange composite tape on such date.
As of February 6, 2018,12, 2021, the number of shares of the Registrant’s common stock outstanding was 123,328,077.118,545,523.
EXHIBIT INDEX APPEARS ON PAGE
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the Registrant’s definitive proxy statement for its 20182021 annual meeting of stockholders to be filed pursuant to Regulation 14A within 120 days after the end of the Registrant’s fiscal year covered by this report. With the exception of the sections of the 20182021 Proxy Statement specifically incorporated herein by reference, the 20182021 Proxy Statement is not deemed to be filed as part of this Form 10-K.
TABLE OF CONTENTS
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| Item | Description | Page |
| Special Note Regarding Forward-Looking Statements | |
| | |
| Part I | |
| 1 | Business | |
| 1A | Risk Factors | |
| 1B | Unresolved Staff Comments | |
| 2 | Properties | |
| 3 | Legal Proceedings | |
| 4 | Mine Safety Disclosures | |
| Information about our Executive Officers | |
| | |
| Part II | |
| 5 | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
| 6 | Selected Financial Data | |
| 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| 7A | Quantitative and Qualitative Disclosures About Market Risk | |
| 8 | Financial Statements and Supplementary Data | |
| 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
| 9A | Controls and Procedures | |
| 9B | Other Information | |
| | |
| Part III | |
| 10 | Directors, Executive Officers and Corporate Governance | |
| 11 | Executive Compensation | |
| 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
| 13 | Certain Relationships and Related Transactions, and Director Independence | |
| 14 | Principal Accountant Fees and Services | |
| | |
| Part IV | |
| 15 | Exhibits and Financial Statement Schedules | |
| 16 | Form 10-K Summary | |
| | |
| Signatures | |
|
| | |
| Item | Description | Page |
| | Special Note Regarding Forward-Looking Statements | |
| | | |
| | Part I | |
| 1 | Business | |
| 1A | Risk Factors | |
| 1B | Unresolved Staff Comments | |
| 2 | Properties | |
| 3 | Legal Proceedings | |
| 4 | Mine Safety Disclosures | |
| | Executive Officers of the Registrant | |
| | | |
| | Part II | |
| 5 | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
| 6 | Selected Financial Data | |
| 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| 7A | Quantitative and Qualitative Disclosures About Market Risk | |
| 8 | Financial Statements and Supplementary Data | |
| 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
| 9A | Controls and Procedures | |
| 9B | Other Information | |
| | | |
| | Part III | |
| 10 | Directors, Executive Officers and Corporate Governance | |
| 11 | Executive Compensation | |
| 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
| 13 | Certain Relationships and Related Transactions, and Director Independence | |
| 14 | Principal Accountant Fees and Services | |
| | | |
| | Part IV | |
| 15 | Exhibits and Financial Statement Schedules | |
| 16 | Form 10-K Summary | |
| | | |
| | Signatures | |
Unless otherwise indicated, references in this Annual Report on Form 10-K (this “Form 10-K”) to “Colfax,” “the Company,” “we,” “our,” and “us” refer to Colfax Corporation and its subsidiaries.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this Form 10-K 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-K is filed with the Securities and Exchange Commission (the “SEC”). All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements regarding: the impact of the COVID-19 global pandemic, including the actions by governments, businesses, and individuals in response to the situation, on the global and regional economies, financial markets, and overall demand for our products; 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 as of the filing of this Form 10-K 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 and actual results could differ materially due to numerous factors, including but not limited to the following:
•risks related to the impact of the COVID-19 global pandemic, including actions by governments, businesses and individuals in response to the situation, such as the scope and duration of the outbreak, the nature and effectiveness of government actions and restrictive measures implemented in response, delays and cancellations of medical procedures, supply chain disruptions, the impact on creditworthiness and financial viability of customers, and other impacts on the Company’s business and ability to execute business continuity plans;
•changes in the general economy, as well as the cyclical nature of the markets we serve;
a significant or sustained decline•volatility in the commodity markets and certain commodity prices, including oil;oil and steel, due to economic disruptions from the COVID-19 pandemic and various geopolitical events;
•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;operations, including risks from trade protection measures and other changes in trade relations;
•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, realizability of deferred tax assets, or exposure to additional income tax liabilities, including the effects of the COVID-19 global pandemic and the U.S. Tax Cuts and Jobs Act;Act and the Coronavirus Aid, Relief, and Economic Security Act (the “CARES 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 or fully realizing projected cost savings and benefits of our acquisitions; and
•other risks and factors, listed in Item 1A. “Risk Factors” in Part I of this Form 10-K.
The effects of the COVID-19 pandemic, including actions by governments, businesses and individuals in response to it, may give rise or contribute to or amplify the risks associated with many of these factors.
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-K 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 Item 1A. “Risk Factors” in Part I of this Form 10-K for a further discussion regarding some of the factors that may cause actual results to differ materially from those that we anticipate.
PART I
Item 1. Business
General
Colfax Corporation (the “Company”, “Colfax”, “we” or “us”) is a leading diversified industrial technology company that provides airfabrication technology and gas handling and fabricationmedical technology products and services to customers around the world principally under the HowdenESAB and ESABDJO brands. The Company has been built through a series of acquisitions, as well as organic growth, since its founding in 1995. We seek to build an enduring premier global enterprise by applying the Colfax Business System (“CBS”) to continuously improve our Company and pursue growth in revenues and improvements in profit and cash flow.
Colfax began with a series of acquisitions in the fluid handling and mechanical power transmission sectors. In 2004, we divested our mechanical power transmission operations to focus on fluid handling and, through the end of 2011, made a series of strategic acquisitions in this sector.
On January 13, 2012, we closedcompleted the acquisition of Charter International plc (“Charter”), which transformed Colfax from its historical roots as a fluid handling business into a diversified industrial enterprise with a broad global footprint. This acquisition provided an additional growth platform in the fragmented fabrication technology sector, while broadening the scope of our fluid handling platform to include air and gas handling products. Following the Charter acquisition, we strengthened and expanded the fluid handling and air & gas handling operations through acquisitions and the application of CBS before divesting the platforms in December 2017 and September 2019, respectively.
FollowingOn February 22, 2019, we completed the acquisition of Charter,DJO Global, Inc. (“DJO”), a global developer, manufacturer and distributor of high-quality medical devices with a broad range of products used for orthopedic bracing, reconstructive implants, rehabilitation, pain management and physical therapy. DJO products address the continuum of patient care from injury prevention to rehabilitation from injury or degenerative disease, enabling people to regain or maintain their natural motion. The DJO acquisition is part of our strategic evolution creating a new growth platform in the high-margin orthopedic solutions market.
On September 30, 2019, we completed 20 acquisitionsthe divestiture of our Air and Gas Handling business for an aggregate purchase price of $1.8 billion, including $1.67 billion of cash paid at closing, subject to growcertain adjustments, and strengthenthe assumption of certain liabilities and minority interests. We used the cash proceeds, net of transaction expenses and estimated taxes, to pay down approximately $1.6 billion of debt.
We believe the completion of the DJO acquisition and Air and Gas Handling divestiture has created a much stronger portfolio – one that is less cyclical, higher margin, and with more stable cash generation and an attractive long-term growth outlook. Our fabrication technology and medical technology platforms provide us a foundation on which to drive continuous improvement and compound our business. Four of those acquisitions related to our fluid handling operations, which we soldresults by investing in December 2017, as discussed below.innovation and attractive acquisitions. During the most recent three-year period, we completed fourhave complemented our organic growth plans with two acquisitions in our Air and Gas Handling segment that expanded our portfolio of gas compression products and enhanced our fan product offering with ventilation control software. We also completed four acquisitions in our Fabrication Technology segment during the most recent three-year period thathave broadened our product offering and technology content.
Incontent in our Fabrication Technology segment. During the year ended December 2017,31, 2020, we completed the divestiture of5 acquisitions and three investments within our fluid handling business. This represents a strategic milestone in the development of our portfolio and strengthens our balance sheet, providing more flexibility to execute our strategic growth strategy.Medical Technology segment. See Note 4, “Discontinued Operations” in the accompanying Notes to Consolidated Financial Statements in this Form 10-K5, “Acquisitions”, for more information about this transaction. We plan to continue our acquisition strategy in attractive markets that we believe will strengthen the core of our business and/or will broaden and diversify our portfolio.further information.
Integral to our operations is the Colfax Business System, or “CBS”. CBS is ourOur business management system, includingCBS, is integral to our operations. CBS consists of a comprehensive set of tools. Ittools that includes repeatable, teachable processes that we useare designed to drive continuous improvement and 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 the CBS methodology is one of our primary competitive strengths.
Each year, Colfax associates in every business develop aggressive strategic and operating plans which are based on the Voice of the Customer. In these plans, we are clear about our market realities, our threats, our risks, our opportunities and most importantly, our vision. Our belief is that when we use the tools of CBS to drive the implementation of these plans, we are able to uniquely provide customers with the world classworld-class quality, delivery, cost and innovation they require. We believe that performance ultimately helps our customers and Colfax sustainably grow and succeed.
In December 2019, a novel coronavirus disease (“COVID-19”) was first reported in China. On March 11, 2020, due to worldwide spread of the virus, the World Health Organization characterized COVID-19 as a pandemic. The COVID-19 global pandemic has resulted in a widespread health crisis, and the resulting impact on governments, businesses and individuals and actions taken by them in response to the situation have resulted in widespread economic disruptions, significantly affecting broader economies and financial markets, and reducing overall demand for the Company’s products. The COVID-19 outbreak
has caused increased uncertainty in estimates and assumptions affecting the reported amounts of assets and liabilities in the Consolidated Financial Statements as the extent and period of recovery from the COVID-19 outbreak and related economic disruption is difficult to forecast.
Reportable Segments
We report our operations through the Air and Gas Handling and Fabrication Technology segments. For certain financial information, including Net sales and long-lived assets by geographic area, see Note 17, “Segment Information” in the accompanying Notes to Consolidated Financial Statements in this Form 10-K.Medical Technology segments.
Air and Gas Handling
Our Air and Gas Handling segment is a global supplier of a broad range of products, including heavy-duty centrifugal and axial fans, rotary heat exchangers, and gas compressors, as well as certain related products, systems, and services, which serves customers in the power generation, oil, gas and petrochemical, mining, wastewater, and general industrial and other end markets. Our air and gas handling products are principally marketed under the Howden brand name, and are manufactured and engineered
in facilities located in Asia, Europe, North and South America, Australia and Africa. The products and services are generally sold directly as well as through independent representatives and distributors.
Fabrication Technology
We formulate, develop, manufacture and supply consumable products and equipment for use in the cutting, joining and automated welding, of steels, aluminum and other metals and metal alloys.as well as gas control equipment. For the year ended December 31, 2017,2020, welding consumables represented approximately 42%69% of our total Net sales.sales in our Fabrication Technology segment. Our fabrication technology products are marketed under several brand names, most notably ESAB, which we believe is well known in the international welding industry. ESAB’s comprehensive range of welding consumables includes electrodes, cored and solid wires and fluxes using a wide range of specialty and other materials, and cutting consumables includes electrodes, nozzles, shields and tips. ESAB’s fabrication technology equipment ranges from portable welding machines to large customized automated cutting and welding systems. ESAB also offers a range of digital software and solutions to help its customers increase their productivity, remotely monitor their welding operations and digitize their documentation. Products are sold into a wide range of global end markets, including infrastructure, wind power, marine, medical / life sciences, pipelines, mobile/off-highway equipment, oil, gas, and mining. Our sales channels include both independent distributors and direct salespeople, depending on geography and end market.
Medical Technology
We develop, manufacture, and distribute high-quality medical devices with a broad range of products used for reconstructive surgery, rehabilitation, pain management and physical therapy. Our products address the continuum of patient care from injury prevention to rehabilitation after surgery, injury or from degenerative disease, enabling people to regain or maintain their natural motion. We serve the following two markets where we maintain leading positions in most of their product categories: Prevention & Rehabilitation and Reconstructive. Our products are used by orthopedic specialists, spine surgeons, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers and other healthcare professionals to treat patients with musculoskeletal conditions resulting from degenerative diseases, deformities, traumatic events and sports related injuries. In addition, many of our non-surgical medical devices and related accessories are used by athletes and patients for injury prevention and at-home physical therapy treatment. Our product lines include rigid and soft orthopedic bracing, hot and cold therapy, bone growth stimulators, vascular therapy systems and compression garments, therapeutic shoes and inserts, electrical stimulators used for pain management and physical therapy products. Our surgical implant business offers a comprehensive suite of reconstructive joint products for the hip, knee, shoulder, elbow, foot, ankle, and finger. We reach a diverse customer base through multiple distribution channels, including both independent distributors and direct salespeople, and provide a wide range of medical devices and related products to orthopedic specialists and other healthcare professionals operating in a variety of patient treatment settings and to the retail consumers.
The following discussions of Industry and Competition, International Operations, Research and Development,, Intellectual Property,, Raw Materials, Seasonality, Working Capital, Regulatory Environment, Human Capital Management, and Backlog, Seasonality, Working Capital, Associates and Company Information and Access to SEC Reports include information that is common to both of our reportable segments, unless indicated otherwise.
Industry and Competition
Our Fabrication Technology segment products and services are marketed worldwide. Theworldwide and the markets served by our Air and Gas Handling segmentwe serve are fragmented and competitive. Because we compete in selected niches of these markets and due to the diversity of our products and services, no single company competes directly with us across all our markets. We encounter a wide variety of competitors that differ by product line, including well-established regional competitors, competitors with greater specialization in particular markets, as well as larger competitors. The markets that our Fabrication Technology segment competes in are also served by Lincoln Electric and the welding business within Illinois Tool Works, Inc.
Our customer base is broadly diversified across many sectors of the economy, and we believe customers place a premium on quality, reliability, availability, designinnovation, and application engineering support. We believe the principal elements of competition in our served markets are the technical ability to meetimprove customer specifications, product qualityproductivity and reliability, brand names, price,solve their technical challenges, reliably and timely supply high-quality products that
represent a good value, and offer outstanding aftermarket support including application expertise and engineering capabilities, timely delivery and strong aftermarket support.capabilities. Our management believes that we are a leading competitor in each of our markets.markets with leading and well-recognized brands.
Our Medical Technology segment generates approximately 75% of its revenues in the United States and the majority of the remaining balance in Europe. The markets in which our Medical Technology segment competes are highly competitive and fragmented. We believe the principal elements of competition are innovation to create better patient outcomes, product quality, product reliability, brand names, and price. We compete with large, diversified corporations and companies that are part of corporate groups that have significantly greater financial, marketing and other resources than we do, as well as numerous smaller niche companies. The markets in which our Medical Technology segment competes are also served by Stryker and DePuy Synthes, the medical device business within Johnson & Johnson. Given our history of product development and the experience of our management team, we are capable of effectively competing in our markets. The comprehensive range of products we offer enables us to reach a diverse customer base through multiple distribution channels with numerous opportunities to increase our growth across our markets. Our management believes that we are a leading competitor in each of our markets with leading and well-recognized brands.
International Operations
Our Fabrication Technology segment products and services are available worldwide. We believe this geographic diversity allows us to draw on the skills of a global workforce, provides stability to our operations, allows us to drive economies of scale, provides revenue streams that may offset economic trends in individual economies, and offers an opportunity to access new markets for products. In addition, we believe that our exposure to developing economies will provide additional opportunities for growth in the future.
Our Medical Technology segment sells its products internationally through a network of wholly owned subsidiaries and independent distributors. In Europe, we use sales forces of direct and independent salespersons and a network of independent distributors who call on healthcare professionals, as well as consumer retail stores and pharmacies, to sell our products. We intend to continue to expand our direct and indirect distribution capabilities in attractive foreign markets.
Our principal markets as a whole outside the U.S. are in Europe, Asia, South America, and the Middle East and South America.East. For the year ended December 31, 2017,2020, approximately 78%59% of our Net sales were shipped to locations outside of the U.S., with approximately 51.2%31% shipped to locations in emerging markets.
Our international operations subject us to certain risks. See Item 1A. “Risk Factors—Risks Related to Our Business—The majority of our sales are derived from international operations. We are subject to specific risks associated with international operations.”
Research and Development
Our research and development activities vary by operating segment, focusing on innovation; developing new products, software and services;services, as well as the enhancement of existing products with the latest technology and updated designs; creating new applications for existing products; lowering the cost of manufacturing our existing products; and, redesigning existing product lines to increase efficiency, improve durability, enhance performance and enhance performance.usability.
Additionally, in our Medical Technology segment, we receive new product and invention ideas from orthopedic surgeons and other healthcare professionals. We seek to obtain rights to ideas we consider promising from a clinical and commercial perspective through entering into either assignment or licensing agreements. We maintain contractual relationships with orthopedic surgeons who assist us in developing our products and may also provide consulting services in connection with our products.
Research and development expense was $42.9$68.6 million, $39.3$61.8 million and $38.0$34.2 million in 2017, 20162020, 2019 and 2015,2018, respectively. These amounts do not include development and application engineering costs incurred in conjunction with fulfilling customer orders and executing customer projects.projects, nor do they include costs related to securing third party product rights. We expect to continue making significant expenditures for research and development to
maintain and improve our competitive position.positions.
Intellectual Property
We rely on a combination of intellectual property rights, including patents, trademarks, copyrights, trade secrets and contractual provisions to protect our intellectual property.property both in the U.S. and around the world for both our Fabrication Technology and Medical Technology segments. Although we highlight recent additions to our patent portfolio as part of our marketing efforts, we do not consider any one patent or trademark or any group thereof essential to our business as a whole or to any of our business operations. We also rely on proprietary product knowledge and manufacturing processes in our operations. We do not rely solely on our patents and other intellectual property rights to maintain our competitive position. We believe that the development and marketing of new products and improvement of existing ones is, and will continue to be, more important to our competitive position than relying solely on existing products and intellectual property.
Raw Materials and Backlog
We obtain raw materials, component parts and supplies from a variety of global sources, generally each from more than one supplier. Our principal raw materials and components for our Fabrication Technology segment are metals, castings, motors, sealssteel, iron, copper and bearings.aluminum. Our principal raw materials and components for our Medical Technologies segment are ethylene-vinyl acetate copolymer form for our bracing and vascular products and cobalt-chromium alloy, stainless steel alloys, titanium alloy and ultra-high molecular weight polyethylene for our surgical implant products. We believe that our sources of raw materials are adequate for our needs for the foreseeable future and the loss of any one supplier would not have a material adverse effect on our business or results of operations.
Manufacturing turnaround time for our Air and Gas Handling operating segment is generally sufficiently short to allow us to manufacture to order for most of our products, which helps to limit inventory levels. Backlog is primarily a function of requested customer delivery dates and generally ranges from several days to less than 12 months; although some orders may be delivered beyond 12 months. Backlog of air and gas handling orders as of December 31, 2017 was $0.9 billion, compared with $0.8 billion as of December 31, 2016. A substantial majority of the air and gas handling order backlog as of December 31, 2017 is expected to be filled within the current fiscal year.
Seasonality
As our air and gas handling customers seek to fully utilize capital spending budgets before the end of the year, historically our shipments have peaked during the fourth quarter. Also, ourOur European operations typically experience a slowdown during the July, August and December vacation seasons. Generalseasons for our Fabrication Technology segment. Sales in our Medical Technology segment typically peak in the fourth quarter. However, the business impact caused by the COVID-19 pandemic, as well as general economic conditions, may however,distort the effects of historical seasonality patterns and impact future seasonal variations.
Working Capital
We maintain an adequate level of working capital to support our business needs. There are no unusual industry practices or requirements related to working capital items.
AssociatesRegulatory Environment
Our medical device products are subject to extensive regulation by the U.S Food and Drug Administration (the “FDA”) and numerous other federal, state and foreign governmental authorities. The FDA, for example, regulates virtually all aspects of a medical device’s development, design, pre-clinical testing, clinical trials, manufacturing, packaging, storage, premarket approval, recordkeeping, reporting, labeling, promotion, distribution, sale and marketing, as well as modifications to existing products and the marketing of existing products for new indications. The process of obtaining regulatory approvals to market these products can be costly and time consuming and approvals might not be granted for future products on a timely basis, if at all. Additionally, modifications to our existing products may require new regulatory approvals and we may be required to cease marketing or to recall any modified product until we obtain clearance or approval.
Both before and after a product is commercially released, we have ongoing responsibilities under FDA regulations and other local, state and foreign requirements. Compliance with these requirements, including the FDA’s Quality System Regulation, recordkeeping regulations, labeling and promotional requirements and adverse event reporting regulations, is subject to continual review and is monitored rigorously through periodic inspections by the FDA and other regulators, which may result in observations (such as on Form 483), and in some cases warning letters, that require corrective action, or other forms of enforcement. If the FDA or another regulator were to conclude that we are not in compliance with applicable laws or regulations, or that any of our products are ineffective or pose an unreasonable health risk, they could ban such products, detain or seize adulterated or misbranded products, order a recall, repair, replacement, or refund of payment of such products, refuse to grant pending premarket approval applications, refuse to provide certificates for exports, and/or require us to notify healthcare professionals and others that the products present unreasonable risks of substantial harm to the public health. The FDA or other regulators may also impose operating restrictions, including a ceasing of operations at one or more facilities, enjoin and restrain certain violations of applicable law pertaining to our products and assess civil or criminal penalties against our officers, employees or us. The FDA or other regulators could also issue a corporate warning letter, a recidivist warning letter, a consent
decree of permanent injunction, and/or recommend prosecution. DJO has received FDA warning letters in the past, and we cannot assure you that the FDA will not take further action in the future.
Governmental regulations outside the United States have and may continue to become increasingly stringent and complex. In the EU, for example, a new Medical Device Regulation (the “MDR”) was published in 2017 which, when it enters into full force in 2021, will include significant additional premarket and post-market requirements. In complying with the requirements of this regulation, we have incurred and will need to incur additional costs to comply, which may be significant. If we fail to meet the requirements of the new regulation, or are delayed in doing so, it could adversely impact our business in the EU and other regions that tie their product registrations to the EU requirements. Additionally, the FDA regulates the export of medical devices from the United States to foreign countries and certain foreign countries may require FDA certification that our medical device products are in compliance with U.S. law. Failure to obtain or maintain export certificates required for the export of our products could materially adversely impact revenues and growth.
Our Medical Technology business is also subject to various federal, state and foreign laws and regulations pertaining to healthcare fraud and abuse, including the federal False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, false claims, or knowingly using false statements, to obtain payment from the federal government, the federal Stark law, which prohibits a physician from making a referral for certain designated health services covered by the Medicare or Medicaid program, if the physician has a financial relationship with the entity providing the designated health services, the federal Physician Payments Sunshine Act, Health Insurance Portability and Accountability Act (“HIPAA”), which created additional federal criminal statutes that prohibit, among other things, executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters, and similar state and foreign laws. These laws and regulations, among other things, constrain our business, marketing and other promotional activities by limiting the kinds of financial arrangements, including royalty, marketing and consulting arrangements, and sales programs we may have with hospitals, physicians or other potential purchasers of our products or individuals or entities who recommend our products, and consignment stock and bill arrangements, such as our OfficeCare program. Because of the breadth of these laws and the narrowness of available statutory and regulatory exemptions or safe harbors, it is possible that some of our activities could be subject to challenge under one or more of such laws. Moreover, the federal government has significantly increased investigations of and enforcement activity involving medical device manufacturers with regard to alleged kickbacks and other forms of remuneration to physicians and other healthcare professionals who use and prescribe their products, as well as financial relationships with other third-party entities in a position to increase utilization of the products. Violations of these laws are punishable by criminal and/or civil sanctions, including, in some instances, fines, imprisonment and, within the United States, exclusion from participation in government healthcare programs, including Medicare, Medicaid and Veterans Administration health programs.
In addition, our Medical Technology business subjects us to federal privacy and transaction law and regulations. HIPAA and the HIPAA Rules impact the transmission, maintenance, use and disclosure of protected health information (“PHI”). As such, HIPAA and the HIPAA Rules apply to certain aspects of our Medical Technology business. There are costs and administrative burdens associated with ongoing compliance with the HIPAA Rules and similar state law requirements. Any failure to comply with current and applicable future requirements could adversely affect our profitability.
HIPAA establishes a set of national privacy and security standards for the protection of individually identifiable health information, including PHI by health plans, certain healthcare clearinghouses and healthcare providers that submit certain covered transactions electronically (“covered entities”), and their “business associates,” which are persons or entities that perform certain services for, or on behalf of, a covered entity that involve creating, receiving, maintaining or transmitting PHI.
Further, various states, such as California and Massachusetts, have implemented similar privacy laws and regulations, such as the California Confidentiality of Medical Information Act, that impose restrictive requirements regulating the use and disclosure of health information and other personally identifiable information. These laws and regulations are not necessarily preempted by HIPAA, particularly if a state affords greater protection to individuals than HIPAA. Where state laws are more protective, we may have to comply with the stricter provisions.
In addition, the interpretation and application of consumer, health-related, and data protection laws, especially with respect to genetic samples and data, in the United States, the EU, and elsewhere are often uncertain, contradictory, and in flux. We operate in a number of countries outside of the United States whose laws may in some cases be more stringent than the requirements in the United States.
Human Capital Management
As of December 31, 2017,2020, we employed approximately 14,30015,400 persons, of whom approximately 2,5003,100 were employed in the United States and approximately 11,80012,300 were employed outside of the United States.
Approximately 2%1% of associates are covered by collective bargaining agreements with U.S. trade unions. In addition, approximately 41%49% of our associates are represented by foreign trade unions and work councils in Europe, Asia, Central and South America, Canada, Africa and Australia, which subjectscould subject us to arrangements very similar to collective bargaining agreements. We have not experienced any work stoppages or strikes that have had a material adverse impact on operations. We consider our relations with our associates to be good.
At Colfax, we believe that the best team wins. Our growth model is focused in part on acquiring good companies, empowering our talent and using Colfax Business Systems (CBS) to make them great. Culture and associate development are critical to our success. We are a diverse team of associates around the world. We empower our associates through our culture that is centered on our corporate purpose – “Creating Better Together.” We are committed to attracting and developing great talent and rewarding our associates to build and sustain our company. Our internal human capital management programs center on the following processes and objectives: (i) identifying, attracting, developing and enabling talent, (ii) promoting associate engagement and an open feedback culture to foster continuous improvement, (iii) offering competitive compensation and benefit programs to motivate associates and reward performance, (iv) building and supporting inclusion, diversity, and equity initiatives, and (v) protecting the health and safety of all of our associates across the world.
Company Information and Access to SEC Reports
We were organized as a Delaware corporation in 1998. Our principal executive offices are located at 420 National Business Parkway, 5th Floor, Annapolis Junction, MD 20701, and our main telephone number at that address is (301) 323-9000. Our corporate website address is www.colfaxcorp.com.
We make available, free of charge through our website at http://ir.colfaxcorp.com/investor-relations, our annual and quarterly reports on Form 10-K and Form 10-Q (including related filings in XBRL format), current reports on Form 8-K and any amendments to those reports as soon as practicable after filing or furnishing the material to the SEC. You may also request a copy of these filings, at no cost, by writing or telephoning us at: Investor Relations, Colfax Corporation, 420 National Business Parkway, 5th Floor, Annapolis Junction, MD 20701, telephone (301) 323-9000.323-9090. Information contained on our website is not incorporated by reference in this report.
Additionally, the SEC maintains an Internet site that contains our reports, proxy statements and other information that we electronically file with, or furnish to, the SEC at www.sec.gov.
Item 1A. Risk Factors
An investment in our Common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with the information included elsewhere in this Form 10-K and other documents we file with the SEC. The risks and uncertainties described below are those that we have identified as material, but may not be the only risks to which Colfax might be exposed. Additional risks and uncertainties, which are currently unknown to us or that we do not currently consider to be material, may materially affect the business of Colfax and could have material adverse effects on our business, financial condition and results of operations. If any of the following risks were to occur, our business, financial condition, and results of operations and liquidity could be materially adversely affected, the value of our Common stock could decline and investors could lose all or part of the value of their investment in Colfax shares. Our business is also subject to general risks and uncertainties that affect many other companies, such as overall U.S. and non-U.S. economic and industry conditions, a global economic slowdown, geopolitical events, changes in laws or accounting rules, fluctuations in interest rates, terrorism, international conflicts, natural disasters or other disruptions of expected economic or business conditions. We operate in a continually changing business environment, and new risk factors emerge from time to time which we cannot predict. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may impair our business, including our results of operations, liquidity and financial condition.
Risks Related to Our Business and Operations
Changes in the general economy and the cyclical nature of the markets that we serve could negatively impact the demand for our products and services and harm our operations and financial performance.
Colfax’s financial performance depends, in large part, on conditions in the markets we serve and on the general condition of the global economy, which impacts these markets. Any sustained weakness in demand for our products and services resulting from a downturn of or uncertainty in the global economy could reduce our sales and profitability.
In addition, we believe that many of our customers and suppliers are reliant on liquidity from global credit markets and, in some cases, require external financing to purchase products or finance operations. If our customers lack liquidity or are unable to access the credit markets, it may impact customer demand for our products and services and we may not be able to collect amounts owed to us.
Further, our products are sold in many industries, some of which are cyclical and may experience periodic downturns. Cyclical weakness in the industries that we serve could lead to reduced demand for our products and affect our profitability and financial performance.
The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
A continued significant or sustained decline in the levels of new capital investment and maintenance expenditures by certain of our customers could reduce the demand for our products and services and harm our operations and financial performance.
Demand for our products and services depends significantly on the level of new capital investment and planned maintenance expenditures by certain of our customers. The level of new capital expenditures by our customers is dependent upon many factors, including general economic conditions, availability of credit, economic conditions and investment activities within their respective industries and expectations of future market behavior. In addition, volatility in commodity prices can negatively affect the level of these new activities and can result in postponement of capital spending decisions or the delay or cancellation of existing orders. For example, conditions in the oil and gas industry are highly cyclical and subject to factors beyond our control. We believe demand for our products and services by many of our customers, particularly those within the oil, gas and petrochemical end market, to be primarily profit-driven, and historically these customers have tended to delay large capital projects, including expensive maintenance and upgrades, when the markets in which they participate experience volatility, reduced returns, or general levels of low activity. A reduction in demand for our products and services could result in the delay or cancellation of existing orders or lead to excess manufacturing capacity, which unfavorably impacts our absorption of fixed manufacturing costs. This reduced demand could have a material adverse effect on our business, financial condition and results of operations.
Acquisitions have formed a significant part of our growth strategy in the past and are expected to continue to do so. If we are unable to identify suitable acquisition candidates, complete any proposed acquisitions or successfully integrate the businesses we acquire, our growth strategy may not succeed.succeed and we may not realize the anticipated benefits of our acquisitions.
We intend to seek acquisition opportunities both to expand into new markets and to enhance our position in our existing markets. However, our ability to do so will depend on a number of steps, including our ability to:
obtain debt or equity financing that we may need to complete proposed acquisitions;
identify suitable acquisition candidates;
negotiate appropriate acquisition terms;
complete the proposed acquisitions; and
integrate the acquired business into our existing operations.
If we fail to achieve any of these steps, our growth strategy may not be successful. In particular, a decline in our stock price has and may continue to make debt or equity financing more challenging to obtain. This may inhibit our ability to acquire new businesses in the future.
Acquisitions involve numerous risks, including risks related to integration, and we may not realize the anticipated benefits of our acquisitions.
Acquisitions involve numerous risks, including difficulties in the assimilation of the operations, systems, controls, technologies, personnel, services and products of the acquired company, the potential loss of key employees, customers, suppliers and distributors of the acquired company, and the diversion of our management’s attention from other business concerns. This is the case particularly in the fiscal quarters immediately following the completion of an acquisition because the operations of the acquired business are integrated into the acquiring business’ operations during this period. We may not accurately anticipate all of the changing demands that any future acquisition may impose on our management, our operational and management information systems and our financial systems. The failure to successfully integrate acquired businesses in a timely manner, or at all, or the incurrence of significant unanticipated expenses associated with integration activities, including information technology integration fees, legal compliance costs, facility closure costs and other restructuring expenses, could have an adverse effect on our business, financial condition and results of operations.
In addition, the anticipated benefits of an acquisition may not be realized fully or at all, or may take longer to realize than we expect. Actual operating, technological, strategic and sales synergies, if achieved at all, may be less significant than we expect or may take longer to achieve than anticipated. If we are not able to realize the anticipated benefits and synergies expected from our acquisitions within a reasonable time, our business, financial condition and results of operations may be adversely affected.
Acquisitions may result in significant integration costs, and unanticipated integration expense may harm our business, financial condition and results of operations.
Integration efforts associated with our acquisitions may require significant capital and operating expense. Such expenses may include information technology integration fees, legal compliance costs, facility closure costs and other restructuring expenses. Significant unanticipated expenses associated with integration activities may harm our business, financial condition and results of operations.
Our acquisitions may expose us to significant unanticipated liabilities and could adversely affect our business, financial condition and results of operations.
WeAdditionally, we may underestimate or fail to discover liabilities relating to acquisitions during our due diligence investigations, and we, as the successor owner of an acquired company, might be responsible for those liabilities. Such liabilities could include employment, retirement or severance-related obligations under applicable law or other benefits arrangements, legal claims, tax liabilities, warranty or similar liabilities to customers, product liabilities and personal injury claims, claims related to infringement of third party intellectual property rights, environmental liabilities and claims by or amounts owed to vendors or other third parties. The indemnification and warranty provisions in our acquisition agreements may not fully protect us from the impact of undiscovered liabilities. Indemnities or warranties are often limited in scope, amount or duration, and may not fully cover the liabilities for which they were intended. The liabilities that are not covered by the limited indemnities or warranties could have a material adverse effect on our business, financial condition and results of operations.
We may require additional capital to finance our operating needs and to finance our growth.growth, including acquisitions. If the terms on which the additional capital is available are unsatisfactory, if the additional capital is not available at all or if we are not able to fully access credit under our credit agreement, we may not be able to pursue our growth strategy.
Our growth strategy will require additional capital investment to complete acquisitions, integrate the completed acquisitions into our existing operations and expand into new markets.
We intend to pay for future acquisitions using cash, capital stock, notes, assumption of indebtedness or any combination of the foregoing. To the extent that we do not generate sufficient cash internally to provide the capital we require to fund our growth strategy and future operations, we will require additional debt or equity financing. This additional financing may not be available or, if available, may not be on terms acceptable to us. Further, high volatility in the capital markets and in our stock price may make it difficult for us to access the capital markets at attractive prices, if at all. If we are unable to obtain sufficient additional capital in the future, it may limit our ability to fully implement our growth strategy. Even if future debt financing is available, it may result in (i) increased interest expense, (ii) increased term loan payments, (iii) increased leverage and (iv) decreased income available to fund further acquisitions and expansion. It may also limit our ability to withstand competitive pressures and make us more vulnerable to economic downturns. If future equity financing is available, issuances of our equity securities may significantly dilute our existing stockholders.
In addition, our credit facility agreement includes restrictive covenants which
Our indebtedness could limitadversely affect our financial flexibility. See
“Our Credit Agreement containscondition and our debt agreements contain restrictions that may limit our flexibility in operating our business.”below.
We have outstanding debt and other financial obligations and significant unused borrowing capacity. As of December 31, 2020, we had $2.2 billion of outstanding indebtedness. We are also party to letter of credit facilities with total capacity of $340.5 million, of which $76.4 million were outstanding as of December 31, 2020.
Our debt level and related debt service obligations could have negative consequences, including: requiring us to dedicate significant cash flow from operations to the payment of principal, interest and other amounts payable on our debt, which would reduce the funds we have available for other purposes, such as working capital, capital expenditures and acquisitions; making it more difficult or expensive for us to obtain any necessary future financing for working capital, capital expenditures, debt service requirements, debt refinancing, acquisitions or other purposes; increasing our leverage and reducing our flexibility in planning for or reacting to changes in our industry and market conditions; making us more vulnerable in the event of a downturn in our business; and exposing us to interest rate risk given that a portion of our debt obligations is at variable interest rates.
Additionally, the credit agreement governing our term loan and revolving credit facilities (the “Credit Facility”) and the indentures governing our notes contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things: incur additional indebtedness; make certain investments; create liens on certain assets to secure debt; consolidate, merge, sell or otherwise dispose of all or substantially all our assets; and refinance our indebtedness.
In addition, under the Credit Facility we are required to satisfy and maintain compliance with a total leverage ratio and an interest coverage ratio. Limitations imposed by the various covenants contained in the Credit Facility or in the indentures governing our notes could have a materially adverse effect on our business, financial condition and results of operations.
Additionally, we may incur or assume more debt in the future, subject to the restrictions contained in our existing debt agreements, and if we do not retire existing debt, the risks described above could increase.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may face substantial liquidity problems and be forced to reduce or delay investments and capital expenditures, sell assets, including material assets or operations, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful or yield adequate proceeds and may not permit us to meet our scheduled debt service obligations. The Credit Facility restricts our ability to dispose of assets and our use of the proceeds of dispositions and the Credit Facility and the indentures governing our notes restrict our ability to refinance our indebtedness. In addition, any future refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations.
The effects of the COVID-19 global pandemic have materially affected how we and our customers and suppliers operate, and the duration and extent to which this will impact our future results of operations, financial condition, and overall financial performance remains uncertain.
The COVID-19 global pandemic has resulted in a widespread health crisis, and the resulting impact on governments, businesses and individuals and actions taken by them in response to the situation have resulted in widespread economic disruptions, significantly affecting broader economies, financial markets, and overall demand for our products. It is uncertain when and to what extent these conditions will subside and whether and how quickly businesses will return to levels that existed before the outbreak of the pandemic. As a result of the COVID-19 outbreak, we have experienced and expect to continue to experience disruptions that severely impact and may continue to severely impact our businesses including, but not limited to:
•Material delays and cancellations of elective medical procedures; orthopedic clinics and physical therapy centers operating at reduced capacity and only serving critical patients; and cancellation of professional, college, high school and youth sports programs impacting our Medical Technology business; and
•Reductions in levels of new capital investment and maintenance expenditures or a sustained industrial downturn impacting our Fabrication Technology business.
As a result of such impacts, we experienced significant decreases in sales at each of our Medical Technology and Fabrication Technology businesses in 2020 and expect pressures to continue into at least the first quarter of 2021 and possibly beyond. To the extent there is a resurgence of COVID-19 or restrictions are reinstated, our businesses could be further negatively impacted. Ultimately, we expect that the longer the period of economic disruption and sharper the declines in customer demand, the more material the adverse impact will be on our businesses, results of operations and financial condition. Moreover, a prolonged period of generating lower cash from operations could adversely affect our financial condition and the achievement of our strategic objectives. Conditions in the financial and credit markets may also limit the availability of funding or increase the cost of funding, which could adversely affect our businesses, financial condition and results of operations.
The degree to which the COVID-19 situation continues to impact our businesses, results of operations and financial condition, including the duration and magnitude of such impacts, will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, including any resurgences, its severity, the actions to contain the virus or treat its impact, the availability and public acceptance of approved vaccines and how quickly and to what extent normal economic and operating conditions resume. Even to the extent conditions begin to improve, the duration and sustainability of any such improvements will be uncertain and continuing adverse impacts and/or the degree of improvement may vary dramatically by geography and line of business. Additionally, the effects of the COVID-19 pandemic, including actions by governments, businesses and individuals in response, could give rise or contribute to or amplify many of the risks discussed in our other risk factors, included in this Part 1, Item A of this Form 10-K.
A continued significant or sustained decline in the levels of new capital investment and maintenance expenditures by certain of our customers could reduce the demand for our fabrication technology products and services and harm our operations and financial performance.
Demand for our fabrication technology products and services depends significantly on the level of new capital investment and planned maintenance expenditures by certain of our customers. The level of new capital expenditures by our fabrication technology customers is dependent upon many factors, including general economic conditions, availability of credit, economic conditions and investment activities within their respective industries and expectations of future market behavior. In addition, volatility in commodity prices can negatively affect the level of these new activities and can result in postponement of capital spending decisions or the delay or cancellation of existing orders. A reduction in demand for our fabrication technology products and services has resulted in the past, and in the future could result in the delay or cancellation of existing orders or lead to excess manufacturing capacity, which unfavorably impacts our absorption of fixed manufacturing costs. For example, in 2020, we experienced a decline in customer demand for our fabrication technology products and services as a result of the COVID-19 pandemic. This reduced demand could have a material adverse effect on our business, financial condition and results of operations.
Our restructuring activities may subject us to additional uncertainty in our operating results.
We have implemented, and plan to continue to implement, restructuring programs designed to facilitate key strategic initiatives and maintain long-term sustainable growth, such as the sale of our Fluid Handling business.growth. As such, we have incurred and expect to continue to incur expenseexpenses relating to restructuring activities. We may not achieve or sustain the anticipated benefits, including any anticipated savings, of these programs.restructuring programs or initiatives. Further, restructuring efforts are inherently risky, and we may not be able to predict the cost and timing of such actions accurately or properly estimate their impact. We also may not be able to realize
Any impairment in the anticipated savings we expect from restructuring activities.
Available insurance coverage, the number of future asbestos-related claims and the average settlement value of currentour intangible assets, including Goodwill, would negatively affect our operating results and future asbestos-related claimstotal capitalization.
Our Total assets reflect substantial intangible assets, primarily Goodwill. The Goodwill results from our acquisitions, representing the excess of certain subsidiaries could be different thancost over the fair value of the net assets we have estimated, whichacquired. As a result of our acquisition of DJO, the amount of Goodwill on our consolidated financial statements increased. We assess at least annually whether there has been impairment in the value of our indefinite-lived intangible assets. If future operating performance at one or more of our business units were to fall significantly below current levels, if competing or alternative technologies emerge, or if market conditions for
an acquired business decline, we could materially andincur, under current applicable accounting rules, a non-cash charge to operating earnings for Goodwill impairment. Any determination requiring the write-off of a significant portion of unamortized intangible assets would adversely affect our business, financial condition, and results of operations.
Certain subsidiaries are each one of many defendants in a large number of lawsuits that claim personal injury as a result of exposure to asbestos from products manufactured with components that are alleged to have contained asbestos. Such components were acquired from third-party suppliersoperations and were not manufactured by any of our subsidiaries nor weretotal capitalization, the subsidiaries producers or direct suppliers of asbestos. Additionally, pursuant the purchase agreement related to the sale of our Fluid Handling business, we will retain the asbestos-related contingencies and insurance coverage related to the business, even though we will not retain an interest in the ongoing operations of the Fluid Handling business. For the purposes of our financial statements, we have estimated the future claims exposure and the amount of insurance available based upon certain assumptions with respect to future claims and liability costs. We estimate the liability costs to be incurred in resolving pending and forecasted claims for the next 15-year period.
Our decision to use a 15-year period is based on our belief that this is the extent of our ability to forecast liability costs. We also estimate the amount of insurance proceeds available for such claims based on the current financial strength of the various insurers, our estimate of the likelihood of payment and applicable current law. We reevaluate these estimates regularly. Although we believe our current estimates are reasonable, a change in the time period used for forecasting our liability costs, the actual number of future claims brought against us, the cost of resolving these claims, the likelihood of payment by, and the solvency of, insurers and the amount of remaining insurance available could be substantially different than our estimates, and future revaluation of our liabilities and insurance recoverables could result in material adjustments to these estimates, anyeffect of which could materially and adversely affect our business, financial condition and results of operations. In addition, we incur defense costs related to those claims, a portion of which has historically been reimbursed by our insurers. We also incur litigation costs in connection with actions against certain of the subsidiaries’ insurers relating to insurance coverage. While these costs may be significant, we may not be able to predict the amount or duration of such costs. Additionally, we may experience delays in receiving reimbursement from insurers, during which time we may be required to pay cash for settlement or legal defense costs. Any increase in the actual number of future claims brought against us, the defense costs of resolving these claims, the cost of pursuing claims against our insurers,material.
the likelihood and timing of payment by, and the solvency of, insurers and the amount of remaining insurance available, could materially and adversely affect our business, financial condition and results of operations.
A material disruption at any of our manufacturing facilities could adversely affect our ability to generate sales and meet customer demand.
If operations at any of our manufacturing facilities were to be disrupted as a result of a significant equipment failure, natural disaster, power outage, fire, explosion, terrorism, cyber-based attack, adverse weather conditions, labor disputes or other reason, our financial performance could be adversely affected as a result of our inability to meet customer demand for our products. Interruptions in production could increase our costs and reduce our sales. Any interruption in production capability could require us to make substantial capital expenditures to remedy the situation, which could negatively affect our profitability and financial condition. Any recovery under our property damage and business interruption insurance policies may not offset the lost sales or increased costs that may be experienced during the disruption of operations, which could adversely affect our business, financial condition and results of operations.
Failure to comply with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act or other applicable anti-bribery laws could have an adverse effect on our business.
The U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business. Recent years have seen a substantial increase in anti-bribery law enforcement activity with more frequent and aggressive investigations and enforcement proceedings by both the Department of Justice and the U.S. Securities and Exchange Commission, increased enforcement activity by non-U.S. regulators and increases in criminal and civil proceedings brought against companies and individuals. Our policies mandate compliance with all anti-bribery laws. However, we operate in certain countries that are recognized as having governmental and commercial corruption. Our internal control policies and procedures may not always protect us from reckless or criminal acts committed by our employees or third-party intermediaries. Violations of these anti-bribery laws may result in criminal or civil sanctions, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, in the event that we believe or have reason to believe that our employees or agents have or may have violated applicable laws, including anti-corruption laws, we may be required to investigate or have outside counsel investigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management.
We have done and may continue to do business in countries subject to U.S. sanctions and embargoes, and we may have limited managerial oversight over those activities. Failure to comply with various sanction and embargo laws may result in enforcement or other regulatory actions.
Certain of our independent foreign subsidiaries have conducted and may continue to conductbusinesses, particularly our Medical Technology business, in countries subject to U.S. sanctions and embargoes or may engage in business dealings with parties whose property or property interests may be blocked under non-country-specific U.S. sanctions programs, and we have limited managerial oversight over those activities. Failure to comply properly with various sanction and embargo laws to which we and our operations may be subject may result in enforcement or other regulatory actions. Specifically, from time to time, certain of our independent foreign subsidiaries sell products to companies and entities located in, or controlled by the governments of, certain countries that are or have previously been subject to sanctions and embargoes imposed by the U.S. government, United Nations or other countries where we maintain operations. With the exception of the U.S. sanctions against Cuba, and Iran to some extent, the applicable sanctions and embargoes generally do not prohibit our foreign subsidiaries from selling non-U.S.-origin products and services to countries that are or have previously been subject to sanctions and embargoes. However, our U.S. personnel, each of our domestic subsidiaries, as well as our employees of foreign subsidiaries who are U.S. citizens, are prohibited from participating in, approving or otherwise facilitating any aspect of the business activities in those countries or with persons prohibited under U.S. sanctions. These constraints impose compliance cost and risk on our operations and may negatively affect the financial or operating performance of such business activities.
Our efforts to comply with U.S. and other applicable sanction and embargo laws may not be effective, and as a consequence we may face enforcement or other actions if our compliance efforts are not or are perceived as not being wholly effective. Actual or alleged violations of these laws could lead to substantial fines or other sanctions which could result in substantial costs. In addition, Syria, Sudan and Iran and certain other sanctioned countries currently are identified by the U.S. State Department as state sponsors of terrorism, and have been subject to restrictive sanctions. Because certain of our independent foreign subsidiaries have contact with and transact limited business in certain U.S. sanctioned countries, including sales to enterprises controlled by agencies of the governments of such countries, our reputation may suffer due to our association with these countries, which may
have a material adverse effect on the price of our shares and our business, financial condition and results of operations. In addition, certain U.S. states and municipalities have enacted legislation regarding investments by pension funds and other retirement systems in companies that have business activities or contacts with countries that have been identified as state sponsors of terrorism and similar legislation may be pending in other states. As a result, pension funds and other retirement systems may be subject to reporting requirements with respect to investments in companies such as Colfax or may be subject to limits or prohibitions with respect to those investments that may have a material adverse effect on the price of our shares and our business, financial condition and results of operations.
If we fail to comply with export control regulations, we could be subject to substantial fines or other sanctions.
Some of our products manufactured or assembled in the U.S. are subject to the U.S. Export Administration Regulations, administered by the U.S. Department of Commerce, Bureau of Industry and Security, which require that an export license is obtained before such products can be exported to certain countries. Additionally, some of our products are subject to the International Traffic in Arms Regulations, which restrict the export of certain military or intelligence-related items, technologies and services to non-U.S. persons. Failure to comply with these laws could harm our business by subjecting us to sanctions by the U.S. government, including substantial monetary penalties, denial of export privileges and debarment from U.S. government contracts. The occurrence of any of the foregoing could have a material and adverse effect on our business, financial condition and results of operations.
The majority of our sales are derived from international operations. We are subject to specific risks associated with international operations.
In the year ended December 31, 2017, we derived approximately 76% of our sales from operations outside of the U.S. and we have principal manufacturing facilities in 28 non-U.S. countries, and for 2018 we expect a majority of our sales to be from operations outside of the U.S. notwithstanding the sale of our Fluid Handling business. Sales from international operations, export sales and the use of manufacturing facilities outside of the U.S. by us are subject to risks inherent in doing business outside the U.S. These risks include:
economic or political instability;
partial or total expropriation of international assets;
limitations on ownership or participation in local enterprises;
trade protection measures by the U.S. or other nations, including tariffs or import-export restrictions, and other changes in trade relations;
currency exchange rate fluctuations and restrictions on currency repatriation;
labor and employment laws that may be more restrictive than in the U.S.;
significant adverse changes in taxation policies or other laws or regulations;
changes in laws and regulations or in how such provisions are interpreted or administered;
difficulties in enforcing our rights outside the U.S.;
difficulties in hiring and maintaining qualified staff and managing geographically diverse operations;
the disruption of operations from natural disasters, labor or political disturbances, terrorist activities, insurrection or war; and
uncertainties arising from local business practices and cultural considerations.
If any of these risks were to materialize, they may have a material adverse effect on our business, financial condition and results of operations.
If our associates represented by trade unions or works councils engage in a strike, work stoppage or other slowdown or if the representation committees responsible for negotiating with such trade unions or works councils are unsuccessful in negotiating new and acceptable agreements when the existing agreements with associates covered by collective bargaining expire, we could experience business disruptions or increased costs.
As of December 31, 2017, approximately 43% of our associates were represented by a number of different trade unions and works councils, and for 2018, as a result of the sale of our Fluid Handling business, we expect a similar percentage of associates to be represented by trade unions or work councils. Further, as of that date, we had approximately 14,300 associates, representing
83% of our worldwide associate base, in foreign locations. In Canada, Australia and various countries in Europe, Asia, and Central and South America, by law, certain of our associates are represented by a number of different trade unions and works councils, which subject us to employment arrangements very similar to collective bargaining agreements. Further, the laws of certain foreign countries may place restrictions on our ability to take certain employee-related actions or require that we conduct additional negotiations with trade unions, works councils or other governmental authorities before we can take such actions.
If our associates represented by trade unions or works councils were to engage in a strike, work stoppage or other slowdown in the future, we could experience a significant disruption of our operations. Such disruption could interfere with our business operations and could lead to decreased productivity, increased labor costs and lost revenue. The representation committees that negotiate with the foreign trade unions or works councils on our behalf may not be successful in negotiating new collective bargaining agreements or other employment arrangements when the current ones expire. Furthermore, future labor negotiations could result in significant increases in our labor costs. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
Our manufacturing business is subject to the possibility of product liability lawsuits, which could harm our business.
AsOur Medical Technology business exposes us to potential product liability risks that are inherent in the design, manufacture and marketing of medical devices. Additionally, as the manufacturer of equipment for use in industrial markets, we face an inherent risk of exposuremay be subject to product liability claims. OurComponent failures, manufacturing nonconformances, design defects, or inadequate disclosure of product-related risks or product-related information with respect to our products may not be free from defects.could result in unsafe conditions, injury or death. In addition, some of our products contain components manufactured by third parties, which may also have defects. From time to time, DJO has historically been, and is currently, subject to a number of product liability claims alleging that the use of its products resulted in adverse effects. Our product liability insurance policies have limits that may not be sufficient to cover claims made. In addition, this insurance may not continue to be available at a reasonable cost. With respect to components manufactured by third-party suppliers, the contractual indemnification that we seek from our third-party suppliers may be limited and thus insufficient to cover claims made against us. If insurance coverage or contractual indemnification is insufficient to satisfy product liability claims made against us, the claims could have an adverse effect on our business and financial condition. Even claims without merit could harm our reputation, reduce demand for our products, cause us to incur substantial legal costs and distract the attention of our management. The occurrence of any of the foregoing could have a material and adverse effect on our business, financial condition and results of operations.
As manufacturers,With respect to certain of our medical device products, the Food and Drug Administration (the “FDA”) and certain foreign regulatory bodies have the authority to require the recall of commercialized products under certain circumstances. Accordingly, a government mandated recall or a voluntary recall initiated by us could occur as a result of actual or potential component failures, manufacturing errors, or design defects, including defects in labeling. Any recall would divert managerial and financial resources and could harm our reputation with customers and with the healthcare professionals that use, prescribe and recommend our products and result in significant costs. Correcting product deficiencies and defects may also require submission of additional marketing authorizations before we may continue marketing the corrected device.
Our information technology infrastructure could be subject to service interruptions, data corruption, cyber-based attacks or network security breaches, which could result in the disruption of operations or the loss of data confidentiality.
We rely on information technology networks and systems, including the Internet, cloud-based services and third-party service providers, to process, transmit and store electronic information (including protected health information (“PHI”), personally identifiable information, credit card and other financial information), and to manage or support a variety of business processes and activities, including procurement, manufacturing, distribution, invoicing, collection, communication with our employees, customers, dealers and suppliers, business acquisitions and other corporate transactions, compliance with regulatory, legal and tax requirements, and research and development. For example, in the ordinary course of business, our Medical Technology segment collects, stores, and transmits certain sensitive data, including PHI, personally identifiable information, and patient data. These information technology networks and systems may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components, power outages, hardware failures or computer viruses. If these information technology systems suffer severe damage, disruption or shutdown and business continuity plans do not effectively resolve the issues in a timely manner, our business, financial condition, results of operations, and liquidity could be materially adversely affected.
In addition, our information technology networks and systems are subject to security threats and sophisticated cyber-based attacks, including, but not limited to, denial-of-service attacks, hacking, “phishing” attacks, computer viruses, ransomware, malware, employee or insider error, malfeasance, social engineering, or physical breaches, that can cause deliberate or unintentional damage, destruction or misuse, manipulation, denial of access to or disclosure of confidential or important information by our employees, suppliers or third-party service providers. Additionally, advanced persistent attempts to gain unauthorized access or deny access to, or otherwise disrupt, our systems and those of third-party service providers we rely on are increasing in sophistication and frequency. We have experienced, and expect to continue to confront, efforts by hackers and other third parties to gain unauthorized access or deny access to, or otherwise disrupt, our information technology systems and networks. Any such future attacks could have a material adverse effect on our business, financial condition, results of operations or liquidity. We can provide no assurance that our efforts to actively manage technology risks potentially
affecting our systems and networks will be successful in eliminating or mitigating risks to our systems, networks and data or in effectively resolving such risks when they materialize. A failure of or breach in information technology security of our own systems, or those of our third-party vendors, could expose us and our employees, customers, dealers and suppliers to risks of misuse of information or systems, the compromise of confidential information, manipulation and destruction of data, defective products, production downtimes and operations disruptions. Any of these events in turn could adversely affect our reputation, competitive position, including loss of customers and revenue, business, results of operations and liquidity. In addition, such breaches in security could result in litigation, regulatory action and potential liability, including liability under federal or state laws that protect the privacy of personal information, such as HIPAA or HITECH, as well as the costs and operational consequences of implementing further data protection measures.
Additionally, to conduct our operations, we regularly move data across national borders, and consequently we are subject to a variety of environmentalcontinuously evolving and healthdeveloping laws and safetyregulations in the United States and abroad regarding privacy, data protection and data security. The scope of the laws that may be applicable to us is often uncertain and may be conflicting, particularly with respect to foreign laws. For example, some of the data we handle and aspects of our operations are subject to the European Union’s General Data Protection Regulation, which greatly increases the jurisdictional reach of European Union law and adds a broad array of requirements for whichhandling personal data, including the public disclosure of significant data breaches and provides for significant potential penalties and remedies for violations. Other countries have enacted or are enacting data localization laws that require data to stay within their borders. All of these evolving compliance or liabilitiesand operational requirements impose significant costs that ariseare likely to increase over time.
A material disruption at any of our manufacturing facilities could adversely affect our ability to generate sales and meet customer demand.
If operations at any of our manufacturing facilities were to be disrupted as a result of noncompliance,a significant equipment failure, natural disaster, power outage, fire, explosion, terrorism, cyber-based attack, health epidemic or pandemic or other contagious outbreak, such as the COVID-19 pandemic, adverse weather conditions, labor dispute or other reason, our financial performance could be costly.adversely affected as a result of our inability to meet customer demand for our products.
Our businessesInterruptions in production could increase our costs and reduce our sales. Any interruption in production capability could require us to make substantial capital expenditures to remedy the situation or rely on third-party manufacturers, which could negatively affect our profitability and financial condition. Any recovery under our property damage and business interruption insurance policies may not offset the lost sales or increased costs that may be experienced during the disruption of operations, which could adversely affect our business, financial condition and results of operations.
The majority of our sales are derived from international operations. We are subject to specific risks associated with international federal, stateoperations.
In the year ended December 31, 2020, we derived approximately 58% of our sales from operations outside of the United States and we have principal manufacturing facilities in 16 countries in addition to the United States. Sales from international operations, export sales and the use of manufacturing facilities outside of the United States by us are subject to risks inherent in doing business outside the United States. These risks include: economic or political instability; partial or total expropriation of international assets; limitations on ownership or participation in local environmentalenterprises; trade protection measures by the United States or other nations including China, including tariffs or import-export restrictions or licensing requirements, and safetyother changes in trade relations; currency exchange rate fluctuations and restrictions on currency repatriation; labor and employment laws that may be more restrictive than in the United States; changes in laws and regulations, including taxation policies, or in how such provisions are interpreted or administered; difficulties in enforcing our rights outside the United States, including intellectual property rights; difficulties in hiring and maintaining qualified staff and managing geographically diverse operations; the disruption of operations from natural disasters, world health events, including the COVID-19 pandemic, labor or political disturbances, terrorist activities, insurrection or war; the imposition of additional foreign governmental controls or regulations on the sale of our products; increased costs of transportation or shipping; the transition away from LIBOR to the Secured Overnight Financing Rate as a benchmark reference for short-term interests; and uncertainties arising from local business practices and cultural considerations.
If any of these risks were to materialize, they may have a material adverse effect on our business, financial condition and results of operations. For example, changes in U.S. policy regarding international trade, including import and export regulation and international trade agreements, could also negatively impact our business. In 2018, the United States imposed tariffs on steel and aluminum as well as on goods imported from China and certain other countries, which has resulted in
retaliatory tariffs by China and other countries. Additional tariffs imposed by the United States on a broader range of imports, or further retaliatory trade measures taken by China or other countries in response, could result in an increase in supply chain costs that we may not be able to offset or otherwise adversely impact our results of operations.
The impact of the United Kingdom’s withdrawal from the European Union and its full effects are still uncertain and will depend on among other things, the financial, trade, regulatory, and legal implications of the trade and cooperation agreement the United Kingdom and the European Union enter into and any future agreements. This uncertainty regarding the economic outlook of the United Kingdom has caused, and may continue to cause, volatility in foreign exchange rates, which could have an adverse effect on our revenue growth in future periods. Any trade barriers resulting from the exit may disrupt distribution channels, increase our Cost of sales, and limit our ability to achieve future product margin growth. We may also face new regulatory costs, employee retention, and other challenges that could have an adverse effect on our business.
In many foreign countries, particularly in those with developing economies, there are companies that engage in business practices prohibited by laws and regulations governing emissions of: regulated air pollutants; dischargesapplicable to us, such as the Foreign Corrupt Practices Act of wastewater1977, as amended, and storm water; storagethe U.K. Bribery Act. Although we implement policies, procedures and handling of raw materials; generation, storage, transportation and disposal of regulated wastes; and laws and regulations governing worker safety. These requirements impose on our businesses certain responsibilities, including the obligationtraining designed to obtain and maintain various environmental permits. If we were to fail to complyfacilitate compliance with these requirementslaws, our employees, contractors and agents, as well as those of the companies to which we outsource certain of our business operations, may take actions in violation of our policies, which could result in civil or fail to obtaincriminal enforcement actions and penalties, create a substantial liability for us and also cause a loss of reputation in the market.
If our associates represented by trade unions or maintainworks councils engage in a required permit,strike, work stoppage or other slowdown or if the representation committees responsible for negotiating with such trade unions or works councils are unsuccessful in negotiating new and acceptable agreements when the existing agreements with associates covered by collective bargaining expire, we could be subject to penaltiesexperience business disruptions or increased costs.
As of December 31, 2020, approximately 50% of our associates were represented by a number of different trade unions and be required to undertake corrective action measures to achieve compliance.works councils. Further, as of that date, we had approximately 12,300 associates, representing 80% of our worldwide associate base, in foreign locations. In addition, ifCanada, Australia and various countries in Europe, Asia, and Central and South America, by law, certain of our noncompliance with such regulations were to result inassociates are represented by a releasenumber of hazardous materials into the environment, such as soil or groundwater, we could be required to remediate such contamination,different trade unions and works councils, which could be costly. Moreover, noncompliance could subject us to private claims for property damageemployment arrangements very similar to collective bargaining agreements. Further, the laws of certain foreign countries may place restrictions on our ability to take certain employee-related actions or personal injury basedrequire that we conduct additional negotiations with trade unions, works councils or other governmental authorities before we can take such actions.
If our associates represented by trade unions or works councils were to engage in a strike, work stoppage or other slowdown in the future, we could experience a significant disruption of our operations. Such disruption could interfere with our business operations and could lead to decreased productivity, increased labor costs and lost revenue. The representation committees that negotiate with the foreign trade unions or works councils on exposure to hazardous materialsour behalf may not be successful in negotiating new collective bargaining agreements or unsafe working conditions. In addition, changes in applicable requirements or stricter interpretation of existing requirements mayother employment arrangements when the current ones expire. Furthermore, future labor negotiations could result in costly compliance requirements or otherwise subject us to future liabilities.significant increases in our labor costs. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
As the present or former owner or operator of real property, or generator of waste, we could become subject to liability for environmental contamination, regardless of whether we caused such contamination.
Under various federal, state and local laws, regulations and ordinances, and, in some instances, international laws, relating to the protection of the environment, a current or former owner or operator of real property may be liable for the cost to remove or remediate contamination on, under, or released from such property and for any damage to natural resources resulting from such contamination. Similarly, a generator of waste can be held responsible for contamination resulting from the treatment or disposal of such waste at any off-site location (such as a landfill), regardless of whether the generator arranged for the treatment or disposal of the waste in compliance with applicable laws. Costs associated with liability for removal or remediation of contamination or damage to natural resources could be substantial and liability under these laws may attach without regard to whether the responsible party knew of, or was responsible for, the presence of the contaminants. In addition, the liability may be joint and several. Moreover, the presence of contamination or the failure to remediate contamination at our properties, or properties for which we are deemed responsible, may expose us to liability for property damage or personal injury, or materially adversely affect our ability to sell our real property interests or to borrow using the real property as collateral. We could be subject to environmental liabilities in the
future as a result of historic or current operations that have resulted or will result in contamination. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
Failure to maintain and protect our intellectual property rights or challenges to these rights by third parties may affect our operations and financial performance.
The market for many of our products, including our medical device products, is, in part, dependent upon patent, trademark, copyright and trade secret laws, agreements with employees, customers and other third parties, including confidentiality agreements, invention assignment agreements and proprietary information agreements, to establish and maintain our intellectual property rights, and the Goodwill engendered by our trademarks and trade names. The protection and enforcement of these intellectual property rights is therefore material to a portion of our businesses.business. The failure to protect these rights may have a material adverse effect on our business, financial condition and results of operations. Litigation may be required to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights of others. It may be particularly difficult to enforce our intellectual property rights in countries where such rights are not highly developed or protected. Any action we take to protect or enforce our intellectual property rights could be costly and could absorb significant management time and attention. As a result of any such litigation, we could lose anyour proprietary rights we have.rights.
In addition, third parties may claim that we or our customers are infringing upon their intellectual property rights. Claims of intellectual property infringement and litigation regarding patent and other intellectual property rights are commonplace in the medical technology industry. Any claims of intellectual property infringement may subject us to costly and
time-consuming defense actions and, should our defenses not be successful, may result in the payment of damages, redesign of affected products, entry into settlement or license agreements, or a temporary or permanent injunction prohibiting us from manufacturing, marketing or selling certain of our products. It is also possible that others will independently develop technology that will compete with our patented or unpatented technology. The occurrence of any of the foregoing could have a material and adverse effect on our business, financial condition and results of operations.
The loss of key leadership could have a material adverse effect on our ability to run our business.
We may be adversely affected if we lose members of our senior leadership. We are highly dependent on our senior leadership team as a result of their expertise in our industry and our business. The loss of key leadership or the inability to attract, retain and motivate sufficient numbers of qualified management personnel could have a material adverse effect on our business, financial condition and results of operations.
Our credit agreement contains restrictions that may limit our flexibility in operating our business.
The credit agreement entered into on June 5, 2015 by and among the Company, as the borrower, certain U.S. subsidiaries of the Company identified therein, as guarantors, each of the lenders party thereto and Deutsche Bank AG New York Branch, as administrative agent, swing line lender and global coordinator (the “DB Credit Agreement”), contains various covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things:
incur additional indebtedness;
make certain investments;
create liens on certain assets to secure debt; and
consolidate, merge, sell or otherwise dispose of all or substantially all our assets.
In addition, under the DB Credit Agreement, we are required to satisfy and maintain compliance with a total leverage ratio and an interest coverage ratio. Limitations imposed by the DB Credit Agreement’s various covenants could have a materially adverse effect on our business, financial condition and results of operations.
Any impairment in the value of our intangible assets, including Goodwill, would negatively affect our operating results and total capitalization.
Our Total assets reflect substantial intangible assets, primarily Goodwill. The Goodwill results from our acquisitions, representing the excess of cost over the fair value of the net assets we have acquired. We assess at least annually whether there has been impairment in the value of our indefinite-lived intangible assets. If future operating performance at one or more of our business units were to fall significantly below current levels, if competing or alternative technologies emerge, or if market conditions for an acquired business decline, we could incur, under current applicable accounting rules, a non-cash charge to operating earnings for Goodwill impairment. Any determination requiring the write-off of a significant portion of unamortized intangible assets would adversely affect our business, financial condition, results of operations and total capitalization, the effect of which could be material.
Our defined benefit pension plans and post-retirement medical and death benefit plans are or may become subject to funding requirements or obligations that could adversely affect our business, financial condition and results of operations.
We operate defined benefit pension plans and post-retirement medical and death benefit plans for our current and former employees worldwide. Each plan’s funding position is affected by the investment performance of the plan’s investments, changes in the fair value of the plan’s assets, the type of investments, the life expectancy of the plan’s members, changes in the actuarial assumptions used to value the plan’s liabilities, changes in the rate of inflation and interest rates, our financial position, as well as other changes in economic conditions. Furthermore, since a significant proportion of the plans’ assets are invested in publicly traded debt and equity securities, they are, and will be, affected by market risks. Any detrimental change in any of the above factors is likely to worsen the funding position of each of the relevant plans, and this would likely require the plans’ sponsoring employers to increase the contributions currently made to the plans to satisfy our obligations. Any requirement to increase the level of contributions currently made could have a material adverse effect on our business, financial condition and results of operations.
Significant movements in foreign currency exchange rates may harm our financial results.
We are exposed to fluctuations in currency exchange rates. During the year ended December 31, 2017,2020, approximately 76%58% of our sales were derived from operations outside the U.S., and for 2018 we expect a majority of our sales to be outside of the U.S. notwithstanding the sale of our Fluid Handling business.United States. A significant portion of our revenues and income are denominated in foreign currencies. Large fluctuations in the rate of exchange between foreign currencies and the U.S. dollar could have a material adverse effect on our business, financial condition and results of operations. Changes in the currency exchange rates may impact theour financial results positively or negatively in one period and not another, which may make it difficult to compare our operating results from different periods. For example, during 2018, Argentina became a highly inflationary economy, resulting in the remeasurement of our Argentinian operations. 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.
We also face exchange risk from transactions with customers in countries outside the U.S.United States and from intercompany transactions between affiliates. Although we use the U.S. dollar as our functional currency for reporting purposes, we have manufacturing sites throughout the world and a substantial portion of our costs are incurred and sales are generated in foreign currencies. Costs incurred and sales recorded by subsidiaries operating outside of the U.S.United States are translated into U.S. dollars using exchange rates effective during the respective period. As a result, we are exposed to movements in the exchange rates of various currencies against the U.S. dollar. Further, we may be subject to foreign currency translation losses depending upon whether foreign nations devalue their currencies.
We have generally accepted the exposure to exchange rate movements in translation without using derivative financial instruments to manage this risk. Both positive and negative movements in currency exchange rates against the U.S. dollar will therefore continue to affect the reported amount of sales, profit, assets and liabilities in our Consolidated Financial Statements.
We are dependent on the availability of raw materials, as well as parts and components used in our products.
While we manufacture many of the parts and components used in our products, we purchase a substantial amount of raw materials, parts and components from suppliers. The availability and prices for raw materials, parts and components may be subject to curtailment or change due to, among other things, suppliers’ allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates and prevailing price levels.levels, trade disputes and increased tariffs. Additionally, FDA regulations may require additional testing of any raw materials or components from new suppliers prior to the use of those materials or components in certain medical device products. In addition, in the case of a device which is the subject of a pre-market approval, we may also be required to obtain prior FDA permission (which may or may not be given), which could delay or prevent access or use of such raw materials or components. Any significant change in the supply of, or price for, these raw materials, parts or components could materially affect our business, financial condition and results of operations. In addition, delays in the delivery of raw materials, parts or components by suppliers could cause delays in our delivery of products to our customers.
We are currently working to streamlineCertain of our supplier base. However, this could exacerbate certain of the risks described above.products use components obtained from single sources. For example, asthe microprocessor used in our OL1000 and SpinaLogic devices is from a resultsingle manufacturer. Establishment of maintaining relationships with feweradditional or replacement suppliers we may become more dependent on such suppliers having adequate quantities of raw materials, parts orfor these components that satisfy our requirements at prices that we consider appropriate,cannot be accomplished quickly and on the timely delivery of such raw materials, parts or components to us. In addition, as a result of maintaining relationships with fewer suppliers, it may be more difficult or impossible to obtain raw materials, parts or components from alternative sources when such components and raw materials are not available from our regular suppliers.
New or changing regulations, and customer focus on environmental, social and governance responsibility, may impose additional costs on us and expose us to new risks, including with respect to the sourcing of our products.
Regulators, stockholders and other interested constituencies have focused increasingly on the environmental, social and governance practices of companies, which has resulted in new regulations that may impose costs on us and expose us to new risks.
We may be subject to additional regulations in the future arising from the increased focus on environmental, social and governance responsibility. In addition, our customers may require us to implement environmental, social or governance responsibility procedures or standards before they will continue to do business with us.The occurrence of any of the foregoing could have a material adverse effect on the price of our shares and our business, financial condition and results of operations.
In addition to the regulations noted above, our businesses are subject to extensive regulation by U.S. and non-U.S. governmental and self-regulatory entities at the supranational, federal, state, local and other jurisdictional levels. These regulations are continually changing, differ or conflict across jurisdictions, and have tended to become more stringent over time. We, our representatives and the industries in which we operate may at times be under review and/or investigation by regulatory authorities. Failure to comply (or any alleged or perceived failure to comply) with relevant regulations could result in civil and criminal, monetary and non-monetary penalties, and any such failure or alleged failure (or becoming subject to a regulatory enforcement investigation) could also cause damage to our reputation, disrupt our business, limit our ability to manufacture, import, export and sell products and services, result in loss of customers and disbarment from selling to certain federal agencies and cause us to incur significant legal and investigatory fees. Compliance with these and other regulations may also affect our returns on investment, require us to incur significant expenses or modify our business model or impair our flexibility in modifying product, marketing, pricing or other strategies for growing our business.
Our information technology infrastructure could be subject to service interruptions, data corruption, cyber-based attacks or network security breaches, which could result in the disruption of operations or the loss of data confidentiality.a single-source supplier, the deterioration of our relationship with a
We rely on information technology networks and systems, includingsingle-source supplier, or any unilateral modification to the Internet and third party service providers, to process, transmit and store electronic information, and to manage or supportcontractual terms under which we are supplied components by a variety of business processes and activities, including procurement, manufacturing, distribution, invoicing, collection, communication with our employees, customers, dealers and suppliers, business acquisitions and other corporate transactions, compliance with regulatory, legal and tax requirements, and research and development. These information technology networks and systems may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components, power outages, hardware failures or computer viruses. If these information technology systems suffer severe damage, disruption or shutdown and business continuity plans do not effectively resolve the issues in a timely manner, our business, financial condition, results of operations, and liquidity could be materially adversely affected.
In addition, information technology security threats and sophisticated cyber-based attacks, including, but not limited to, denial-of-service attacks, hacking, “phishing” attacks, computer viruses, ransomware, malware employee or insider error, malfeasance, social engineering, or physical breaches, may cause deliberate or unintentional damage, destruction or misuse, manipulation, denial of access to or disclosure of confidential or important information by our employees, suppliers or third party service providers. Additionally, advanced persistent attempts to gain unauthorized access to our systems and those of third party service providers we rely on are increasing in sophistication and frequency. We have experienced, and expect to continue to confront attempts from hackers and other third parties to gain unauthorized access to our information technology systems and networks. Although these attacks to date have not had a material impact on us, we could in the future experience attacks thatsingle-source supplier could have a material adverse effect on our business, financial condition and results of operationsoperations. In addition, we rely on third parties to manufacture some of our medical device products. For example, we use a single source for many of the consumer devices our Medical Technology segment distributes in one country. If our agreements with these manufacturing companies were terminated, we may not be able to find suitable replacements within a reasonable amount of time or liquidity. We can provide no assurance thatat all. Any such cessation, interruption or delay may impair our effortsability to actively manage technology risks potentially affectingmeet scheduled deliveries of our systems and networks will be successful in eliminating or mitigating risksproducts to our systems, networks and data or in effectively resolving such risks when they materialize. A failure of or breach in information technology security of our own systems, or those of our third-party vendors, could expose us and our employees, customers, dealers and suppliers to risks of misuse of information or systems, the compromise of confidential information, manipulation and destruction of data, defective products, production downtimes and operations disruptions. Any of these events in turn could adversely affect our reputation, competitive position, including loss of customers and revenue, business, results of operationsmay cause our customers to cancel orders.
Additionally, political and liquidity. In addition, such breaches in security could result in litigation, regulatory action and potential liability, as well as the costs and operational consequences of implementing further data protection measures.
To conduct our operations, we regularly move data across national borders, and consequently we are subject to a variety of continuously evolving and developing laws and regulations in the United States and abroad regarding privacy, data protection and data security. The scope of the laws that may be applicable to us is often uncertain and may be conflicting, particularly with respect to foreign laws. For example, the European Union’s General Data Protection Regulation (“GDPR”), which greatly increases the jurisdictional reach of European Union law and adds a broad array of requirements for handling personal data, including the public disclosure of significant data breaches, becomes effective in May 2018. Other countries have enacted or are enacting data localization laws that require data to stay within their borders. All of these evolving compliance and operational requirements impose significant costs that are likely to increase over time.
We may be subject to risks arising from changes in technology.
The supply chains in which we operate are subject to technological changeseconomic instability and changes in government regulations in China and other parts of Asia or any health epidemics or pandemics or other contagious outbreaks, such as the COVID-19 pandemic, could affect our ability to continue to receive materials from suppliers there. The loss of suppliers in these areas, any other interruption or delay in the supply of required materials or our inability to obtain these materials at acceptable prices and within a reasonable amount of time could impair our ability to meet scheduled product deliveries to our customers and could hurt our reputation and cause customers to cancel orders.
The markets we serve are highly competitive and some of our competitors may have superior resources. If we are unable to respond successfully to this competition, this could reduce our sales and operating margins.
Our businesses operate in highly fragmented and competitive markets. In order to maintain and enhance our competitive position, we intend to, among other things, continue investing in manufacturing quality, marketing, customer requirements.service and support, distribution networks, and research and development. We may not successfullyhave sufficient resources to continue to make these investments and we may not be able to maintain our competitive position. Our competitors may develop or implement new or modified types ofproducts that are superior to our products or more widely accepted, develop methods of more efficiently and effectively providing products and services, adapt more quickly than us to new technologies thator evolving customer requirements or have a larger product portfolio. Some of our competitors may also have greater financial, marketing and research and development resources than we have or stronger name recognition. As a result, those competitors may be required bybetter able to withstand the effects of periodic economic downturns. In addition, pricing pressures could cause us to lower the prices of some of our customers in the future. Further, theproducts to stay competitive. The development of new technologies by competitors that may compete with our technologies could reduce demand for our products and affect our financial performance. For example, our present and future medical device products could be rendered obsolete or uneconomical by technological advances by one or more of our present or future competitors or by other therapies, including biological therapies. Should we not be able to maintain or enhance the competitive values of our products or develop and introduce new products or technologies successfully, or if new products or technologies fail to generate sufficient revenues to offset research and development costs, our business, financial condition and operating results could be materially adversely affected.
The markets we serve are highly competitive and somesuccess of our competitors may have superior resources. If we are unablemedical device products depends heavily on acceptance by healthcare professionals who prescribe and recommend these products, and our failure to respond successfully to this competition, this could reduce our sales and operating margins.
We sell mostmaintain relationships with key healthcare professionals or maintain a high level of confidence by key healthcare professionals in our products in highly fragmented and competitive markets. We believe that the principal elements of competition incould adversely affect our markets are:business.
the ability to meet customer specifications;
application expertise and design and engineering capabilities;
product quality and brand name;
timeliness of delivery;
price; and
quality of aftermarket sales and support.
In order to maintain and enhance our competitive position, we intend to continue investing in manufacturing quality, marketing, customer service and support, distribution networks, and research and development. We may not have sufficient resources to continue to make these investments and we may not be able to maintain our competitive position. Our competitors may develop products that are superior to our products, develop methods of more efficiently and effectively providing products and services, or adapt more quickly than us to new technologies or evolving customer requirements. Some of our competitors may have greater financial, marketing and research and development resources than we have. As a result, those competitors may be better able to withstand the effects of periodic economic downturns. In addition, pricing pressures could cause us to lower the prices of some of our products to stay competitive. We may not be able to compete successfully with our existing competitors or with new competitors. If we fail to compete successfully, the failure may have a material adverse effect on our business, financial condition and results of operations. Please see Part I, Item 1. “Business - Industry and Competition” for additional information about the competitive markets in which we operate.
Changes in our tax rates or exposure to additional income tax liabilities could adversely affect our financial results.
Our future effective income tax rates could be unfavorably affected by various factors, including, among others, changes in the tax rates, rules and regulations in jurisdictions in which we generate income. A number of countries where we do business, including the United States and many countries in the European Union, have implemented, and are considering implementing, changes in relevant tax, accounting and other laws, regulations and interpretations. Moreover, the recent change in the U.S. presidential administration may increase the likelihood of changes to U.S. federal income tax law. Additionally, longstanding international tax norms that determine each country’s jurisdiction to tax cross-border international trade are subject to potential evolution. For example, compliancean outgrowth of the Organization for Economic Co-operation and Development’s (“OECD”) original Base Erosion and Profit Shifting (“BEPS”) project is an ongoing project undertaken by the 139 member countries of the expanded OECD Inclusive Framework focused on “Addressing the Challenges of the Digitalization of the Economy,” which may impact all multinational businesses by potentially redefining jurisdictional taxation rights with the 2017 U.S. Tax CutPillar One and Jobs Act (“Tax Act”) may require the collection of information not regularly produced within our Company, the use of provisional estimates inPillar Two blueprints. As these and other tax laws, regulations and norms change or evolve, our financial statements,results could
be materially impacted. Given the unpredictability of these possible changes, it is very difficult to assess whether the overall effect of such potential tax changes would be cumulatively positive or negative for our earnings and the exercise of significant judgment in accounting for its provisions. Many aspects of the Tax Act are unclear and may not be clarified for some time. As regulations and guidance evolve with respect to the Tax Act, and as we gather more information and perform more analysis, our results may differ from previous estimates and may materially affectcash flow, but such changes could adversely impact our financial position.results.
In addition, foreign countries may consider changes to existing tax laws, in response to the Tax Act or otherwise, including allowing existing provisions to expire, that could significantly impact the treatment of income earned outside the U.S. An increase in our effective tax rate could have a material adverse effect on our after-tax results of operations.
On December 22, 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code which included how the U.S. imposes income tax on multinational corporations. Key changes in the Tax Act which are relevant to the Company and generally effective January 1, 2018 include a flat corporate income tax rate of 21 percent to replace the marginal rates that range from 15 percent to 35 percent, elimination of the corporate alternative minimum tax, the creation of a territorial tax system, a one-time tax on accumulated foreign subsidiary earnings (“Transition Tax”) to transition to the territorial system, a “minimum tax” on certain foreign earnings above an enumerated rate of return, a new base erosion anti-abuse tax that subjects
certain payments made by a U.S. company to its foreign subsidiary to additional taxes, and an incentive for U.S. companies to sell, lease or license goods and services outside the U.S. by taxing the income at a reduced effective rate. The Tax Act also imposes limits on executive compensation and interest expense deductions, while permitting the immediate expensing for the cost of new investments in certain property acquired after September 27, 2017.
The financial accounting literature requires registrants to account for the Tax Act in the period of enactment. The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which allows registrants to include a provisional amount to account for the implications of the Tax Act. Accordingly, of significance, the Company included a provisional estimate of approximately $52 million for the Transition Tax, payable over 8 years. Generally, the foreign earnings subject to the Transition Tax can be distributed without additional U.S. tax; however, if distributed, the amount could be subject to foreign taxes and U.S. state and local taxes. The Company continues to evaluate the implications of the Tax Act including actions we may take to address our business objectives. Therefore, the Company continues to maintain its indefinite reinvestment of foreign earnings assertion. The Company also included a provisional tax benefit estimate of approximately $55 million for the re-measurement of its U.S. deferred tax assets and liabilities to 21 percent.
The Tax Act introduces significant complexity, notably in the computation of the Transition Tax including interpretation of law, and the information required to perform the computations is significant. As additional regulatory guidance is issued by the applicable taxing authorities, as accounting treatment is clarified, and as we perform additional analysis on the application of the law, we will adjust our provisional estimates in the period completed, which could materially affect our tax obligations and effective tax rate.
In addition, the amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. tax authorities. If these audits result in assessments different from amounts recorded, our future financial results may include unfavorable tax adjustments.
Risk Related to Our Medical Technology Business
If coverage and adequate levels of reimbursement from third-party payors for our medical device products are not obtained, healthcare providers and patients may be reluctant to use our medical device products, our margins may suffer and revenue and profits may decline.
The sales of our medical device products depend largely on whether there is coverage and adequate reimbursement by government healthcare programs, such as Medicare and Medicaid, and by private payors. Surgeons, hospitals, physical therapists and other healthcare providers may not use, purchase or prescribe our products and patients may not purchase these products if these third-party payors do not provide satisfactory coverage of and reimbursement for the costs of our medical device products or the procedures involving the use of such products. Reduced reimbursement rates will also lower our margins on product sales and could adversely impact the profitability and viability of the affected products.
Third-party payors continue to review their coverage policies carefully and can, without notice, reduce or eliminate reimbursement for our medical device products or treatments that use these products. For instance, they may attempt to control costs by (i) authorizing fewer elective surgical procedures, including joint reconstructive surgeries, (ii) requiring the use of the least expensive product available, (iii) reducing the reimbursement for or limiting the number of authorized visits for rehabilitation procedures, (iv) bundling reimbursement for all services related to an episode of care, or (v) otherwise restricting coverage or reimbursement of our medical device products or procedures using these products.
Medicare payment for Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (“DMEPOS”) also can be impacted by the DMEPOS competitive bidding program, under which Medicare rates are based on bid amounts for certain products in designated geographic areas, rather than the Medicare fee schedule amount. Only those suppliers selected through the competitive bidding process within each designated competitive bidding area (“CBA”) are eligible to have their products reimbursed by Medicare. The Centers for Medicare & Medicaid Services (“CMS”) also has adopted regulations to adjust national DMEPOS fee schedules to take into account competitive bidding pricing. If any of our medical device products are included in competitive bidding and we are not selected as a contract supplier (or subcontractor) in a particular region, or if contract or fee schedule prices are significantly below current Medicare fee schedule reimbursement levels, it could have an adverse impact on our sales and profitability.
Because many private payors model their coverage and reimbursement policies on Medicare, other third-party payors’ coverage of, and reimbursement for, our medical device products also could be negatively impacted by legislative, regulatory or other measures that restrict Medicare coverage or reduce Medicare reimbursement.
International sales of medical device products also depend in part upon the coverage and eligibility for reimbursement of our products through government-sponsored healthcare payment systems and third-party payors, the amount of reimbursement, and the cost allocation of payments between the patient and government-sponsored healthcare payment systems and third-party payors. Coverage and reimbursement practices vary significantly by country, with certain countries requiring products to undergo a lengthy regulatory review in order to be eligible for third-party coverage and reimbursement. In addition, healthcare cost containment efforts similar to those we face in the United States are prevalent in many of the foreign countries in which our products are sold, and these efforts are expected to continue in the future, possibly resulting in the adoption of more stringent reimbursement standards relating to our international operations.
Additionally, federal and state legislatures and regulators have periodically considered proposals to limit the types of orthopedic professionals who can fit or sell our orthotic products or who can seek reimbursement for them. Several states have adopted legislation imposing certification or licensing requirements on the measuring, fitting and adjusting of certain orthotic devices, and additional states may do so in the future. Although some of these state laws exempt manufacturers’ representatives, others do not. Such laws could reduce the number of potential customers by restricting our sales representatives’ activities in those jurisdictions or reduce demand for our products by reducing the number of professionals who fit and sell them. In
addition, legislation has been adopted, but not implemented to date, requiring that certain certification or licensing requirements be met for individuals and suppliers furnishing certain custom-fabricated orthotic devices as a condition of Medicare payment. Medicare currently follows state policies in those states that require the use of an orthotist or prosthetist for furnishing of orthotics or prosthetics.
Federal and state health reform and cost control efforts include provisions that could adversely impact our business and results of operations, and federal and state legislatures continue to consider further reforms and cost control efforts that could adversely impact our business and results of operations.
In the United States, there have been and continue to be a number of legislative initiatives to contain healthcare costs. In March 2010, the Affordable Care Act (“ACA”) was enacted in the United States. The ACA is a sweeping measure designed to expand access to affordable health insurance, control health care spending, and improve health care quality. Several provisions of the ACA specifically affect the medical equipment industry. The ACA also implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models. The ACA also established enhanced Medicare and Medicaid program integrity provisions, including expanded documentation requirements for Medicare DMEPOS orders, more stringent procedures for screening Medicare and Medicaid DMEPOS suppliers, and new disclosure requirements regarding manufacturer payments to physicians and teaching hospitals, along with broader expansion of federal fraud and abuse authorities. The ACA also established a new Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical effectiveness research in an effort to coordinate and develop such research.
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. On August 2, 2011, the Budget Control Act of 2011 was signed into law, which, among other things, reduced Medicare payments to providers by 2% per fiscal year, effective on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2027 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. The Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) enacted on April 16, 2015, repealed the formula by which Medicare made annual payment adjustments to physicians and replaced the former formula with fixed annual updates and a new system of incentive payments that became effective in 2019 that are based on various performance measures and physicians’ participation in alternative payment models such as accountable care organizations. It is unclear what effect new quality and payment programs, such as MACRA, may have on our business, financial condition, results of operations or cash flows. Likewise, most states have adopted or are considering policies to reduce Medicaid spending as a result of state budgetary shortfalls, which in some cases include reduced reimbursement for DMEPOS items and/or other Medicaid coverage restrictions.
Federal policy may also impact state Medicaid policy. For instance, effective January 1, 2018, the 21st Century Cures Act prohibits federal financial participation payments to states for certain Medicaid DME spending that exceeds what Medicare would have paid for such items. Any modification or repeal of any provisions of the ACA may require states to modify their own laws and regulations. As states continue to face significant financial pressures, it is possible that state health policy changes will adversely affect our profitability.
We are subject to extensive government regulation relating to the safety, efficacy, testing, manufacturing, labeling, and marketing of our medical device products, non-compliance with which could adversely affect our business, financial condition and results of operations.
As described in Part I, Item 1. “Business – Regulation,” our medical device products are subject to extensive regulation by the FDA and numerous other federal, state and foreign governmental authorities. Failure to comply with such regulations could adversely affect our business, financial condition and results of operations.
Our contract manufacturers and component suppliers are also required to comply with the FDA’s Quality System Regulation. We cannot assure you that our contract manufacturers’ or component suppliers’ facilities would pass any future quality system inspection. If we or any of our contract manufacturers’ or component suppliers’ facilities fail a quality system inspection, our product sales and profitability could be adversely affected.
In addition, the FDA has taken the position that device manufacturers are prohibited from promoting their products other than for the uses and indications set forth in the approved product labeling, and any failure to comply could subject us to
significant civil or criminal exposure, administrative obligations and costs, and/or other potential penalties from, and/or agreements with, the federal government.
With respect to our operations in the EU, we have incurred and will need to incur additional costs to comply, which may be significant. If we fail to meet the requirements of the MDR, or are delayed in doing so, it could adversely impact our business in the EU and other regions that tie their product registrations to the EU requirements. Additionally, the FDA regulates the export of medical devices from the United States to foreign countries and certain foreign countries may require FDA certification that our medical device products are in compliance with U.S. law. Failure to obtain or maintain export certificates required for the export of our products could materially adversely impact revenues and growth.
The success of our surgical implant products depends on our relationships with leading surgeons who assist with the development and testing of our products, and our ability to comply with enhanced disclosure requirements regarding payments to physicians.
A key aspect of the development and sale of our surgical implant products is the use of designing and consulting arrangements with orthopedic surgeons who are highly qualified and experienced in their field. These surgeons assist in the development and clinical testing of new surgical implant products. They also participate in symposia and seminars introducing new surgical implant products and assist in the training of healthcare professionals in using our new products. We may not be successful in maintaining or renewing our current designing and consulting arrangements with these surgeons or in developing similar arrangements with new surgeons. In that event, our ability to develop, test and market new surgical implant products could be adversely affected.
In addition, the Physician Payment Sunshine Act which requires manufacturers of drugs, medical devices, biologicals and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program to report annually certain information related to payments or other transfers of value made to licensed physicians, certain other healthcare providers, and teaching hospitals, and related state marketing and payment disclosure requirements and industry guidelines could have an adverse impact on our relationships with surgeons, and we cannot assure you that such requirements and guidelines would not impose additional costs on us or adversely impact our consulting and other arrangements with surgeons.
We rely on a variety of distribution methods to market and sell our medical device products and if we fail to effectively manage the distribution of such products, our results of operations and future growth could be adversely impacted.
We use a variety of distribution methods to market and sell our medical device products, each of which has distinct risks. For example, to market and sell certain of the orthopedic rehabilitation products which are intended for use in the home and in rehabilitation clinics, we rely on our own direct sales force of representatives in the United States and in Europe. A direct sales force may subject us to higher fixed costs than those of companies that market competing products through independent third parties due to the costs associated with employee benefits, training, and managing sales personnel. As a result, we could be at a competitive disadvantage compared to certain competitors that rely predominately on independent sales agents and third-party distributors. Additionally, these fixed costs may slow our ability to reduce costs in the face of a sudden decline in demand for such products, which could have a material adverse impact on our results of operations. However, for certain orthopedic products, CMF products and surgical implant products, we rely on third-party distributors and independent commissioned sales representatives that maintain the customer relationships with the hospitals, orthopedic surgeons, physical therapists and other healthcare professionals that purchase, use and recommend the use of such products. Although our internal sales staff trains and manages these third-party distributors and independent sales representatives, we do not directly monitor the efforts that they make to sell our products. In addition, some of the independent sales representatives that we use to sell our surgical implant products also sell products that directly compete with our product offerings. These sales representatives may not dedicate the necessary time or effort to market and sell our products. If we fail to attract and maintain relationships with third-party distributors and skilled independent sales representatives or fail to adequately train and monitor the efforts of the third-party distributors and sales representatives that market and sell our products, or if our existing third-party distributors and independent sales representatives choose not to carry our products, our results of operations and future growth could be adversely affected.
Audits or denials of claims by government agencies could reduce our revenues or profits.
As part of our Medical Technology business, we submit claims on behalf of patients directly to, and receive payments directly from, the Medicare and Medicaid programs and private payors. Therefore, we are subject to extensive government
regulation, including detailed requirements for submitting reimbursement claims under appropriate codes and maintaining certain documentation to support our claims. Medicare contractors and Medicaid agencies periodically conduct pre- and post-payment reviews and other audits of claims and are under increasing pressure to more closely scrutinize healthcare claims and supporting documentation. Historically, DJO was subject to pre-payment and post-payment reviews as well as audits of claims and we may experience such reviews and audits of claims in the future. Such reviews or similar audits of our claims including by RACs (private companies operating on a contingent fee basis to identify and recoup Medicare overpayments) and ZPICs (contractors charged with investigating potential fraud and abuse) could result in material delays in payment, as well as material recoupment or denials, which would reduce our net sales and profitability, investigations, potential liability under fraud or abuse laws or exclusion from participation in the Medicare or Medicaid programs. Private payors may from time to time conduct similar reviews and audits.
Additionally, we participate in the government’s Federal Supply Schedule program for medical equipment, whereby we contract with the government to supply certain of our medical products. Participation in this program requires us to follow certain pricing practices and other contract requirements. Failure to comply with such pricing practices and/or other contract requirements could result in delays in payment or fines or penalties, which could reduce our revenues or profits.
If we fail to comply with broad based healthcare and other governmental regulations, we could face substantial fines and penalties and our business, results of operations and financial condition could be adversely affected.
As described in Part I, Item 1. “Business – Regulation,” our Medical Technology business is subject to various federal, state and foreign laws and regulations pertaining to healthcare fraud and abuse. Violations of these laws are punishable by criminal and/or civil sanctions, including, in some instances, fines, imprisonment and, within the United States, exclusion from participation in government healthcare programs, including Medicare, Medicaid and Veterans Administration health programs, and any action brought against us for violations of these laws or regulations, even successfully defended, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Additionally, if there is a change in law, regulation or administrative or judicial interpretations, we may have to change one or more of our business practices to be in compliance with these laws. Required changes could be costly and time consuming and could adversely affect our business and results of operations.
Managed care and buying groups have put downward pressure on the prices of medical device products.
The growth of managed care and the advent of buying groups in the United States have caused a shift toward coverage and payments based on more cost-effective treatment alternatives. Buying groups enter into preferred supplier arrangements with one or more manufacturers of medical products in return for price discounts to members of these buying groups. Our failure to obtain new preferred supplier commitments from major group purchasing organizations or our failure to retain our existing preferred supplier commitments could adversely affect our sales and profitability. In international markets where we sell our medical device products, there has been similar downward pressure on product pricing and other effects of healthcare cost control efforts. We expect a continued emphasis on healthcare cost controls, alternate payment models such as bundled payments, and managed care in the United States and in these international markets, which could put further downward pressure on product pricing, which, in turn may adversely affect our sales and profitability
Risks Related to Litigation and Regulatory Compliance
Available insurance coverage, the number of future asbestos-related claims and the average settlement value of current and future asbestos-related claims of certain subsidiaries could be different than we have estimated, which could materially and adversely affect our business, financial condition and results of operations.
Certain of our subsidiaries are one of many defendants in a large number of lawsuits that claim personal injury as a result of exposure to asbestos from products manufactured with components that are alleged to have contained asbestos. Such components were acquired from third-party suppliers and were not manufactured by any of our subsidiaries nor were the subsidiaries producers or direct suppliers of asbestos. Additionally, pursuant to the definitive purchase agreements related to the sale of our Fluid Handling and Howden businesses, we have retained the asbestos-related contingencies and insurance coverage related to these businesses, even though we do not retain an interest in the ongoing operations of the Fluid Handling or Howden businesses.
For the purposes of our financial statements, we have estimated the future claims exposure and the amount of insurance available based upon certain assumptions with respect to future claims and liability costs. We estimate the liability
costs to be incurred in resolving pending and forecasted claims for the next 15-year period as well as the amount of insurance proceeds available for such claims. We reevaluate these estimates regularly. Although we believe our current estimates are reasonable, a change in the time period used for forecasting our liability costs, the actual number of future claims brought against us, the cost of resolving these claims, the likelihood of payment by, and the solvency of, insurers and the amount of remaining insurance available could be substantially different than our estimates, and future revaluation of our liabilities and insurance recoveries could result in material adjustments to these estimates, any of which could materially and adversely affect our business, financial condition and results of operations.
In addition, we incur defense costs related to those claims, a portion of which has historically been reimbursed by our insurers. We also incur litigation costs in connection with actions against certain of the subsidiaries’ insurers relating to insurance coverage. These costs may be significant, and we may not be able to predict the amount or duration of such costs. Additionally, we may experience delays in receiving reimbursement from insurers, during which time we may be required to pay cash for settlement or legal defense costs. Any increase in the actual number of future claims brought against us, the defense costs of resolving these claims, the costs of pursuing claims against our insurers, the likelihood and timing of payment by, and the solvency of, insurers and the amount of remaining insurance available, could materially and adversely affect our business, financial condition and results of operations.
We have done and may continue to do business in countries subject to U.S. sanctions and embargoes, and we may have limited managerial oversight over those activities. Failure to comply with various sanction and embargo laws may result in enforcement or other regulatory actions.
Certain of our independent foreign subsidiaries have conducted and may continue to conduct business in countries subject to U.S. sanctions and embargoes or may engage in business dealings with parties whose property or property interests may be blocked under non-country-specific U.S. sanctions programs, and we have limited managerial oversight over those activities. Failure to comply properly with various sanction and embargo laws to which we and our operations may be subject may result in enforcement or other regulatory actions. Specifically, from time to time, certain of our independent foreign subsidiaries sell products to companies and entities located in, or controlled by the governments of, certain countries that are or have previously been subject to sanctions and embargoes imposed by the U.S. government, the United Nations or other countries where we maintain operations. With the exception of the U.S. sanctions against Cuba and Iran, the applicable sanctions and embargoes generally do not prohibit our foreign subsidiaries from selling non-U.S.-origin products and services to countries that are or have previously been subject to sanctions and embargoes. However, our U.S. personnel, each of our domestic subsidiaries, as well as our employees of foreign subsidiaries who are U.S. citizens, are prohibited from participating in, approving or otherwise facilitating any aspect of the business activities in those countries or with persons prohibited under U.S. sanctions. These constraints impose compliance costs and risks on our operations and may negatively affect the financial or operating performance of such business activities.
Our efforts to comply with U.S. and other applicable sanction and embargo laws may not be effective, and as a consequence we may face enforcement or other actions if our compliance efforts are not or are perceived as not being wholly effective. Actual or alleged violations of these laws could lead to substantial fines or other sanctions which could result in substantial costs. In addition, Syria, Sudan and Iran and certain other sanctioned countries currently are identified by the U.S. State Department as state sponsors of terrorism, and have been subject to restrictive sanctions. Because certain of our independent foreign subsidiaries have contact with and transact limited business in certain U.S. sanctioned countries, including sales to enterprises controlled by agencies of the governments of such countries, our reputation may suffer due to our association with these countries, which may have a material adverse effect on the price of our Common stock and our business, financial condition and results of operations. In addition, certain U.S. states and municipalities have enacted legislation regarding investments by pension funds and other retirement systems in companies that have business activities or contacts with countries that have been identified as state sponsors of terrorism and similar legislation may be pending in other states. As a result, pension funds and other retirement systems may be subject to reporting requirements with respect to investments in companies such as Colfax or may be subject to limits or prohibitions with respect to those investments that may have a material adverse effect on the price of our Common stock and our business, financial condition and results of operations.
If we fail to comply with export control regulations, we could be subject to substantial fines or other sanctions, which could have a material adverse effect on our business, financial condition and results of operations.
Some of our products manufactured or assembled in the United States are subject to the U.S. Export Administration Regulations, administered by the U.S. Department of Commerce, Bureau of Industry and Security, which require that an export license is obtained before such products can be exported to certain countries, and the U.S. Treasury Department’s Office of
Foreign Assets Control’s trade and economic sanctions programs. Additionally, some of our products are subject to the International Traffic in Arms Regulations, which restrict the export of certain military or intelligence-related items, technologies and services to non-U.S. persons. Such regulations may prohibit or restrict our ability to, directly or indirectly, conduct activities or dealings in or with certain countries or territories that are the subject of comprehensive embargoes, as well as with certain individuals or entities. Failure to comply with these laws could harm our business by subjecting us to sanctions by the U.S. government, including substantial monetary penalties, denial of export privileges and debarment from U.S. government contracts. For example, from 2016 through 2020, one of our foreign subsidiaries engaged in certain transactions, a limited number of which included U.S. origin goods, either directly or indirectly through distributors, involving sales to specially designated nationals and/or to the Crimea region of Ukraine, which may have been made in violation of relevant trade sanctions or export control laws. We have submitted a voluntary disclosure report to relevant U.S. government agencies regarding these transactions. As a result of these transactions, we may be subject to fines or other sanctions.
We are subject to a variety of environmental and health and safety laws for which compliance, or liabilities that arise as a result of noncompliance, could be costly.
Our businesses are subject to international, federal, state and local environmental and safety laws and regulations, including laws and regulations governing emissions of regulated air pollutants; discharges of wastewater and storm water; storage and handling of raw materials; the use, manufacture, handling, storage and disposal of hazardous materials; generation, storage, transportation and disposal of regulated wastes; and laws and regulations governing worker safety. These requirements impose certain responsibilities on our businesses, including the obligation to obtain and maintain various environmental permits. If we were to fail to comply with these requirements or fail to obtain or maintain a required permit, we could be subject to penalties and be required to undertake corrective action measures to achieve compliance.
In addition, under various federal, state and local laws, regulations and ordinances, and, in some instances, international laws, relating to the protection of the environment, a current or former owner or operator of real property may be liable for the cost to remove or remediate contamination on, under, or released from such property and for any damage to natural resources, such as soil or groundwater, resulting from such contamination. Similarly, a generator of waste can be held responsible for contamination resulting from the treatment or disposal of such waste at any off-site location (such as a landfill), regardless of whether the generator arranged for the treatment or disposal of the waste in compliance with applicable laws. Costs associated with liability for removal or remediation of contamination or damage to natural resources could be substantial and liability under these laws may attach without regard to whether the responsible party knew of, or was responsible for, the presence of the contaminants. Moreover, noncompliance could subject us to private claims for property damage or personal injury based on exposure to hazardous materials or unsafe working conditions. In addition, changes in applicable requirements or stricter interpretation of existing requirements may result in costly compliance requirements or otherwise subject us to future liabilities.
In addition, any environmental liability may be joint and several. Moreover, the presence of contamination or the failure to remediate contamination at our properties, or properties for which we are deemed responsible, may expose us to liability for property damage or personal injury, or materially adversely affect our ability to sell our real property interests or to borrow using the real property as collateral. We could be subject to environmental liabilities in the future as a result of historic or current operations that have resulted or will result in contamination.
The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
General and Other Considerations RelatedRisks
Changes in the general economy and the cyclical nature of the markets that we serve could negatively impact the demand for our products and services and harm our operations and financial performance.
Our financial performance depends, in large part, on conditions in the markets we serve and on the general condition of the global economy, which impacts these markets. For example, the COVID-19 global pandemic has resulted in widespread economic disruption which has severely impacted, and will likely continue to severely impact, our Common Stockbusiness and demand for our products and services. Any sustained weakness in demand for our products and services resulting from a downturn of or uncertainty in the global economy could reduce our sales and profitability. In addition, we believe that many of our customers and suppliers are reliant on liquidity from global credit markets and, in some cases, require external financing to purchase products or finance operations. If our customers lack liquidity or are unable to access the credit markets, it may impact customer demand for our products and services and we may not be able to collect amounts owed to us. Further, our products are
sold in many industries, some of which are cyclical and may experience periodic downturns. Cyclical weakness in the industries that we serve could lead to reduced demand for our products and affect our profitability and financial performance. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
The loss of key leadership could have a material adverse effect on our ability to run our business.
We may be adversely affected if we lose members of our senior leadership. We are highly dependent on our senior leadership team as a result of their expertise in our industry and our business. The loss of key leadership or the inability to attract, retain and motivate sufficient numbers of qualified management personnel could have a material adverse effect on our business, financial condition and results of operations.
The issuances of additional Common and Preferred stock or the resale of previously restricted Common stock may adversely affect the market price of Colfax Common stock.
Pursuant to certain registration rights agreements we have entered with Mitchell P. Rales, Steven M. Rales BDT CF Acquisition Vehicle, LLC, and Markel Corporation (collectively, the “Investors”), the Investors and their permitted transferees have registration rights for the resale of certain shares of Colfax Common stock. These registration rights would facilitate the resale of such securities into the public market, and any such resale would increase the number of shares of Colfax Common stock available for public trading. Sales by the Investors or their permitted transferees of a substantial number of shares of Colfax Common stock in the public market, or the perception that such sales might occur, could have a material adverse effect on the price of Colfax Common stock.
Additionally, under our Amended and Restated Certificate of Incorporation, there are additional authorized shares of Colfax Common stock. Furthermore, we may issue a significant number of additional shares, in connection with acquisitions or otherwise. We also may issue a significant number of additional shares, either into the marketplace through an existing shelf registration statement or through other mechanisms. Additional shares issued would have a dilutive effect on our earnings per share.
Provisions in our governing documents and Delaware law, and the percentage of Common stock owned by our largest stockholders, may delay or prevent an acquisition of Colfax that may be beneficial to our stockholders.
Our Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, and Delaware law contain provisions that may make it difficult for a third partythird-party to acquire us without the consent of our Board of Directors. These include provisions prohibiting stockholders from taking action by written consent, prohibiting special meetings of stockholders called by stockholders, prohibiting stockholder nominations and approvals without complying with specific advance notice requirements, and mandating certain procedural steps for stockholders who wish to introduce business or nominate a director candidate. In addition, our Board of Directors has the right to issue Preferred stock without stockholder approval, which our Board of Directors could use to affect a rights plan or “poison pill” that could dilute the stock ownership of a potential hostile acquirer and may have the effect of delaying, discouraging or preventing an acquisition of Colfax. Delaware law also imposes some restrictions on mergers and other business combinations between Colfax and any holder of 15% or more of its outstanding voting stock.
In addition, the percentage of Colfax Common stock owned Mitchell P. Rales, Steven M. Rales, and BDT Capital Partners, LLC and its affiliates could discourage a third party from proposing a change of control or other strategic transaction concerning Colfax.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters are located in Annapolis Junction, Maryland in a facility that we lease. As of December 31, 2017, our Air and Gas Handling reportable segment had 7 principal production facilities in the U.S. representing approximately 0.7 million and 0.1 million square feet of owned and leased space, and 28 principal production facilities in 17 different countries in Asia, Europe, the Americas, Australia and South Africa, representing a total of 2.6 million and 0.3 million square feet of owned and leased space, respectively. Additionally, as of December 31, 2017,2020, our Fabrication Technology segment had a total of 6five production facilities in the U.S., representing a total of 0.6 million and 0.90.7 million square feet of owned and leased space, respectively, and 33 production facilities outside the U.S., representing a total of 6.97.1 million and 2.42.0 million square feet of owned and leased space, respectively, in 1617 countries in Australia, Central and Eastern Europe, Central and South America and Asia. As of December 31, 2020, our Medical Technology segment had a total of four production facilities in the U.S., representing a total of 0.1 million and 0.2 million square feet of owned and leased space, respectively, and two production facilities outside the U.S., representing a total of 0.3 million square feet of leased space in two countries in Central America and Africa.
Item 3. Legal Proceedings
Discussion of legal matters is incorporated by reference to Part II, Item 8, Note 16,18, “Commitments and Contingencies,” in the Notes to the Consolidated Financial Statements.
Item 4. Mine Safety Disclosures
None.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, positions and experience of our executive officers. All of our executive officers hold office at the pleasure of our Board of Directors.
|
| | | | | | | | | | | | | |
| Name | | Age | | Position |
| Matthew L. Trerotola | | 5053 | | President and Chief Executive Officer and Director, Colfax Corporation |
| Christopher M. Hix | | 5558 | | SeniorExecutive Vice President, Finance, Chief Financial Officer and Treasurer |
| Daniel A. Pryor | | 4952 | | Executive Vice President, Strategy and Business Development |
Ian Brander | | 56 | | Chief Executive Officer, Howden |
| Shyam Kambeyanda | | 4750 | | SeniorExecutive Vice President, President and CEO of ESAB |
Lynn Clark | | 60 | | Senior Vice President, Global Human Resources |
A. Lynne PuckettBrady R. Shirley | | 55 | | Chief Executive Officer of DJO |
| Bradley J. Tandy | | 62 | | Senior Vice President, General Counsel and Corporate Secretary |
Jason MacLeanPatricia Lang | | 4857 | | Senior Vice President, Colfax Business System and Supply Chain StrategyChief Human Resources Officer |
Matthew L. Trerotola has been President and Chief Executive Officer since July 2015. Prior to joining Colfax, Mr. Trerotola was an Executive Vice President and a member of DuPont’s Office of the Chief Executive, responsible for DuPont’s Electronics & Communications and Safety & Protection segments. Mr. Trerotola also had corporate responsibility for DuPont’s Asia-Pacific business. Many of Mr. Trerotola’s roles at DuPont involved applying innovation to improve margins and accelerate organic growth in global businesses. Prior to rejoining DuPont in 2013, Mr. Trerotola had served in leadership roles at Danaher Corporation since 2007, and was most recently Vice President and Group Executive for Life Sciences. Previously, Mr. Trerotola was Group Executive for Product Identification from 2009 to 2012, and President of the Videojet business from 2007 to 2009. While at McKinsey & Company from 1995 to 1999, Mr. Trerotola focused primarily on helping industrial companies accelerate growth. Mr. Trerotola earned his Masters of Business Administration (“M.B.A.”) from Harvard Business School and his Bachelor of Science (“B.S”B.S.”) in Chemical Engineering from the University of Virginia.
Christopher M. Hix has been SeniorExecutive Vice President, Finance, Chief Financial Officer since December 2019 and Treasurerprior to such position served as Senior Vice President, Finance, since July 2016. Prior to joining Colfax, Mr. Hix was the Chief Financial Officer of OM Group, Inc., a global, publicly-listed diversified industrial company. Mr. Hix served within OM Group from 2012 until the company’s acquisition in late 2015. Previously, Mr. Hix was the Chief Financial Officer of Robbins & Myers, a diversified industrial company, from 2006 to 2011. Prior to that, Mr. Hix spent 13 years in a variety of positions with increasing responsibility in operating, financial and strategic roles within Roper Industries, a global, diversified industrial and technology company that underwent rapid growth and transition from private to public ownership during his tenure. Mr. Hix earned his M.B.A. from St. Mary’s College of California and his B.S. in Business Administration from the University of Southern California.
Daniel A. Pryor has been the Executive Vice President‚ Strategy and Business Development since July 2013. Mr. Pryor was Senior Vice President, Strategy and Business Development from January 2011 through July 2013. Prior to joining Colfax‚ he was a Partner and Managing Director with The Carlyle Group‚ a global alternative asset manager, where he focused on industrial leveraged buyouts and led numerous portfolio company and follow-on acquisitions. While at The Carlyle Group, he served on the boards of portfolio companies Veyance Technologies, Inc., John Maneely Co., and HD Supply Inc. Prior to The Carlyle Group, he spent 11 years at Danaher Corporation in roles of increasing responsibility‚ most recently as Vice President - Strategic Development. Mr. Pryor earned his M.B.A. from Harvard Business School and his Bachelor of Arts in Economics from Williams College.
Shyam Kambeyandahas been the Chief Executive Officer of Howden since August 1, 2011. Prior to becoming Chief Executive Officer of Howden, he served as Operations Director beginning in 2008. His experience includes over 20 years at Howden in various roles in technical, project, commercial and general management positions associated with a wide range of products. He holds a Mechanical Engineering degree from the University of Strathclyde.
Shyam Kambeyanda has been the Senior Vice President since December 2019 and President and Chief Executive Officer of ESAB since May 2016. Prior to joining Colfax‚ Mr. Kambeyanda most recently served as the President Americas for Eaton Corporation's Hydraulics Group. Mr. Kambeyanda joined Eaton in 1995 and has held a variety of positions of increasing responsibility in engineering, quality, ecommerce,e-commerce, product strategy, and operations management in the U.S., Mexico, Europe and Asia. Mr. Kambeyanda maintains a keen international perspective on driving growth and business development in emerging markets. Mr. Kambeyanda holds bachelor's degrees in Physics and General Science from Coe College in Iowa and in Electrical Engineering from Iowa State University. Mr. Kambeyanda also earned his M.B.A from Kellogg School of Management at Northwestern University and is a Six Sigma Green Belt.
Lynn Clark has beenBrady Shirley was appointed DJO Chief Executive Officer in November 2016. Prior to this, Mr. Shirley served as the President of the DJO Surgical business, a position he was appointed to in March of 2014. From 2009 to 2013, Mr. Shirley was the CEO and Director of Innovative Medical Device Solutions (“IMDS”), a company that provides comprehensive product development, manufacturing and supply chain management solutions for medical device companies within the orthopedic medical device industry. At IMDS, Mr. Shirley managed the integration of four companies, consolidated the capital structure and led a successful sale of the business in 2013. From December 1992 to August 2009, Mr. Shirley had several key leadership positions with Stryker Corporation, including President of Stryker Communications and Senior Vice President Global Human Resourcesof Stryker Endoscopy. Mr. Shirley received a Bachelor of Business Administration in Finance from the University of Texas, Austin.
Bradley Tandy has been Senior Vice President, General Counsel since January 2013.July 2019 and was appointed as Corporate Secretary in February 2020. From February 2019 through June 2019, he served as our interim general counsel. Mr. Tandy also served in his capacity as Executive Vice President, General Counsel and Secretary of DJO. Prior to joining Colfax, sheDJO, Mr. Tandy served as senior vice president, global human resources for Mead Johnson Nutrition. Ms. Clark held roles of increasing responsibility in human resources at Bristol-Myers Squibb from 2001 to 2009, and prior to this, with Lucent Technologies and Allied Signal Corporation. Prior to her experience in human resources, she worked for 15 years in sales and marketing. Ms. Clark has a B.S in Education and a Master of Science in College Student Personnel from Bowling Green University in Ohio.
A. Lynne Puckett has been the Senior Vice President, General Counsel and Secretary since September 2010.of Biomet, Inc. from 2006 through 2014. Prior to joining Colfax‚ sheserving as General Counsel, Mr. Tandy served as Vice President, Assistant General Counsel and Chief Compliance Officer of Biomet from 1999 through 2006. He joined Biomet as Assistant General Counsel in 1992. Prior to his employment at Biomet, Mr. Tandy was a Partner withpartner in the law firm of Hogan Lovells US LLPRasor, Harris, Lemon & Reed in Warsaw, Indiana, focusing his practice on representation of medical device and healthcare companies. He was an elected public official in Kosciusko County, Indiana, serving as a County Councilman for 22 years. He received his undergraduate degree in Political Science from 1999 to 2010. Her experience includes a broad rangeDePauw University and earned his Doctorate of corporate and transactional matters‚ including mergers and acquisitions‚ venture capital financings‚ debt and equity offerings and general corporate and securities law matters. Before entering the practice of law‚ Ms. Puckett worked for the U.S. Central Intelligence Agency and a major U.S. defense contractor. Ms. Puckett holds a J.D. from theJurisprudence at Indiana University of Maryland School of Law and a B.S. degree from James Madison University.in Bloomington, Indiana.
Jason MacLean has been thePatricia Lang was appointed Senior Vice President, Colfax Business SystemPresident‚ Chief Human Resources Officer in January 2019. Most recently Ms. Lang was the Chief People Officer for Diebold Nixdorf and Supply Chain Strategy since October 2017.was responsible for managing employee-focused initiatives across the organization. Prior to joining Colfax, he was the Vice PresidentDiebold Nixdorf, Ms. Lang held a number of Advance Analyticshuman resource and operations leadership positions at Cummins, Inc. Mr. MacLean wascompanies such as Mylan Pharmaceuticals, Consol Energy, Mercer Consulting and Cigna. Ms. Lang holds a business degree with Cummins since 2006a concentration in information technology and servedmanagement from Duquesne University. Additionally, she holds various certifications in multiple senior supply chain roleshuman capital management, mergers and acquisitions, global employee benefits including the Vice President of Supply Chain & Manufacturing for all of Cummins. Mr. MacLean has a combination of supply chain,C.E.B.S, as well as complex project management, lean manufacturing and strategic experience. His experience includes applying advanced analytics, digital technologies, and automation to complement and multiply the impact from driving lean across a range of supply chains. He is a Six Sigma Green Belt. Mr. MacLean holds a bachelor's degree in English from the University of Pennsylvania and earned both an M.B.A. in Finance and a Masters in International Studies from the Wharton School of Businessbusiness systems and the Lauder Institute, University of Pennsylvania.
Toyota production system.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our Common stock began trading on the New York Stock Exchange under the symbol CFX on May 8, 2008. As of February 7, 2018,12, 2021, there were 34,337201 holders of record of our Common stock. The highnumber of holders of record is based upon the actual number of holders registered at such date and low sales prices per sharedoes not include holders of our Common stock, as reported on the New York Stock Exchange, for the fiscal periods presented are as follows:shares in “street name” or persons, partnerships, associates, corporations or other entities identified in security position listings maintained by depositories.
|
| | | | | | | | | | | | | | | | |
| | | Year Ended |
| | | 2017 | | 2016 |
| | | High | | Low | | High | | Low |
| First Quarter | | $ | 41.99 |
| | $ | 35.31 |
| | $ | 30.18 |
| | $ | 18.22 |
|
| Second Quarter | | $ | 41.96 |
| | $ | 36.60 |
| | $ | 33.63 |
| | $ | 24.62 |
|
| Third Quarter | | $ | 42.93 |
| | $ | 37.26 |
| | $ | 31.66 |
| | $ | 25.19 |
|
| Fourth Quarter | | $ | 43.29 |
| | $ | 33.31 |
| | $ | 39.84 |
| | $ | 28.47 |
|
We have not paid any dividends on our Common stock since inception, and we do not anticipate the declaration or payment of dividends at any time in the foreseeable future.
Performance Graph
The graph below compares the cumulative total stockholder return on our Common stock with the cumulative total return of the Standard & Poor’s (“S&P”) 400 Industrial Index and the S&P Industrial Machinery Index. The graph assumes that $100 was invested on December 31, 20112015 in each of our Common stock, the S&P 400 Industrial Index and the S&P Industrial Machinery Index, and that all dividends were reinvested. Note that we have elected to add the S&P 400 Industrial Index this year because this index is used in relative total shareholder return performance share units that we have granted to employees.
Issuer Repurchase of Equity Securities
On October 11, 2015, the Company’s Board of Directors authorized the repurchase of up to $100.0 million of the Company’s Common stock from time-to-time on the open market or in privately negotiated transactions, which were to be retired upon repurchase. The timing and amount of shares repurchased was determined by management based on its evaluation of market conditions and other factors. The repurchase program was conducted pursuant to SEC Rule 10b-18.
Under the repurchase program, the Company repurchased 1,000,000 shares of its Common stock in open market transactions for $20.8 million in 2016. In 2015, the Company repurchased 986,279 shares of its Common stock under the program in open market transactions for $27.4 million. The repurchase program expired as of December 31, 2016.
On February 12, 2018, the Company’s Board of Directors authorized the repurchase of up to $100.0 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, and again for an additional $100 million on July 19, 2018. The timing and amount of shares repurchased is to be determined by management based on its evaluation of market conditions and other factors. The repurchase program has no expiration date and does not obligate the Company to acquire any specific number of shares. NoThe repurchase program was conducted pursuant to SEC Rule 10b-18.
There were no repurchases made under the repurchase program during 2020 or 2019. The Company repurchased 6,449,425 shares have been repurchased to date.of its Common stock under the repurchase program in open market transactions for $200.0 million in 2018. As of December 31, 2020, there are authorized Common stock repurchases of approximately $100 million remaining.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs | |
| | | | | | | | | |
| | | | | | | | | |
| 10/03/20 - 10/30/20 | | — | | | $ | — | | | — | | | $ | 99,997,744 | | |
| 10/31/20 - 11/27/20 | | — | | | — | | | — | | | 99,997,744 | | |
| 11/28/20 - 12/31/20 | | — | | | — | | | — | | | 99,997,744 | | |
| Total | | — | | | $ | — | | | — | | | $ | 99,997,744 | | (1) |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
(1) Represents the repurchase program limit authorized by the Board of Directors of $300 million less the value of purchases made under the repurchase program.
Item 6. Selected Financial Data
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended and As of December 31, |
| | | 2020 | | 2019(1) | | 2018(2) | | 2017(3) | | 2016(4)(5) |
| | | (Dollars in thousands, except per share data) |
| Statement of Operations Data: | | | | | | | | | | |
| Net sales | | $ | 3,070,769 | | | $ | 3,327,458 | | | $ | 2,193,083 | | | $ | 1,937,282 | | | $ | 3,185,753 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Operating income | | 162,291 | | | 203,612 | | | 151,536 | | | 135,598 | | | 236,848 | |
| Specific costs included in Operating income: | | | | | | | | | | |
| Restructuring and other related charges | | 38,413 | | | 65,295 | | | 29,077 | | | 35,333 | | | 58,496 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Goodwill and intangible asset impairment | | — | | | — | | | — | | | — | | | 238 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Net income from continuing operations | | 64,082 | | | 18,863 | | | 121,872 | | | 46,076 | | | 154,752 | |
| | | | | | | | | | |
| Net income per share from continuing operations - diluted | | 0.44 | | | 0.10 | | | 1.00 | | | 0.36 | | | 1.12 | |
| Net income (loss) income per share from discontinued operations - diluted | | (0.13) | | | (3.99) | | | 0.16 | | | 0.86 | | | (0.08) | |
| Balance Sheet and Other Data: | | | | | | | | | | |
| Cash and cash equivalents | | 97,068 | | | 109,632 | | | 77,153 | | | 111,674 | | | 208,814 | |
| | | | | | | | | | |
| Total assets | | 7,351,549 | | | 7,386,832 | | | 6,615,958 | | | 6,709,697 | | | 6,338,440 | |
| Total debt, including current portion | | 2,231,243 | | | 2,311,826 | | | 1,197,428 | | | 1,061,071 | | | 1,292,144 | |
| Net cash provided by operating activities | | 301,935 | | | 130,948 | | | 226,367 | | | 218,770 | | | 246,974 | |
(1)During 2019, we completed the acquisition of DJO for $3.15 billion and incurred $61 million of strategic transaction costs as well as $51 million of Restructuring and other related charges at DJO. Additionally, we completed the divestiture of our Air and Gas Handling business on September 30, 2019. The results of our Air and Gas Handling business are presented as discontinued operations and include a charge for goodwill impairment of $449 million, which did not have an associated tax benefit and contributed approximately $3.28 to the loss per share from discontinued operations. Additionally, we incurred divestiture-related expense of $49 million, interest expense of $48 million associated with the mandatory pay down of our Term Loan Facilities using net proceeds from the sale, pension settlement loss of $44 million, and income tax expense of $44 million. Refer to Note 5, “Acquisitions” and Note 4, “Discontinued Operations” in the accompanying Notes to Consolidated Financial Statements in this Form 10-K for additional information.
(2)During 2018, we repurchased approximately $200 million of our Common stock. See Note 14, “Equity” in the accompanying Notes to Consolidated Financial Statements in this Form 10-K for additional information.
(3)In 2017, we divested our Fluid Handling business for total consideration, including certain post-closing adjustments, of $861 million.
(4)During 2016, we repurchased approximately $21 million of our Common stock.
(5)In accordance with the SEC staff Financial Reporting Manual and in conjunction with the filing of the 2019 Form 10-K, we elected not to recast the selected financial data for the years 2016 and prior for the 2019 divestiture of the Air and Gas Handling segment as discontinued operations. As such, the above selected financial data for the year ended 2016 includes the results of the divested Air and Gas Handling segment.
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended and As of December 31, |
| | | 2017(1) | | 2016(2) | | 2015(3) | | 2014(4) | | 2013(5) |
| | | (In thousands, except per share data) |
| Statement of Income Data: | | |
| | |
| | |
| | |
| | |
|
| Net sales | | $ | 3,300,184 |
| | $ | 3,185,753 |
| | $ | 3,434,352 |
| | $ | 3,971,059 |
| | $ | 3,543,890 |
|
| Operating income | | 29,151 |
| | 236,800 |
| | 265,620 |
| | 377,428 |
| | 318,494 |
|
| Specific costs included in Operating income: | | | | | | | | | | |
| Restructuring and other related charges | | 68,351 |
| | 58,496 |
| | 56,822 |
| | 51,133 |
| | 31,861 |
|
| Goodwill and intangible asset impairment | | 152,700 |
| | 238 |
| | 1,486 |
| | — |
| | — |
|
| Pension settlement loss (gain) | | 46,933 |
| | 48 |
| | (582 | ) | | 190 |
| | (592 | ) |
| Dividends on preferred stock | | — |
| | — |
| | — |
| | 2,348 |
| | 20,396 |
|
| Preferred stock conversion inducement payment | | — |
| | — |
| | — |
| | 19,565 |
| | — |
|
| Net (loss) income from continuing operations | | (54,540 | ) | | 154,752 |
| | 176,950 |
| | 400,381 |
| | 160,606 |
|
| Net (loss) income per share from continuing operations - diluted | | (0.59 | ) | | 1.12 |
| | 1.26 |
| | 2.86 |
| | 1.06 |
|
| Net income (loss) per share from discontinued operations - diluted | | 1.81 |
| | (0.08 | ) | | 0.08 |
| | 0.16 |
| | 0.48 |
|
| Balance Sheet and Other Data: | | |
| | |
| | |
| | |
| | |
|
| Cash and cash equivalents | | 262,019 |
| | 208,814 |
| | 178,993 |
| | 281,066 |
| | 275,793 |
|
| Total assets | | 6,709,697 |
| | 6,338,440 |
| | 6,732,919 |
| | 7,211,517 |
| | 6,593,679 |
|
| Total debt, including current portion | | 1,061,071 |
| | 1,292,144 |
| | 1,417,547 |
| | 1,536,810 |
| | 1,479,586 |
|
| Net cash provided by operating activities | | 218,770 |
| | 246,974 |
| | 303,813 |
| | 385,758 |
| | 362,169 |
|
| |
(1)
| In 2017, we divested our Fluid Handling business for total consideration of $864.9 million. We reported a gain of $308.4 million which is included in Income (loss) from discontinued operations, net of taxes in the Consolidated Statements of Income. Refer to Note 4, “Discontinued Operations” in the accompanying Notes to Consolidated Financial Statements in this Form 10-K for additional information. |
| |
(2)
| During 2016, we repurchased approximately $21 million of our Common stock. See Note 12, “Equity” in the accompanying Notes to Consolidated Financial Statements in this Form 10-K for additional information. |
| |
(3)
| In 2015, we repurchased approximately $27 million of our Common stock. See Note 12, “Equity” in the accompanying Notes to Consolidated Financial Statements in this Form 10-K for additional information. |
| |
(4)
| During 2014, we completed the acquisition of Victor Technologies Holdings, Inc. which enabled us to reassess the realizability of certain deferred tax assets on expected U.S. future income, resulting in a non-cash income tax benefit of $145.4 million.In February 2014, we entered into a Conversion Agreement with BDT CF Acquisition Vehicle, LLC (the “BDT Investor”) pursuant to which the BDT Investor exercised its option to convert its shares of Series A Perpetual Convertible Preferred Stock into shares of our Common stock plus cash.
|
| |
(5)
| During 2013, we completed three acquisitions in our Air and Gas Handling segment. In February 2013 and November 2013, we refinanced our Debt resulting in an approximately $30 million write-off of deferred financing fees and original issue discount. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of Company’s management. This MD&A is divided into four main sections:
•Overview
•Results of Operations
•Liquidity and Capital Resources
•Critical Accounting Policies
The following MD&A should be read together with Item 6. “Selected Financial Data”, Part I, Item 1A. “Risk Factors” and the accompanying Consolidated Financial Statements and Notes to Consolidated Financial Statements included in Item 8. of this Form 10-K. The MD&A includes forward-looking statements. For a discussion of important factors that could cause actual results to differ materially from the results referred to in these forward-looking statements, see “Special Note Regarding Forward-Looking Statements.”
Overview
Please see Part I, Item 1. “Business” for a discussion of Colfax’s objectives and methodologies for delivering shareholder value and the sale of Colfax’s Fluid Handling business.value.
On September 24, 2017, we entered into a definitive purchase agreement (the “Purchase Agreement”) with CIRCOR International, Inc., a Delaware corporation (“CIRCOR” or the “Buyer”), pursuant to which CIRCOR agreed to purchase certain subsidiaries and assets comprising our Fluid Handling business (“Fluid Handling”).
On December 11, 2017 (the “Closing”), we completed the divestiture of Fluid Handling. Total consideration was $864.9 million, consisting of $555.3 million of cash, 3.3 million shares of CIRCOR common stock (the “CIRCOR Shares”), and assumption of $168.0 million of net retirement liabilities. $65.0 million of the cash consideration is expected to be collected during 2018 and is included in Other current assets in the accompanying Consolidated Balance Sheets as of December 31, 2017. The CIRCOR Shares we received represent 16.6% of CIRCOR’s issued and outstanding shares on the Closing date. The purchase price is subject to certain adjustments pursuant to the Purchase Agreement. See Note 4, “Discontinued Operations” for further information.
The accounting requirements for reporting the sale of Fluid Handling as a discontinued operation were met during the third quarter of 2017. Accordingly, the results of operations for the Fluid Handling segment have been excluded from the discussion of our results of operations for all periods presented.
Prior to the sale of the Fluid Handling business, the Company conductedColfax conducts its operations through threetwo operating segments: Air and Gas Handling, Fluid Handling and Fabrication Technology. The Air and Gas Handling and Fluid Handling operating segments were aggregated into a single reportable segment. Subsequent to the sale, the Company now conducts its continuing operations through the Air and Gas Handling and Fabrication Technology segments, which also represent the Company’s reportable segments.and Medical Technology.
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 leading global supplier of consumable products and equipment for use in the cutting, joining and automated welding, as well as gas control equipment, providing a wide range of steels, aluminumproducts with innovative technologies to solve challenges in a wide range of industries.
•Medical Technology - a leader in orthopedic solutions, providing devices, software and other metals and metal alloys
services spanning the full continuum of patient care, from injury prevention to joint replacement to rehabilitation.
Certain amounts not allocated to the two reportable segments and intersegment eliminations are reported under the heading “Corporate and other.”
We have a global geographic footprint, with production facilities in Europe, North America, South America, Asia, Australia and Africa. Through our reportable segments, weWe 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 in the medical and includes commercial, industrial and government customers.end markets.
Integral to our operations is CBS.CBS, our business management system. CBS is our business management system, includingculture and includes our values and behaviors, a comprehensive set of tools. It includestools, and repeatable, teachable processes that we use to drive continuous improvement and 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 the CBS methodology is one of our primary competitive strengths.
Outlook
We believe that we are well positioned to grow our businesses organically over the long term by enhancing our product offerings and expanding our customer base. Our Medical Technology segment orthopedic business enjoys sustainable secular drivers such as aging populations that require increasing levels of medical care that should contribute to reduced cyclicality of our Company. In addition, the shift to greater outpatient surgeries at ambulatory surgical centers (ASCs) is expected to benefit our rehabilitation and recovery business as patients require proper bracing and other support during recoveries. We have seen an acceleration of shifting to ASCs allowing for increased opportunity to sell to these centers in the future. Our Fabrication Technology business mix is expected to be well balanced between long- and short-cycle businesses, sales in emerging markets and developed nations, and fore-equipment and aftermarketconsumables. We intend to continue to utilize our strong global presence and worldwide network of salespeople and distributors to capitalize on growth opportunities by selling regionally-developed and/or marketed products and services.solutions throughout our served markets. Our geographic and end market diversity helps mitigate the effects from cyclical industrial market exposures. Given this balance, management does not use indices other than general economic trends and business initiatives to predict the overall outlook for the Company. Instead, theour individual businesses monitor key competitors and customers, including to the extent possible their sales, to gauge relative performance and outlook for the future.
We face a number of challenges and opportunities, including the successful integration of new acquisitions,acquired businesses, application and expansion of our CBS tools to improve margins and working capital management,business performance, and rationalization of assets and costs.
We expect strategic acquisitions to contribute to our growth. We believe that the extensive experience of our leadership team in acquiring and effectively integrating acquisition targets should enable us to capitalize on future opportunities.
The discussion that follows includes a comparison of our results of operations, liquidity and capital resources for the fiscal years ended December 31, 2020 and 2019. For a comparison of the Company’s results of operations, liquidity and capital resources for the fiscal years ended December 31, 2019 and 2018, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Results of Operations
The following discussion of Results of Operations addresses the comparison of the periods presented. The Company’sOur management evaluates the operating results of each of its reportable segments based upon Net sales, and Segment operating income, (loss), which represents Operating income before Goodwill and intangible asset impairment charge, Pension settlement loss and Restructuring and other related charges.charges and European Union Medical Devices Regulation (“MDR”) and other costs, and Adjusted EBITA as defined in the “Non-GAAP Measures” section.
Items Affecting Comparability of Reported Results
OurThe comparability of our operating results for the year ended December 31, 2020 to the comparable 2019 period is affected by the following additional significant items:
Recent Developments
In December 2019, a novel coronavirus disease (“COVID-19”) was first reported in China. On March 11, 2020, due to worldwide spread of the virus, the World Health Organization characterized COVID-19 as a pandemic. The COVID-19 global pandemic has resulted in a widespread health crisis, and the resulting impact on governments, businesses and individuals and actions taken by them in response to the situation have resulted in widespread economic disruptions, significantly affecting broader economies, financial performancemarkets, and growth are driven by many factors, principallyoverall demand for our abilityproducts.
In an effort to serve global markets, fluctuationsprotect the health and safety of our employees, we have taken actions to adopt social distancing policies at our locations around the world, including working from home, reducing the number of people in our sites at any one time, and suspending or restricting employee travel. In an effort to contain COVID-19 or slow its spread, governments around the world enacted measures in 2020, including periodically closing businesses not deemed “essential,” isolating residents to their homes, limiting access to healthcare, curtailing activities including sporting events, and practicing social distancing.
We implemented a broad range of temporary actions to mitigate the effects of lower sales levels including temporarily reducing salaries, furloughing and laying-off employees, significantly curtailing discretionary expenses, re-phasing of capital expenditures, reducing supplier purchase levels and / or prices, adjusting working capital practices and other measures.
As reflected in the relationshipdiscussions that follow, the pandemic and actions taken in response to it have had a variety of foreign currencies to the U.S. dollar, general economic market conditions, the global economy and capital spending levels, the availability of capital, our estimates concerning asbestos litigation expense and liabilities and availability of insurance thereto, the impact of restructuring initiatives, our ability to pass cost increasesimpacts on to customers through pricing, the impact of sales mix, our ability to continue to grow through acquisitions, and other factors. These key factors have impacted our results of operations during 2020. The most severe financial impact occurred in the pastsecond quarter, resulting in 31.8% lower sales than the second quarter of 2019. Sales began to recover in the latter part of the second quarter and are likelythrough the third and fourth quarters. Third quarter sales improved to affect thema 4.8% decrease as compared to the third quarter of 2019 while fourth quarter sales decreased 3.9% as compared to the fourth quarter of 2019 on an equivalent sales-per-day basis and another 2.9% due to fewer selling days in 2020. The surge in COVID-19 cases in the fourth quarter contributed to certain jurisdictions putting further restrictions into place.
We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including national and local public health authorities, and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control that require us to further adjust our operations. As such, given the dynamic nature of this situation, we cannot reasonably estimate the full impacts of COVID-19 on our financial condition, results of operations or cash flows in the future.
Please see Part I. Item 1A. “Risk Factors” in this Form 10-K for further discussion of the Company’s risks relating to the COVID-19 pandemic.
Acquisitions
We complement our organic growth plans with acquisitions and other investments. Acquisitions can significantly affect our reported results, and we report the change in our Net sales between periods both from existing and acquired businesses. The change in Net sales due to acquisitions for the periods presented in this filing represents the incremental sales as a result of acquisitions. On February 22, 2019, we completed the acquisition of DJO, creating a new growth platform in the higher-margin orthopedic solutions market.
During the year ended December 31, 2020, we completed five acquisitions in our Medical Technology segment for total consideration, net of cash received, of $67.5 million, subject to certain purchase price adjustments. This includes the acquisition of LiteCure LLC, a U.S. leader in high-powered laser rehab products for human and veterinary medical applications, in the fourth quarter for cash consideration of $39.6 million.
Global Operations
Our products and services are available worldwide. The manner in which our products and services are sold differs by region. During 2017,2020, approximately 78%59% of our sales were shipped to locations outside of the U.S., mostly from locations outside the U.S. Accordingly, we are affected by levels of industrial activity andmarket demand, economic and political factors in countries throughout the world. Our ability to grow and our financial performance will be affected by our ability to address a variety of challenges and opportunities that are a consequence of our global operations, including efficiently utilizing our global sales, manufacturing and distribution capabilities, participating in the expansion of market opportunities in emerging markets, successfully completing global strategic acquisitions and engineering innovative new product applications for end users in a variety of geographic markets. However, we believe that our geographic, end market, customer and product diversification may limit the impact that any one country or economy could have on our consolidated results.
Foreign Currency Fluctuations
A significant portion of our Net sales, approximately 76%58% for 2017,2020, is derived from operations outside the U.S., with the majority of those sales denominated in currencies other than the U.S. dollar. Because much of our manufacturing and employee costs are outside the U.S., a significant portion of our costs are also denominated in currencies other than the U.S. dollar. Changes in foreign exchange rates can impact our results of operations and are quantified when significant to our discussion. Changes in foreign exchange rates had an overall negligible impact on Net sales and Income from continuing operations before income taxes forsignificant. For the year ended December 31, 2017. Changes2020 compared to 2019, fluctuations in foreign exchange rates since December 31, 2016 increased net assets bycurrencies had unfavorable impacts on the change in Net sales of approximately 8%.
During 2016, we determined that an other-than-temporary lack of exchangeability between the Venezuelan bolivar2% and U.S. dollar, due to government controls, restricted our Venezuelan operations ability to pay dividendsaffected Gross profit and satisfy other obligations denominated in U.S. dollars. In addition, other government-imposed restrictions affecting labor, production, and distribution prohibited the Company from controlling key operating decisions. These circumstances have caused us to no longer meet the accounting criteria of control in order to continue consolidating our Venezuelan operations. Therefore, we deconsolidated the financial statements of our Venezuelan operations as of September 30, 2016. As a result of the deconsolidation, we recorded a charge of $2.4 million, of which $0.5 million is included in Selling, general and administrative expense and $1.9 million is included in Income (loss) from discontinued operations, net of taxes, for the year ended December 31, 2016. Substantially all of this amount related to accumulated foreign currency translation charges previously included in Accumulated other comprehensive loss. Due to loss of control, we have applied the cost method of accounting for our Venezuelan operations beginning on September 30, 2016. Prior to, and at the date of deconsolidation, our Venezuelan operations representedexpenses by less than 1% of our net assets, revenues and operating income.2%.
Economic Conditions
Demand for our products depends in part on the level of new capital investment and planned maintenance by our customers. The level of capital expenditures depends, in turn, on general economic conditions as well as access to capital at reasonable cost. Additionally, volatility in commodity prices, including oil, can negatively affect the level of these activities and can result in postponement of capital spending decisions or the delay or cancellation of existing orders. While demand can be cyclical, we believe that our diversified operations generally limit the impact of a downturn in any one market on our consolidated results. During in the second half of 2017, declines in activity in the oil, gas, and petrochemical and power generation end markets impacted our Air and Gas Handling segment. These declines reduced the levels of capital invested and maintenance expenditures made by certain of our customers, which in turn has reduced the demand for our products and services.
Seasonality
As our air and gas handling customers seek to fully utilize capital spending budgets before the end of the year, historically our shipments have peaked during the fourth quarter. Also, ourOur European operations typically experience a slowdown during the July, August and December vacation seasons. General economic conditionsSales in our Medical Technology segment typically peak in the fourth quarter. However, the business impact caused by the COVID-19 pandemic may however, impact future seasonal variations.distort the effects of historical seasonality patterns.
Raw Material Costs
We believe our customers place a premium on quality, reliability, availability, design and application engineering support. Our Fabrication Technology segment results may be sensitive to price movementscost changes in our raw materials. Our largest material purchases are for components and raw materials including steel, iron, copper and aluminum. Our principal raw materials and components for our Medical Technology segment are foam ethylene vinyl acetate, copolymer for our bracing and vascular products and cobalt chromium alloy, stainless steel alloys, titanium alloy and ultra high molecular weight polyethylene for our surgical implant products. Historically, we have been generally successful in passing raw material pricecost increases on to our customers.customers in the form of higher prices. While we seek to take actions to manage this risk, future changes in component and raw material costs may adversely impact earnings.
Sales and Cost Mix
OurThe gross profit margins within our Fabrication Technology segment vary in relation to the relative mix of many factors, including the type of product, the location in which the product is manufactured, the end market application for which the product is designed, and the percentage of total revenue represented by aftermarket sales and services,consumables, which tend to often have higher margins than foremarketequipment. Gross profit margins within our Medical Technology segment vary primarily based on the type of product and distribution channel. Reconstructive products tend to have higher margins than the prevention and consumables.rehabilitation products.
The mix of sales was as follows for the periods presented:
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| Fabrication Technology Segment: | | 2020 | | 2019 |
| Equipment | | 31 | % | | 31 | % |
| Consumables | | 69 | % | | 69 | % |
| Medical Technology Segment: | | | | |
| Prevention & Rehabilitation | | 70 | % | | 71 | % |
| Reconstructive | | 30 | % | | 29 | % |
| | | | |
|
| | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Foremarket and equipment | | 40 | % | | 40 | % | | 43 | % |
| Aftermarket and consumables | | 60 | % | | 60 | % | | 57 | % |
Strategic AcquisitionsNon-GAAP Measures
Adjusted EBITA
Adjusted EBITA, a non-GAAP performance measure, is included in this report because it is a key metric used by our management to assess our operating performance. Adjusted EBITA excludes from Net income from continuing operations the effect of restructuring and other related charges, MDR and other costs, acquisition-related intangible asset amortization and other non-cash charges, strategic transaction costs, and pension settlement loss, as well as related income tax expense (benefit) and interest expense, net. We complementalso present Adjusted EBITA margin, which is subject to the same adjustments as Adjusted EBITA. Further, we present Adjusted EBITA (and Adjusted EBITA margin) on a segment basis, where we exclude the impact of restructuring and other related charges, MDR and other costs, acquisition-related intangible asset amortization and other non-cash charges, and strategic transaction costs from segment operating income. 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 and other initiatives that are fundamentally different from our organic growth plansongoing productivity improvements. Colfax management also believes that presenting these measures allows investors to view its performance using the same measures that we use in evaluating our 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 strategic acquisitions. Acquisitions can significantly affect our reported results, and we reportU.S. GAAP. Investors are encouraged to review the changereconciliation of these non-GAAP measures to their most directly comparable U.S. GAAP financial measures. The following tables set forth a reconciliation of Net income from continuing operations, the most directly comparable U.S. GAAP financial measure, to Adjusted EBITA.
| | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
| (Dollars in millions) |
| Net income from continuing operations (GAAP) | $ | 64.1 | | | $ | 18.9 | |
| Income tax expense (benefit) | (6.1) | | | 31.6 | |
| | | |
Interest expense, net(1) | 104.3 | | | 119.5 | |
| Pension settlement loss | — | | | 33.6 | |
Restructuring and other related charges(2) | 45.0 | | | 73.7 | |
MDR and other costs(3) | 6.9 | | | — | |
Strategic transaction costs(4) | 2.8 | | | 61.0 | |
Acquisition-related amortization and other non-cash charges(5) | 143.9 | | | 138.5 | |
| Adjusted EBITA (non-GAAP) | $ | 361.0 | | | $ | 476.9 | |
| Net income margin from continuing operations (GAAP) | 2.1 | % | | 0.6 | % |
| Adjusted EBITA margin (non-GAAP) | 11.8 | % | | 14.3 | % |
(1) The year ended December 31, 2019 includes $0.8 million of debt extinguishment charges in our Net sales between periods both from existing and acquired businesses. Orders and order backlog are presented onlythe first quarter of 2019 related to financing for the longer-cycle AirDJO acquisition.
(2) Restructuring and Gas Handling segment, where this information is relevant. The change in Netother related charges includes $6.6 million and $8.5 million of expense classified as Cost of sales due to acquisitionson the Company’s Consolidated Statements of Operations for the periods presented in this filing representsyears ended December 31, 2020 and 2019, respectively.
(3) Primarily related to costs specific to compliance with medical device reporting regulations and other requirements of the incremental sales from acquired businesses.European Union Medical Device Regulation of 2017.
Air and Gas Handling
During 2017, the Company completed two acquisitions in our Air and Gas Handling segment(4) Includes costs incurred for total consideration, net of cash received, of $219.6 million, subject to certain purchase price adjustments. This includes the acquisition of Siemens Turbomachinery Equipment GmbH (STE) from Siemens AGDJO.
(5) Includes amortization of acquired intangibles and fair value charges on acquired inventory.
The following tables set forth a reconciliation of operating income (loss), the most directly comparable financial statement measure, to Adjusted EBITA by segment for the years ended December 31, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| Fabrication Technology | | Medical Technology | | Corporate and other | | Total |
| (Dollars in millions) |
| Operating income (loss) (GAAP) | $ | 224.4 | | | $ | (1.2) | | | $ | (60.8) | | | $ | 162.3 | |
Restructuring and other related charges(1) | 21.6 | | | 23.4 | | | — | | | 45.0 | |
MDR and other costs(2) | — | | | 6.9 | | | — | | | 6.9 | |
| Segment operating income (loss) (non-GAAP) | 246.0 | | | 29.1 | | | (60.8) | | | 214.3 | |
| Strategic transaction costs | — | | | — | | | 2.8 | | | 2.8 | |
Acquisition-related amortization and other non-cash charges(3) | 36.3 | | | 107.6 | | | — | | | 143.9 | |
| Adjusted EBITA (non-GAAP) | $ | 282.3 | | | $ | 136.7 | | | $ | (58.0) | | | $ | 361.0 | |
| Segment operating income margin (non-GAAP) | 12.6 | % | | 2.6 | % | | — | % | | 7.0 | % |
| Adjusted EBITA margin (non-GAAP) | 14.5 | % | | 12.2 | % | | — | % | | 11.8 | % |
(1) Restructuring and other related charges in the fourth quarterMedical Technology segment includes $6.6 million of expense classified as Cost of sales on the Company’s Consolidated Statements of Operations.
(2) Primarily related to costs specific to compliance with medical device reporting regulations and other requirements of the European Union Medical Device Regulation of 2017.
(3) Includes amortization of acquired intangibles and fair value charges on acquired inventory.
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
| Fabrication Technology | | Medical Technology | | Corporate and other | | Total |
| (Dollars in millions) |
| Operating income (loss) (GAAP) | $ | 279.6 | | | $ | 45.5 | | | $ | (121.4) | | | $ | 203.6 | |
Restructuring and other related charges(1) | 23.0 | | | 50.7 | | | — | | | 73.7 | |
| Segment operating income (loss) (non-GAAP) | 302.6 | | | 96.2 | | | (121.4) | | | 277.4 | |
Strategic transaction costs(2) | — | | | — | | | 61.0 | | | 61.0 | |
Acquisition-related amortization and other non-cash charges(3) | 35.6 | | | 102.9 | | | — | | | 138.5 | |
| Adjusted EBITA (non-GAAP) | $ | 338.2 | | | $ | 199.0 | | | $ | (60.4) | | | $ | 476.9 | |
| Segment operating income margin (non-GAAP) | 13.5 | % | | 8.9 | % | | — | % | | 8.3 | % |
| Adjusted EBITA margin (non-GAAP) | 15.1 | % | | 18.4 | % | | — | % | | 14.3 | % |
(1) Restructuring and other related charges in the Medical Technology segment includes $8.5 million of expense classified as Cost of sales on the Company’s Consolidated Statements of Operations.
(2) Strategic transaction costs in the Corporate and other segment includes costs incurred for cash considerationthe acquisition of $214.6 million. This acquisition broadened the segment’s rangeDJO.
(3) Includes amortization of compression solutionsacquired intangibles and expanded its product offering into smaller steam turbines.fair value charges on acquired inventory.
During 2015, the Company completed two acquisitions for an aggregate purchase price of approximately $196 million. The acquisitions expanded our portfolio of air and gas compression products and enhanced our fan product offering with ventilation control software.
Fabrication Technology
During 2017, the Company completed three acquisitions for total consideration, net of cash, received of $128.3 million, subject to certain purchase price adjustments. These acquisitions broadened our product offering and technology content.
During 2016, the Company deployed approximately $26 million to acquire a business that increased the segment’s product and technology offerings.
Total Company
Sales Orders and Backlog
Net sales from continuing operations decreased from $3.4to $3.1 billion in 2015 to $3.2 billion in 2016, and increased to2020 from $3.3 billion in 2017.2019. The following table presents the components of changes in our consolidated Net sales from continuing operations and, for our Air and Gas Handling segment, orders and order backlog:sales.
| | | | | | | | | | | |
| Net Sales |
| $ | | % |
| (Dollars in millions) |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| For the year ended December 31, 2019 | $ | 3,327.5 | | | |
| Components of Change: | | | |
Existing businesses(1) | (389.5) | | | (11.7) | % |
Acquisitions(2) | 206.6 | | | 6.2 | % |
Foreign currency translation(3) | (73.8) | | | (2.2) | % |
| (256.7) | | | (7.7) | % |
| For the year ended December 31, 2020 | $ | 3,070.8 | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Air and Gas Handling |
| | Net Sales | | Orders(1) | | Backlog at Period End |
| | $ | | % | | $ | | % | | $ | | % |
| | (In millions) |
| | | | | | | | | | | | |
| As of and for the year ended December 31, 2015 | $ | 3,434.4 |
| | | | $ | 1,304.7 |
| | | | $ | 904.2 |
| | |
| Components of Change: | | | | | | | | | | | |
Existing businesses(2) | (160.3 | ) | | (4.7 | )% | | (15.0 | ) | | (1.1 | )% | | (58.7 | ) | | (6.5 | )% |
Acquisitions(3) | 52.9 |
| | 1.5 | % | | 66.6 |
| | 5.1 | % | | — |
| | — | % |
Foreign currency translation(4) | (141.2 | ) | | (4.0 | )% | | (51.3 | ) | | (4.0 | )% | | (49.4 | ) | | (5.5 | )% |
| | (248.6 | ) | | (7.2 | )% | | 0.3 |
| | — | % | | (108.1 | ) | | (12.0 | )% |
| As of and for the year ended December 31, 2016 | $ | 3,185.8 |
| | | | $ | 1,305.0 |
| | | | $ | 796.1 |
| | |
| Components of Change: | | | | | | | | | | | |
Existing businesses(2) | (15.7 | ) | | (0.5 | )% | | (44.1 | ) | | (3.4 | )% | | (57.0 | ) | | (7.2 | )% |
Acquisitions(3) | 85.2 |
| | 2.7 | % | | 34.7 |
| | 2.7 | % | | 105.3 |
| | 13.2 | % |
Foreign currency translation(4) | 44.9 |
| | 1.4 | % | | 10.9 |
| �� | 0.8 | % | | 49.0 |
| | 6.2 | % |
| | 114.4 |
| | 3.6 | % | | 1.5 |
| | 0.1 | % | | 97.3 |
| | 12.2 | % |
| As of and for the year ended December 31, 2017 | $ | 3,300.2 |
| | | | $ | 1,306.5 |
| | | | $ | 893.4 |
| | |
(1) Represents contracts for products or services, net of current year cancellations for orders placed in the current and prior period. Prior period amounts have been recast to conform to current year presentation.
(2) Excludes the impact of foreign exchange rate fluctuations and acquisitions, thus providing a measure of growth due to factors such as price, product mix and volume.
(3) (2) Represents the incremental sales orders and order backlogfrom our acquisitions discussed previously, primarily driven by approximately two additional months of incremental reported sales compared to the corresponding prior year period as a result of our acquisitions discussed previously.the acquisition of DJO being completed on February 22, 2019.
(4) (3) Represents the difference between prior year sales orders and order backlog valued at the actual prior year foreign exchange rates and prior year sales orders and order backlog valued at current year foreign exchange rates.
The decrease in Net sales fromdecreased in 2020 as compared to 2019, primarily due to the COVID-19 pandemic. Our Fabrication Technology segment decreased $218.4 million and our Medical Technology segment decreased $171.1 million for existing businesses, during 2017 compared to 2016 was attributable to decreases of $74.7 million in our Air and Gas Handling, mostly offset by an increase of $59.0 million in our Fabrication Technology segment. Air and Gas Handling orders, net of cancellations and excluding acquisitions and foreign currency translation effects, decreased $44.1 million during 2017 in comparison to 2016 due to large project bookings during the second half of 2016 that did not repeat, delays in orders in the second half of 2017, and lower demand in power generation markets. The decline was partially offset by increasesa $199.5 million increase from approximately two additional months of acquisition sales in general industrial and other end markets.
The decrease in Netour Medical Technology segment, which represents the incremental reported sales compared to the corresponding prior year period as a result of the acquisition of DJO being completed on February 22, 2019, as well as an additional $7.1 million of sales from existing businesses during 2016 compared to 2015 was due to decreases of $58.1 million and $102.2 millionfourth quarter acquisitions in our Air and Gas Handling and FabricationMedical Technology segments, respectively. Orders, netsegment. The strengthening of cancellations, from existing businesses for our Air and Gas Handling segment decreased during 2016 in comparisonthe U.S. dollar relative to 2015 due to declines in all end markets except mining. The unfavorable domestic and international macroeconomic conditions experienced during the first half of 2016 were partially offset by consecutive quarters of order growth during the second half of 2016.other currencies caused a $73.8 million negative currency translation impact.
Operating Results
The following table summarizes our results from continuing operations for the comparable three yeartwo-year period.
| | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
| (Dollars in millions) |
| Gross profit | $ | 1,288.1 | | | $ | 1,401.1 | |
| Gross profit margin | 41.9 | % | | 42.1 | % |
| Selling, general and administrative expense | $ | 1,087.4 | | | $ | 1,132.1 | |
| Operating income | $ | 162.3 | | | $ | 203.6 | |
| Operating income margin | 5.3 | % | | 6.1 | % |
| Net income from continuing operations | $ | 64.1 | | | $ | 18.9 | |
| Net income margin from continuing operations | 2.1 | % | | 0.6 | % |
| Adjusted EBITA (non-GAAP) | $ | 361.0 | | | $ | 476.9 | |
| Adjusted EBITA Margin (non-GAAP) | 11.8 | % | | 14.3 | % |
| Items excluded from Adjusted EBITA: | | | |
Restructuring and other related charges(1) | $ | 45.0 | | | $ | 73.7 | |
MDR and other costs(2) | $ | 6.9 | | | $ | — | |
Strategic transaction costs(3) | $ | 2.8 | | | $ | 61.0 | |
Acquisition-related amortization and other non-cash charges(4) | $ | 143.9 | | | $ | 138.5 | |
| Pension settlement loss | $ | — | | | $ | 33.6 | |
| | | |
| Interest expense, net | $ | 104.3 | | | $ | 119.5 | |
| Income tax expense (benefit) | $ | (6.1) | | | $ | 31.6 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (Dollars in millions) |
| Gross profit | $ | 1,029.5 |
| | $ | 992.4 |
| | $ | 1,071.7 |
|
| Gross profit margin | 31.2 | % | | 31.2 | % | | 31.2 | % |
| Selling, general and administrative expense | $ | 732.3 |
| | $ | 696.8 |
| | $ | 748.3 |
|
| Restructuring and other related charges | 68.4 |
| | 58.5 |
| | 56.8 |
|
| Goodwill and intangible asset impairment charge | 152.7 |
| | 0.2 |
| | 1.5 |
|
| Pension settlement loss (gain) | 46.9 |
| | — |
| | (0.6 | ) |
| Operating income | 29.2 |
| | 236.8 |
| | 265.6 |
|
| Operating income margin | 0.9 | % | | 7.4 | % | | 7.7 | % |
| Interest expense | $ | 41.1 |
| | $ | 30.3 |
| | $ | 47.5 |
|
| Provision for income taxes | 42.6 |
| | 51.8 |
| | 41.2 |
|
2017 Compared to 2016
The $37.1 million increase in Gross profit during 2017 in comparison to 2016 was attributable to an increase of $49.6 million in our Fabrication Technology segment, partially offset by a decline of $12.5 million in our Air and Gas Handling segment. Acquisition-related growth in both segments contributed $32.1 million of Gross profit in 2017, and foreign exchange translation added another $14.0 million to the increase. These increases combined with $26.8 million of savings from restructuring initiatives, helped offset the impact of lower new build project margins and higher material costs experienced in 2017, keeping Gross profit margin consistent with the prior year.
Selling, general and administrative expense increased by $35.5 million during 2017 in comparison to 2016, which was attributable to increases in both Air and Gas Handling and Fabrication Technology. The increases were mainly driven by $28.3 million increases associated with acquisitions completed in 2017, a $14.2 million increase in business development related expenses, partially offset by the incremental benefits realized from our restructuring programs and cost savings initiatives. (1) Restructuring and other related charges increasedincludes $6.6 million and $8.5 million of expense classified as Cost of sales on the Company’s Consolidated Statements of Operations for the years ended December 31, 2020 and 2019, respectively.
(2) Primarily related to costs specific to compliance with medical device reporting regulations and other requirements of the European Union Medical Device Regulation of 2017.
(3) Includes costs incurred for the acquisition of DJO.
(4) Includes amortization of acquired intangibles and fair value charges on acquired inventory.
2020 Compared to 2019
Gross profit decreased $113.0 million during 2017 compared2020 in comparison to 2016,2019, primarily driven by acceleratedlower sales volumes that resulted from the COVID-19 pandemic and $15.3 million of unfavorable currency translation effects, partly offset by temporary mitigating cost actions, new product initiatives, and the inclusion of $113.3 million from two additional months of Medical Technology segment sales and profit. Gross profit margins approximated the same level as 2019. Gross margins were impacted by lower sales volume related to COVID-19, offset by two additional months of higher-margin sales of our Medical Technology segment in 2020 and temporary cost reduction programs to eliminate excess costactions taken in response to the current market conditions.pandemic.
During 2017, we recorded impairment charges totaling $152.7 million. These charges consisted of a goodwill impairment of $150.2 million and an indefinite-lived trademark impairment charge of $2.5 million. Both charges related to our Air and Gas Handling segment. Additionally, we incurred a $46.9 million non-cash pension settlement loss in connection with a third-party buyout of one of the Company’s pension plans.
Interest expense during 2017 increased by $10.8 million compared to 2016, primarily attributable to the senior note offering of €350 million in April 2017 and higher interest rates on our senior unsecured debt.
Loss from continuing operations before income taxes was $12.0 million and the Provision for income taxes was $42.6 million for 2017. The effective tax rate for continuing operations during 2017 was (355.0)%, which was higher than the U.S. federal statutory tax rate primarily due to non-deductible impairment losses, losses in certain jurisdictions where a tax benefit is not expected to be recognized offset in part by foreign earnings where international tax rates that are lower than the 2017 U.S. tax rate. The Tax Act provisional amounts did not have a significant net impact on the effective tax rate for 2017. Income from continuing operations before income taxes was $206.5 million and the Provision for income taxes was $51.8 million for 2016, resulting in a 25.1% effective tax rate that was primarily driven by foreign earnings where international tax rates are lower than the U.S. federal tax rate.
2016 Compared to 2015
The $79.3 million decrease in Gross profit during 2016 in comparison to 2015 was attributable to decreases of $43.9 million and $35.4 million in our Air and Gas Handling segment and our Fabrication Technology segment, respectively. The decrease in Gross profit in both of our segments during 2016 as compared to 2015 was primarily due to lower overall volumes as a result of decline in numerous end-markets and geographic markets. Changes in foreign exchange rates decreased Gross profit by approximately $40 million. These decreases were offset by acquisition related growth and restructuring savings, each contributing approximately $14 million to Gross profit. The increase in Gross profit margin in our Fabrication Technology segment during 2016 as compared to 2015 was more than offset by the lower Gross profit margin in our Air and Gas Handling segment.
Selling, general and administrative expense decreased $51.5$44.7 million mainly due to a $58.2 million decrease in strategic transaction costs and temporary cost reductions that peaked in the second quarter, partially offset by two additional months of results of our Medical Technology segment. Restructuring and other related charges decreased by $28.7 million due to completing certain Medical Technology segment restructuring programs.
Interest expense, net decreased by $15.2 million, primarily attributable to lower interest rates and a lower debt balance.
The effective tax rate for Net income from continuing operations during 2016 in comparison to 2015,2020 was (10.4)%, which was attributablelower than the 2020 U.S. federal statutory tax rate of 21% mainly due to the net impact of U.S. tax credits, a benefit from U.S. state tax losses, a discrete tax benefit associated with the filing of timely elected changes to U.S. Federal tax returns to credit rather than to deduct foreign taxes and release of valuation allowance on U.S. federal net operating losses. These favorable impacts were partially offset by the impact of additional U.S. tax on international operations, withholding taxes, and certain non-deductible expenses.
The effective tax rate for 2019 was 62.6%, which was higher than the 2019 U.S. federal statutory tax rate of 21% mainly due to taxation of foreign earnings, non-deductible transaction costs and unfavorable changes to the realization of deferred tax assets. These unfavorable adjustments were partially offset by lower effective tax rates of foreign jurisdictions, U.S. R&D and foreign tax credits, and the realization of deferred tax assets that previously had valuation allowances.
Net income from continuing operations increased in 2020 compared to 2019, largely due to decreases in both Airstrategic transaction and Gas Handlingrestructuring costs and Fabrication Technology. Execution of structural costthe pension settlement loss incurred during 2019. These were offset by a decrease in Gross profit from COVID-19 impacts, mitigated by the reductions in both segments as a result of restructuring programs and cost savings initiatives was the primary driver in reducing Selling, general and administrative expense overfrom our temporary cost reduction programs. Net income margin from continuing operations increased by 150 basis points for the prior year. Changessame reasons that Net income from continuing operations increased.
The lower Adjusted EBITA was driven by COVID-19 impacts, partially offset by the inclusion of two additional months of results of our Medical Technology segment in foreign exchange rates during 2016 decreased2020 and the reductions in Selling, general and administrative expensesexpense from our temporary cost reduction programs. Adjusted EBITA margin decreased by approximately $27 million. These decreases were partially offset by $13 million of acquisition-related growth in our Air and Gas Handling segment.250 basis points for largely the same reasons.
The decrease in Interest expense, net during 2016 was the result of the refinancing of our principal credit facility in 2015. The refinancing resulted in, among other things, lower borrowing margins, lower outstanding borrowings and reduced non-cash interest expense in the current year by $2.5 million. Interest expense for 2015 also included a $4.7 million write-off of certain deferred financing fees and original issue discount in connection with the refinancing. Lower foreign currency charges in 2016 as compared to the prior year, contributed approximately $10 million of the decrease in Interest expense, net over the prior year.
Income before income taxes was $206.5 million and the Provision for income taxes was $51.8 million for 2016. Income before income taxes was $218.1 million and the Provision for income taxes was $41.2 million for 2015. The Provision for income taxes in both periods was impacted by the effect of foreign earnings where international tax rates are lower than the U.S. tax rate. The Provision for income taxes for 2015 was also impacted by a tax benefit of $13.0 million associated with the resolution of a liability for unrecognized tax benefits.
Business Segments
As discussed further above, the Company reportswe report results in two reportable segments: AirFabrication Technology and Gas Handling and FabricationMedical Technology.
Air and Gas Handling
We design, manufacture, install and maintain air and gas handling products for use in a wide range of markets, including power generation, oil, gas and petrochemical, mining, wastewater, and general industrial and other. Our air and gas handling products are principally marketed under the Howden brand name. Howden’s primary products are heavy-duty fans, rotary heat exchangers and compressors. The fans and heat exchangers are used in coal-fired and other types of power stations, both in combustion and emissions control applications, underground mines, steel sintering plants and other industrial facilities that require movement of large volumes of air in harsh applications. Howden’s compressors are mainly used in the oil, gas and petrochemical end markets.
The following table summarizes selected financial data for our Air and Gas Handling segment:
|
| | | | | | | | | | | |
| | Year Ended |
| | 2017 | | 2016 | | 2015 |
| | (Dollars in millions) |
| Net sales | $ | 1,362.9 |
| | $ | 1,385.3 |
| | $ | 1,449.1 |
|
| Gross profit | 357.9 |
| | 370.4 |
| | 414.3 |
|
| Gross profit margin | 26.3 | % | | 26.7 | % | | 28.6 | % |
| Selling, general and administrative expense | $ | 231.7 |
| | $ | 220.3 |
| | $ | 243.2 |
|
| Segment operating income | 126.2 |
| | 150.1 |
| | 171.0 |
|
| Segment operating income margin | 9.3 | % | | 10.8 | % | | 11.8 | % |
| Items not included in segment results: | | | | | |
| Restructuring and other related items | $ | 52.2 |
| | $ | 26.8 |
| | $ | 27.2 |
|
| Goodwill and intangible asset impairment charge | 152.7 |
| | — |
| | — |
|
Net sales from existing businesses, as discussed and defined under “Sales, Orders and Backlog” above, decreased by $74.7 million during 2017 in comparison to 2016 primarily due to declines in the oil, gas, and petrochemical and power generation end markets, partially offset by increases in mining and general industrial and other end markets. Additionally, acquisition-related growth contributed $37.1 million, and changes in foreign exchange rates had a positive impact of $15.2 million on Net sales. Gross profit and Gross profit margin decreased during 2017, which was primarily the result of lower volumes and project margins. These decreases were partially offset by $8.6 million of acquisition-related growth and $18.6 million incremental benefits realized from restructuring programs and cost savings initiatives. Selling, general and administrative expense increased during 2017 compared to 2016, which is mainly the result of acquisition-related increases of $10.4 million. The lower Segment operating income and Segment operating income margin in 2017 compared to 2016 were the result of lower Gross profit and the increase in Selling, general and administrative expense discussed above. Restructuring and other related charges increased during 2017 driven by accelerated cost reduction programs to eliminate excess cost in response to the current market conditions. In 2017, we recorded a goodwill impairment charge of $150.2 million and a trade name impairment charge of $2.5 million, as a result of conclusions reached from performing our annual impairment tests.
The $58.1 million Net sales decrease due to existing businesses, as discussed and defined under “Sales, Orders and Backlog” above, during 2016 in comparison to 2015 was primarily due to declines in the oil, gas, and petrochemical and general industrial and other end markets. The power generation, marine and mining end markets were flat on a year over year basis. Additionally, changes in foreign exchange rates had a negative impact of $57.2 million on Net sales, partially offset by acquisition related growth of $51.6 million. Gross profit and Gross profit margin decreased during 2016, which was primarily the result of lower volumes and, to a lesser extent, project margins. Foreign exchange rate changes as compared to prior year contributed $16.5 million to the decrease. These decreases were partially offset by $13.0 million of acquisition-related growth. Selling, general and administrative expense for 2016 decreased compared to 2015 primarily due to benefits realized from our restructuring programs and cost savings initiatives. Changes in foreign exchange rates represented approximately $11 million of the decrease in Selling, general and administrative expense when comparing 2016 to the prior year. The decrease in gross profit, discussed previously, were the primary driver in the reduction of Segment operating income and Segment operating income margin in 2016. Restructuring and other related charges for the Air and Gas Handling segment remained relatively consistent in 2016 as the segment responds to the cyclical market downturn.
Fabrication Technology
We formulate, develop, manufacture and supply consumable products and equipment, for use in theincluding cutting, joining, and automated welding of steels, aluminum and other metals and metal alloys.products, as well as gas control equipment. Our fabrication technology products are marketed under several brand names, most notably ESAB, which we believe is well knownproviding a wide range of products with innovative technologies to solve challenges in the international cutting and weldingvirtually any industry. ESAB’s comprehensive range of welding consumables includes electrodes, cored and solid wires, and fluxes using a wide range of specialty and other materials, and cutting consumables including electrodes, nozzles, shields and tips. ESAB’s fabrication technology equipment ranges from portable welding machines to large customized automated cutting and welding systems. ESAB also offers a range of digital software and solutions to help its customers increase their productivity, remotely monitor their welding operations and digitize their documentation. Products are sold into a wide range of end markets, including infrastructure, wind power, marine, medical / life sciences, pipelines, mobile/off-highway equipment, oil, gas, and mining.
The following table summarizes selected financial data for our Fabrication Technology segment:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
| (Dollars in millions) |
| Net sales | $ | 1,950.1 | | | $ | 2,247.0 | |
| Gross profit | $ | 684.5 | | | $ | 798.2 | |
| Gross profit margin | 35.1 | % | | 35.5 | % |
| Selling, general and administrative expense | $ | 438.5 | | | $ | 495.6 | |
| Segment operating income | $ | 246.0 | | | $ | 302.6 | |
| Segment operating income margin | 12.6 | % | | 13.5 | % |
| Adjusted EBITA (non-GAAP) | $ | 282.3 | | | $ | 338.2 | |
| Adjusted EBITA margin (non-GAAP) | 14.5 | % | | 15.1 | % |
| Items excluded from Adjusted EBITA: | | | |
| Restructuring and other related charges | $ | 21.6 | | | $ | 23.0 | |
| Acquisition-related amortization and other non-cash charges | $ | 36.3 | | | $ | 35.6 | |
| Pension settlement loss | $ | — | | | $ | 33.6 | |
|
| | | | | | | | | | | |
| | Year Ended |
| | 2017 | | 2016 | | 2015 |
| | (Dollars in millions) |
| Net sales | $ | 1,937.3 |
| | $ | 1,800.5 |
| | $ | 1,985.3 |
|
| Gross profit | 671.6 |
| | 622.0 |
| | 657.4 |
|
| Gross profit margin | 34.7 | % | | 34.5 | % | | 33.1 | % |
| Selling, general and administrative expense | $ | 447.2 |
| | $ | 426.6 |
| | $ | 457.6 |
|
| Segment operating income | $ | 224.4 |
| | $ | 195.4 |
| | $ | 199.8 |
|
| Segment operating income margin | 11.6 | % | | 10.9 | % | | 10.1 | % |
| Items not included in segment results: | | | | | |
| Restructuring and other related items | $ | 16.2 |
| | $ | 31.7 |
| | $ | 29.7 |
|
| Intangible asset impairment charge | — |
| | 0.2 |
| | 1.5 |
|
The Net sales increasein our Fabrication Technology segment decreased $296.9 million during 20172020 compared to 2016 was primarily the result of an increase in existing businesses of $59.02019 due to lower sales volumes related to COVID-19 and a $78.6 million led by a market recovery in North America and growth in certain developing regions. Acquisition-related growth contributed $48.1 million of incremental sales in 2017, andunfavorable foreign currency translation had a positive impact of $29.7 million.impact. Despite the $113.7 million decrease in Gross profit increased in 2017 due to acquisition-related growth of $23.4 million and increases in volumes from existing businesses. Costs savings associated with restructuring programs added another $8.2 million of additional grosslower sales, Gross profit inmargin was substantially maintained at the current year. These increases were partially offset by a $38.6 million increase in cost of goods soldprior year level due to higher commodity prices in 2017. Gross margin increased 20 basis points due to the positive impact from increased volumestemporary cost reductions and favorable mix, which was partially offset by higher raw material costs during the year.restructuring benefits. Selling, general and administrative expense increased by $20.6 milliondecreased in 2017 as comparedthe period due to 2016benefits from restructuring initiatives and was primarily attributabletemporary cost reduction programs. Lower sales levels related to COVID-19 resulted in a $17.9 million increasedecline in acquisition-related cost. Segment operating income, margin expanded approximately 80 basis points dueAdjusted EBITA, and related margins over the same period.
Medical Technology
We develop, manufacture and distribute high-quality medical devices and services across the continuum of patient care from injury prevention to higher salesjoint replacement to rehabilitation after surgery, injury or from degenerative disease, enabling people to regain or maintain their natural motion. Our products are used by orthopedic specialists, spine surgeons, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers and improved profit margin. other healthcare professionals. Our products primarily include orthopedic braces, rehabilitation devices, footwear, surgical implants, and bone growth stimulators.
The following table summarizes the selected financial data for our Medical Technology segment:
| | | | | | | | | | | | | |
| | | Year Ended December 31, 2020 | | From February 22, 2019 to December 31, 2019 |
| | | (Dollars in millions) |
| Net sales | | | $ | 1,120.7 | | | $ | 1,080.4 | |
| Gross profit | | | $ | 604.8 | | | $ | 604.2 | |
| Gross profit margin | | | 54.0 | % | | 55.9 | % |
| Selling, general and administrative expense | | | $ | 589.3 | | | $ | 516.5 | |
| Segment operating income | | | $ | 29.1 | | | $ | 96.2 | |
| Segment operating income margin | | | 2.6 | % | | 8.9 | % |
| Adjusted EBITA (non-GAAP) | | | $ | 136.7 | | | $ | 199.0 | |
| Adjusted EBITA margin (non-GAAP) | | | 12.2 | % | | 18.4 | % |
| Items excluded from Adjusted EBITA: | | | | | |
Restructuring and other related charges(1) | | | $ | 23.4 | | | $ | 50.7 | |
| MDR and other costs | | | $ | 6.9 | | | $ | — | |
| Acquisition-related amortization and other non-cash charges | | | $ | 107.6 | | | $ | 102.9 | |
(1) Restructuring and other related items decreased in 2017 in comparison to 2016, consistent with management’s plan.charges includes $6.6 million and $8.5 million of expense classified as Cost of sales on the Company’s
Consolidated Statements of Operations for the years ended December 31, 2020 and 2019, respectively.
The
Net sales decreaseincreased for our Medical Technology segment during 20162020 compared with 2019 due to 2015 was primarily the result$199.5 million from approximately two additional months of acquisition-related sales in 2020, partially offset by a decrease in existing businessessales volume related to COVID-19. Gross profit was consistent with 2019 and benefited early in the year from an additional two months of $102.2sales in 2020 and a $15.2 million and changesdecrease in foreign exchange rates which had a negative impact of $83.9 million, partiallyinventory fair value charges. These gross profit increases were offset by acquisition-related growth of $1.3 million. The $102.2 million Net sales decline dueCOVID-19 volume declines as well as higher freight costs and production inefficiencies related to existing businesses, as discussed and defined under “Sales, Orders and Backlog” above, during 2016 in comparison to 2015 was primarily the result of decreases in equipment sales and consumable volumes in North America. The lower volumes decreased Gross profit for 2016 by approximately $40 million as compared to 2015, and changes in foreign exchange rates contributed $24 million to the decrease.COVID-19. Gross profit margin for the segment increased in the current year due to favorable consumable pricing in selected marketsdeclined primarily as a result of COVID-19 effects on sales volumes and materials costs savings initiatives across the segment. The decrease insupply chain inefficiencies. Selling, general and administrative expense during 2016 was primarilyalso increased $72.8 million due to benefits realized from our restructuring programs and cost savings initiatives, totaling approximately $29 million. Changesincluding two additional months of activity in foreign exchange rates decreased Selling, general and administrativeresults, partially offset by temporary expense by approximately $16 million in 2016.reductions. Segment operating income, margin increased despiteAdjusted EBITA, and related margins all declined as a result of the lower overall volumes primarily due to our execution on cost control.aforementioned factors. Restructuring and other related charges for the Fabrication Technology segment remained relatively consistent in 2016 as the segment respondsdecreased by $27.3 million due to the cyclical market downturn.completing certain projects.
Liquidity and Capital Resources
Overview
We have financedfinance our long-term capital and working capital requirements through a combination of cash flows from operating activities, various borrowings and the issuances of equity. We expect that our primary ongoing requirements for cash will be for working capital, funding of acquisitions, capital expenditures, restructuring, asbestos-related expensescash outflows, and fundingdebt service and required amortization of pension plans. If determined appropriate for strategic acquisitions or other corporate purposes, weprincipal. We believe we could raise additional funds in the form of debt or equity.equity if it was determined to be appropriate for strategic acquisitions or other corporate purposes.
Equity Capital
On May 21, 2015, we contributed 66,000 shares of newly issued Colfax Common stock to our U.S. defined benefit pension plan. No contributions of our Common stock were made in 2016 and 2017.
On October 11, 2015,February 12, 2018, our Board of Directors authorized the repurchase of up to $100.0$100 million of our Common stock from time-to-time on the open market or in privately negotiated transactions, whichtransactions. The Board of Directors increased the repurchase authorization by an additional $100 million on June 6, 2018, and again for an additional $100 million on July 19, 2018. There were to be retired upon repurchase. The repurchase program was authorized until$200.0 million repurchases made during the year ended December 31, 20162018. There were no repurchases made in 2019 and did not obligate us to acquire any specific number2020. As of shares.December 31, 2020, the remaining stock repurchase authorization provided by our Board of Directors was $100.0 million. The timing,
amount, and amountmethod of shares repurchased wasis determined by management based on its evaluation of market conditions and other factors. TheThere is no term associated with the remaining repurchase program was conducted pursuant to SEC Rule 10b-18. During the years ended December 31, 2016authorization.
Term Loan and 2015, we repurchased 1,000,000 shares and 986,279 shares, respectively, of our Common stock in open market transactions for $20.8 million and $27.4 million, respectively. The repurchase program expired as of December 31, 2016.Revolving Credit Facility
Borrowing Arrangements
On June 5, 2015, we entered into aOur credit agreement (the “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, and DeutscheJPMorgan Chase Bank, AG New York Branch,N.A., as administrative agent, swing line lenderCitizens Bank, N.A., as syndication agent, and global coordinator (the “DB Credit Agreement”). The proceeds of the loans under the DB Credit Agreement were used by us to repay in full balances under our preexisting credit agreement, as well as for working capital and general corporate purposes. The DB Credit Agreementco-documentation agents named therein consists of a term loan in the aggregate amount of $750.0$975 million (the “Term Loan”) and a revolving credit facility (the “Revolver”) and a Term A-1 loan in an initial aggregate principal amount of $825 million (the “Term Loan”), each with a commitment capacitymaturity date of $1.3 billion, each of which had an initial maturity term of five years.December 6, 2024. The Revolver contains a $50.0$50 million swing line loan sub-facility. In conjunction withOn May 1, 2020, the DBCompany entered into an amendment to its Credit Agreement, we recordedFacility (the “Amendment”). During the third quarter of 2020, the Company made a chargevoluntary $40 million principal payment on the Term Loan. Refer to Interest expenseNote 10, “Debt” in the Consolidated Statement of Income for the year ended December 31, 2015 of $4.7 million to write-off certain deferred financing fees and original issue discount and expensed $0.4 million of costs incurred in connection with the refinancing of the DB Credit Agreement.
The Term Loan and the Revolver bear interest, at our election, at either the base rate or the Eurocurrency rate (each as defined in the DB Credit Agreement), plus the applicable interest rate margin. The applicable interest rate margin results from the lower applicable interest rate margin (subject to certain exceptions) dueaccompanying Notes to the Company’s total leverage ratio orConsolidated Financial Statements for more information regarding the corporate family rating of the Company 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). Swing line loans bear interest at the applicable rate, as specified under the terms of the DB Credit Agreement, based upon the currency borrowed. Amendment.
As of December 31, 2017,2020, we are in compliance with the covenants under the Credit Facility. As of December 31, 2020, the weighted-average interest rate of borrowings under the DB Credit AgreementFacility was 3.07%1.90%, excluding accretion of original issue discount and deferred financing fees, and there was $1.3 billion$975 million available on the revolving credit facility.Revolver.
Euro Senior Notes
On April 19, 2017, we issued senior unsecured notes with an aggregate principal amount of €350 million (the “Euro Notes”). The Euro Notes are due onin April 15, 2025, and have an interest rate of 3.25% and are guaranteed by certain of our domestic subsidiaries (the “Guarantees”). The proceeds from the Euro Notes offering were used to repay borrowings under our DB Credit Agreement and bilateralprevious credit facilities totaling €283.5 million, as well as for general corporate purposes, and are guaranteed by certain of our domestic subsidiaries (the “Guarantees”).purposes. The Euro Notes and the Guarantees have not been, and will not be, registered under the Securities Act of 1933, as amended (the "Securities Act"), or the securities laws of any other jurisdiction.
As of December 31, 2017, the Company had an original issue discount of $3.72022 Tangible Equity Units
On January 11, 2019, we issued $460 million and deferred financing fees of $9.2in tangible equity units. We offered 4 million included in its Consolidated Balance Sheet as of December 31, 2017, which will be accreted to Interest expense primarily using the effective interest method, over the life of the applicable debt agreements.5.75% tangible equity units at the stated amount of $100 per unit and an option to purchase up to an additional 600,000 tangible equity units at the stated amount of $100 per unit, which 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. Refer to Note 14, “Equity” in the accompanying Notes to Consolidated Financial Statements for more information.
2024 Notes and 2026 Notes
On February 5, 2019, CFX Escrow Corporation, an unaffiliated special purpose finance entity established to issue the notes and incorporated in the State of Delaware, issued two tranches of senior notes with aggregate principal amounts of $600 million (the “2024 Notes”) and $400 million (the “2026 Notes) 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 acquisition, we assumed all of CFX Escrow Corporation’s obligations under the 2024 Notes and 2026 Notes. Each tranche of notes is guaranteed by certain of our domestic subsidiaries.
Other Indebtedness
In addition, to the debt agreements discussed above, the Company iswe are party to various bilateral credit facilities with a borrowing capacity of $217.9$195.0 million. As of December 31, 2017,2020, there were no outstanding borrowings under these facilities totaled $22.8 million, with a weighted average borrowing rate of 1.00%.facilities.
We are also party to letter of credit facilities with an aggregate capacity of $780.6$340.5 million. Total letters of credit of $418.8$76.4 million were outstanding as of December 31, 2017.2020.
The Company was party to a receivables financing facility through a wholly-owned, special purpose bankruptcy-remote subsidiary which purchased trade receivables from certain of the Company’s subsidiaries on an ongoing basis and pledged them to support its obligation as borrower under the receivables financing facility. This special purpose subsidiary has a separate legal existence from its parent and its assets are not available to satisfy the claims of creditors of the selling subsidiaries or any other member of the consolidated group. According to the receivable financing facility agreement, the program limit was not to exceed $80 million and the scheduled termination date for the receivables financing facility was December 19, 2017. On December 15, 2017, the Company paid off the total outstanding borrowings under the receivables financing facility of $52.4 million, and the agreement was terminated.
Certain U.S. subsidiaries of the Company have agreed to guarantee the obligations of the Company under the DB Credit Agreement. The DB Credit Agreement contains customary covenants limiting the ability of the Company 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 DB Credit Agreement contains financial covenants requiring the Company to maintain a total leverage ratio, as defined therein, of generally not more than 3.5 to 1.0 and minimum interest coverage ratio, as defined therein, of 3.0 to 1.0,
measured at the end of each quarter. The DB Credit Agreement contains various events of default (including failure to comply with the covenants under the DB Credit Agreement and related agreements) and upon an event of default the lenders may, subject to various customary cure rights, require the immediate payment of all amounts outstanding under the Term Loan and the Revolver. The Company is in compliance with all such covenants as of December 31, 2017. We believe that our sources of liquidity including the DB Credit Agreement, are adequate to fund our operations for the next twelve months.
Cash Flows
As of December 31, 2017,2020, we had $262.0$101.1 million of Cash and cash equivalents an increaseand restricted cash, a decrease of $40.3$8.5 million from $221.7$109.6 million as of December 31, 2016. The Cash and cash equivalents as2019. See Note 2, "Summary of December 31, 2016 includes $12.9 million, related to the Fluid Handling business, which was reported in Current portion of assets heldSignificant Accounting Policies - Restricted Cash" for sale in the Consolidated Balance Sheet.further information. The following table summarizes the change in Cash and cash equivalents during the periods indicated:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
| (Dollars in millions) |
| Net cash provided by operating activities | $ | 301.9 | | | $ | 130.9 | |
| Purchases of property, plant and equipment | (114.8) | | | (125.4) | |
| Proceeds from sale of property, plant and equipment | 9.6 | | | 7.8 | |
| Acquisitions, net of cash received | (69.8) | | | (3,151.1) | |
| Proceeds from sale of business, net | — | | | 1,635.9 | |
| | | |
| | | |
| Net cash used in investing activities | (175.1) | | | (1,632.8) | |
| Proceeds from (repayments of) borrowings, net | (122.9) | | | 1,085.4 | |
| Proceeds from issuance of common stock, net | 3.5 | | | 11.9 | |
| Payment for noncontrolling interest share repurchase | — | | | (93.5) | |
| Proceeds from prepaid stock purchase contracts | — | | | 377.8 | |
| | | |
| Other | (12.3) | | | (12.1) | |
| Net cash provided by (used in) financing activities | (131.7) | | | 1,369.5 | |
| Effect of foreign exchange rates on Cash and cash equivalents | (3.8) | | | (3.1) | |
| Decrease in Cash and cash equivalents | $ | (8.6) | | | $ | (135.4) | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In millions) |
| Net cash provided by operating activities | $ | 218.8 |
| | $ | 247.0 |
| | $ | 303.8 |
|
| Purchases of fixed assets, net | (68.8 | ) | | (63.2 | ) | | (69.9 | ) |
| Acquisitions, net of cash received | (346.8 | ) | | (26.0 | ) | | (196.0 | ) |
| Proceeds from sale of business, net | 490.3 |
| | — |
| | — |
|
| Other, net | 15.1 |
| | 7.2 |
| | 18.9 |
|
Net cash provided by (used in) investing activities | 89.8 |
| | (82.0 | ) | | (247.0 | ) |
| Repayments of borrowings, net | (277.3 | ) | | (118.8 | ) | | (88.9 | ) |
| Proceeds from issuance of common stock, net | 6.9 |
| | 2.2 |
| | 6.1 |
|
| Repurchases of common stock | — |
| | (20.8 | ) | | (27.4 | ) |
| Other | (10.0 | ) | | (7.8 | ) | | (21.1 | ) |
| Net cash used in financing activities | (280.4 | ) | | (145.2 | ) | | (131.3 | ) |
| Effect of foreign exchange rates on Cash and cash equivalents | 12.1 |
| | 4.5 |
| | (33.5 | ) |
| Increase (decrease) in Cash and cash equivalents | $ | 40.3 |
| | $ | 24.3 |
| | $ | (108.0 | ) |
Cash provided byused in operating activities ofrelated to the discontinued operations which is included in net cash provided by operating activities above,of the divested Air and Gas Handling business for the years ended December 31, 2020 and 2019 was $65.2 million, $23.1$9.4 million and $64.7$18.1 million, respectively during 2017, 2016, and 2015.respectively. Cash used in investing activities ofrelated to the discontinued operations which is included in net cash provided by (used in) investing activities above,of the divested Air and Gas Handling business was $10.1$27.5 million $3.9 million, and $5.1 million during 2017, 2016, and 2015, respectively.for the year ended December 31, 2019.
Cash flows from operating activities can fluctuate significantly from period to period due to changes in working capital and the timing of payments for items such as pension funding, asbestos-related costs and asbestos-related costs.restructuring program funding. Changes in significant operating cash flow items are discussed below.
•Net cash received or paid for asbestos-related costs, net of insurance proceeds, including the disposition of claims, defense costs and legal expenses related to litigation against our insurers, creates variability in our operating cash
flows. We had net cash outflows of $3.7 million, $16.0$2.2 million and $22.7$3.2 million during 2017, 20162020 and 2015,2019, respectively. Net cash outflows for 20172020 and 20162019 were net of $36.5$79.6 million and $23.6$59.8 million, respectively, of reimbursements from insurance companies on our asbestos insurance receivable.asset balances.
•Funding requirements of our defined benefit plans, including pension plans and other post-retirement benefit plans, can vary significantly from period to period due to changes in the fair value of plan assets and actuarial assumptions. For 2017, 20162020 and 2015,2019, cash contributions for defined benefit plans were $37.9 million, $34.5$11.0 million and $44.1$11.7 million, respectively.
•During 2017, 20162020 and 2015,2019, cash payments of $30.7 million, $66.6$39.2 million and $57.7$74.6 million, respectively, were made related to our restructuring initiatives.
Changes in net•During 2020 and 2019, cash paid for strategic transaction costs were $5.1 million and $58.7 million, respectively.
•Year ended December 31, 2020 results include $52.3 million of inflows from working capital also affecteddue to lower sales and operational improvements. Year ended December 31, 2019 results included a $83.1 million outflow, due to an increase in Net Sales, an estimated $40 million one-time effort to bring DJO suppliers into payment terms consistent with our normal practices, and the operating cash flows for the periods presented.elimination of a DJO accounts receivable factoring program. We define working capital as Trade receivables, net and Inventories, net, both reduced by Accounts payable and Customercustomer advances and billings in excess of costs incurred. During 2017, net working capital consumed
Cash flows used in investing activities during 2020 includes $69.8 million of cash of $92.5 million, before the impact of foreign exchange, primarily due to an increase in receivablesused for 5 acquisitions and inventories driven by revenue growth and timing of collections and
shipments. During 2016, net working capital consumed cash of $31.4 million, before the impact of foreign exchange, primarily due to an increase in receivables and lower billings in excess of costs incurred associated with our Air and Gas business segment. The net increase was offset by an increase in payablesthree investments in our Medical Technology segment. Cash flows used by investing activities during 2019 included $3.2 billion of cash used for acquisitions and $1.6 billion in proceeds from the sale of the Air and Gas Handling segment and Fabrication Technology segment and partially offset by decline in inventory levels in our Fabrication Technology segment. During 2015, net working capital provided cash of $43.5 million, before the impact of foreign exchange, primarily due to decrease in receivables with our Air and Gas Handling segment and Fabrication Technology segment, offset by lower billings in excess of costs incurred associated with our Air and Gas business segment.business.
Cash flows provided by investing activities during 2017 included net proceeds of $490.3 million from the sale of the Fluid Handling business segment and net cash outflows of $346.8 million associated with two acquisitions in our Air and Gas Handling segments and three acquisitions in our Fabrication Technology segment. Cash flows from investing activities during 2016 were impacted by the net cash outflows of approximately $26 million associated with an acquisition in our Fabrication Technology segment. Cash flows from investing activities during 2015 were impacted by the net cash outflows of $196 million associated with two acquisitions completed by our Air and Gas Handling segment.
Cash flows used in financing activities in 2017, 20162019 included $1.1 billion of proceeds from borrowings, net and 2015 reflect net repayments$377.8 million of borrowings. The outflow in 2017 is attributable to the repayment of borrowings under the DB credit agreement and bilateral credit facilities for $651.8 million, reduced by proceeds from the issuance of Euro Notes, discussed under “—Borrowing Arrangements” above. The cash outflows in 2016 and 2015 were attributable to repayment of borrowings under the DB credit agreement and bilateral credit facilities of $118.8 million and $88.9 million, respectively. Additionally, the cash flows during 2016 and 2015 were impacted by the share repurchases discussed under “Equity Capital” above.tangible equity units.
Our Cash and cash equivalents as of December 31, 2017 included $252.12020 include $50.3 million held in jurisdictions outside the U.S. We currently do not intend nor foresee a need to repatriate these funds. If however, we elect to repatriate future earnings from foreign jurisdictions, suchCash repatriation remittancesof non-U.S. cash into the U.S. may be subject to taxes, and other local statutory restrictions.restrictions and minority owner distributions.
Prior Disclosure Under Section 13(r) of the Exchange Act
In the Company’s quarterly report for the period ended June 30, 2017, we reported pursuant to Section 13(r)(1)(A) of the Exchange Act that one of our non-U.S. ESAB subsidiaries sold a total of $1,236,800 of welding products for end use in the Iranian petrochemical sector pursuant to General License H, which authorizes such transactions. Colfax subsequently learned that our ESAB subsidiary inadvertently mischaracterized the end market industry sector for a portion of these sales. After correction, the aggregate value of sales relating to the Iranian petrochemical sector for the relevant period was $327,822 and did not require disclosure in the Quarterly Report. Accordingly, the Company did not make further disclosure of these sales in its quarterly report for the period ended September 29, 2017 or in this Annual Report.
Contractual Obligations
The following table summarizes our future contractual obligations as of December 31, 2017.2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Less Than
One Year | | 1-3 Years | | 3-5 Years | | More Than
5 Years | | Total |
| | | (Dollars in millions) |
| Debt | | $ | 27.1 | | | $ | 6.5 | | | $ | 1,813.2 | | | $ | 400.0 | | | $ | 2,246.8 | |
Interest payments on debt(1) | | 93.3 | | | 183.3 | | | 150.1 | | | 30.1 | | | 456.8 | |
| Operating leases | | 42.5 | | | 60.7 | | | 33.1 | | | 71.8 | | | 208.1 | |
Purchase obligations(2) | | 239.8 | | | 31.2 | | | 4.4 | | | 1.5 | | | 276.9 | |
| Total | | $ | 402.7 | | | $ | 281.7 | | | $ | 2,000.8 | | | $ | 503.4 | | | $ | 3,188.6 | |
(1)Variable interest payments are estimated using a static rate of 1.90%.
|
| | | | | | | | | | | | | | | | | | | | |
| | | Less Than One Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years | | Total |
| | | (In millions) |
| Debt | | $ | 5.8 |
| | $ | 621.3 |
| | $ | — |
| | $ | 443.1 |
| | $ | 1,070.2 |
|
Interest payments on debt(1) | | 32.7 |
| | 42.7 |
| | 29.7 |
| | 33.9 |
| | 139.0 |
|
| Operating leases | | 32.2 |
| | 42.6 |
| | 24.2 |
| | 53.4 |
| | 152.4 |
|
| Capital leases | | 2.5 |
| | 0.2 |
| | 0.2 |
| | 0.3 |
| | 3.2 |
|
Purchase obligations(2) | | 250.3 |
| | 21.4 |
| | 0.1 |
| | — |
| | 271.8 |
|
| Total | | $ | 323.5 |
| | $ | 728.2 |
| | $ | 54.2 |
| | $ | 530.7 |
| | $ | 1,636.6 |
|
| |
(1)
| Variable interest payments are estimated using a static rate of 3.07%. |
| |
(2)
| Excludes open purchase orders for goods or services that are provided on demand, the timing of which is not certain. |
We have funding requirements associated with our pension and other post-retirement benefit plans as of December 31, 2017,2020, which are estimated to be $40.5$6.9 million for the year ending 2018.December 31, 2021. Other long-term liabilities, such as those for asbestos and other legal claims, employee benefit plan obligations, deferred income taxes and liabilities for unrecognized income tax benefits, are excluded from the above table since they are not contractually fixed as to timing and amount.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that provide liquidity, capital resources, market or credit risk support that expose us to any liability that is not reflected in our Consolidated Financial Statements at December 31, 20172020 other than outstanding letters of credit of $418.8$76.4 million and unconditional purchase obligations with suppliers of $271.8 million, and $152.4 million of future operating lease payments.$276.9 million.
The Company and its subsidiaries have in the past divested certain of its businesses and assets. In connection with these divestitures, certain representations, warranties and indemnities were made to purchasers to cover various risks or unknown liabilities. We cannot estimate the potential liability, if any, that may result from such representations, warranties and indemnities because they relate to unknown and unexpected contingencies; however, we do not believe that any such liabilities will have a material adverse effect on our financial condition, results of operations or liquidity.
Critical Accounting Policies
The methods, estimates and judgments we use in applying our critical accounting policies have a significant impact on our results of operations and financial position. We evaluate our estimates and judgments on an ongoing basis. Our estimates are based upon our historical experience, our evaluation of business and macroeconomic trends and information from other outside sources, as appropriate. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what our management anticipates and different assumptions or estimates about the future could have a material impact on our results of operations and financial position.
We believe the following accounting policies are the most critical in that they are important to the financial statements and they require the most difficult, subjective or complex judgments in the preparation of the financial statements. For a detailed discussion on the application of these and other accounting policies, see Note 2, “Summary of Significant Accounting Policies” in the accompanying Notes to Consolidated Financial Statements in this Form 10-K.
Asbestos Liabilities and Insurance Assets
Certain subsidiaries are each one of many defendants in a large number of lawsuits that claim personal injury as a result of exposure to asbestos from products manufactured with components that are alleged to have contained asbestos. Such components were acquired from third-party suppliers and were not manufactured by any of the Company’sour subsidiaries, nor were the subsidiaries producers or direct suppliers of asbestos. The manufactured products that are alleged to have contained asbestos generally were provided to meet the specifications of the subsidiaries’ customers, including the U.S. Navy.
On September 24, 2017, we entered into the Purchase Agreement with CIRCOR, pursuant to which CIRCOR agreed to purchase certain subsidiaries and assets comprisingWe sold our Fluid Handling business. Pursuantbusiness in 2017, and pursuant to the Purchase Agreement,purchase agreement, we retained the Company will retain its asbestos-related contingencies and insurance coverages. However, as the Company willwe did not retain an interest in the ongoing operations of the business subject to the contingencies, the Company haswe have classified asbestos-related activity in itsour Consolidated Statements of Operations as part of Income (loss) from discontinuingdiscontinued operations, net of taxes. See Note 4, “Discontinued Operations” for further information.
We have projected future asbestos-related liability costs with regard to pending and future unasserted claims based upon the Nicholson methodology. The Nicholson methodology is a standard approach used by experts and has been accepted by numerous courts. This methodology is based upon risk equations, exposed population estimates, mortality rates, and other demographic statistics. In applying the Nicholson methodology for each subsidiary we performed: (1) an analysis of the estimated population likely to have been exposed or claim to have been exposed to products manufactured by the subsidiaries based upon national studies undertaken of the population of workers believed to have been exposed to asbestos; (2) a review of epidemiological and demographic studies to estimate the number of potentially exposed people that would be likely to develop asbestos-related diseases in each year; (3) an analysis of the subsidiaries’ recent claims history to estimate likely filing rates for these diseases and (4) an analysis of the historical asbestos liability costs to develop average values, which vary by disease type, jurisdiction and the nature of claim, to determine an estimate of costs likely to be associated with currently pending and projected asbestos claims. Our projections, based upon the Nicholson methodology, estimate both claims and the estimated cash outflows related to the resolution of such claims for periods up to and including the endpoint of asbestos studies referred to in item (2) above. It is our policy to record a liability for asbestos-related liability costs for the longest period of time that we can reasonably estimate. Accordingly, no accrual has been recorded for any costs which may be paid after the next 15 years.
Projecting future asbestos-related liability costs is subject to numerous variables that are difficult to predict, including, among others, the number of claims that might be received, the type and severity of the disease alleged by each claimant, the latency
period associated with asbestos exposure, dismissal rates, costs of medical treatment, the financial resources of other companies that are co-defendants in the claims, funds available in post-bankruptcy trusts, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, including fluctuations in the timing of court actions and rulings, and the impact of potential changes in legislative or judicial standards, including potential tort reform. Furthermore, any projections with respect to these variables are subject to even greater uncertainty as the projection period lengthens. These trend factors have both positive and negative effects on the dynamics of asbestos litigation in the tort system and the related best estimate of our asbestos liability, and these effects do not move in linear fashion but rather change over multiple year periods. Accordingly, we monitor these trend factors over time and periodically assess whether an alternative forecast period is appropriate. Taking these factors into account and the inherent uncertainties, we believe that we can reasonably estimate the asbestos-related liability for pending and future claims that will be resolved in the next 15 years and have recorded that liability as our best estimate. While it is reasonably possible that the subsidiaries will incur costs after this period, we do not believe the reasonably possible loss or range of reasonably possible loss is estimable at the current time. Accordingly, no accrual has been
recorded for any costs which may be paid after the next 15 years. Defense costs associated with asbestos-related liabilities as well as costs incurred related to litigation against the subsidiaries’ insurers are expensed as incurred.
We assessed the subsidiaries’ existing insurance arrangements and agreements, estimated the applicability of insurance coverage for existing and expected future claims, analyzed publicly available information bearing on the current creditworthiness and solvency of the various insurers, and employed such insurance allocation methodologies as we believed appropriate to ascertain the probable insurance recoveries for asbestos liabilities. The analysis took into account self-insurance retentions, policy exclusions, pending litigation, liability caps and gaps in coverage, existing and potential insolvencies of insurers as well as how legal and defense costs will be covered under the insurance policies.
Each subsidiary has separate insurance coverage acquired prior to our ownership of each independent entity. In our evaluation of the insurance asset, we use differing insurance allocation methodologies for each subsidiary based upon the applicable law pertaining to the affected subsidiary.
Management’s analyses are based on currently known facts and a number of assumptions. However, projecting future events, such as new claims to be filed each year, the average cost of resolving each claim, coverage issues among layers of insurers, the method in which losses will be allocated to the various insurance policies, interpretation of the effect on coverage of various policy terms and limits and their interrelationships, the continuing solvency of various insurance companies and collectability of claims tendered, the amount of remaining insurance available, as well as the numerous uncertainties inherent in asbestos litigation could cause the actual liabilities and insurance recoveries to be higher or lower than those projected or recorded which could materially affect our financial condition, results of operations or cash flow.
See Note 16,18, “Commitments and Contingencies” in the accompanying Notes to Consolidated Financial Statements for additional information regarding our asbestos liabilities and insurance assets.
Retirement Benefits
Pension obligations and other post-retirement benefits are actuarially determined and are affected by several assumptions, including the discount rate, assumed annual rates of return on plan assets, and per capita cost of covered health care benefits. Changes in discount rate and differences from actual results for each assumption will affect the amounts of pension expense and other post-retirement expense recognized in future periods. These assumptions may also have an effect on the amount and timing of future cash contributions. See Note 14, “Defined Benefit Plans” in the accompanying Notes to Consolidated Financial Statements for further information.
Impairment of Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the costs in excess of the fair value of net assets acquired associated with our acquisitions. Indefinite-lived intangible assets consist of certain trade names.
We evaluate the recoverability of Goodwill and indefinite-lived intangible assets annually or more frequently if an event occurs or circumstances change in the interim that would more likely than not reduce the fair value of the asset below its carrying amount. Goodwill and indefinite-lived intangible assets are considered to be impaired when the carrying value of a reporting unit or asset exceeds its value.
In the evaluation of Goodwill for impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting entity is less than its carrying value. If we determine that it is more likely than not for a reporting unit’s fair value to be greater than its carrying value, a calculation of the fair value is not performed. If we determine that it is more likely than not for a reporting unit’s fair value to be less than its carrying value, a calculation of the fair value is not performed. If we determine that
it is more likely than not for a reporting unit’s fair value to be less than its carrying value, a calculation of the reporting entity’s fair value is performed and compared to the carrying value of that entity.reporting unit. In certain instances, we may elect to forgo the qualitative assessment and proceed directly to the quantitative impairment test. If the carrying value of a reporting unit exceeds its fair value, Goodwill of that reporting unit is impaired. Pursuant to ASU 2017-04, which the Company elected to adopt during the three months ended December 31, 2017, if the carrying value of the reporting unit’s Goodwill is greater than its fair value,impaired and an impairment loss is recorded equal to the excess of the carrying value over its fair value.
Generally, we measure fair value of reporting units based on a present value of future discounted cash flows and a market valuation approach. The discounted cash flow models indicate the fair value of the reporting units based on the present value of the cash flows that the reporting units are expected to generate in the future. Significant estimates in the discounted cash flow models include:include the weighted average cost of capital;capital, revenue growth rates, long-term rate of growth, and profitability of our business;business, tax rates, and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison against certain market information. Significant estimates in the market approach model include identifying appropriate market multiples and assessing earnings before interest, income taxes, depreciation and amortization.
The Company performed an annual qualitative test for both reporting units as of September 26, 2015, which indicated no impairment existed. During 2016, the Company experienced a concurrent decline in numerous end-markets and geographic markets that negatively impacted both of the Company’s reporting units. The Company elected not to perform qualitative assessments of Goodwill and instead, proceeded directly to performing the first step of quantitative Goodwill impairment test for its 2016 annual impairment test. The quantitative impairment assessment of Goodwill for each of the Fabrication Technology, Air and Gas Handling reporting units, based on the methodologies identified above, resulted in calculated fair values that exceeded the carrying values for both reporting units. As such, no impairment charges were recorded as a result of the annual Goodwill impairment analysis performed as of October 1, 2016 and September 26, 2015.
Due to continued declines in various end markets forthe sale of the Air and Gas Handling reporting unit in 2019 and the held for sale accounting treatment, we performed a quantitative analysis for this reporting unit asimpairment in the second quarter of September 29, 2017 as part2019. Based on the purchase price and the carrying value of our annualthe net assets being sold, the Company recorded an impairment loss of $481 million in the second quarter of 2019, which is included in Income (loss) from discontinued operations, net of taxes in the Consolidated Statements of Operations. The impairment loss included a $449 million goodwill impairment testing. The quantitative Goodwill impairment assessmentcharge 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 reporting unit resultedbusiness was included in a calculated fair value lower than carrying value. As a result, anthe determination of the goodwill impairment charge, which is mostly attributable to the recognition of $150.2 million, which equalscumulative foreign currency translation effects from the excesslong-term strengthening of the carrying value overU.S. Dollar. The Air and Gas Handling business sale was completed on September 30, 2019. Impairment charges related to the fair value, was recorded. divested Air and Gas Handling business are recorded in Income (loss) from discontinued operations, net of taxes on the Consolidated Statements of Operations. See Note 4, “Discontinued Operations” in the accompanying Notes to Consolidated Financial Statements for further information.
A qualitative assessment of Goodwill was performed for the Fabrication Technology reporting unit for the years ended December 31, 2019 and 2018, which indicated no impairment existed. Additionally, we performed a qualitative assessment of Goodwill for the Medical Technology reporting unit for the year ended December 31, 2017,2019, which indicated no impairment existed.
Due to overall market declines as a result of the COVID-19 pandemic, management decided to forgo the qualitative assessment and performed quantitative Goodwill impairment tests for both the Fabrication Technology and Medical Technology reporting units for the year ended December 31, 2020, which indicated no impairment existed. The carrying amount of Goodwill of the Fabrication Technology and Medical Technology reporting units for the year ended December 31, 2020 was $1.6 billion and $1.8 billion, respectively. We determined the fair value of each reporting unit by equally weighting a discounted cash flow approach and market valuation approach. The Fabrication Technology reporting unit quantitative impairment test resulted in a fair value that exceeded its carrying amount by approximately 50%. The Medical Technology reporting unit had a fair value that exceeded its carrying amount by approximately 12%. Determining the fair value of a reporting unit requires the application of judgment and involves the use of significant estimates and assumptions which can be affected by changes in business climate, economic conditions, the competitive environment and other factors. We base these fair value estimates on assumptions our management believes to be reasonable but which are unpredictable and inherently uncertain. Future changes in the judgment, assumptions and estimates could result in significantly different estimates of fair value in the future. An increase in discount rates, a reduction in projected cash flows or a combination of the two could lead to a reduction in the estimated fair values, which may result in impairment charges that could materially affect our financial statements in any given year. For sensitivity analysis, we estimated the fair value of the Medical Technology reporting unit if we increased the discount rate by 25 basis points or reduced the long-term revenue growth rate by 25 basis points, and the resulting excess fair value over carrying value decreased by 220 basis points and 160 basis points, respectively.
In the evaluation of indefinite-lived intangible assets for impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying value. If we determine that it is not more likely than not for the indefinite-lived intangible asset’s fair value to be lessgreater than its carrying value, a calculation of the fair value is not performed. If we determine that it is more likely than not that the indefinite-lived intangible asset’s fair value is less than its carrying value, a calculation is performed and compared to the carrying value of the asset. If the carrying amount of the indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. We measure the fair value of our indefinite-lived intangible assets using the “relief from royalty” method. Significant estimates in this approach include projected revenues and royalty and discount rates for each trade name evaluated.
From time-to-time, we have identified certain indefinite-lived intangible assets that, due to indicators present at the specific operation associated with the indefinite-lived intangible asset, should be tested for impairment prior to our annual impairment evaluation. Prior to the annual impairment assessment during 2015, due to a decline in anticipated performance at an operation associated with certain intangible assets, we performed an analysis to evaluate if the identified intangible assets might be impaired. The analysis determined an indefinite-lived trade name within our Fabrication Technology segment was impaired based upon relief from royalty measurements and resulted in a $1.5 million impairment loss calculated as the difference between the fair value of the asset and its carrying value as of the date of the impairment test. The calculated fair value of the asset was $2.8 million and is included in Level Three of the fair value hierarchy.
The annual impairment analysis performed as of October 1, 2016 and September 26, 2015 for indefinite-lived intangible assets resulted in no impairment charges.
During the annual impairment analysis for the year ended December 31, 2017, quantitative analyses were performed, as of September 29, 2017 for the Air and Gas Handling reporting unit trade names due to continued declines in various end markets. The analyses determined the fair value was lower than carrying value for one trade name, which resulted in an impairment charge of $2.5 million for that trade name. The calculated fair value of the trade name was $11.7 million and is included in Level Three of the fair value hierarchy. For another indefinite-lived intangible trade name, the analysis determined the fair value was marginally greater than its $22.1 million carrying value. A qualitative assessment was performed for the Fabrication Technology reporting unitsegment trade names for the years ended December 31, 2019 and 2018, which indicated no impairment existed. For the year ended December 31, 2017,2020, due to overall market declines as a result of the COVID-19 pandemic, we performed quantitative impairment tests on all indefinite-lived trade names within our Fabrication Technology segment, which indicated no impairment existed.
Impairment charges related to Goodwill and Indefinite-lived intangible assets are included in Goodwill and intangible assets impairment charges in the Consolidated Statements of Income.
The continuation of aA sustained decline in our end-markets and geographic markets could increase the risk of impairments in future years. Actual results could differ from our estimates and projections, which would also affect the assessment of impairment. As of December 31, 2017,2020, we have Goodwill of $2.5$3.3 billion and indefinite lived trade names of $407.2$212.0 million that are subject to at least annual review for impairment. See Note 8,9, “Goodwill and Intangible Assets” in the accompanying Notes to Consolidated Financial Statements for further information.
Income Taxes
We account for income taxes under the asset and liability method, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion of the deferred tax asset will not be realized. In evaluating the need for a valuation allowance, we take into accountconsider various factors, including the
expected level of future taxable income and available tax planning strategies. If actual results differ from the assumptions made in the evaluation of our valuation allowance, we record a change in valuation allowance through income tax expense in the period such determination is made.
Accounting Standards Codification 740, “Income Taxes” prescribes a recognition threshold and measurement attribute for a position taken in a tax return. Under this standard, we must presume the income tax position will be examined by a relevant tax authority and determine whether it is more likely than not that the income tax position will be sustained upon examination based on its technical merits. An income tax position that meets the more-likely-than-not recognition threshold is then measured to determine the amount of the benefit to be recognized in the financial statements. Liabilities for unrecognized income tax benefits are reviewed periodically and are adjusted as events occur that affect our estimates, such as the availability of new information, the lapsing of applicable statutes of limitations, the conclusion of tax audits and, if applicable, the conclusion of any court proceedings. To the extent we prevail in matters for which liabilities for unrecognized tax benefits have been established or are required to pay amounts in excess of our liabilities for unrecognized tax benefits, our effective income tax rate in a given period could be materially affected. The Company recognizesWe recognize interest and penalties related to unrecognized tax benefits in the Provision for income taxesIncome tax expense (benefit) in the Consolidated Statements of Income.Operations. Net liabilities for unrecognized income tax benefits, including accrued interest and penalties, were $41.0$58.0 million as of December 31, 20172020 and are included in Other liabilities or as a reduction to deferred tax assets in the accompanying Consolidated Balance Sheet.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code which included how the U.S. imposes income tax on multinational corporations. Key changes inCoinciding with the Tax Act which are relevant to the Company and generally effective January 1, 2018 include a flat corporate income tax rate of 21 percent to replace the marginal rates that range from 15 percent to 35 percent, elimination of the corporate alternative minimum tax, the creation of a territorial tax system replacing the worldwide tax system, a one-time tax on accumulated foreign subsidiary earnings (“Transition Tax”) to transition to the territorial system, a “minimum tax” on certain foreign earnings above an enumerated rate of return, a new base erosion anti-abuse tax that subjects certain payments made by a U.S. company to its foreign subsidiary to additional taxes, and an incentive for U.S. companies to sell, lease or license goods and services outside the U.S. by taxing the income at a reduced effective rate. The new tax also imposes limits on executive compensation and interest expense deductions, while permitting the immediate expensing for the cost of new investments in certain property acquired after September 27, 2017.
On December 22, 2017,enactment, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. SAB 118 allows registrants to include a provisional amount to account for the implications of the Tax Act where a reasonable estimate can be made and requires the completion of the accounting no later than one year from the date of enactment of the Tax Act or December 22, 2018. Additionally, the Company will file itsWe filed our 2017 U.S. income tax return in the fourth quarter of 2018, which may changechanged our tax basis in temporary differences and Transition Tax estimated as of December 31, 2017, which will resultresulting in an adjustment to the tax provision to the re-measurement amount recorded in the financial statements.
ASC 740 requires changes in tax rates and tax laws to be accounted for in the period of enactment in continuing operations. Accordingly, of significance, the Company included a provisional estimate of approximately $52 million for the Transition Tax, payable over 8 years. The Company also included a provisional estimate of approximately $55 million tax benefit for the re-measurement of its U.S. deferred tax assets and liabilities to 21 percent. The ultimate impact may differ from these provisional
amounts, possibly materially, due to, among other things, additional information necessary to complete the computation and analysis thereof, additional regulatory guidance that may be issued, and actions the Company may take as As a result of this tax filing, we reduced our provisional amount by $10.8 million and $0.7 million for Transition Tax and the Tax Act. The accounting is expected to be complete byremeasurement of U.S. deferred taxes respectively for the year ended December 22,31, 2018. See Note 7 in these notes to the consolidated financial statements for additional information.
Revenue Recognition
We account for revenue in accordance with Topic 606, “Revenue from Contracts with Customers,” which we adopted on January 1, 2018, using the full retrospective method. We recognize revenue and costs from product sales when title passes to the buyer and allcontrol of the following criteria are met: persuasive evidence of an arrangement exists, the price is fixed or determinable, product delivery has occurredpromised goods or services have been rendered, there are no further obligations to customers, and collectibility is probable. Product delivery occurs when title and risk of loss transfertransferred to the customer. Our shipping terms varyThe amount of revenue recognized reflects the consideration to which we expect to be entitled in exchange for transferring the goods or services. The nature of our contracts gives rise to certain types of variable consideration, including rebates and other discounts. We include estimated amounts of variable consideration in the transaction price to the extent that it is probable there will not be a significant reversal of revenue. Estimates are based on historical or anticipated performance and represent our best judgment at the contract. If any significanttime. Any estimates are evaluated on a quarterly basis until the uncertainty is resolved. Additionally, related to sales of our medical device products and services, we maintain provisions for estimated contractual allowances for reimbursement amounts from certain third-party payers based on negotiated contracts, historical experience for non-contracted payers, and the impact of new contract terms or modifications of existing arrangements with these customers. We report these allowances as a reduction to net sales.
We provide a variety of products and services to our customers. Most of our contracts consist of a single, distinct performance obligation or promise to transfer goods or services to a customer. For contracts that include multiple performance obligations, we allocate the total transaction price to each performance obligation using our best estimate of the standalone selling price of each identified performance obligation.
A majority of the revenue we recognize relates to contracts with customers for standard or off-the-shelf products. As control typically transfers to the customer with respect to such sale remain to be fulfilled followingupon shipment typically involving obligations relating to installation and acceptance byof the buyer,product in these circumstances, revenue recognition is deferred until such obligations have been fulfilled. Any customer allowances and discounts are recorded as a reductiongenerally recognized at that point in reported revenues at the time of sale because these allowances reflect a reduction in the sales price for the products sold. These allowances and discounts are estimated based on historical experience and known trends. Revenue related totime. For service agreements is recognized ascontracts, we recognize revenue ratably over the termperiod of performance as the customer simultaneously receives and consumes the benefits of the agreement. Progress billings are generally shown as a reduction of Inventories, net unless such billings areservices provided.
Any recognized revenues in excess of accumulated costs, in which case such balances are included in Customer advances andcustomer billings in excess of costs incurred in the Consolidated Balance Sheets.
We recognize revenue and cost of sales on air and gas handling long-term contracts using the “percentage of completion method” in accordance with GAAP. Under this method, contract revenues are recognized over the performance period of the contract in direct proportion to the costs incurred as a percentage of total estimated costs for the entirety of the contract. Any recognized revenues that have not been billed to a customer are recorded as a component of Trade receivables and any billings ofreceivables. Billings to customers in excess of recognized revenues are recorded as a component of Customer advances and billings in excess of costs incurred. As of December 31, 2017, there were $219.8 million of revenues in excess of billings and $95.9 million of billings in excess of revenues on long-term contracts in the Consolidated Balance Sheet.Accrued liabilities. Each contract is evaluated
We have contracts in various stages of completion. Such contracts require estimatesindividually to determine the appropriate costnet asset or net liability position. Substantially all of our revenue is recognized at a point in time, and revenue recognition. Significant management judgmentsrecognition and estimates, including estimatedbilling typically occur simultaneously.
The period of benefit for our incremental costs of obtaining a contract would generally have less than a one-year duration; therefore, we apply the practical expedient available and expense costs to complete projects, must be made and used in connection with revenue recognized during each period. Current estimates may be revised as additional information becomes available. The revisions are recorded in income in the period in which they are determined using the cumulative catch-up method of accounting.obtain a contract when incurred.
We maintain allowancesTrade receivables are presented net of an allowance for doubtful accountscredit losses. The Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments as of January 1, 2020. The estimate of current expected credit losses on trade receivables considers historical credit loss information that is adjusted for estimated losses resulting from the inability of our customers to make required payments. These allowances are based on recent trends of certain customers estimated to be a greater credit risk as well as general trends of the entire pool of customers.current conditions and reasonable and supportable forecasts. The allowance for doubtful accountscredit losses was $31.5 million and $29.0$37.7 million as of December 31, 2017 and 2016, respectively. If2020 compared to $36.0 million as of January 1, 2020, following the financial conditionadoption of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required.the standard.
Recently Issued Accounting Pronouncements
For detailed information regarding recently issued accounting pronouncements and the expected impact on our financial statements, see Note 3, “Recently Issued Accounting Pronouncements” in the accompanying Notes to Consolidated Financial Statements included in this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in short-term interest rates, foreign currency exchange rates and commodity prices that could impact our results of operations and financial condition. We address our exposure to these risks through our normal operating and financing activities. We do not enter into derivative contracts for tradingspeculative purposes.
Interest Rate Risk
We are subject to exposure from changes in short-term interest rates related to interest payments on our borrowing arrangements. The majorityA significant amount of our borrowings as of December 31, 2017, including the DB Credit Agreement and the receivable facility,2020 are variable rate facilities based on LIBOR or EURIBOR. In order to mitigate our interest rate risk, we may enter into interest rate swap or collar agreements. A hypothetical increase in the interest rate of 1.00% during 20172020 would have increased Interest expense for our variable-rate debt by approximately $10.2$9.0 million.
Exchange Rate Risk
We have manufacturing sites throughout the world and sell our products globally. As a result, we are exposed to movements in the exchange rates of various currencies against the U.S. dollar and against the currencies of other countries in which we manufacture and sell products and services. During 2017,2020, approximately 76%58% of our sales were derived from operations outside the U.S. We have significant manufacturing operations in European countries that are not part of the Eurozone. Sales revenues are more highly weighted toward the Euro and U.S. dollar. We also have significant contractual obligations in U.S. dollars that are met with cash flows in other currencies as well as U.S. dollars. To better match revenue and expense as well as cash needs from contractual liabilities, we regularly enter into crossforeign currency swaps and forward contracts.
We also face exchange rate risk from our investments in subsidiaries owned and operated in foreign countries. Euro denominated borrowings under the DBour Credit AgreementFacility and Euro Notes provide a natural hedge to a portion of our European net asset position. The effect of a change in currency exchange rates on our net investment in international subsidiaries, net of the translation effect of the Company’s Euro denominated borrowings, is reflected in the Accumulated other comprehensive loss component of Equity. A 10% depreciation in major currencies, relative to the U.S. dollar as of December 31, 20172020 (net of the translation effect of our Euro denominated borrowings) would result in a reduction in Equity of approximately $332$166 million.
We also face exchange rate risk from transactions with customers in countries outside the U.S. and from intercompany transactions between affiliates. Although we use the U.S. dollar as our functional currency for reporting purposes, we have manufacturing sites throughout the world, and a substantial portion of our costs are incurred and sales are generated in foreign currencies. Costs incurred and sales recorded by subsidiaries operating outside of the U.S. are translated into U.S. dollars using exchange rates effective during the respective period. As a result, we are exposed to movements in the exchange rates of various currencies against the U.S. dollar.
We have generally accepted the exposure to exchange rate movements in the translation of our financial statements into U.S. dollars without using derivative financial instruments to manage this risk. Both positive and negative movements in currency exchange rates against the U.S. dollar will, therefore, continue to affect the reported amount of sales, profit, assets and liabilities in our Consolidated Financial Statements.
Commodity Price Risk
We are exposed to changes in the prices of raw materials used in our production processes. Commodity futures contracts are periodically usedIn order to manage such exposure. As of December 31, 2017, our open commodity futuresprice risk, we periodically enter into fixed price contracts were not material.directly with suppliers.
See Note 15,17, “Financial Instruments and Fair Value Measurements” in the accompanying Notes to Consolidated Financial Statements included in this Form 10-K for additional information regarding our derivative instruments.
Item 8. Financial Statements and Supplementary Data
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | |
| Page |
| |
| Report of Independent Registered Public Accounting Firm – Internal Control Over Financial Reporting | |
| Report of Independent Registered Public Accounting Firm – Consolidated Financial Statements | |
Consolidated Statements of IncomeOperations | |
| Consolidated Statements of Comprehensive Income (Loss) | |
| Consolidated Balance Sheets | |
| Consolidated Statements of Equity | |
| Consolidated Statements of Cash Flows | |
| Notes to Consolidated Financial Statements | |
| Note 1. Organization and Nature of Operations | |
| Note 2. Summary of Significant Accounting Policies | |
| Note 3. Recently Issued Accounting Pronouncements | |
| Note 4. Discontinued Operations | |
| Note 5. Acquisitions | |
| Note 6. Revenue | |
| Note 7. Net Income Per Share from Continuing Operations | |
Note 7.8. Income Taxes | |
Note 8.9. Goodwill and Intangible Assets | |
Note 9.10. Property, Plant and Equipment, Net | |
Note 10.11. Inventories, Net | |
Note 11. Debt12. Leases | |
Note 12. Equity13. Debt | |
Note 13. Accrued Liabilities14. Equity | |
Note 14.15. Accrued Liabilities | |
| Note 16. Defined Benefit Plans | |
Note 15.17. Financial Instruments and Fair Value Measurements | |
Note 16.18. Commitments and Contingencies | |
Note 17.19. Segment Information | |
Note 18.20. Selected Quarterly Data—(unaudited) | |
Note 19.21. Subsequent EventEvents | |
Report of Independent Registered Public Accounting Firm
Internal Control Over Financial Reporting
To the Shareholders and the Board of Directors of Colfax Corporation
Opinion on Internal Control overOver Financial Reporting
We have audited Colfax Corporation’s internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, Colfax Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Colfax Corporation as of December 31, 20172020 and 2016,2019, the related consolidated statements of income,operations, comprehensive income (loss), equity and cash flows for each of the three years in the period ended December 31, 2017,2020, and the related notes and financial statement schedule listed in the Index at Item 15(A)(2) and our report dated February 16, 201818, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, appearing in Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Baltimore, Maryland
February 16, 2018
18, 2021
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
To the Shareholders and the Board of Directors of Colfax Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Colfax Corporation (the Company) as of December 31, 20172020 and 2016,2019, the related consolidated statements of income,operations, comprehensive income (loss), equity and cash flows for each of the three years in the period ended December 31, 2017,2020, and the related notes and financial statement schedule listed in the Index at Item 15(A)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 16, 201818, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| | | | | | | | |
| | Goodwill and Other Indefinite-Lived Intangible Asset Impairment |
| Description of the Matter | | At December 31, 2020, the Company’s goodwill allocated to the Fabrication Technology and Medical Technology reporting units was $1.6 billion and $1.8 billion, respectively. Other indefinite-lived intangible assets were $212 million at December 31, 2020. As discussed in Note 9 to the consolidated financial statements, goodwill and indefinite-lived intangible assets are not amortized, but rather are subject to an annual impairment review, or more frequent reviews if events and circumstances indicate an impairment exists. Auditing the Company's goodwill and indefinite-lived intangible asset impairment tests was complex and highly judgmental due to the significant estimation required by management to determine the fair values of the reporting units and indefinite-lived intangible assets. In particular, the fair value estimates were sensitive to significant assumptions, such as changes in the discount rate, royalty rates, projected revenue and projected operating income that are forward-looking and affected by future economic and market conditions. |
| How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company's controls over its annual goodwill and indefinite-lived intangible asset impairment review process, including controls over management’s review of the significant assumptions described above. We also tested management’s controls over the completeness and accuracy of the data used in the model. To test the estimated fair value of the reporting units and certain indefinite-lived intangible assets, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions used in the Company’s analyses, as well as testing the completeness and accuracy of the underlying data. For example, we compared the significant assumptions to current third-party industry data, and to the historical results of the reporting units. We performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units and indefinite-lived intangible assets that would result from changes in key assumptions. We also involved internal valuation specialists to assist in our evaluation of the methodologies and significant assumptions used by the Company. In addition, we tested management’s reconciliation of the fair value of both reporting units to the market capitalization of the Company. |
| | |
| | Asbestos Liability |
| Description of the Matter | | At December 31, 2020, the Company’s asbestos liability balance was $295 million. As discussed in Note 18 of the consolidated financial statements, certain of the Company’s subsidiaries are defendants in a large number of lawsuits that claim personal injury as a result of exposure to asbestos from products manufactured with components that are alleged to have contained asbestos. The Company records an asbestos liability for probable pending and future claims over the period that the Company believes it can reasonably estimate such claims. Auditing the asbestos liability was complex and highly judgmental due to the significant estimation of numerous variables required in determining the asbestos obligation. In particular, the estimates were sensitive to significant assumptions such as the period of time over which claims activity can be reasonably predicted, the estimated rate of decline in future asbestos-related claims, the rate at which claims are disposed, the lag between when claims are filed and subsequently settled, and settlement values. These assumptions have a significant effect on the asbestos liability. |
| How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process to estimate the asbestos liability, including controls related to estimates of expected future claims and other key assumptions underlying the calculation of the obligation. We also tested management’s controls over the completeness and accuracy of the data used in the calculation. To audit the asbestos liability recorded by management, we performed procedures that included, among others, evaluating the methodology applied and the significant assumptions used in the Company’s calculation. For example, we assessed management’s assumptions for the nature and rate of future claims, claims disposition and settlement patterns by comparing these assumptions to the Company’s historical experience and industry data. We considered the Company’s historical data and industry data in evaluating the adequacy of the Company’s projections. We developed, with the assistance of an internal actuarial specialist, an independent range of estimated asbestos liability. We tested the completeness and accuracy of the claims data used by management. We also performed analyses to determine the sensitivity of changes in certain assumptions, such as the period over which claims can be estimated, to the calculated liability. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2000.2002.
Baltimore, Maryland
February 16, 2018
18, 2021
COLFAX CORPORATION
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
Dollars in thousands, except per share amounts
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| | | | | |
| Net sales | $ | 3,070,769 | | | $ | 3,327,458 | | | $ | 2,193,083 | |
| Cost of sales | 1,782,664 | | | 1,926,402 | | | 1,463,707 | |
| Gross profit | 1,288,105 | | | 1,401,056 | | | 729,376 | |
| Selling, general and administrative expense | 1,087,401 | | | 1,132,149 | | | 548,763 | |
| Restructuring and other related charges | 38,413 | | | 65,295 | | | 29,077 | |
| | | | | |
| Operating income | 162,291 | | | 203,612 | | | 151,536 | |
| Pension settlement loss (gain) | 0 | | | 33,616 | | | (39) | |
| Interest expense, net | 104,262 | | | 119,503 | | | 49,083 | |
| Loss on short-term investments | 0 | | | 0 | | | 10,128 | |
| Income from continuing operations before income taxes | 58,029 | | | 50,493 | | | 92,364 | |
| Income tax expense (benefit) | (6,053) | | | 31,630 | | | (29,508) | |
| Net income from continuing operations | 64,082 | | | 18,863 | | | 121,872 | |
| Income (loss) from discontinued operations, net of taxes | (18,311) | | | (536,009) | | | 32,601 | |
| Net income (loss) | 45,771 | | | (517,146) | | | 154,473 | |
| Less: income attributable to noncontrolling interest, net of taxes | 3,146 | | | 10,500 | | | 14,277 | |
| Net income (loss) attributable to Colfax Corporation | $ | 42,625 | | | $ | (527,646) | | | $ | 140,196 | |
| | | | | |
| | | | | |
| Net income (loss) per share - basic | | | | | |
| Continuing operations | $ | 0.45 | | | $ | 0.10 | | | $ | 1.01 | |
| Discontinued operations | $ | (0.13) | | | $ | (3.99) | | | $ | 0.16 | |
| Consolidated operations | $ | 0.31 | | | $ | (3.89) | | | $ | 1.17 | |
| Net income (loss) per share - diluted | | | | | |
| Continuing operations | $ | 0.44 | | | $ | 0.10 | | | $ | 1.00 | |
| Discontinued operations | $ | (0.13) | | | $ | (3.99) | | | $ | 0.16 | |
| Consolidated operations | $ | 0.31 | | | $ | (3.89) | | | $ | 1.16 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
| Net sales | $ | 3,300,184 |
| | $ | 3,185,753 |
| | $ | 3,434,352 |
|
| Cost of sales | 2,270,709 |
| | 2,193,371 |
| | 2,362,666 |
|
| Gross profit | 1,029,475 |
| | 992,382 |
| | 1,071,686 |
|
| Selling, general and administrative expense | 732,340 |
| | 696,800 |
| | 748,340 |
|
| Restructuring and other related charges | 68,351 |
| | 58,496 |
| | 56,822 |
|
| Goodwill and intangible asset impairment charge | 152,700 |
| | 238 |
| | 1,486 |
|
| Pension settlement loss (gain) | 46,933 |
| | 48 |
| | (582 | ) |
| Operating income | 29,151 |
| | 236,800 |
| | 265,620 |
|
| Interest expense | 41,137 |
| | 30,276 |
| | 47,502 |
|
| (Loss) income from continuing operations before income taxes | (11,986 | ) | | 206,524 |
| | 218,118 |
|
| Provision for income taxes | 42,554 |
| | 51,772 |
| | 41,168 |
|
| Net (loss) income from continuing operations | (54,540 | ) | | 154,752 |
| | 176,950 |
|
| Income (loss) from discontinued operations, net of taxes | 224,047 |
| | (9,561 | ) | | 10,228 |
|
| Net income | 169,507 |
| | 145,191 |
| | 187,178 |
|
| Less: income attributable to noncontrolling interest, net of taxes | 18,417 |
| | 17,080 |
| | 19,439 |
|
| Net income attributable to Colfax Corporation | $ | 151,090 |
| | $ | 128,111 |
| | $ | 167,739 |
|
| Net (loss) income per share - basic | | | | | |
| Continuing operations | $ | (0.59 | ) | | $ | 1.12 |
| | $ | 1.27 |
|
| Discontinued operations | $ | 1.82 |
| | $ | (0.08 | ) | | $ | 0.08 |
|
| Consolidated operations | $ | 1.23 |
| | $ | 1.04 |
| | $ | 1.35 |
|
| Net (loss) income per share - diluted | | | | | |
| Continuing operations | $ | (0.59 | ) | | $ | 1.12 |
| | $ | 1.26 |
|
| Discontinued operations | $ | 1.81 |
| | $ | (0.08 | ) | | $ | 0.08 |
|
| Consolidated operations | $ | 1.22 |
| | $ | 1.04 |
| | $ | 1.34 |
|
See Notes to Consolidated Financial Statements.
COLFAX CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Dollars in thousands
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Net income (loss) | $ | 45,771 | | | $ | (517,146) | | | $ | 154,473 | |
| Other comprehensive income (loss): | | | | | |
| Foreign currency translation, net of tax expense of $(25), $2,248 and $3,018 | 59,880 | | | (47,734) | | | (249,907) | |
| Unrealized gain (loss) on hedging activities, net of tax expense of $(9,120), $1,574 and $5,273 | (26,268) | | | 5,832 | | | 14,745 | |
| | | | | |
| Changes in unrecognized pension and other post-retirement benefit (cost), net of tax expense (benefit) of $(1,502), $(3,980) and $366 | (8,169) | | | (27,931) | | | 10,116 | |
| | | | | |
| Amounts reclassified from Accumulated other comprehensive loss: | | | | | |
| Amortization of pension and other post-retirement net actuarial gain, net of tax expense (benefit) of $883, $779 and $805 | 3,735 | | | 2,597 | | | 3,623 | |
| Amortization of pension and other post-retirement prior service cost, net of tax of $0, $0 and $(411) | 0 | | | 32 | | | (1,998) | |
| Divestiture-related recognition of foreign currency translation, pension, and other post-retirement cost | 0 | | | 291,263 | | | 0 | |
| | | | | |
| | | | | |
| Other comprehensive income (loss) | 29,178 | | | 224,059 | | | (223,421) | |
| Comprehensive income (loss) | 74,949 | | | (293,087) | | | (68,948) | |
| Less: comprehensive income (loss) attributable to noncontrolling interest | 585 | | | (97,101) | | | (8,491) | |
| Comprehensive income (loss) attributable to Colfax Corporation | $ | 74,364 | | | $ | (195,986) | | | $ | (60,457) | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net income | $ | 169,507 |
| | $ | 145,191 |
| | $ | 187,178 |
|
| Other comprehensive income (loss): | | | | | |
| Foreign currency translation, net of tax of $(2,433), $0, and $751 | 269,432 |
| | (330,488 | ) | | (317,909 | ) |
| Unrealized (loss) gain on hedging activities, net of tax of $(19,569), $(8,989), and $19,349 | (23,593 | ) | | 17,692 |
| | 11,659 |
|
| Unrealized gain on available-for-sale securities, net of tax of $2,808, $0, and $0 | 5,152 |
| | — |
| | — |
|
| Changes in unrecognized pension and other post-retirement benefit cost, net of tax of $4,882, $9,247, and $6,373 | 4,167 |
| | 4,810 |
| | 29,323 |
|
| Changes in deferred tax related to pension and other post-retirement benefit cost | — |
| | — |
| | 3,817 |
|
| Amounts reclassified from Accumulated other comprehensive loss: | | | | | |
| Amortization of pension and other post-retirement net actuarial loss, net of tax of $2,463, $3,049, and $3,744 | 6,875 |
| | 4,465 |
| | 7,167 |
|
| Amortization of pension and other post-retirement prior service cost, net of tax of $37, $93, and $115 | 93 |
| | 155 |
| | 133 |
|
Divestiture-related recognition of pension and other post-retirement cost and foreign currency translation, net of tax of $27,518, $0, and $0
| 167,857 |
| | — |
| | — |
|
| Foreign currency translation adjustment resulting from Venezuela deconsolidation | — |
| | 2,378 |
| | — |
|
| Other comprehensive income (loss) | 429,983 |
| | (300,988 | ) | | (265,810 | ) |
| Comprehensive income (loss) | 599,490 |
| | (155,797 | ) | | (78,632 | ) |
| Less: comprehensive income (loss) attributable to noncontrolling interest | 34,427 |
| | 17,722 |
| | (3,347 | ) |
| Comprehensive income (loss) attributable to Colfax Corporation | $ | 565,063 |
| | $ | (173,519 | ) | | $ | (75,285 | ) |
See Notes to Consolidated Financial Statements.
COLFAX CORPORATION
CONSOLIDATED BALANCE SHEETS
Dollars in thousands, except share amounts
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| ASSETS | | | |
| CURRENT ASSETS: | | | |
| Cash and cash equivalents | $ | 97,068 | | | $ | 109,632 | |
| | | |
| Trade receivables, less allowance for credit losses of $37,666 and $32,634 | 517,006 | | | 561,865 | |
| Inventories, net | 564,822 | | | 571,558 | |
| Prepaid expenses | 69,515 | | | 70,429 | |
| Other current assets | 113,418 | | | 90,761 | |
| Total current assets | 1,361,829 | | | 1,404,245 | |
| Property, plant and equipment, net | 486,960 | | | 491,241 | |
| Goodwill | 3,314,541 | | | 3,202,517 | |
| Intangible assets, net | 1,663,446 | | | 1,719,019 | |
| Lease asset - right of use | 173,942 | | | 173,320 | |
| Other assets | 350,831 | | | 396,490 | |
| | | |
| | | |
| Total assets | $ | 7,351,549 | | | $ | 7,386,832 | |
| | | |
| LIABILITIES AND EQUITY | | | |
| CURRENT LIABILITIES: | | | |
| Current portion of long-term debt | $ | 27,074 | | | $ | 27,642 | |
| Accounts payable | 330,251 | | | 359,782 | |
| Accrued liabilities | 454,333 | | | 469,890 | |
| | | |
| | | |
| Total current liabilities | 811,658 | | | 857,314 | |
| Long-term debt, less current portion | 2,204,169 | | | 2,284,184 | |
| Non-current lease liability | 139,230 | | | 136,399 | |
| Other liabilities | 608,618 | | | 619,307 | |
| | | |
| | | |
| Total liabilities | 3,763,675 | | | 3,897,204 | |
| Equity: | | | |
| | | |
| Common stock, $0.001 par value; 400,000,000 shares authorized; 118,496,687 and 118,059,082 issued and outstanding as of December 31, 2020 and December 31, 2019, respectively | 118 | | | 118 | |
| Additional paid-in capital | 3,478,008 | | | 3,445,597 | |
| Retained earnings | 517,367 | | | 479,560 | |
| Accumulated other comprehensive loss | (452,106) | | | (483,845) | |
| Total Colfax Corporation equity | 3,543,387 | | | 3,441,430 | |
| Noncontrolling interest | 44,487 | | | 48,198 | |
| Total equity | 3,587,874 | | | 3,489,628 | |
| Total liabilities and equity | $ | 7,351,549 | | | $ | 7,386,832 | |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| ASSETS | | | |
| CURRENT ASSETS: | | | |
| Cash and cash equivalents | $ | 262,019 |
| | $ | 208,814 |
|
| Short term investments | 149,608 |
| | — |
|
| Trade receivables, less allowance for doubtful accounts of $31,488 and $29,005 | 970,199 |
| | 838,796 |
|
| Inventories, net | 429,627 |
| | 364,972 |
|
| Other current assets | 258,379 |
| | 175,721 |
|
| Current portion of assets held for sale | — |
| | 150,275 |
|
| Total current assets | 2,069,832 |
| | 1,738,578 |
|
| Property, plant and equipment, net | 552,802 |
| | 505,431 |
|
| Goodwill | 2,538,544 |
| | 2,350,996 |
|
| Intangible assets, net | 1,017,203 |
| | 916,347 |
|
| Other assets | 531,316 |
| | 520,031 |
|
| Assets held for sale, less current portion | — |
| | 307,057 |
|
| Total assets | $ | 6,709,697 |
| | $ | 6,338,440 |
|
| | | | |
| LIABILITIES AND EQUITY | | | |
| CURRENT LIABILITIES: | | | |
| Current portion of long-term debt | $ | 5,766 |
| | $ | 5,406 |
|
| Accounts payable | 587,129 |
| | 515,520 |
|
| Customer advances and billings in excess of costs incurred | 145,853 |
| | 140,220 |
|
| Accrued liabilities | 358,632 |
| | 311,326 |
|
| Current portion of liabilities held for sale | — |
| | 87,183 |
|
| Total current liabilities | 1,097,380 |
| | 1,059,655 |
|
| Long-term debt, less current portion | 1,055,305 |
| | 1,286,738 |
|
| Other liabilities | 829,748 |
| | 732,729 |
|
| Liabilities held for sale, less current portion | — |
| | 165,974 |
|
| Total liabilities | 2,982,433 |
| | 3,245,096 |
|
| Equity: | | | |
| Common stock, $0.001 par value; 400,000,000 shares authorized; 123,245,827 and 122,780,261 issued and outstanding | 123 |
| | 123 |
|
| Additional paid-in capital | 3,228,174 |
| | 3,199,682 |
|
| Retained earnings | 846,490 |
| | 685,411 |
|
| Accumulated other comprehensive loss | (574,372 | ) | | (988,345 | ) |
| Total Colfax Corporation equity | 3,500,415 |
| | 2,896,871 |
|
| Noncontrolling interest | 226,849 |
| | 196,473 |
|
| Total equity | 3,727,264 |
| | 3,093,344 |
|
| Total liabilities and equity | $ | 6,709,697 |
| | $ | 6,338,440 |
|
See Notes to Consolidated Financial Statements.
COLFAX CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
Dollars in thousands, except share amounts and as noted
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interest | Total |
| Shares | Amount | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Balance at January 1, 2018 | 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) | | — | | 0 | |
| Net income | — | | — | | | | — | | 140,196 | | — | | 14,277 | | 154,473 | |
| Distributions to noncontrolling owners | — | | — | | | | — | | — | | — | | (11,172) | | (11,172) | |
| Other comprehensive loss, net of tax of $9,051 | — | | — | | | | — | | — | | (200,653) | | (22,768) | | (223,421) | |
| Common stock repurchases | (6,449,425) | | (6) | | | | (199,994) | | 0 | | 0 | | 0 | | (200,000) | |
| Common stock-based award activity | 478,815 | | — | | | | 29,802 | | — | | — | | — | | 29,802 | |
| 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) | | — | | 0 | |
| Net income (loss) | — | | — | | | | — | | (527,646) | | — | | 10,500 | | (517,146) | |
| Distributions to noncontrolling owners | — | | — | | | | — | | — | | — | | (12,379) | | (12,379) | |
| Noncontrolling interest share repurchase | — | | — | | | | (24,037) | | — | | (19,960) | | (49,508) | | (93,505) | |
| Other comprehensive income, net of tax of $621 | — | | — | | | | — | | — | | 331,660 | | (107,601) | | 224,059 | |
| Issuance of Tangible Equity Units | — | | — | | | | 377,814 | | — | | — | | — | | 377,814 | |
| Common stock-based award activity | 783,865 | | 1 | | | | 33,838 | | — | | — | | — | | 33,839 | |
| Balance at December 31, 2019 | 118,059,082 | | 118 | | | | 3,445,597 | | 479,560 | | (483,845) | | 48,198 | | 3,489,628 | |
| Cumulative effect of accounting change | — | | — | | | | — | | (4,818) | | 0 | | — | | (4,818) | |
| Net income | — | | — | | | | — | | 42,625 | | — | | 3,146 | | 45,771 | |
| Distributions to noncontrolling owners | — | | — | | | | — | | — | | — | | (4,296) | | (4,296) | |
| | | | | | | | | |
| Other comprehensive income, net of tax benefit of $9,764 | — | | — | | | | — | | — | | 31,739 | | (2,561) | | 29,178 | |
| | | | | | | | | |
| Common stock-based award activity | 437,605 | | — | | | | 32,411 | | — | | — | | — | | 32,411 | |
| Balance at December 31, 2020 | 118,496,687 | | $ | 118 | | | | $ | 3,478,008 | | $ | 517,367 | | $ | (452,106) | | $ | 44,487 | | $ | 3,587,874 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interest | Total |
| | Shares | $ Amount |
| Balance at January 1, 2015 | 123,730,578 |
| $ | 124 |
| $ | 3,200,832 |
| $ | 389,561 |
| $ | (443,691 | ) | $ | 205,618 |
| $ | 3,352,444 |
|
| Net income | — |
| — |
| — |
| 167,739 |
| — |
| 19,439 |
| 187,178 |
|
| Distributions to noncontrolling owners | — |
| — |
| — |
| — |
| — |
| (15,690 | ) | (15,690 | ) |
| Other comprehensive loss, net of tax of $26.2 million and $0.4 million | — |
| — |
| — |
| — |
| (243,024 | ) | (22,786 | ) | (265,810 | ) |
| Stock repurchase | (986,279 | ) | (1 | ) | (27,366 | ) | — |
| — |
| — |
| (27,367 | ) |
| Common stock-based award activity | 676,126 |
| — |
| 22,373 |
| — |
| — |
| — |
| 22,373 |
|
| Contribution to defined benefit pension plan | 66,000 |
| — |
| 3,428 |
| — |
| — |
| — |
| 3,428 |
|
| Balance at December 31, 2015 | 123,486,425 |
| 123 |
| 3,199,267 |
| 557,300 |
| (686,715 | ) | 186,581 |
| 3,256,556 |
|
| Net income | — |
| — |
| — |
| 128,111 |
| — |
| 17,080 |
| 145,191 |
|
| Distributions to noncontrolling owners | — |
| — |
| — |
| — |
| — |
| (7,830 | ) | (7,830 | ) |
| Other comprehensive (loss) income, net of tax of $3.4 million | — |
| — |
| — |
| — |
| (301,630 | ) | 642 |
| (300,988 | ) |
| Stock repurchase | (1,000,000 | ) | (1 | ) | (20,811 | ) | — |
| — |
| — |
| (20,812 | ) |
| Common stock-based award activity | 293,836 |
| 1 |
| 21,226 |
| — |
| — |
| — |
| 21,227 |
|
| Balance at December 31, 2016 | 122,780,261 |
| 123 |
| 3,199,682 |
| 685,411 |
| (988,345 | ) | 196,473 |
| 3,093,344 |
|
| Cumulative effect of accounting change | — |
| — |
| — |
| 9,989 |
| — |
| — |
| 9,989 |
|
| Net income | — |
| — |
| — |
| 151,090 |
| — |
| 18,417 |
| 169,507 |
|
| Distributions to noncontrolling owners | — |
| — |
| — |
| — |
| — |
| (4,051 | ) | (4,051 | ) |
| Other comprehensive income, net of tax of $15.7 million | — |
| — |
| — |
| — |
| 413,973 |
| 16,010 |
| 429,983 |
|
| Common stock-based award activity | 465,566 |
| — |
| 28,492 |
| — |
| — |
| — |
| 28,492 |
|
| Balance at December 31, 2017 | 123,245,827 |
| $ | 123 |
| $ | 3,228,174 |
| $ | 846,490 |
| $ | (574,372 | ) | $ | 226,849 |
| $ | 3,727,264 |
|
See Notes to Consolidated Financial Statements.
COLFAX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 169,507 |
| | $ | 145,191 |
| | $ | 187,178 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Impairment of goodwill, intangibles and property, plant and equipment | 183,751 |
| | 6,082 |
| | 12,505 |
|
| Depreciation and amortization | 132,203 |
| | 137,176 |
| | 142,037 |
|
| Stock-based compensation expense | 21,548 |
| | 19,020 |
| | 16,321 |
|
| Non-cash interest expense | 4,519 |
| | 4,176 |
| | 10,101 |
|
| Deferred income tax expense (benefit) | 12,066 |
| | (1,682 | ) | | (22,717 | ) |
| Gain on sale of facility | (11,243 | ) | | — |
| | — |
|
| Gain on sale of business | (308,388 | ) | | — |
| | — |
|
| Pension settlement loss | 46,933 |
| | — |
| | — |
|
| Changes in operating assets and liabilities: | | | | | |
| Trade receivables, net | (44,345 | ) | | (50,958 | ) | | 64,048 |
|
| Inventories, net | (34,023 | ) | | 19,665 |
| | (390 | ) |
| Accounts payable | 10,266 |
| | 37,083 |
| | 965 |
|
| Customer advances and billings in excess of costs incurred | (24,388 | ) | | (37,210 | ) | | (21,094 | ) |
| Changes in other operating assets and liabilities | 60,364 |
| | (31,569 | ) | | (85,141 | ) |
| Net cash provided by operating activities | 218,770 |
| | 246,974 |
| | 303,813 |
|
| Cash flows from investing activities: | | | | | |
| Purchases of fixed assets | (68,765 | ) | | (63,251 | ) | | (69,877 | ) |
| Acquisitions, net of cash received | (346,764 | ) | | (25,992 | ) | | (196,007 | ) |
| Proceeds from sale of business, net | 490,308 |
| | — |
| | — |
|
| Other, net | 15,097 |
| | 7,249 |
| | 18,927 |
|
| Net cash provided by (used in) investing activities | 89,876 |
| | (81,994 | ) | | (246,957 | ) |
| Cash flows from financing activities: | | | | | |
| Borrowings under term credit facility | — |
| | — |
| | 750,000 |
|
| Payments under term credit facility | (65,628 | ) | | (37,500 | ) | | (1,232,872 | ) |
| Proceeds from borrowings on revolving credit facilities and other | 1,046,457 |
| | 896,742 |
| | 1,498,039 |
|
| Repayments of borrowings on revolving credit facilities and other | (1,632,658 | ) | | (978,024 | ) | | (1,104,055 | ) |
| Proceeds from borrowings on senior unsecured notes | 374,450 |
| | — |
| | — |
|
| Proceeds from issuance of common stock, net | 6,944 |
| | 2,206 |
| | 6,052 |
|
| Repurchases of common stock | — |
| | (20,812 | ) | | (27,367 | ) |
| Other | (10,012 | ) | | (7,830 | ) | | (21,066 | ) |
| Net cash used in financing activities | (280,447 | ) | | (145,218 | ) | | (131,269 | ) |
| Effect of foreign exchange rates on Cash and cash equivalents | 12,090 |
| | 4,499 |
| | (33,566 | ) |
| Increase (decrease) in Cash and cash equivalents | 40,289 |
| | 24,261 |
| | (107,979 | ) |
| Cash and cash equivalents, beginning of period | 221,730 |
| | 197,469 |
| | 305,448 |
|
| Cash and cash equivalents, end of period | $ | 262,019 |
| | $ | 221,730 |
| | $ | 197,469 |
|
| | | | | | |
| Supplemental Disclosure of Cash Flow Information: | | | | | |
| Non-cash consideration received from sale of business | $ | 206,415 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| | | | | |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | 45,771 | | | $ | (517,146) | | | $ | 154,473 | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
| Divestiture impairment loss | 0 | | | 449,000 | | | 0 | |
| Impairment of property, plant and equipment | 0 | | | 0 | | | 7,086 | |
| Depreciation, amortization and other impairment charges | 246,229 | | | 236,026 | | | 141,877 | |
| Stock-based compensation expense | 28,911 | | | 21,960 | | | 25,103 | |
| Non-cash interest expense | 5,739 | | | 9,937 | | | 4,415 | |
| Loss on short-term investments | 0 | | | 0 | | | 10,128 | |
| Deferred income tax benefit | (29,218) | | | (590) | | | (66,573) | |
| (Gain) loss on sale of property, plant and equipment | (491) | | | 61 | | | (21,108) | |
| (Gain) loss on sale of business | 0 | | | (14,233) | | | 4,337 | |
| Pension settlement loss (gain) | 0 | | | 77,390 | | | (39) | |
| Changes in operating assets and liabilities: | | | | | |
| Trade receivables, net | 42,688 | | | 49,924 | | | (72,405) | |
| Inventories, net | 23,787 | | | (44,887) | | | (47,156) | |
| Accounts payable | (30,747) | | | (119,325) | | | 70,085 | |
| | | | | |
| Other operating assets and liabilities | (30,734) | | | (17,169) | | | 16,144 | |
| Net cash provided by operating activities | 301,935 | | | 130,948 | | | 226,367 | |
| Cash flows from investing activities: | | | | | |
| Purchases of property, plant and equipment | (114,785) | | | (125,402) | | | (69,646) | |
| Proceeds from sale of property, plant and equipment | 9,552 | | | 7,781 | | | 34,829 | |
| Acquisitions, net of cash received | (69,846) | | | (3,151,056) | | | (290,918) | |
| Proceeds from sale of business, net | 0 | | | 1,635,920 | | | 18,404 | |
| Sale of short-term investments, net | 0 | | | 0 | | | 139,480 | |
| | | | | |
| Net cash used in investing activities | (175,079) | | | (1,632,757) | | | (167,851) | |
| Cash flows from financing activities: | | | | | |
| Proceeds from borrowings on term credit facility | 0 | | | 1,725,000 | | | 0 | |
| Payments under term credit facility | (40,000) | | | (1,387,500) | | | (131,250) | |
| Proceeds from borrowings on revolving credit facilities and other | 860,681 | | | 2,045,083 | | | 1,271,051 | |
| Repayments of borrowings on revolving credit facilities and other | (938,997) | | | (2,273,802) | | | (981,563) | |
| Proceeds from borrowings on senior unsecured notes | 0 | | | 1,000,000 | | | 0 | |
| Payment of debt issuance costs | (4,560) | | | (23,380) | | | 0 | |
| Proceeds from prepaid stock purchase contracts | 0 | | | 377,814 | | | 0 | |
| Proceeds from issuance of common stock, net | 3,500 | | | 11,879 | | | 4,699 | |
| Payment for noncontrolling interest share repurchase | 0 | | | (93,505) | | | 0 | |
| Payments for common stock repurchases | 0 | | | 0 | | | (200,000) | |
| Deferred consideration payments and other | (12,275) | | | (12,095) | | | (10,090) | |
| Net cash provided by (used in) financing activities | (131,651) | | | 1,369,494 | | | (47,153) | |
| Effect of foreign exchange rates on Cash and cash equivalents and Restricted cash | (3,768) | | | (3,072) | | | (28,363) | |
| Decrease in Cash and cash equivalents and Restricted cash | (8,563) | | | (135,387) | | | (17,000) | |
| Cash and cash equivalents and Restricted Cash, beginning of period | 109,632 | | | 245,019 | | | 262,019 | |
| Cash and cash equivalents and Restricted cash, end of period | $ | 101,069 | | | $ | 109,632 | | | $ | 245,019 | |
| | | | | |
| Supplemental Disclosure of Cash Flow Information: | | | | | |
| | | | | |
| Interest payments | $ | 104,620 | | | $ | 139,268 | | | $ | 50,389 | |
| Income tax payments, net | $ | 59,377 | | | $ | 134,915 | | | $ | 97,452 | |
See Notes to Consolidated Financial Statements.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Operations
Colfax Corporation (the “Company” or “Colfax”) is a leading diversified industrial technology company that provides airfabrication technology and gas handling and fabrication technologymedical device products and services to customers around the world under the HowdenESAB and DJO brands. The Company conducts its operations through 2 operating segments, “Fabrication Technology”, which incorporates the operations of ESAB brands.
Saleand its related brands, and “Medical Technology”, which incorporates the operations of Fluid Handling Business
On December 11, 2017,DJO and its related brands. The Company completed the Companypurchase of DJO Global, Inc. (“DJO”) on February 22, 2019 becoming a new growth platform for Colfax. See Note 5, “Acquisitions”, for further information. Later that year, Colfax completed the sale of its FluidAir and Gas Handling business (“Fluid Handling”) to CIRCOR International, Inc., a Delaware corporation (“CIRCOR” or the “Buyer”), pursuant to a definitive purchase agreement (the “Purchase Agreement”) signed on September 24, 2017.30, 2019. See Note 4, “Discontinued Operations”, for further information. These transactions were the culmination of a multi-year strategic plan to remodel the Company into a faster growth, higher-margin, and less cyclical business with opportunities for significant bolt-on and adjacent acquisitions over time. The Company applies the Colfax Business System (“CBS”) to continuously improve and pursue growth in revenues and increase profits and cash flows.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The Company’s Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts ofall majority-owned subsidiaries over which the Company exercises control and, its subsidiaries. Less than wholly owned subsidiaries, includingwhen applicable, entities or joint ventures are consolidated when it is determined thatfor which the Company has a controlling financial interest whichor is generally determined when the Company holds a majority voting interest.primary beneficiary. When protective rights, substantive rights or other factors exist, further analysis is performed in order to determine whether or not there is a controlling financial interest. The Consolidated Financial Statements reflect the assets, liabilities, revenues and expenses of consolidated subsidiaries and the noncontrolling parties’ ownership share is presented as a noncontrolling interest. All significant intercompany accounts and transactions have been eliminated.
During the year ended December 31, 2016, the Company determined that an other-than-temporary lack of exchangeability between the Venezuelan bolivar and U.S. dollar, due to government controls, has restricted the Company’s Venezuelan operations’ ability to pay dividends and satisfy other obligations denominated in U.S. dollars. In addition, other government-imposed restrictions affecting labor, production, and distribution are prohibiting the Company from controlling key operating decisions. These circumstances have caused the Company to no longer meet the accounting criteria of control in order to continue consolidating its Venezuelan operations. Therefore, the Company deconsolidated the financial statements of its Venezuelan operations as of September 30, 2016. As a result of the deconsolidation, the Company recorded a charge of $2.4 million, of which $0.5 million is included in Selling, general and administrative expense and $1.9 million is included in Income (loss) from discontinued operations, net of taxes, for the year ended December 31, 2016. Substantially all of this amount related to accumulated foreign currency translation charges previously included in Accumulated other comprehensive loss. Due to loss of control, the Company has applied the cost method of accounting for its Venezuelan operations beginning on September 30, 2016. Prior to, and at the date of deconsolidation, the Company’s Venezuelan operations represented less than 1% of the Company’s net assets, revenues and operating income.
Equity Method Investments
Investments in joint ventures, where the Company has a significant influence but not a controlling interest, are accounted for using the equity method of accounting. Investments accounted for under the equity method are initially recorded at the amount of the Company’s initial investment and adjusted each period for the Company’s share of the investee’s income or loss and dividends paid. All equity investments are reviewed periodically for indications of other than temporaryother-than-temporary impairment, including, but not limited to, significant and sustained decreases in quoted market prices or a series of historic and projected operating losses by investees. If the decline in fair value is considered to be other than temporary,other-than-temporary, an impairment loss is recorded and the investment is written down to a new carrying value. Investments in joint ventures acquired in a business combination are recognized in the opening balance sheet at fair value.
Revenue Recognition
The Company generally recognizes revenues and costs from product salesrevenue when allcontrol of the following criteria are met: persuasive evidence of an arrangement exists, the price is fixed or determinable, product delivery has occurredpromised goods or services have been rendered, there are no further obligations to customers, and collectibility is reasonably assured. Product delivery occurs when title and risk of loss transfertransferred to the customer. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled in exchange for transferring the goods or services. The nature of the Company’s shipping terms varycontracts gives rise to certain types of variable consideration, including rebates and other discounts. The Company includes estimated amounts of variable consideration in the transaction price to the extent that it is probable there will not be a significant reversal of revenue. Estimates are based on historical or anticipated performance and represent the contract. If any significant obligationsCompany’s best judgment at the time. Any estimates are evaluated on a quarterly basis until the uncertainty is resolved. Additionally, related to sales of its medical device products and services, the Company maintains provisions for estimated contractual allowances for reimbursement amounts from certain third-party payers based on negotiated contracts, historical experience for non-contracted payers, and the impact of new contract terms or modifications of existing arrangements with these customers. We report these allowances as a reduction to net sales.
The Company provides a variety of products and services to its customers. Most of the Company’s contracts consist of a single, distinct performance obligation or promise to transfer goods or services to a customer.
A majority of revenue recognized by the Company relates to contracts with customers for standard or off-the-shelf products. As control typically transfers to the customer with respect to such sale remain to be fulfilled following shipments,upon shipment of the product in these circumstances, revenue is generally recognized at that point in time. Revenue recognition and billing typically involving obligations relating to installation and acceptance by the buyer, revenue recognition is deferred until such obligations have been fulfilled. Any customer allowances
occur simultaneously for contracts
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and discounts are recorded asrecognized at a reductionpoint in reportedtime. Therefore, we do not have material revenues at the time of sale because these allowances reflect a reduction in the sales price for the products sold. These allowances and discounts are estimated based on historical experience and known trends. Revenue related to service agreements is recognized as revenue over the term of the agreement. Progress billings are generally shown as a reduction of Inventories, net unless such billings are in excess of accumulated costs, in which case such balances are included in Customer advances andcustomer billings in excess of costs incurred in the Consolidated Balance Sheets.
The Company recognizes revenue and cost of sales on air and gas handling long-term contracts using the “percentage of completion method” in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Under this method, contract revenues are recognized over the performance period of the contract in direct proportionor billings to the costs incurred as a percentage of total estimated costs for the entirety of the contract. Any recognized revenues that have not been billed to a customer are recorded as a component of Trade receivables and any billings of customers in excess of recognized revenues are recordedrevenues.
For service contracts, the Company recognizes revenue ratably over the period of performance as the customer simultaneously receives and consumes the benefits of the services provided. The Company applies the available practical expedient involving the existence of a componentsignificant financing component. As the Company generally does not receive payments greater than one year in advance or arrears of Customer advances and billings in excess of costs incurred. As of December 31, 2017, there were $219.8 million of revenues in excess of billings and $95.9 million of billings in excess of revenues on long-term contracts inrevenue recognition, the Consolidated Balance Sheet. As of December 31, 2016, there were $174.9 million of revenues in excess of billings and $108.2 million of billings in excess of revenues on long-term contracts in the Consolidated Balance Sheet.Company does not consider any arrangements to include financing components.
The period of benefit for the Company’s incremental costs of obtaining a contract generally have less than a one-year duration; therefore, the Company has contracts in various stages of completion. Such contracts require estimates to determineapplies the appropriate costpractical expedient available and revenue recognition. Significant management judgments and estimates, including estimatedexpenses costs to complete projects, must be made and used in connection with revenue recognized during each period. Current estimates may be revised as additional information becomes available. The revisions are recorded in income in the period in which they are determined using the cumulative catch-up method of accounting. See Note 17, “Segment Information” for sales by major product group.obtain a contract when incurred.
Amounts billed for shipping and handling are recorded as revenue. Shipping and handling expenses are recorded as a component of Cost of sales.
Taxes Collected from Customers and Remitted to Governmental Authorities
The Company collects various taxes and fees as an agent in connection with the sale of products and remits these amounts to the respective taxing authorities. These taxes and fees have been presented on a net basis in the Consolidated Statements of IncomeOperations and are recorded as a component of Accrued liabilities in the Consolidated Balance Sheets until remitted to the respective taxing authority.
Research and Development Expense
Research and development costs of $42.9$68.6 million, $39.3$61.8 million and $38.0$34.2 million for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively, are expensed as incurred and are included in Selling, general and administrative expense in the Consolidated Statements of Income.Operations. These amounts do not include development and application engineering costs incurred in conjunction with fulfilling customer orders and executing customer projects.
Interest Expense, Net
Interest expense, net includes interest income of $7.8$3.2 million, $6.6$3.2 million and $5.0$2.5 million for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively, primarily associated with interest bearing deposits inof certain foreign subsidiaries.
Cash and Cash Equivalents
Cash and cash equivalents include all financial instruments purchased with an initial maturity of three months or less.
Short Term InvestmentsRestricted Cash
Short term investments includeCash and cash equivalents that are restricted as to withdrawal or use under the CIRCOR Shares receivedterms of certain contractual agreements are excluded from Cash and cash equivalents in the Consolidated Balance Sheets. Restricted cash is recorded as parta component of Other current assets on the consideration received forConsolidated Balance Sheets.
The following table summarizes the sale of Fluid Handling. The investments are classified as available-for-sale securitiesCompany’s Cash and are measured at fair value at the end of each reporting period, with any changes in fair value included in Other comprehensive income (loss).cash equivalents and Restricted cash:
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| (In thousands) |
| Cash and cash equivalents | $ | 97,068 | | | $ | 109,632 | |
| Restricted cash | 4,001 | | | 0 | |
| Total cash and cash equivalents and restricted cash | $ | 101,069 | | | $ | 109,632 | |
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Trade Receivables
Trade receivables are presented net of an allowance for doubtful accounts.credit losses. The Company records an allowanceadopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments as of January 1, 2020. The estimate of current expected credit losses on trade receivables considers historical credit loss information that is adjusted for doubtful accounts based upon estimates of amounts deemed uncollectiblecurrent conditions and a specific review of significant delinquent accounts, factoring in currentreasonable and expected economic conditions.supportable forecasts. Estimated credit losses are based on historical collection experience, and are reviewed periodically by management.
Inventories
Inventories, net include the cost of material, labor and overhead and are stated at the lower of cost (determined under various methods including average cost, last-in, first-out and first-in, first-out, but predominantly first-in, first-out) or net realizable value. For airThe value of inventory stated using the last-in, first-out method as of December 31, 2020 and gas handling long-term contracts, cost is primarily determined based upon actual cost.2019 was $105.1 million and $121.8 million, respectively. The Company periodically reviews its quantities of inventories on hand and compares these amounts to the expected usage of each particular product. The Company records as a charge to Cost of sales for any amounts required to reduce the carrying value of inventories to its net realizable value.
Property, Plant and Equipment
Property, plant and equipment, net areis stated at historical cost, which includes the fair values of such assets acquired. Depreciation of property, plant and equipment is recorded on a straight-line basis over estimated useful lives. Assets recorded under capital leases are amortized over the shorter of their estimated useful lives or the lease terms, which range from three to 15 years.acquired through acquisitions. Repair and maintenance expenditures are expensed as incurred unless the repair extends the useful life of the asset. The Company capitalizes surgical implant instruments that are provided free of charge to surgeons for use while implanting our surgical products and the related depreciation expense is recorded as a component of Selling, general and administrative expense.
Impairment of Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the costs in excess of the fair value of net assets acquired associated withthrough acquisitions by the Company. Indefinite-lived intangible assets consist of certain trade names.
The Company evaluates the recoverability of Goodwill and indefinite-lived intangible assets annually or more frequently if an event occurs or circumstances change in the interim that would more likely than not reduce the fair value of the asset below its carrying amount. The annual impairment test date elected by the Company is the first day of our fourth quarter. Goodwill and indefinite-lived intangible assets are considered to be impaired when the carrying value of a reporting unit or asset exceeds its fair value. The Company currently has two2 reporting units: Air and Gas HandlingMedical Technology and Fabrication Technology.
In the evaluation of Goodwillgoodwill for impairment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting entity is less than its carrying value. If the Company determines that it is not more likely than not for a reporting unit’s fair value to be lessgreater than its carrying value, a calculation of the fair value is not performed. If the Company determines that it is more likely than not for a reporting unit’s fair value to be less than its carrying value, a calculation of the reporting entity’s fair value is performed and compared to the carrying value of that entity. In certain instances, the Company may elect to forgo the qualitative assessment and proceed directly to the quantitative impairment test. If the carrying value of a reporting unit exceeds its fair value, Goodwillgoodwill of that reporting unit is impaired. In this case, pursuant to ASU 2017-04, which the Company elected to early adopt during the three months ended December 31, 2017,impaired and an impairment loss is recorded equal to the excess of the reporting unit’s carrying value over its fair value.
Generally,When a quantitative impairment test is needed, the Company measures fair value of reporting units based on a present value of future discounted cash flows and a market valuation approach. The discounted cash flow models indicate the fair value of the reporting units based on the present value of the cash flows that the reporting units are expected to generate in the future. Significant estimates in the discounted cash flow models include:include the weighted average cost of capital;capital, revenue growth rates, long-term rate of growth, and profitability of our business;business, tax rates, and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison against certain market information. Significant estimates in the market approach model include identifying appropriate peer companies, market multiples and assessing earnings before interest, income taxes, depreciation and amortization.
During theA quantitative annual impairment analysistest of Goodwill for the Fabrication Technology reporting unit was performed for the year ended December 31, 2017, due to continued declines in various end markets2020, while qualitative assessments were performed for the Airyears ended December 31, 2019 and Gas Handling reporting unit, the Company decided to perform a2018, both of which indicated no impairment existed. A quantitative analysis for this reporting unit asannual impairment test of September 29, 2017. The quantitative Goodwill impairment assessment for the Air and Gas Handling reporting unit resulted in a calculated fair value lower than carrying value. As a result, an impairment charge of $150.2 million, which equals
Medical
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the excess of the carrying value over the fair value, was recorded. A qualitative assessment of Goodwill was performed for the Fabrication Technology reporting unit was performed for the year ended December 31, 2017,2020, and a qualitative assessment was performed for the year ended December 31, 2019, both of which indicated no impairment existed.
In the evaluation of indefinite-lived intangible assets for impairment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying value. If the Company determines that it is not more likely than not for the indefinite-lived intangible asset’s fair value to be lessgreater than its carrying value, a calculation of the fair value is not performed. If the Company determines that it is more likely than not that the indefinite-lived intangible asset’s fair value is less than its carrying value, a calculation is performed and compared to the carrying value of the asset. In certain instances, the Company may elect to forgo the qualitative assessment and proceed directly to the quantitative impairment test. If the carrying amount of the indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The Company measures the fair value of its indefinite-lived intangible assets using the “relief from royalty” method. Significant estimates in this approach include projected revenues and royalty and discount rates for each trade name evaluated.
From time-to-time, the Company has identified certain indefinite-lived intangible assets that, due to indicators present at the specific operation associated with the indefinite-lived intangible asset, should be tested for A quantitative impairment prior to the annual impairment evaluation. During the year ended December 31, 2015, an analysistest was performed to evaluate certain intangible assets related to a specific operation withinfor all the Company due to a decline in anticipated performance at the operation associated with those assets. The analysis determined an indefinite-lived trade name withinbrands in the Company’s Fabrication Technology segment was impaired based upon relief from royalty measurements and resulted in a $1.5 million impairment loss calculated as the difference between the fair value of the asset and its carrying value as of the date of the impairment test. The calculated fair value of the asset was $2.8 million and is included in Level Three of the fair value hierarchy.
The analyses performed as of October 1, 2016 and September 26, 2015 resulted in no impairment charges.
During the annual impairment analysis for the year ended December 31, 2017,2020, while a combination of quantitative analysesimpairment tests and qualitative assessments were performed, as of September 29, 2017, for the Air and Gas Handling reporting unit trade names due to continued declines in various end markets. The analyses determined the fair value was lower than carrying value for one indefinite-lived trade name, which resulted in an impairment charge of $2.5 million for that trade name. The calculated fair value of the trade name was $11.7 million and is included in Level Three of the fair value hierarchy. For another indefinite-lived intangible trade name, the analysis determined the fair value was marginally greater than its $22.1 million carrying value. A qualitative assessment was performed for the Fabrication Technology reporting unit trade names for the yearyears ended December 31, 2017,2019 and 2018, all of which indicated no impairment existed.
Impairment charges related to Goodwill and Indefinite-lived intangible assets are included in Goodwill and intangible assets impairment charges in the Consolidated Statements of Income.
Impairment of Long-Lived Assets Other than Goodwill and Indefinite-Lived Intangible Assets
Intangible assets primarily represent acquired trade names, customer relationships, acquired order backlog, acquired technology and software license agreements. Acquired order backlog is amortized in the same period the corresponding revenue is recognized. A portion of the Company’s acquired customer relationships is being amortized on an accelerated basis over periods ranging from seven to 30thirty years based on the present value of the future cash flows expected to be generated from the acquired customers. All other intangible assets are being amortized on a straight-line basis over their estimated useful lives, generally ranging from two to 20twenty years.
The Company assesses its long-lived assets other than Goodwill and indefinite-livedfinite-lived intangible assets for impairment whenever facts and circumstances indicate that the carrying amounts may not be fully recoverable. To analyze recoverability, the Company projects undiscounted net future cash flows over the remaining lives of such assets. If these projected cash flows are less than the carrying amounts, an impairment loss equal to the difference between the carrying amount of the asset and its fair value would be recognized, resulting in a write-down of the assets with a corresponding charge to earnings. The impairment loss is measured based upon the difference between the carrying amounts and the fair values of the assets. Assets to be disposed ofheld for sale are reported at the lower of the carrying amounts or fair value less cost to sell. Management determines fair value using the discounted cash flow method or other accepted valuation techniques.
The Company recorded asset impairment losses related to facility closures totaling $31.0$3.5 million, $2.6$4.2 million and $9.3$5.5 million during the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively, as a component of Restructuring and other related charges in the Consolidated Statements of Income.Operations. The aggregate carrying value of these assets subsequent to impairment was $53.7$62.5 million, $2.7$44.6 million and $21.1$39.8 million for the years endedas of December 31, 2017, 20162020, 2019 and 2015,2018, respectively.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Derivatives
The Company is subject to foreign currency risk associated with the translation of the net assets of foreign subsidiaries to United States (“U.S.”) dollars on a periodic basis. TheOn April 19, 2017. the Company issued senior unsecured notes with an aggregate principal amount of €350 million (as defined and further discussed in Note 11,13, “Debt”) during the year ended December 31, 2017,, which has been designated as a net investment hedge in order to mitigate a portion of thisits foreign currency risk.
Derivative instruments are generally recognized on a gross basis in the Consolidated Balance Sheets in either Other current assets, Other assets, Accrued liabilities or Other liabilities depending upon their respective fair values and maturity dates. The Company designates a portion of its foreign exchange contracts as cash flow hedges and fair value hedges. For all instruments designated as hedges, including net investment hedges and cash flow hedges and fair value hedges, the Company formally documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and the strategy for using the hedging instrument. The Company assesses whether the relationship between the hedging instrument and the hedged item is highly effective at offsetting changes in the fair value both at inception of the hedging relationship and on an ongoing basis. For cash flow hedges and net investment hedges, unrealized gains and losses are recognized as a component of Accumulated other comprehensive loss in the Consolidated Balance Sheets to the extent that it is effective at offsetting the change in the fair value of the hedged item and realized gains and losses are recognized in the Consolidated Statements of IncomeOperations consistent with the underlying hedged instrument. Gains and losses related to fair value hedges are recorded as an offset to the fair value of the underlying asset or liability, primarily Trade receivables and Accounts payable in the Consolidated Balance Sheets.
The Company does not enter into derivative contracts for tradingspeculative purposes.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
See Note 15,17, “Financial Instruments and Fair Value Measurements” for additional information regarding the Company’s derivative instruments.
Warranty Costs
Estimated expenses related to product warranties are accrued as the revenue is recognized on products sold to customers and included in Cost of sales in the Consolidated Statements of Income.Operations. Estimates are established using historical information as to the nature, frequency, and average costs of warranty claims.
The activity in the Company’s warranty liability, which is included in Accrued liabilities and Other liabilities in the Company’s Consolidated Balance Sheets, consisted of the following:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
| (In thousands) |
| Warranty liability, beginning of period | $ | 15,528 | | | $ | 12,312 | |
| Accrued warranty expense | 7,253 | | | 6,038 | |
| Changes in estimates related to pre-existing warranties | 1,849 | | | 1,668 | |
| Cost of warranty service work performed | (9,708) | | | (9,502) | |
| Acquisition-related liability | 300 | | | 5,520 | |
| Foreign exchange translation effect | 321 | | | (508) | |
| Warranty liability, end of period | $ | 15,543 | | | $ | 15,528 | |
|
| | | | | | | |
| | Year Ended |
| | 2017 | | 2016 |
| | (In thousands) |
| Warranty liability, beginning of period | $ | 30,222 |
| | $ | 35,634 |
|
| Accrued warranty expense | 17,760 |
| | 17,368 |
|
| Changes in estimates related to pre-existing warranties | 1,453 |
| | 4,701 |
|
| Cost of warranty service work performed | (22,600 | ) | | (27,429 | ) |
| Acquisitions | 5,277 |
| | 304 |
|
| Foreign exchange translation effect | 2,065 |
| | (356 | ) |
| Warranty liability, end of period | $ | 34,177 |
| | $ | 30,222 |
|
Income Taxes
Income taxes for the Company are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities in the Consolidated Financial Statements and their respective tax basis. Deferred income tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred income tax assets and liabilities are reported in Other assets and Other liabilities in the Company’s Consolidated Balance Sheets, respectively. The effect on deferred income tax assets and liabilities of a change in tax rates is generally recognized in Provision for income taxesIncome tax expense (benefit) in the period that includes the enactment date.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Global Intangible Low-Taxed Income (“GILTI”) is accounted for as a current tax expense in the year the tax is incurred.
Valuation allowances are recorded if it is more likely than not that some portion of the deferred income tax assets will not be realized. In evaluating the need for a valuation allowance, the Company takes into accountconsiders various factors, including the expected level of future taxable income and available tax planning strategies. Any changes in judgment about the valuation allowance are recorded through Provision for income taxesIncome tax expense (benefit) and are based on changes in facts and circumstances regarding realizability of deferred tax assets.
The Company must presume that an income tax position taken in a tax return will be examined by the relevant tax authority and determine whether it is more likely than not that the tax position will be sustained upon examination based upon the technical merits of the position. An income tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The Company establishes a liability for unrecognized income tax benefits for income tax positions for which it is more likely than not that a tax position will not be sustained upon examination by the respective taxing authority to the extent such tax positions reduce the Company’s income tax liability. The Company recognizes interest and penalties related to unrecognized income tax benefits in the Provision for income taxesIncome tax expense (benefit) in the Consolidated Statements of Income.Operations.
Foreign Currency Exchange Gains and Losses
The Company’s financial statements are presented in U.S. dollars. The functional currencies of the Company’s operating subsidiaries are generally the local currencies of the countries in which each subsidiary is located. Assets and liabilities
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
denominated in foreign currencies are translated at rates of exchange in effect at the balance sheet date. The amounts recorded in each year in Foreign currency translation are net of income taxes to the extent the underlying equity balances in the entities are not deemed to be permanently reinvested. Revenues and expenses are translated at average rates of exchange in effect during the year.
Transactions in foreign currencies are translated at the exchange rate in effect at the date of each transaction. Differences in exchange rates during the period between the date a transaction denominated in a foreign currency is consummated and the date on which it is either settled or translated for inclusion in the Consolidated Balance Sheets are recognized in Selling, general and administrative expense or Interest expense, net in the Consolidated Statements of IncomeOperations for that period.
During the year ended December 31, 2017,2020, the Company recognized net foreign currency transaction gains of $0.04 million and $3.4$2.8 million in Interest expense, net and net foreign currency transaction loss of $2.4 million in Selling, general and administrative expense in the Consolidated Statements of Operations. During the year ended December 31, 2019, the Company recognized net foreign currency transaction gain of $0.5 million in Interest expense, net and net foreign currency transaction loss of $0.7 million in Selling, general and administrative expense in the Consolidated Statements of Operations. During the year ended December 31, 2018, the Company recognized net foreign currency transaction loss of $1.4 million and $7.8 million in Interest expense, net and Selling, general and administrative expense, respectively, in the Consolidated StatementStatements of Income. During the year ended December 31, 2016, the Company recognized net foreign currency transaction gain of $2.6 million and $5.0 million in Interest expense and Selling, general and administrative expense, respectively, in the Consolidated Statement of Income. During the year ended December 31, 2015, net foreign currency transaction losses of $3.7 million and a gain of $3.3 million were recognized in Interest expense and Selling, general and administrative expense, respectively, in the Consolidated Statement of Income.Operations.
Debt Issuance Costs and Debt Discount
Costs directly related to the placement of debt are capitalized and amortized to Interest expense primarily using the effective interest method over the term of the related obligation. Net deferred issuance costsFurther, the carrying value of $9.2 million and $5.9 million, respectively, were included indebt is reduced by an original issue discount, which is accreted to Interest expense, net using the Consolidated Balance Sheets aseffective interest method over the term of December 31, 2017 and 2016, which includes $12.3 million and $15.6 million, respectively, of accumulated amortization.the related obligation. As of December 31, 2017, $3.82020, $7.0 million and $5.4$15.6 million of deferred issuance costs were included in Other assets and as a reduction of Long-term debt, respectively. As of December 31, 2016, $5.32019, $6.1 million and $0.6$17.7 million of deferred issuance costs were included in Other assets and as a reduction of Long-term debt, respectively. Further, the carrying value of Long-term debt is reduced by an original issue discount, which is accreted to Interest expense using the effective interest method over the term of the related obligation. See Note 11,13, “Debt” for additional discussion regarding the Company’s borrowing arrangements.
Use of Estimates
The Company makes certain estimates and assumptions in preparing its Consolidated Financial Statements in accordance with U.S. 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 Consolidated Financial Statements and the reported amounts of revenues and expenses for the period presented. Actual results may differ from those estimates.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Reclassifications
Certain prior period amounts have been reclassified to conform to current year presentations.presentations, including Prepaid expenses on the Company’s Consolidated Balance Sheets and certain items within Note 8, “Income Taxes”.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. Recently Issued Accounting Pronouncements
Accounting Guidance Implemented in 20172020
| | | | | | | | | | | | | | |
| Standards Adopted | | Description | | Effective 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 adopted Topic 326 on January 1, 2020 using a modified retrospective transition method, which requires a cumulative-effect adjustment to the opening balance sheet of retained earnings to be recognized on the date of adoption without restating prior periods. The cumulative-effect adjustment, net of tax, on January 1, 2020 was $4.8 million.
| | 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 adoption of this standard did not result in any changes to the current disclosures, as the requirements modified by the ASU are not applicable or are immaterial for disclosure. | | January 1, 2020
|
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330) - Simplifying the Measurement of Inventory”. The ASU requires an entity to measure inventory at the lower of cost and net realizable value, except for inventory that is measured using the last-in, first-out method or the retail inventory method. The Company adopted the ASU during the year ended December 31, 2017 on a prospective basis. The adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718)”. The ASU, among other things, aims to simplify shared-based payment accounting by recording all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and eliminates the requirement that excess tax benefits be realized before they can be recognized. The effect for excess tax benefits not previously recognized is recorded as a cumulative adjustment to retained earnings pursuant to a modified retrospective adoption method. Excess tax benefits and deficiencies are accounted for as discrete items in the period the stock awards vest or otherwise are settled. Further, the guidance requires that excess tax benefits be presented as an operating activity on the statement of cash flows consistent with other income tax cash flows. The Company’s adoption of the ASU as of January 1, 2017 resulted in a cumulative catch-up adjustment that increased retained earnings by $10.0 million with a corresponding increase to U.S. deferred tax assets related to prior years’ unrecognized excess tax benefits. The Company has also elected to continue its entity-wide accounting policy to estimate the amount of awards that are expected to vest.
In December 2016, the FASB issued ASU No. 2016-19, “Technical Corrections and Improvements”. Among other things, the ASU provides clarification on the presentation of the costs of computer software developed or obtained for internal use. The Company retrospectively adopted the ASU during the year ended December 31, 2017 and reclassified the carrying value of internal-use computer software from Property, plant and equipment, net to Intangible assets, net. The carrying value of internal-use computer software was $29.3 million and $32.3 million, respectively, as of December 31, 2017 and December 31, 2016.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350)”. The ASU modifies the measurement of a goodwill impairment loss from the portion of the carrying amount of goodwill that exceeds its implied fair value to the excess of the carrying amount of a reporting unit that exceeds its fair value. This eliminates step 2 of the goodwill impairment test under current guidance. The Company elected to early adopt ASU 2017-04 for the 2017 annual impairment tests performed as of the first day of the Company’s fourth quarter (September 29, 2017). The impact of the adoption is discussed in Note 2. “Summary of Significant Accounting Policies.”
New Accounting Guidance to be Implemented
| | | | | | | | | | | | | | | | | | | | |
| Standards Pending Adoption | | Description | | Anticipated Impact | | Effective/Adoption Date |
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. | | January 1, 2021 |
| ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes | | The ASU eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of accounting for income taxes. | | The Company is currently evaluating the impact of this ASU on its consolidated financial statements. | | January 1, 2021
|
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The ASU outlines a single set of comprehensive principles for recognizing revenue under U.S. GAAP and supersedes existing revenue recognition guidance. The main principle of the ASU is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company will apply the ASU and its related updates on a full retrospective basis as of January 1, 2018. The Company has completed a comprehensive assessment of customer contracts across the Company’s operating segments and evaluated the effect the ASU will have on the Company’s financial statements and related disclosures. The Company has concluded that the adoption of the ASU will not have a material impact on the Consolidated Financial Statements. As such, no cumulative catch-up adjustment will be recorded. The primary impact of adoption will be expanded disclosures that will enable users to better understand the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. Additionally, the Company has made appropriate revisions to its accounting policies, procedures, and internal controls, which took effect starting January 1, 2018, to comply with the effective date of the standard.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which requires various changes to the measurement and disclosure of equity investments. For the Company, the most relevant change under ASU 2016-01 is the elimination of the available-for-
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
sale classification for equity securities with readily determinable fair values. The ASU is effective for fiscal periods beginning after December 15, 2017, at which point any changes in fair value of the Company’s Short term investments will be included as an adjustment to earnings, rather than other comprehensive income.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The ASU requires, among other things, a lessee to recognize assets and liabilities associated with the rights and obligations attributable to most leases but also recognize expenses similar to current lease accounting. The ASU also requires certain qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases, along with additional key information about leasing arrangements. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The new guidance must be adopted using a modified retrospective transition and provides for certain practical expedients. The Company is in the process of analyzing initial data gathered to evaluate the impact of adopting the ASU on its Consolidated Financial Statements, the related systems required to capture the increased reporting and disclosures associated with the ASU, and its use of practical expedients. The Company will apply the ASU and its related updates on a modified retrospective basis as of January 1, 2019. The adoption of the guidance will have a material effect on the Consolidated Balance Sheets, resulting in the recording of an operating lease asset and liability.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The ASU is effective for fiscal periods beginning after December 15, 2019 and early adoption is permitted. The ASU eliminates the probable initial recognition threshold under current U.S. GAAP and broadens the information an entity must consider when developing its expected credit loss estimates to include forward-looking information. The Company is currently evaluating the impact of adopting the ASU on its Consolidated Financial Statements.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 203)”. The ASU addresses eight specific cash flow issues and clarifies their presentation and classification in the Statement of Cash Flows. The ASU is effective for fiscal years beginning after December 15, 2017 and is to be applied retrospectively with early adoption permitted. The Company concluded that the adoption of the ASU will not have a material impact on the Consolidated Financial Statements and will apply the ASU and its related updates on a retrospective basis as of January 1, 2018.
In October 2016, the FASB issued ASU 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory”. The ASU eliminates the exception that the tax effects of an intra-entity transfer (sales) are deferred until the transferred asset is sold to a third party or recovered through use. The resulting impact will be the recognition of tax expense in the seller’s jurisdiction and any deferred tax asset in the buyer’s jurisdiction in the period the transfer occurs. The new guidance will not apply to intra entity sales of inventory whose tax effects will continue to be deferred until the inventory is sold to a third party. This new standard is effective for fiscal years beginning after December 15, 2017 and is to be applied on a modified retrospective approach with a cumulative adjustment effect recorded in retained earnings as of the beginning of the period of adoption. The Company does not expect the adoption of this ASU to have a material impact on the Consolidated Financial Statements.
In March 2017, the FASB issued ASU No. 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. This ASU requires that the service cost component of net benefit costs of pension and postretirement benefit plans be reported in the same line item as other compensation costs. Other components of net periodic pension cost and net periodic postretirement benefit cost will be presented in the income statement separately from the service cost component, and only the service cost will be eligible for capitalization. The guidance should be applied retrospectively for the presentation requirements and prospectively for the capitalization of the service cost. The ASU is effective for the Company during the first quarter of 2018, and it is not expected that the guidance will have a significant impact on the Company’s consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”. The ASU amends the current hedge accounting model and eliminates the requirement to separately measure and report hedge ineffectiveness and requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The ASU also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. Companies are required to apply amendments to cash flow and net investment hedge relationship using modified retrospective method and apply prospective method for the presentation and disclosure requirements. The ASU is effective for fiscal periods beginning after December 15, 2018 and early adoption is permitted. The Company is currently evaluating the impact of adopting the ASU on its Consolidated Financial Statements and the timing of adoption.
On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. SAB 118 allows registrants to include a provisional amount to account for the implications of the Tax Act where a reasonable estimate can be made and requires the completion of the accounting no later than one year from the date of enactment of the Tax Act or December 22, 2018. Additionally, the Company will file its 2017 U.S. income tax return in Q4 which may change our tax basis in temporary differences estimated as of December 31, 2017 which will result in an adjustment to the tax provision to the re-measurement amount recorded in the financial statements.
4. Discontinued Operations
Sale of FluidAir and Gas Handling Business
During the three months ended September 29, 2017,As discussed previously in Note 1, “Organization and Nature of Operations,” the Company entered into the Purchase Agreement to sellsold its FluidAir and Gas Handling business to CIRCOR. The accounting requirements for reporting the divested business as a discontinued operation were met during the three months endedon September 29, 2017.30, 2019. Accordingly, the accompanying Consolidated Financial Statements for all periods presented reflect the FluidAir and Gas Handling business as a discontinued operation.
In connection with the Purchase Agreement, the Company and the Buyer entered into various agreements to provide a framework for their relationship after the disposition, including a transition services agreement. The amounts to be billed for future transition services are not expected to be material to the Company’s results of operations.
The sale was completed on December 11, 2017. Totaltotal consideration for the sale was $864.9 million, consisting of $555.3 million of$1.8 billion, including $1.67 billion in cash 3.3 million shares of CIRCOR common stock (the “CIRCOR Shares”), valuedpaid at $141.6 million, and assumption of $168.0 million of net retirement liabilities. $65.0 million of the cash consideration is expected to be collected during 2018 and is included in Other current assets in the accompanying Consolidated Balance Sheets as of December 31, 2017. The CIRCOR shares are classified as Short term investments in the accompanying Consolidated Balance Sheets as of December 31, 2017. The consideration amount isclosing, subject to certain post-closing adjustments pursuant to the Purchase Agreement.purchase agreement, and the assumption of certain liabilities and minority interests by the purchaser. 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 Income (loss) from discontinued operations, net of taxes in the Consolidated Statements 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 recorded a pre-tax gain on disposal of $308.4$14.2 million which is included in Income (loss) from discontinued operations, net of taxes in the Consolidated Statements of Income. IncludedOperations. The total divestiture-related expenses incurred for the Air and Gas Handling sale were $48.6 million in the gain calculation wasyear ended December 31, 2019.
In connection with the purchase agreement, the Company entered into various agreements to provide a reductionframework for its relationships after the disposition, including a transition services agreement. The transition services under the above agreements have been completed and were not material to the Company’s results of operations.
The key components of Income (loss) from discontinued operations, net of taxes related to the accumulated other comprehensive lossAir and Gas Handling business for the years ended December 31, 2020, 2019 and 2018 were as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (In thousands)
|
| Net sales | $ | 0 | | | $ | 998,793 | | | $ | 1,473,729 | |
| Cost of sales | 0 | | | 689,004 | | | 1,070,266 | |
| Selling, general and administrative expense | 0 | | | 194,589 | | | 269,447 | |
| Restructuring and other related charges | 0 | | | 13,354 | | | 48,609 | |
| Goodwill impairment charge | 0 | | | 449,000 | | | 0 | |
Divestiture-related expense(1) | 9,040 | | | 48,640 | | | 0 | |
| Operating income (loss) | (9,040) | | | (395,794) | | | 85,407 | |
Interest expense(2) | 0 | | | 47,553 | | | (5,031) | |
| Pension settlement loss | 0 | | | 43,774 | | | 0 | |
| Gain on disposal | 0 | | | 14,233 | | | 0 | |
| Loss from discontinued operations before income taxes | (9,040) | | | (472,888) | | | 90,438 | |
Income tax expense (benefit)(3) | (238) | | | 44,062 | | | 29,487 | |
Income (loss) from discontinued operations, net of taxes(4) | $ | (8,802) | | | $ | (516,950) | | | $ | 60,951 | |
(1) Primarily related to professional, consulting, and legal fees associated with the Fluid Handling business, which was $167.9 million,divestiture including $76.5 million in cumulative translation adjustments. Sinceseller 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 the mandatory pay down of the Term Loan Facilities using net proceeds from the sale closing,of the Company hasbusiness.
(3) Income tax expense for the year ended December 31, 2019 is largely due to nondeductible items that do not had material cash flows withprovide a tax benefit on the loss.
(4) Income (loss) from discontinued operation nor are there material itemsoperations, net of taxes on the Statements of Operations includes the results from retained asbestos-related contingencies attributable to the divested fluid handling business as discussed in the accompanying Consolidated Statements of Income that had been eliminated in consolidation prior to the disposal.Asbestos Contingencies section below.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Total income attributable to noncontrolling interest related to the Air and Gas Handling business, net of taxes was $5.9 million and $13.6 million for the years ended December 31, 2019 and 2018, respectively. These amounts are presented within Income attributable to noncontrolling interest, net of taxes on the Consolidated Statements of Operations.
The key components of income (loss) from
Cash used in operating activities related to the discontinued operations were as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands)
|
| Net sales | $ | 436,682 |
| | $ | 461,294 |
| | $ | 532,701 |
|
| Cost of sales | 294,946 |
| | 308,025 |
| | 352,613 |
|
Selling, general and administrative expense(1) | 118,740 |
| | 136,380 |
| | 156,708 |
|
Divestiture-related expense, net(2) | 5,257 |
| | — |
| | — |
|
Restructuring and other related items(3) | (6,768 | ) | | 15,674 |
| | 4,355 |
|
| Operating income (loss) | 24,507 |
| | 1,215 |
| | 19,025 |
|
Interest income (loss)(4) | 473 |
| | 260 |
| | (241 | ) |
Gain on disposal(5) | 308,388 |
| | — |
| | — |
|
| Income (loss) from discontinued operations before income taxes | 333,368 |
| | 1,475 |
| | 18,784 |
|
| Income taxes | 109,321 |
| | 11,036 |
| | 8,556 |
|
| Income (loss) from discontinued operations, net of taxes | $ | 224,047 |
| | $ | (9,561 | ) | | $ | 10,228 |
|
(1) Pursuantof the divested Air and Gas Handling business for the years ended December 31, 2020 and 2019 was $9.4 million and $18.1 million, respectively. Cash provided by operating activities related to the Purchase Agreement,discontinued operations of the divested Air and Gas Handling business for the year ended December 31, 2018 was $127.8 million. Cash used in investing activities related to the discontinued operations of the divested Air and Gas Handling business was $27.5 million and $43.6 million for the years ended December 31, 2019 and 2018, respectively.
Asbestos Contingencies
As a result of previous divestitures, the Company retained itscertain 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 Consolidated Statements of Income as part of Income (loss) from discontinuing operations.discontinued operations, net of taxes on the Statements of Operations for the years ended December 31, 2020, 2019 and 2018 includes a loss from retained asbestos-related contingencies and the 2017 divestiture of the fluid handling business of $9.5 million, $19.0 million, and $28.4 million, respectively. Net cash outflows related to asbestos claims of divested businesses were $2.2 million, $3.2 million and $5.6 million for the years ended December 31, 2020, 2019 and 2018, respectively. See Note 16,18, “Commitments and Contingencies” for further information.
(2) Primarily related to professional and consulting fees associated with due diligence and preparation of regulatory filings, as well as employee benefit arrangements and other disposition-related activities.
(3) During
5. Acquisitions
General
The Company completed 5 acquisitions during the year ended December 31, 2017, the Company recorded a gain of approximately $12 million from the sale of a facility that was previously closed as part of restructuring activities.
(4) Interest expense has not been allocated to the discontinued operations.
(5) Calculated as the difference between total consideration received and net assets sold less costs to sell of $14.3 million. Included in the gain calculation is a reduction of $167.9 million of the accumulated other comprehensive loss associated with the Fluid Handling business.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 December 31, 2016:
|
| | | |
| | December 31, 2016 |
| | (In thousands) |
| ASSETS HELD FOR SALE | |
| Cash and cash equivalents | $ | 12,916 |
|
| Trade receivables, less allowance for doubtful accounts of $12,506 | 74,818 |
|
| Inventories, net | 38,885 |
|
| Other current assets | 23,656 |
|
| Property, plant, and equipment, net | 66,474 |
|
| Goodwill | 212,330 |
|
| Intangible assets, net | 15,302 |
|
| Other assets | 12,951 |
|
| Total assets held for sale | 457,332 |
|
| Less: current portion | 150,275 |
|
| Total assets held for sale, less current portion | 307,057 |
|
| | |
| LIABILITIES HELD FOR SALE | |
| Accounts payable | $ | 43,356 |
|
| Customer advances and billings in excess of costs incurred | 10,795 |
|
| Accrued liabilities | 33,032 |
|
| Other Liabilities | 165,974 |
|
| Total liabilities held for sale | 253,157 |
|
| Less: current portion | 87,183 |
|
| Total liabilities held for sale, less current portion | 165,974 |
|
Cash provided by operating activities of discontinued operations for the years ended December 31, 2017, 2016, and 2015 was $65.2 million, $23.1 million, and $64.7 million, respectively. Cash used in investing activities of discontinued operations was $10.1 million, $3.9 million, and $5.1 million for the years ended December 31, 2017, 2016, and 2015, respectively.
5. Acquisitions
The following acquisitions were2020, which are accounted for usingunder the acquisition method of accounting, and accordingly, the Consolidated Financial Statements include the financial position and results of operations from the respective dateacquisition date. The assets acquired and liabilities assumed reported on the Consolidated Balance Sheets represent the Company’s best estimate. NaN of acquisition:
Airthese acquisitions closed in the fourth quarter of 2020 and Gas Handling
Duringthe Consolidated Balance Sheet at December 31, 2020 reflects our preliminary estimates of fair value and are subject to adjustment. The estimated proforma annual revenues of the acquisitions in the year ended December 31, 2017, the2020 are approximately 2% of Colfax consolidated revenues. The Company completed two acquisitionsalso made three other immaterial investments in our Air and Gas Handling segment for total consideration, net of cash received, of $219.6 million, subject to certain purchase price adjustments. These acquisitions will broaden the segment’s range of compression solutions and expand its product offering into smaller steam turbines.
Duringmedical technology businesses during the year ended December 31, 2015, the Company completed two acquisitions in our Air and Gas Handling segment for total consideration, net of cash received, of approximately $196 million. The acquisitions expanded our portfolio of gas compression products and enhanced our fan product offering with ventilation control software.2020.
Fabrication Technology
During year ended December 31, 2017, the Company completed three acquisitions in our Fabrication Technology segment for total consideration, net of cash received, of $129.2 million, subject to certain purchase price adjustments. These acquisitions will expand and improve the segment’s high quality welding equipment and consumables.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During the year ended December 31, 2016, the Company completed an acquisition for total consideration, net of cash received, of approximately $26 million. This acquisition expanded our automation welding equipment portfolio.
General
DuringFor the years ended December 31, 2017, 2016,2020, 2019, and 2015, the Company’s Consolidated Statements of Income included $58.5 million, $1.3 million, and $47.9 million of2018, Net sales associated with acquisitions consummated during the respective period.period were $7.1 million, $1,080.4 million, and $78.9 million, respectively. Net Income attributable to Colfax Corporation common shareholders associated with acquisitions consummated during the years ended December 31, 2017, 2016,2020 and 20152018 was not material.
Acquisitionsmaterial for each respective period. Net Income attributable to Colfax Corporation common shareholders associated with acquisitions consummated during the year ended December 31, 2017 are accounted2019 was $57.3 million.
Medical Technology
All 5 acquisitions completed in 2020 were in our Medical Technology segment for undertotal consideration, net of cash received, of $67.5 million, subject to certain purchase price adjustments. Total Goodwill acquired through the acquisitions was $21.4 million, of which $15.9 million is expected to be deductible for income tax purposes.
Acquisitions in our Medical Technology segment included LiteCure LLC (“LiteCure”), a U.S. leader in high-powered laser rehabilitation products for human and veterinary medical applications. The acquisition was completed in the fourth quarter of 2020 for net cash consideration of $39.6 million. Net working capital and intangible assets acquired represent 10% and 69% of the total consideration paid, respectively, with the residual amount primarily attributable to Goodwill.
The Medical Technology segment platform at Colfax was established on February 22, 2019 when Colfax completed the acquisition method of accounting.DJO. The Company paid an aggregate net purchase price of $3.15 billion. The Company incurred $2.8 million and $60.8 million of advisory, legal, audit, valuation and other professional service fees in connection with the DJO acquisition in the years ended December 31, 2020 and 2019, respectively, which are included in Selling, general and administrative expense in the Consolidated Statements of Operations. During the first quarter of 2020, as part of the fair value adjustments to the assets acquired and liabilities assumed reportedacquired, the Company increased the valuation allowance on U.S. deferred taxes, presented net within Other liabilities, by $51.4 million as of the acquisition date, with a corresponding increase to Goodwill. As of the end of the
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
first quarter of 2020, the accounting related to the DJO acquisition was finalized, and the assets and liabilities acquired are no longer subject to adjustment.
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 U.S. GAAP, consistent with the Company’s accounting policies.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (In thousands) |
| Net sales | $ | 3,070,769 | | | $ | 3,496,624 | | | $ | 3,395,018 | |
| Net income from continuing operations attributable to Colfax Corporation | 68,039 | | | 105,491 | | | 97,410 | |
Fabrication Technology
During year ended December 31, 2018, the Company completed 2 acquisitions in our Fabrication Technology segment for total consideration, net of cash received, of $245.1 million, subject to certain purchase price adjustments. These acquisitions expanded the segment’s presence in specialty gas applications and broadened its global presence.
6. 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 further disaggregates its Fabrication Technology revenue into the following product groups:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (In thousands) |
| Equipment | $ | 607,504 | | | $ | 703,024 | | | $ | 623,987 | |
| Consumables | 1,342,565 | | | 1,544,002 | | | 1,569,096 | |
| Total | $ | 1,950,069 | | | $ | 2,247,026 | | | $ | 2,193,083 | |
Contracts with customers in the consumables product grouping generally have a shorter fulfillment period than equipment contracts.
The Company’s Medical Technology segment provides orthopedic solutions, including products and services spanning the full continuum of patient care, from injury prevention to rehabilitation. While 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 is recognized at a point in time. The Company disaggregates its Medical Technology revenue into the following product groups:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019(1) |
| (In thousands) |
| Prevention & Rehabilitation | $ | 781,007 | | | $ | 766,429 | |
| Reconstructive | 339,693 | | | 314,003 | |
| Total | $ | 1,120,700 | | | $ | 1,080,432 | |
(1) For the year ended December 31, 2019, the Medical Technology segment includes results from the acquisition date of February 22, 2019.
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 December 31, 2020 is immaterial.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, customers are billed in advance of revenue recognition, resulting in contract liabilities. As of December 31, 2020, 2019 and 2018, total contract liabilities were $36.6 million, $14.8 million and $13.0 million, respectively. During the years ended December 31, 2020 and 2019, all of the revenue that was included in the contract liability balance at the beginning of the respective year was recognized.
Allowance for Credit Losses
The Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments as of January 1, 2020. The estimate of current expected credit losses on trade receivables considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management elected to disaggregate trade receivables into business segments due to risk characteristics unique to each segment given the individual lines of business and market. Pooling was further disaggregated based on either geography or product type.
The Company leveraged historical write-offs over a defined lookback period in deriving a historical loss rate. The expected credit loss model further considers current conditions and reasonable and supportable forecasts using an adjustment for current and projected macroeconomic factors. Management identified appropriate macroeconomic indicators based on tangible correlation to historical losses considering the location and risks associated with the Company.
A summary of the activity in the Company’s allowance for credit losses included within Trade receivables in the Consolidated Balance Sheets represent the Company’s best estimate. These amounts are based upon certain valuations and studies that have yet to be finalized and are subject to adjustment once the detailed analyses are completed.is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| Balance at
Beginning
of Period | | Charged to Expense, net | | Write-Offs and Deductions | | Foreign
Currency
Translation | | Balance at
End of
Period |
| (In thousands) |
| Allowance for credit losses | $ | 36,009 | | | $ | 7,574 | | | $ | (5,165) | | | $ | (752) | | | $ | 37,666 | |
6.
7. Net (Loss) Income Per Share from Continuing Operations
Net income per share from continuing operations was computed as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (In thousands, except share and per share data) |
| Computation of Net income per share from continuing operations - basic: | | | | | |
Net income from continuing operations attributable to Colfax Corporation (1) | $ | 60,936 | | | $ | 14,245 | | | $ | 121,211 | |
| Weighted-average shares of Common stock outstanding – basic | 136,766,124 | | | 135,716,944 | | | 120,288,297 | |
| Net income per share from continuing operations – basic | $ | 0.45 | | | $ | 0.10 | | | $ | 1.01 | |
| | | | | |
| Computation of Net income per share from continuing operations - diluted: | | | | | |
Net income from continuing operations attributable to Colfax Corporation (1) | $ | 60,936 | | | $ | 14,245 | | | $ | 121,211 | |
| Weighted-average shares of Common stock outstanding – basic | 136,766,124 | | | 135,716,944 | | | 120,288,297 | |
| Net effect of potentially dilutive securities - stock options, restricted stock units and tangible equity units | 2,144,304 | | | 949,942 | | | 506,759 | |
| Weighted-average shares of Common stock outstanding – diluted | 138,910,428 | | | 136,666,886 | | | 120,795,056 | |
| Net income per share from continuing operations – diluted | $ | 0.44 | | | $ | 0.10 | | | $ | 1.00 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands, except share data) |
| Computation of Net income (loss) per share from continuing operations - basic: | | | | | |
Net (loss) income from continuing operations attributable to Colfax Corporation (1)
| $ | (72,957 | ) | | $ | 137,672 |
| | $ | 157,511 |
|
| Weighted-average shares of Common stock outstanding - basic | 123,229,806 |
| | 122,911,581 |
| | 124,101,033 |
|
| Net (loss) income per share from continuing operations - basic | $ | (0.59 | ) | | $ | 1.12 |
| | $ | 1.27 |
|
| Computation of Net income (loss) per share from continuing operations - diluted: | | | | | |
Net (loss) income from continuing operations attributable to Colfax Corporation (1)
| $ | (72,957 | ) | | $ | 137,672 |
| | $ | 157,511 |
|
| Weighted-average shares of Common stock outstanding - basic | 123,229,806 |
| | 122,911,581 |
| | 124,101,033 |
|
| Net effect of potentially dilutive securities - stock options and restricted stock units | — |
| | 287,145 |
| | 768,616 |
|
| Weighted-average shares of Common stock outstanding - diluted | 123,229,806 |
| | 123,198,726 |
| | 124,869,649 |
|
Net (loss) income per share from continuing operations - diluted | $ | (0.59 | ) | | $ | 1.12 |
| | $ | 1.26 |
|
(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.taxes, of $3.1 million, $4.6 million, and $0.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For the years ended December 31, 2020 and 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. For the year ended December 31, 2020, the weighted-average shares of Common stock outstanding - diluted includes the impact of an additional 0.9 million potentially issuable dilutive shares related to Colfax’s tangible equity units as a result of the Company’s share price in March 2020. See Note 14, “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 years ended December 31, 2017, 20162020, 2019 and 20152018 excludes approximately 5.04.2 million, 4.54.3 million and 3.03.4 million outstanding stock-based compensation awards, respectively, as their inclusion would be anti-dilutive.
Included in the calculation of diluted net (loss) income per share from discontinued operations are 0.8 million potentially dilutive securities for the year ended December 31, 2017.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
7.8. Income Taxes
(Loss) incomeIncome from continuing operations before income taxes and Provision for income taxesIncome tax expense (benefit) consisted of the following:
| | | | | | | | | | Year Ended December 31, |
| | Year Ended December 31, | | 2020 | | 2019 | | 2018 |
| | 2017 | | 2016 | | 2015 | | (In thousands) |
| | (In thousands) | |
| Income (loss) from continuing operations before income taxes: | |
| | |
| | |
| |
| Income from continuing operations before income taxes: | | Income from continuing operations before income taxes: | | | | | |
| Domestic operations | $ | (29,470 | ) | | $ | (34,015 | ) | | $ | (35,048 | ) | Domestic operations | $ | (156,675) | | | $ | (129,182) | | | $ | (60,352) | |
| Foreign operations | 17,484 |
| | 240,539 |
| | 253,166 |
| Foreign operations | 214,704 | | | 179,675 | | | 152,716 | |
| | $ | (11,986 | ) | | $ | 206,524 |
| | $ | 218,118 |
| | $ | 58,029 | | | $ | 50,493 | | | $ | 92,364 | |
| Provision for (benefit from) income taxes: | |
| | |
| | |
| |
| Income tax expense (benefit): | | Income tax expense (benefit): | | | | | |
| Current: | |
| | |
| | |
| Current: | | | | | |
| Federal | $ | 49,259 |
| | $ | 621 |
| | $ | 471 |
| Federal | $ | (39,376) | | | $ | 811 | | | $ | (15,132) | |
| State | (439 | ) | | (592 | ) | | 941 |
| State | 1,454 | | | 6,712 | | | 816 | |
| Foreign | 53,274 |
| | 60,651 |
| | 67,740 |
| Foreign | 56,076 | | | 56,477 | | | 41,831 | |
| | $ | 102,094 |
| | $ | 60,680 |
| | $ | 69,152 |
| | $ | 18,154 | | | $ | 64,000 | | | $ | 27,515 | |
| Deferred: | |
| | |
| | |
| Deferred: | | | | | |
| Domestic operations | $ | (54,226 | ) | | $ | (2,924 | ) | | $ | (6,134 | ) | Domestic operations | $ | 3,641 | | | $ | (24,151) | | | $ | (21,908) | |
| Foreign operations | (5,314 | ) | | (5,984 | ) | | (21,850 | ) | Foreign operations | (27,848) | | | (8,219) | | | (35,115) | |
| | (59,540 | ) | | (8,908 | ) | | (27,984 | ) | | (24,207) | | | (32,370) | | | (57,023) | |
| | $ | 42,554 |
| | $ | 51,772 |
| | $ | 41,168 |
| | $ | (6,053) | | | $ | 31,630 | | | $ | (29,508) | |
See Note 4, “Discontinued Operations” for the income (loss) from discontinued operations before income taxes and related income taxes.
On December 22, 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code which included how the U.S. imposes income tax on multinational corporations. Key changes in
Coinciding with the enactment of the Tax Act, which are relevant to the Company and generally effective January 1, 2018 include a flat corporate income tax rate of 21 percent to replace the marginal rates that range from 15 percent to 35 percent, elimination of the corporate alternative minimum tax, the creation of a territorial tax system replacing the worldwide tax system, a one-time tax on accumulated foreign subsidiary earnings to transition to the territorial system, a “minimum tax” on certain foreign earnings above an enumerated rate of return, a new base erosion anti-abuse tax that subjects certain payments made by a U.S. company to its foreign subsidiary to additional taxes, and an incentive for U.S. companies to sell, lease or license goods and services outside the U.S. by taxing the income at a reduced effective rate. The new tax also imposes limits on executive compensation and interest expense deductions, while permitting the immediate expensing for the cost of new investments in certain property acquired after September 27, 2017.
On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. SAB 118 allows registrants to include a provisional amount to account for the implications of the Tax Act where a reasonable estimate can be made and requires the completion of the accounting no later than one year from the date of enactment of the Tax Act or December 22, 2018. Additionally, theThe Company will filefiled its 2017 U.S. income tax return in Q4the fourth quarter of 2018 which may change ourchanged its tax basis in temporary differences and transition tax estimated as of December 31, 2017, which will resultresulting in an adjustment to the tax provision to the re-measurement amount recorded in the financial statements.
ASC 740 requires changes in As a result of this tax rates and tax laws to be accounted for in the period of enactment in continuing operations. Accordingly, of significance,filing, the Company included areduced its provisional estimate of approximately $52amount by $10.8 million and $0.7 million for transition tax and the Transition Tax, payable over 8 years. Generally,remeasurement of U.S. deferred taxes, respectively, for the foreign earnings subjectyear ended December 31, 2018. In addition, in 2020 the Company timely filed changes to the Transition Tax can be distributed without additional U.S. tax; however, if distributed, the amount could be subjectfederal tax returns to credit rather than to deduct foreign taxes and U.S. state and local taxes. The Company continues to evaluate the implications of the Tax Act andreduced its implications including actions we may take to address our business objectives. Therefore, the Company continues to maintain its indefinite reinvestment of foreign earnings. The Company also included a provisional estimate of approximately $55 milliontransition tax benefit for the re-measurement of its U.S. deferred tax assets and liabilities to 21 percent.
further by $6.8 million.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s Provision for income taxesIncome tax expense (benefit) from continuing operations differs from the amount that would be computed by applying the U.S. federal statutory rate as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019(1) | | 2018(1) |
| (In thousands) |
| Taxes calculated at the U.S. federal statutory rate | $ | 12,186 | | | $ | 10,677 | | | $ | 19,392 | |
| State taxes | (2,196) | | | (5,358) | | | (3,543) | |
| Effect of tax rates on international operations | (18,577) | | | (14,115) | | | (9,323) | |
| Change in enacted international tax rates | (1,023) | | | (2,843) | | | (2,403) | |
| Changes in valuation allowance | (24,149) | | | 11,196 | | | (11,577) | |
| Changes in tax reserves | 1,394 | | | 1,119 | | | (1,704) | |
| Tax Act - re-measurement of U.S. deferred taxes | 0 | | | 0 | | | (667) | |
| Tax Act - mandatory repatriation taxes | (6,766) | | | 0 | | | (10,804) | |
| | | | | |
| Research and development tax credits | (1,649) | | | (4,029) | | | (7,123) | |
| Foreign tax credits | (12,197) | | | (15,299) | | | (21,927) | |
| Net items not deductible in an international jurisdiction | 5,365 | | | 10,060 | | | 12,077 | |
| SubPart F and GILTI | 27,797 | | | 29,407 | | | 12,872 | |
| U.S. Deal Costs and other non-deductibles | 38 | | | 5,556 | | | 0 | |
| Withholding taxes | 8,570 | | | 4,545 | | | 3,446 | |
| Non-deductible employee compensation | 6,619 | | | 714 | | | 1,068 | |
| Other | (1,465) | | | 0 | | | (9,292) | |
| Income tax expense (benefit) | $ | (6,053) | | | $ | 31,630 | | | $ | (29,508) | |
(1) Certain prior period amounts have been reclassified to conform with current year presentation.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Taxes calculated at the U.S. federal statutory rate | $ | (4,195 | ) | | $ | 72,283 |
| | $ | 76,365 |
|
| State taxes | 86 |
| | 228 |
| | 768 |
|
| Effect of tax rates on international operations | (13,916 | ) | | (27,831 | ) | | (36,305 | ) |
| Change in enacted international tax rates | 536 |
| | (2,419 | ) | | (4,415 | ) |
| Changes in valuation allowance and tax reserves | 5,859 |
| | 2,675 |
| | (55 | ) |
| Tax Act - re-measurement of U.S. deferred taxes | (54,988 | ) | | — |
| | — |
|
| Tax Act - mandatory repatriation taxes | 52,381 |
| | — |
| | — |
|
| Non-deductible impairment expenses | 52,570 |
| | — |
| | — |
|
| Other | 4,221 |
| | 6,836 |
| | 4,810 |
|
| Provision for income taxes | $ | 42,554 |
| | $ | 51,772 |
| | $ | 41,168 |
|
The valuation allowance benefit reflected above is predominately the utilization of net operating losses in the current period. Certain movements of valuation allowance, particularly related to repatriation taxes, foreign tax credits, SubPart F and GILTI, and withholding taxes haven been aggregated with that particular line item within the rate reconciliation.
Deferred income taxes, net reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the Tax Act becoming law on December 22, 2017 and the reduction in the U.S. corporate income tax rate from 35% to 21%, the Company revalued its ending net U.S. deferred tax liabilities at December 31, 2017 and recognized a provisional $55 million tax benefit in the Company’s Consolidated Statement of Income for the year ended December 31, 2017. The significant components of deferred tax assets and liabilities included in continuing operations, in addition to the reconciliation of the beginning and ending amount of gross unrecognized tax benefits, are as follows:
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | December 31, | | December 31, |
| | 2017 | | 2016 | | 2020 | | 2019 |
| | (In thousands) | | (In thousands) |
| Deferred tax assets: | | | | Deferred tax assets: | |
| Post-retirement benefit obligation | $ | 23,297 |
| | $ | 66,911 |
| Post-retirement benefit obligation | $ | 11,617 | | | $ | 11,295 | |
| Expenses currently not deductible | 69,039 |
| | 105,780 |
| Expenses currently not deductible | 147,636 | | | 131,921 | |
| Net operating loss carryforward | 142,700 |
| | 211,205 |
| Net operating loss carryforward | 308,965 | | | 342,442 | |
| Tax credit carryforward | 4,148 |
| | 10,882 |
| Tax credit carryforward | 33,674 | | | 16,727 | |
| Depreciation and amortization | 10,001 |
| | 7,879 |
| Depreciation and amortization | 6,433 | | | 6,487 | |
| Other | 36,733 |
| | 14,956 |
| Other | 42,881 | | | 42,407 | |
| Valuation allowance | (155,179 | ) | | (153,740 | ) | Valuation allowance | (203,341) | | | (149,037) | |
| Deferred tax assets, net | $ | 130,739 |
| | $ | 263,873 |
| Deferred tax assets, net | $ | 347,865 | | | $ | 402,242 | |
| Deferred tax liabilities: | |
| | |
| Deferred tax liabilities: | | | |
| Depreciation and amortization | $ | (271,359 | ) | | $ | (292,906 | ) | Depreciation and amortization | $ | (403,704) | | | $ | (415,888) | |
| UK and other foreign benefit obligation | (11,317 | ) | | (14,990 | ) | |
| | Inventory | (12,109 | ) | | (18,309 | ) | Inventory | (1,559) | | | (3,694) | |
| Outside basis differences and other | (118,974 | ) | | (178,166 | ) | Outside basis differences and other | (78,012) | | | (84,706) | |
| Total deferred tax liabilities | $ | (413,759 | ) | | $ | (504,371 | ) | Total deferred tax liabilities | $ | (483,275) | | | $ | (504,288) | |
| Total deferred tax liabilities, net | $ | (283,020 | ) | | $ | (240,498 | ) | Total deferred tax liabilities, net | $ | (135,410) | | | $ | (102,046) | |
The Company evaluates the recoverability of its deferred tax assets on a jurisdictional basis by considering whether deferred tax assets will be realized on a more likely than not basis. To the extent a portion or all of the applicable deferred tax assets do not meet the more likely than not threshold, a valuation allowance is recorded. During the year ended December 31, 2017,2020, the valuation allowance increased from $153.7$149.0 million to $155.2$203.3 million with a net increase of $17.3$6.2 million recognized in ProvisionIncome tax expense (benefit), $48.5 million increase attributed to finalizing our DJO purchase accounting for income
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
taxes in the first quarter of 2020, and a $18.9$0.4 million decrease due to reclassifications and the divestiture of Colfax Fluid Handling entities and a $3.1 million increase related to changes in foreign currency rates. Consideration was given to tax planning strategies and, when applicable, future taxable income as to how much of the relevant deferred tax asset could be realized on a more likely than not basis.
The Company has U.S. net operating loss carryforwards of $16.3$611.3 million expiring in years 20222021 through 2033.2037 and $72.6 million that may be carried forward indefinitely. The Company’s ability to use these various carryforwards to offset any taxable income generated in future taxable periods may be limited under Section 382 and other federal tax provisions. At December 31, 20172020, the Company also has $577.9$581.3 million foreign net operating loss carryforwards primarily in Brazil, Czech Republic, Germany, India,the Netherlands, Sweden, and the United Kingdom that may be subject to local tax restrictive limitations including changes in ownership. Generally, theThe foreign net operating losses can be carried forward indefinitely, except in applicable jurisdictions that make up less than five percent of the Czech Republicavailable net operating losses.
The Company has U.S. foreign tax and India where they will expire between 2019R&D tax credits that may be used to offset U.S. tax in previous or future tax periods subject to Section 382 and 2026. other federal provisions. The Company’s $22.7 million foreign tax credit can be carried back one year and can be carried forward to tax years through 2025-2030. The Company’s $14.0 million R&D credit can be carried back one year and can be carried forward to tax years through 2021-2040.
For the year ended December 31, 2017, after accounting for the Tax Act provisional amounts,2020, all undistributed earnings of the Company’s foreign subsidiaries, which are indefinitely reinvested outside the U.S., arewere provisionally estimated to be $950$184.0 million. The amount ofCompany has assessed a total deferred tax liability that would have been recognized hadof $1.9 million as of December 31, 2020 on such earnings that have not been indefinitely reinvestedreinvested. This is not reasonably determinable.a decrease of $2 million as compared to the deferred tax liability as of December 31, 2019.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company records a liability for unrecognized income tax benefits for the amount of benefit included in its previously filed income tax returns and in its financial results expected to be included in income tax returns to be filed for periods through the date of its Consolidated Financial Statements for income tax positions for which it is more likely than not that a tax position will not be sustained upon examination by the respective taxing authority. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (inclusive of associated interest and penalties):
|
| | | |
| | (In thousands) |
| Balance, December 31, 2014 | $ | 77,525 |
|
| Addition for tax positions taken in prior periods | 3,924 |
|
| Addition for tax positions taken in the current period | 924 |
|
| Reductions related to settlements with taxing authorities | (22,473 | ) |
| Reductions resulting from a lapse of applicable statute of limitations | (1,143 | ) |
| Other, including the impact of foreign currency translation | (5,879 | ) |
| Balance, December 31, 2015 | $ | 52,878 |
|
| Addition for tax positions taken in prior periods | 6,552 |
|
| Addition for tax positions taken in the current period | 1,418 |
|
| Reductions related to settlements with taxing authorities | (53 | ) |
| Reductions resulting from a lapse of applicable statute of limitations | (2,195 | ) |
| Other, including the impact of foreign currency translation | 608 |
|
| Balance, December 31, 2016 | $ | 59,208 |
|
| Addition for tax positions taken in prior periods | 1,521 |
|
| Addition for tax positions taken in the current period | 424 |
|
| Reductions related to settlements with taxing authorities | (10,708 | ) |
| Reductions resulting from a lapse of applicable statute of limitations | (3,677 | ) |
| Other, including the impact of foreign currency translation and U.S. tax rate changes | (5,750 | ) |
| Balance, December 31, 2017 | $ | 41,018 |
|
| | | | | |
| (In thousands) |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Balance, December 31, 2017 | $ | 41,018 | |
| Addition for tax positions taken in prior periods | 2,525 | |
| Addition for tax positions taken in the current period | 240 | |
| Reductions related to settlements with taxing authorities | (461) | |
| Reductions resulting from a lapse of applicable statute of limitations | (4,477) | |
| Other, including the impact of foreign currency translation and U.S. tax rate changes | (1,224) | |
| Balance, December 31, 2018 | $ | 37,621 | |
| Acquisitions and divestitures | 18,248 | |
| Addition for tax positions taken in prior periods | 1,441 | |
| Addition for tax positions taken in the current period | 2,054 | |
| Reductions related to settlements with taxing authorities | (118) | |
| Reductions resulting from a lapse of applicable statute of limitations | (3,643) | |
| Other, including the impact of foreign currency translation and U.S. tax rate changes | (123) | |
| Balance, December 31, 2019 | $ | 55,480 | |
| Addition for tax positions taken in prior periods | $ | 5,911 | |
| Addition for tax positions taken in the current period | $ | 1,980 | |
| Reductions related to settlements with taxing authorities | $ | 0 | |
| Reductions resulting from a lapse of applicable statute of limitations | $ | (5,689) | |
| Other, including the impact of foreign currency translation and U.S. tax rate changes | $ | 332 | |
| Balance, December 31, 2020 | $ | 58,014 | |
The Company is routinely examined by tax authorities around the world. Tax examinations remain in process in multiple countries, including but not limited to Sweden,the United States, Germany, Indonesia, France, the Netherlands, Mexico, Brazil, Russia, Italy and various U.S. states. The Company files numerous group and separate tax returns in U.S. federal and state jurisdictions, as well as international jurisdictions. In the U.S., tax years dating back to 20032006 remain subject to examination, due to tax attributes available to be carried forward to open or future tax years. With some exceptions, other major tax jurisdictions generally are not subject to tax examinations for years beginning before 2011.2014.
The Company’s total unrecognized tax benefits were $41.0$58.0 million and $59.2$55.5 million as of December 31, 20172020 and 2016,2019, respectively, inclusive of $5.4$6.9 million and $8.5$5.7 million, respectively, of interest and penalties. The Company records interest and
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
penalties on uncertain tax positions as a component of Provision for income taxes,Income tax expense (benefit), which was $1.3$0.7 million, $2.7$1.0 million and $1.8$1.1 million for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively.
Due to the difficulty in predicting with reasonable certainty when tax audits will be fully resolved and closed, the range of reasonably possible significant increases or decreases in the liability for unrecognized tax benefits that may occur within the next 12 months is difficult to ascertain. Currently, the Company estimates that it is reasonably possible that the expiration of various statutes of limitations, resolution of tax audits and court decisions may reduce its tax expense in the next 12 months up to $1.8$4.8 million.
8.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
9. Goodwill and Intangible Assets
The following table summarizes the activity in Goodwill, by segment during the years ended December 31, 20172020 and 2016:2019:
| | | | | | | | | | | | | | | | | |
| | Medical Technology | | Fabrication
Technology | | Total |
| | (In thousands) |
| Balance, January 1, 2019 | $ | 0 | | | $ | 1,497,832 | | | $ | 1,497,832 | |
Goodwill attributable to acquisitions(1) | 1,674,328 | | | 8,406 | | | 1,682,734 | |
| | | | | |
| Impact of foreign currency translation | (1,407) | | | 23,358 | | | 21,951 | |
| Balance, December 31, 2019 | 1,672,921 | | | 1,529,596 | | | 3,202,517 | |
Goodwill attributable to acquisitions(1) | 72,815 | | | 0 | | | 72,815 | |
| | | | | |
| Impact of foreign currency translation | 15,574 | | | 23,635 | | | 39,209 | |
| Balance, December 31, 2020 | $ | 1,761,310 | | | $ | 1,553,231 | | | $ | 3,314,541 | |
| | | | | |
|
| | | | | | | | | | | |
| | Air and Gas Handling | | Fabrication Technology | | Total |
| | (In thousands) |
| Balance, January 1, 2016 | $ | 1,206,715 |
| | $ | 1,391,421 |
| | $ | 2,598,136 |
|
| Goodwill attributable to acquisitions | 1,317 |
| | 15,242 |
| | 16,559 |
|
| Impact of foreign currency translation and other | (154,489 | ) | | (109,210 | ) | | (263,699 | ) |
| Balance, December 31, 2016 | 1,053,543 |
| | 1,297,453 |
| | 2,350,996 |
|
Goodwill attributable to acquisitions(1) | 107,024 |
| | 74,180 |
| | 181,204 |
|
Goodwill impairment
| (150,200 | ) | | — |
| | (150,200 | ) |
| Impact of foreign currency translation and other | 97,805 |
| | 58,739 |
| | 156,544 |
|
| Balance, December 31, 2017 | $ | 1,108,172 |
| | $ | 1,430,372 |
| | $ | 2,538,544 |
|
| Accumulated goodwill impairment as of December 31, 2017 | $ | (150,200 | ) | | $ | — |
| | $ | (150,200 | ) |
(1) Includes purchase accounting adjustments associated with the two air and gas handling acquisitions and three fabrication technology acquisitions completed during the year ended December 31, 2017. Seediscussed in Note 5, “Acquisitions”.
See Note 4, “Discontinued Operations” for further discussion.discussion of the Air And Gas segment impairment recorded in 2019 as part of the divestiture, which is presented within Income (loss) from discontinued operations, net of taxes on the Consolidated Statements of Operations.
The following table summarizes the Company’s Intangible assets, excluding Goodwill:
| | | | | | | | | | | | December 31, |
| | December 31, | | 2020 | | 2019 |
| | 2017 | | 2016 | | Gross
Carrying
Amount | | Accumulated
Amortization | | Gross
Carrying
Amount | | Accumulated
Amortization |
| | Gross
Carrying
Amount | | Accumulated
Amortization | | Gross
Carrying
Amount | | Accumulated
Amortization | | (In thousands) |
| | (In thousands) | |
| Trade names – indefinite life | $ | 407,167 |
| | $ | — |
| | $ | 363,132 |
| | $ | — |
| |
| Indefinite-Lived Intangible Assets | | Indefinite-Lived Intangible Assets | |
| Trade names | | Trade names | $ | 212,048 | | | $ | — | | | $ | 193,465 | | | $ | — | |
| Definite-Lived Intangible Assets | | Definite-Lived Intangible Assets | |
| Acquired customer relationships | 622,893 |
| | (184,100 | ) | | 541,419 |
| | (137,567 | ) | Acquired customer relationships | 952,007 | | | (266,347) | | | 919,574 | | | (182,813) | |
| Acquired technology | 170,453 |
| | (62,491 | ) | | 137,902 |
| | (44,906 | ) | Acquired technology | 455,738 | | | (99,748) | | | 440,719 | | | (60,971) | |
| Acquired trade names | | Acquired trade names | 404,076 | | | (41,960) | | | 389,112 | | | (21,069) | |
| Software | 100,098 |
| | (71,010 | ) | | 82,235 |
| | (49,926 | ) | Software | 129,852 | | | (90,196) | | | 103,274 | | | (71,644) | |
| Acquired backlog | 10,398 |
| | (2,600 | ) | | — |
| | — |
| |
| Other intangible assets | 48,695 |
| | (22,300 | ) | | 40,398 |
| | (16,340 | ) | Other intangible assets | 24,511 | | | (16,535) | | | 22,809 | | | (13,437) | |
| | $ | 1,359,704 |
| | $ | (342,501 | ) | | $ | 1,165,086 |
| | $ | (248,739 | ) | | $ | 2,178,232 | | | $ | (514,786) | | | $ | 2,068,953 | | | $ | (349,934) | |
Amortization expense related to intangible assets was included in the Consolidated Statements of IncomeOperations as follows:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | (In thousands) |
| Selling, general and administrative expense | $ | 158,427 | | | $ | 135,769 | | | $ | 43,703 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Selling, general and administrative expense | $ | 71,119 |
| | $ | 57,365 |
| | $ | 56,758 |
|
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
See Note 2, “Summary of Significant Accounting Policies” for discussion regarding impairment of Intangible assets.
As of December 31, 2017, total
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Expected Amortization Expense
The Company’s expected annual amortization expense for intangible assets is expected to be $76.5 million, $65.4 million, $62.1 million, $59.0 million and $52.8 million for the years ending December 31, 2018, 2019, 2020, 2021 and 2022, respectively.next five years:
| | | | | |
| | December 31, 2020 |
| | (In thousands) |
| 2021 | $ | 153,923 | |
| 2022 | 148,995 | |
| 2023 | 143,325 | |
| 2024 | 137,707 | |
| 2025 | 136,620 | |
9.
10. Property, Plant and Equipment, Net
| | | | | | | | | | | | | | | | | |
| | | | December 31, |
| | Depreciable Life | | 2020 | | 2019 |
| | (In years) | | (In thousands) |
| Land | n/a | | $ | 23,821 | | | $ | 25,138 | |
| Buildings and improvements | 5-40 | | 205,397 | | | 196,810 | |
| Machinery and equipment | 3-15 | | 570,411 | | | 528,848 | |
| | | | 799,629 | | | 750,796 | |
| Accumulated depreciation | | | (312,669) | | | (259,555) | |
| Property, plant and equipment, net | | | $ | 486,960 | | | $ | 491,241 | |
|
| | | | | | | | | |
| | | | December 31, |
| | Depreciable Life | | 2017 | | 2016 |
| | (In years) | | (In thousands) |
| Land | n/a | | $ | 47,584 |
| | $ | 31,855 |
|
| Buildings and improvements | 5-40 | | 322,431 |
| | 292,448 |
|
| Machinery and equipment | 3-15 | | 495,366 |
| | 406,270 |
|
| | | | 865,381 |
| | 730,573 |
|
| Accumulated depreciation | | | (312,579 | ) | | (225,142 | ) |
| Property, plant and equipment, net | | | $ | 552,802 |
| | $ | 505,431 |
|
Depreciation expense including the amortization of assets recorded under capital leases, for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, was $52.3$85.5 million, $52.5$76.1 million and $57.6$34.2 million, respectively. Impairment of fixed assets recorded for the years ended December 31, 2017, 20162020, 2019 and 20152018 was $30.9$2.1 million, $3.4$0.5 million and $9.3$3.1 million, respectively.
10.
11. Inventories, Net
Inventories, net consisted of the following:
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| (In thousands) |
| Raw materials | $ | 110,848 | | | $ | 115,587 | |
| Work in process | 40,517 | | | 37,019 | |
| Finished goods | 476,297 | | | 475,933 | |
| 627,662 | | | 628,539 | |
| | | |
| Less: allowance for excess, slow-moving and obsolete inventory | (62,840) | | | (56,981) | |
| Inventories, net | $ | 564,822 | | | $ | 571,558 | |
12. Leases
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | (In thousands) |
| Raw materials | $ | 141,827 |
| | $ | 121,886 |
|
| Work in process | 74,704 |
| | 55,845 |
|
| Finished goods | 250,364 |
| | 221,866 |
|
| | 466,895 |
| | 399,597 |
|
| Less: customer progress payments | (2,308 | ) | | — |
|
| Less: allowance for excess, slow-moving and obsolete inventory | (34,960 | ) | | (34,625 | ) |
| Inventories, net | $ | 429,627 |
| | $ | 364,972 |
|
The Company leases certain office spaces, warehouses, facilities, vehicles, and equipment. Leases with an initial term of
11. Debt
Long-term debt consistedtwelve 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 following:Company’s leases include rental payments adjusted for inflation. The right-of-use lease asset and lease liability are recorded on the Consolidated Balance Sheet, with the current lease liability being included in Accrued liabilities. Operating lease expense was $45.0 million for the year ended December 31, 2020, and approximated cash paid for leases during the year.
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | (In thousands) |
| Senior unsecured notes | $ | 414,862 |
| | $ | — |
|
| Term loans | 615,095 |
| | 678,286 |
|
| Trade receivables financing arrangement | — |
| | 63,399 |
|
| Revolving credit facilities and other | 31,114 |
| | 550,459 |
|
| Total Debt | 1,061,071 |
| | 1,292,144 |
|
| Less: current portion | (5,766 | ) | | (5,406 | ) |
| Long-term debt | $ | 1,055,305 |
| | $ | 1,286,738 |
|
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | |
| December 31, 2020 |
| (In thousands) |
| Future lease payments by year: | |
| 2021 | $ | 42,516 | |
| 2022 | 33,809 | |
| 2023 | 26,836 | |
| 2024 | 18,987 | |
| 2025 | 14,073 | |
| Thereafter | 71,838 | |
| Total | 208,059 | |
| Less: present value discount | (30,578) | |
| Present value of lease liabilities | $ | 177,481 | |
| |
| Weighted-average remaining lease term (in years): | |
| Operating leases | 8.6 |
| Weighted-average discount rate: | |
| Operating leases | 3.7 | % |
On June 5, 2015,
13. Debt
Long-term debt consisted of the Company entered into afollowing:
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| (In thousands) |
| Term loan | $ | 781,557 | | | $ | 822,945 | |
| Euro senior notes | 425,045 | | | 388,925 | |
| TEU amortizing notes | 31,251 | | | 54,044 | |
| 2024 and 2026 notes | 991,319 | | | 989,236 | |
| Revolving credit facilities and other | 2,071 | | | 56,676 | |
| Total debt | 2,231,243 | | | 2,311,826 | |
| Less: current portion | (27,074) | | | (27,642) | |
| Long-term debt | $ | 2,204,169 | | | $ | 2,284,184 | |
Term Loan Facilities and Revolving Credit Facility
The Company’s credit agreement (the “DB Credit Agreement”“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, and DeutscheJPMorgan Chase Bank, AG New York Branch,N.A., as administrative agent, swing line lenderCitizens Bank, N.A., as syndication agent, and global coordinator. The proceeds of the loans under the DB Credit Agreement were used by the Company to repay in full balances under its preexisting credit agreement, as well as for working capital and general corporate purposes. The DB Credit Agreementco-documentation agents named therein consists of an initial term loan in the aggregate amount of $750.0a $975 million (the “Term Loan”) and a revolving credit facility (the “Revolver”) and a Term A-1 loan with an initial aggregate principal amount of $825 million (the “Term Loan”), each with a commitment capacitymaturity date of $1.3 billion, each of which had an initial maturity term of five years.December 6, 2024. The Revolver contains a $50.0$50 million swing line loan sub-facility. In conjunction with the DB Credit Agreement, the Company recorded a charge to Interest expense in the Consolidated Statement of Income for the year ended December 31, 2015 of $4.7 million to write-off certain deferred financing fees and original issue discount and expensed $0.4 million of costs incurred in connection with the refinancing of the DB Credit Agreement.
The Term Loan and the Revolver bear interest, at the election of the Company, at either the base rate (as defined in the DB Credit Agreement) or the Eurocurrency rate (as defined in the DB Credit Agreement), in each case, plus the applicable interest rate margin. The applicable interest rate margin is based upon either, whichever results in the lower applicable interest rate margin (subject to certain exceptions), the Company’s total leverage ratio and the corporate family rating of the Company 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). Swing line loans bear interest at the applicable rate, as specified under the terms of the DB Credit Agreement, based upon the currency borrowed. As of December 31, 2017, the weighted-average interest rate of borrowings under the DB Credit Agreement was 3.07%, excluding accretion of original issue discount and amortization of deferred financing fees, and there was $1.3 billion available on the revolving credit facility.
On April 19, 2017, we issued senior unsecured notes with an aggregate principal amount of €350 million (the “Euro Notes”). Euro Notes are due in April 2025 and have an interest rate of 3.25%. The proceeds from the Euro Notes offering were used to repay borrowings under our DB Credit Agreement and bilateral credit facilities totaling €283.5 million, as well as for general corporate purposes, and are guaranteed by certain of our domestic subsidiaries (the “Guarantees”). In conjunction with the issuance of the senior unsecured notes, the Company recorded $6.0 million of deferred financing fees. The Euro Notes and the Guarantees have not been, and will not be, registered under the Securities Act of 1933, as amended (the "Securities Act"), and are listed on the Irish stock exchange.
The Company had an original issue discount of $3.7 million and deferred financing fees of $9.2 million included in its Consolidated Balance Sheet as of December 31, 2017, which will be accreted to Interest expense primarily using the effective interest method, over the life of the applicable debt agreement.
In addition to the debt agreements discussed above, the Company is party to various bilateral credit facilities with a borrowing capacity of $217.9 million. As of December 31, 2017, outstanding borrowings under these facilities total $22.8 million, with a weighted average borrowing rate of 1.00%.
The Company is also party to letter of credit facilities with an aggregate capacity of $780.6 million. Total letters of credit of $418.8 million were outstanding as of December 31, 2017.
The Company was party to a receivables financing facility through a wholly-owned, special purpose bankruptcy-remote subsidiary which purchased trade receivables from certain of the Company’s subsidiaries on an ongoing basis and pledged them to support its obligation as borrower under the receivables financing facility. This special purpose subsidiary has a separate legal existence from its parent and its assets are not available to satisfy the claims of creditors of the selling subsidiaries or any other member of the consolidated group. According to the receivable financing facility agreement, the program limit could not exceed $80 million and the scheduled termination date for the receivables financing facility was December 19, 2017. As of December 15, 2017, the Company paid off the total outstanding borrowings under the receivables financing facility which was $52.4 million and the agreement was terminated.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The contractual maturities of the Company’s debt as of December 31, 2017 are as follows(1):
|
| | | |
| | (In thousands) |
| 2018 | $ | 5,766 |
|
| 2019 | 2,532 |
|
| 2020 | 618,750 |
|
| Thereafter | 443,111 |
|
| Total contractual maturities | 1,070,159 |
|
| Debt discount | (9,088 | ) |
| Total debt | $ | 1,061,071 |
|
(1) Represents scheduled payments required under the DB Credit Agreement through June 5, 2020 and the Euro Notes through April 15, 2025, as well as the contractual maturities of other debt outstanding as of December 31, 2017, and reflects management’s intention to repay scheduled maturities of the term loans outstanding under the DB Credit Agreement (if not extended) with proceeds from the revolving credit facility.
Certain U.S. subsidiaries of the Company have agreed to guarantee the obligations of the Company under the DB Credit Agreement.Facility. The DB Credit AgreementFacility contains customary covenants limiting the ability of the CompanyColfax 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 DB Credit AgreementFacility contains financial covenants requiring Colfax to maintain (subject to certain exceptions) (i) a maximum total leverage ratio, calculated as the ratio of Consolidated Net Debt (as defined in the Credit Facility) to EBITDA (as defined in the Credit Facility) and (ii) a minimum interest coverage ratio. During the third quarter of 2020, the Company made a voluntary $40 million principal payment on the Term Loan.
On May 1, 2020, the Company entered into an amendment to its Credit Facility (the “Amendment”). The Amendment, among other changes, modified the total leverage ratio by permitting the Company to maintain adeduct (subject to certain exceptions) up to $125 million of unrestricted cash and cash equivalents from the debt component of the ratio and by increasing the maximum total leverage ratio to 5.75:1.00 as defined therein, of generally not more than 3.5 to 1.0June 30, 2020, 6.50:1.00 as of each fiscal quarter thereafter until March 31, 2021,
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5.25:1.00 for the quarter ending June 30, 2021, 4.50:1.00 for the quarter ending September 30, 2021, 4.25:1.00 for the quarters ending December 31, 2021 and minimumMarch 31, 2022, 4.00:1.00 for the quarters ending June 30, 2022 and September 30, 2022, and 3.50:1.00 as of December 31, 2022 and for each fiscal quarter ending thereafter. Under the terms of the Amendment the interest coverage ratio remained at 3.00:1.00 for the quarter ending June 30, 2020, decreased to 2.75:1.00 for each of the fiscal quarters ending September 30, 2020 until June 30, 2021, and then will increase back to 3.00:1.00 for the quarters ending September 30, 2021 and thereafter. The Amendment added a “springing” collateral provision (based upon the Gross Leverage Ratio as defined therein,in the Amendment to the Credit Facility) which requires the obligations under the Amendment to the Credit Facility to be secured by substantially all personal property of 3.0Colfax and its U.S. subsidiaries and the equity of its first tier foreign subsidiaries, subject to 1.0, measuredcustomary exceptions, in the event Colfax’s Gross Leverage Ratio under the Credit Facility is greater than 5.00:1.00 as of the last day of any fiscal quarter. Lastly, the Amendment added a fifth pricing tier in the event the total leverage ratio is greater than 4.50:1.00 (regardless of the corporate family rating), with pricing at 2.50%, in the endcase of each quarter.the Eurocurrency margin, 1.50%, in the case of the base rate margin, and 0.50% when undrawn. The DBtotal commitment and maturity of the Credit AgreementFacility remained unchanged. The Credit Facility contains various events of default (including failure to comply with the covenants under the DB Credit AgreementFacility and related agreements) and upon an event of default the lenders may, subject to various customary cure rights, require the immediate payment of all amounts outstanding under the Term Loan Facilities and the Revolver. As of December 31, 2017,2020, the Company iswas in compliance with the covenants under the DB Credit Agreement.Facility.
As of December 31, 2020, the weighted-average interest rate of borrowings under the Credit Facility was 1.90%, excluding accretion of original issue discount and deferred financing fees, and there was$975 million available on the Revolver. 12. Equity
Common Stock
The Company contributed 66,000 shareshas $10.4 million in deferred financing fees recorded in conjunction with the Credit Facility as of newly issued Colfax Common stock to its U.S. defined benefit pension plan on May 21, 2015. No contributions of Colfax Common stock were made during the years ended December 31, 2020, which is being accreted to Interest expense, net primarily using the effective interest method over the life of the facility.
Euro Senior Notes
On April 19, 2017, the Company issued senior unsecured notes with an aggregate principal amount of €350 million (the “Euro Notes”). The Euro Notes are due in April 2025, have an interest rate of 3.25% and 2016.are guaranteed by certain of our domestic subsidiaries (the “Guarantees”). The proceeds from the Euro Notes offering were used to repay borrowings under our previous credit facilities totaling €283.5 million, as well as for general corporate purposes. In conjunction with the issuance of the Euro notes, the Company recorded $6 million of deferred financing fees. The Euro Notes and the Guarantees have not been, and will not be, registered under the Securities Act of 1933, as amended, 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 and an option to purchase up to an additional 600,000 tangible equity units at the stated amount of $100 per unit, which 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 14, “Equity.”
2024 Notes and 2026 Notes
On February 5, 2019, 2 tranches of senior notes with aggregate principal amounts of $600 million (the “2024 Notes”) and $400 million (the “2026 Notes”) were issued to finance a portion of the purchase price for 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%. Each tranche of notes is guaranteed by certain domestic subsidiaries of the Company.
Other Indebtedness
In addition to the debt agreements discussed above, the Company is party to various bilateral credit facilities with a borrowing capacity of $195.0 million. As of December 31, 2020, there were no outstanding borrowings under these facilities.
The Company is party to letter of credit facilities with an aggregate capacity of $340.5 million. Total letters of credit of $76.4 million were outstanding as of December 31, 2020.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In total, the Company had deferred financing fees of $22.6 million included in its Condensed Consolidated Balance Sheet as of December 31, 2020, which will be charged to Interest expense, net, primarily using the effective interest method, over the life of the applicable debt agreements.
Total Debt
The contractual maturities of the Company’s debt as of December 31, 2020 are as follows:
| | | | | |
| | (In thousands) |
| 2021 | $ | 27,074 | |
| 2022 | 6,507 | |
| 2023 | 0 | |
| 2024 | 1,385,000 | |
| 2025 | 428,242 | |
| Thereafter | 400,000 | |
| Total contractual maturities | 2,246,823 | |
| Debt discount | (15,580) | |
| Total debt | $ | 2,231,243 | |
14. Equity
Share Repurchase Program
On October 11, 2015, the Company’s Board of Directors authorized the repurchase of up to $100.0 million of the Company’s Common stock from time-to-time on the open market or in privately negotiated transactions, which were to be retired upon repurchase. The repurchase program was authorized until December 31, 2016 and did not obligate the Company to acquire any specific number of shares. The timing and amount of shares repurchased was determined by management based on its evaluation of market conditions and other factors. The repurchase program was conducted pursuant to SEC Rule 10b-18. During the years ended December 31, 2016 and 2015, the Company repurchased 1,000,000 shares and 986,279 shares, respectively, of its Common stock in open market transactions for $20.8 million and $27.4 million, respectively. The repurchase program expired as of December 31, 2016.
On February 12, 2018, the Company’s Board of Directors authorized the repurchase of up to $100.0$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 another $100 million. The timing, amount and amountmethod of shares repurchased is to be determined by management based on its evaluation of market conditions and other factors. The repurchase program has no expiration date and does not obligate
During the year ended December 31, 2018, the Company to acquire any specific numberrepurchased 6,449,425 shares of shares. No shares have been repurchased to date.our Common stock in open market transactions for $200 million. There were 0 repurchases made during the years ended December 31, 2020 and 2019. As of December 31, 2020, the remaining stock repurchase authorization by the Company’s Board of Directors was $100 million. There is no term associated with the remaining repurchase authorization.
Accumulated Other Comprehensive Loss
The following table presents the changes in the balances of each component of Accumulated other comprehensive loss including reclassifications out of Accumulated other comprehensive loss for the years ended December 31, 2017, 20162020, 2019 and 2015.2018. All amounts are net of tax and noncontrolling interest.
interest, if any.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Accumulated Other Comprehensive Loss Components |
| Net Unrecognized Pension And Other Post-Retirement Benefit Cost | | Foreign Currency Translation Adjustment | | Unrealized Gain (Loss) On Hedging Activities | | Changes in Fair Value of Available-for-Sale Securities | | Total |
| (In thousands) |
| Balance at January 1, 2018 | $ | (84,338) | | | $ | (525,324) | | | $ | 30,138 | | | $ | 5,152 | | | $ | (574,372) | |
| Other comprehensive income (loss) before reclassifications: | | | | | | | | | |
| Net actuarial gain | 5,609 | | | — | | | — | | | — | | | 5,609 | |
| Foreign currency translation adjustment | 1,145 | | | (222,158) | | | (424) | | | — | | | (221,437) | |
| | | | | | | | | |
| | | | | | | | | |
| Loss on long-term intra-entity foreign currency transactions | — | | | (5,507) | | | — | | | — | | | (5,507) | |
| Gain on net investment hedges | — | | | — | | | 16,745 | | | — | | | 16,745 | |
| Unrealized loss on cash flow hedges | — | | | — | | | (2,153) | | | — | | | (2,153) | |
| Other comprehensive income (loss) before reclassifications: | 6,754 | | | (227,665) | | | 14,168 | | | — | | | (206,743) | |
Amounts reclassified from Accumulated other comprehensive loss(1) | 6,090 | | | — | | | — | | | — | | | 6,090 | |
| | | | | | | | | |
| Net current period Other comprehensive income (loss) | 12,844 | | | (227,665) | | | 14,168 | | | 0 | | | (200,653) | |
| Cumulative effect of accounting change | — | | | — | | | — | | | (5,152) | | | (5,152) | |
| Balance at December 31, 2018 | $ | (71,494) | | | $ | (752,989) | | | $ | 44,306 | | | $ | 0 | | | $ | (780,177) | |
| Other comprehensive income (loss) before reclassifications: | | | | | | | | | |
| Net actuarial loss | (27,931) | | | — | | | — | | | — | | | (27,931) | |
| Foreign currency translation adjustment | (404) | | | (78,468) | | | (65) | | | — | | | (78,937) | |
| Divestiture-related AOCI write-off | — | | | 400,143 | | | — | | | — | | | 400,143 | |
| Gain on long-term intra-entity foreign currency transactions | — | | | 29,385 | | | — | | | — | | | 29,385 | |
| Gain on net investment hedges | — | | | — | | | 6,215 | | | — | | | 6,215 | |
| Unrealized loss on cash flow hedges | — | | | — | | | 156 | | | — | | | 156 | |
| Other comprehensive income (loss) before reclassifications: | (28,335) | | | 351,060 | | | 6,306 | | | — | | | 329,031 | |
Amounts reclassified from Accumulated other comprehensive loss(1) | 2,629 | | | — | | | — | | | — | | | 2,629 | |
| Noncontrolling interest share repurchase | — | | | (19,960) | | | | | — | | | (19,960) | |
| Net current period Other comprehensive income (loss) | (25,706) | | | 331,100 | | | 6,306 | | | — | | | 311,700 | |
| Cumulative effect of accounting change | (9,300) | | | — | | | (6,068) | | | — | | | (15,368) | |
| Balance at December 31, 2019 | $ | (106,500) | | | $ | (421,889) | | | $ | 44,544 | | | $ | 0 | | | $ | (483,845) | |
| Other comprehensive income (loss) before reclassifications: | | | | | | | | | |
| | | | | | | | | |
| Foreign currency translation adjustment | (1,849) | | | 57,623 | | | 3,378 | | | — | | | 59,152 | |
| | | | | | | | | |
| Gain on long-term intra-entity foreign currency transactions | — | | | 3,289 | | | — | | | — | | | 3,289 | |
| Loss on net investment hedges | — | | | — | | | (26,268) | | | — | | | (26,268) | |
| | | | | | | | | |
| Other comprehensive income (loss) before reclassifications: | (1,849) | | | 60,912 | | | (22,890) | | | — | | | 36,173 | |
Amounts reclassified from Accumulated other comprehensive loss(1) | (4,434) | | | — | | | — | | | — | | | (4,434) | |
| | | | | | | | | |
| Net current period Other comprehensive income (loss) | (6,283) | | | 60,912 | | | (22,890) | | | — | | | 31,739 | |
| | | | | | | | | |
| Balance at December 31, 2020 | $ | (112,783) | | | $ | (360,977) | | | $ | 21,654 | | | $ | 0 | | | $ | (452,106) | |
|
| | | | | | | | | | | | | | | | | | | |
| | Accumulated Other Comprehensive Loss Components |
| | Net Unrecognized Pension And Other Post-Retirement Benefit Cost | | Foreign Currency Translation Adjustment | | Unrealized (Loss) Gain On Hedging Activities | | Changes in Fair Value of Available-for-Sale Securities | | Total |
| | (In thousands) |
| Balance at January 1, 2015 | $ | (240,513 | ) | | $ | (227,059 | ) | | $ | 23,881 |
| | $ | — |
| | $ | (443,691 | ) |
| Other comprehensive income (loss) before reclassifications: | | | | | | | | | |
| Net actuarial gain | 28,349 |
| | — |
| | — |
| | — |
| | 28,349 |
|
| Foreign currency translation adjustment | 7,747 |
| | (301,011 | ) | | (382 | ) | | — |
| | (293,646 | ) |
| Loss on long-term intra-entity foreign currency transactions | — |
| | (550 | ) | | — |
| | — |
| | (550 | ) |
| Gain on net investment hedges | — |
| | — |
| | 14,537 |
| | — |
| | 14,537 |
|
| Unrealized loss on cash flow hedges | — |
| | — |
| | (2,873 | ) | | — |
| | (2,873 | ) |
| Other | 3,817 |
| | — |
| | — |
| | — |
| | 3,817 |
|
| Other comprehensive income (loss) before reclassifications | 39,913 |
| | (301,561 | ) | | 11,282 |
| | — |
| | (250,366 | ) |
Amounts reclassified from Accumulated other comprehensive loss(1) | 7,342 |
| | — |
| | — |
| | — |
| | 7,342 |
|
| Net current period Other comprehensive income (loss) | 47,255 |
| | (301,561 | ) | | 11,282 |
| | — |
| | (243,024 | ) |
| Balance at December 31, 2015 | $ | (193,258 | ) | | $ | (528,620 | ) | | $ | 35,163 |
| | $ | — |
| | $ | (686,715 | ) |
| Other comprehensive income (loss) before reclassifications: | | | | | | | | | |
| Net actuarial gain | 4,815 |
| | — |
| | — |
| | — |
| | 4,815 |
|
| Foreign currency translation adjustment | 2,620 |
| | (312,017 | ) | | 722 |
| | — |
| | (308,675 | ) |
| Loss on long-term intra-entity foreign currency transactions | — |
| | (22,530 | ) | | — |
| | — |
| | (22,530 | ) |
| Gain on net investment hedges | — |
| | — |
| | 18,537 |
| | — |
| | 18,537 |
|
| Unrealized loss on cash flow hedges | — |
| | — |
| | (789 | ) | | — |
| | (789 | ) |
| Other comprehensive income (loss) before reclassifications | 7,435 |
| | (334,547 | ) | | 18,470 |
| | — |
| | (308,642 | ) |
Amounts reclassified from Accumulated other comprehensive loss(1)(2) | 4,634 |
| | 2,378 |
| | — |
| | — |
| | 7,012 |
|
| Net current period Other comprehensive income (loss) | 12,069 |
| | (332,169 | ) | | 18,470 |
| | — |
| | (301,630 | ) |
| Balance at December 31, 2016 | $ | (181,189 | ) | | $ | (860,789 | ) | | $ | 53,633 |
| | $ | — |
| | $ | (988,345 | ) |
| Other comprehensive (loss) income before reclassifications: | | | | | | | | | |
| Net actuarial gain | 4,185 |
| | — |
| | — |
| | — |
| | 4,185 |
|
| Foreign currency translation adjustment | (5,689 | ) | | 288,354 |
| | 18 |
| | — |
| | 282,683 |
|
| Unrealized gain on available-for-sale securities | — |
| | — |
| | — |
| | 5,152 |
| | 5,152 |
|
| Loss on long-term intra-entity foreign currency transactions | — |
| | (29,372 | ) | | — |
| | — |
| | (29,372 | ) |
| Loss on net investment hedges | — |
| | — |
| | (32,388 | ) | | — |
| | (32,388 | ) |
| Unrealized gain on cash flow hedges | — |
| | — |
| | 8,875 |
| | — |
| | 8,875 |
|
| Other comprehensive (loss) income before reclassifications | (1,504 | ) | | 258,982 |
| | (23,495 | ) | | 5,152 |
| | 239,135 |
|
Amounts reclassified from Accumulated other comprehensive loss(1) | 6,981 |
| | — |
| | — |
| | — |
| | 6,981 |
|
| Divestiture-related recognition of pension and other post-retirement cost and foreign currency translation | 91,374 |
| | 76,483 |
| | — |
| | — |
| | 167,857 |
|
| Net current period Other comprehensive income (loss) | 96,851 |
| | 335,465 |
| | (23,495 | ) | | 5,152 |
| | 413,973 |
|
| Balance at December 31, 2017 | $ | (84,338 | ) | | $ | (525,324 | ) | | $ | 30,138 |
| | $ | 5,152 |
| | $ | (574,372 | ) |
(1) Included in the computation of net periodic benefit cost. See Note 14,16, “Defined Benefit Plans” for additional details.
(2) Foreign currency translation adjustment reclassification is the result of deconsolidation of the Company’s Venezuelan operations during the year ended December 31, 2016. See Note 2, “Summary of Significant Accounting Policies” for further discussion.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During the year ended December 31, 2017,2020, Noncontrolling interest increaseddecreased by $16.0$2.6 million as a result of Other comprehensive income, primarily due to foreign currency translation adjustments. During the years ended December 31, 20162019 and 2015,2018, Noncontrolling interest increaseddecreased by $0.6$107.6 million and decreased by $22.8 million, respectively, as a result of Other comprehensive loss,income, primarily due to the Howden sale and foreign currency translation adjustment.
Share-Based Payments
On May 13, 2016,21, 2020, the shareholders of the Company adoptedapproved the Colfax Corporation 2020 Omnibus Incentive Plan (the “2020 Plan”) which replaced the Colfax Corporation 2016 Omnibus Incentive Plan dated May 13, 2016 (the “2016 Plan”) which replaced. Upon the Colfax Corporation 2008 Omnibus Incentiveapproval of the 2020 Plan, dated April 21, 2008, as amendedno additional ordinary shares were to be granted under the previously approved plans. All awards previously granted and restated on April 2, 2012.outstanding under the prior plans remain subject to the terms of those prior plans. The 20162020 Plan provides the Compensation Committee of the Company’s Board of Directors discretion in creating employee equity incentives. Awards under the 20162020 Plan may be made in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based stock, performance-based stock units, dividend equivalent rights, performance shares, performance units,equivalents, and other stock-based awards.
The Company measures and recognizes compensation expense related to share-based payments based on the fair value of the instruments issued. Stock-based compensation expense is generally recognized as a component of Selling, general and administrative expense in the Consolidated Statements of Income,Operations, as payroll costs of the employees receiving the awards are recorded in the same line item.
The Company’s Consolidated Statements of IncomeOperations reflect the following amounts related to stock-based compensation:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | (In thousands) |
| Stock-based compensation expense | $ | 28,911 | | | $ | 21,960 | | | $ | 25,103 | |
| Deferred tax benefit | 1,804 | | | 1,280 | | | 3,418 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Stock-based compensation expense | $ | 21,548 |
| | $ | 19,020 |
| | $ | 16,321 |
|
| Deferred tax benefit | 7,079 |
| | 6,271 |
| | 5,342 |
|
As of December 31, 2017,2020, the Company had $36.2$32.4 million of unrecognized compensation expense related to stock-based awards that will be recognized over a weighted-average period of approximately 1.10.9 years. The intrinsic value of awards exercised or issued upon vesting was $12.3$11.5 million, $6.5$11.2 million and $21.8$10.2 million during the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively.
Stock Options
Under the 20162020 Plan, the Company may grant options to purchase Common stock, with a maximum term of 10 years at a purchase price equal to the market value of the Company’s Common stock on the date of grant. In the case of an incentive stock option granted to a holder of 10% of the Company’s outstanding Common stock, the Company may grant options to purchase Common stock with a maximum term of 5 years, at a purchase price equal to 110% of the market value of the Company’s Common stock on the date of grant.
Stock-based compensation expense for stock option awards is based upon the grant-date fair value using the Black-Scholes option pricing model. The Company recognizes compensation expense for stock option awards on a straight-line basis over the requisite service period of the entire award. The following table shows the weighted-average assumptions used to calculate the fair value of stock option awards using the Black-Scholes option pricing model, as well as the weighted-average fair value of options granted:
| | | | Year Ended December 31, | | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 |
| Expected period that options will be outstanding (in years) | 4.78 |
| | 4.95 |
| | 5.02 |
| Expected period that options will be outstanding (in years) | 4.62 | | 4.56 | | 4.54 |
| Interest rate (based on U.S. Treasury yields at the time of grant) | 1.92 | % | | 1.41 | % | | 1.62 | % | Interest rate (based on U.S. Treasury yields at the time of grant) | 1.09 | % | | 2.46 | % | | 2.65 | % |
| Volatility | 32.15 | % | | 42.50 | % | | 28.75 | % | Volatility | 37.76 | % | | 34.51 | % | | 31.89 | % |
| Dividend yield | — |
| | — |
| | — |
| Dividend yield | 0 | | | 0 | | | 0 | |
| Weighted-average fair value of options granted | $ | 12.16 |
| | $ | 9.47 |
| | $ | 11.87 |
| Weighted-average fair value of options granted | $ | 11.81 | | | $ | 8.80 | | | $ | 10.37 | |
During the years ended December 31, 20172020, 2019 and 2016,2018, expected volatility was estimated based on the historical volatility of the Company’s stock price; during the year ended December 31, 2015, expected volatility was estimated based on the historical
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
volatility of comparable public companies.price. The Company considers historical data to estimate employee termination within the valuation model. Separate groups of employees that have similar historical exercise behavior are considered separately for
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
valuation purposes. Since the Company has limited option exercise history, it has generally elected to estimate the expected life of an award based upon the Securities and Exchange Commission-approved “simplified method” noted under the provisions of Staff Accounting Bulletin No. 107 with the continued use of this method extended under the provisions of Staff Accounting Bulletin No. 110.
Stock option activity is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Number
of Options | | Weighted-
Average
Exercise
Price | | Weighted-
Average
Remaining
Contractual
Term
(In years) | | Aggregate
Intrinsic
Value(1) (In thousands) |
| Outstanding at January 1, 2020 | 4,675,281 | | | $ | 34.93 | | | | | |
| Granted | 618,403 | | | 35.89 | | | | | |
| Exercised | (126,576) | | | 27.64 | | | | | |
| Forfeited and expired | (568,041) | | | 45.75 | | | | | |
| Outstanding at December 31, 2020 | 4,599,067 | | | 33.92 | | | 3.53 | | $ | 29,875 | |
| Vested or expected to vest at December 31, 2020 | 4,543,740 | | | 33.94 | | | 3.53 | | $ | 29,549 | |
| Exercisable at December 31, 2020 | 2,943,374 | | | 35.76 | | | 2.74 | | $ | 17,315 | |
(1) The aggregate intrinsic value is based upon the difference between the Company’s closing stock price at the date of the Consolidated Balance Sheet and the exercise price of the stock option for in-the-money stock options. The intrinsic value of outstanding stock options fluctuates based upon the trading value of the Company’s Common stock.
|
| | | | | | | | | | | | |
| | Number
of Options | | Weighted-
Average
Exercise
Price | | Weighted-
Average
Remaining
Contractual
Term
(In years) | | Aggregate
Intrinsic
Value(1) (In thousands) |
| Outstanding at January 1, 2017 | 4,327,827 |
| | $ | 37.49 |
| | | | |
|
| Granted | 872,146 |
| | 40.28 |
| | | | |
|
| Exercised | (319,902 | ) | | 21.70 |
| | | | |
|
| Forfeited and expired | (440,486 | ) | | 42.48 |
| | | | |
|
| Outstanding at December 31, 2017 | 4,439,585 |
| | $ | 38.68 |
| | 4.40 | | $ | 24,715 |
|
| Vested or expected to vest at December 31, 2017 | 4,304,963 |
| | $ | 38.47 |
| | 4.38 | | $ | 24,589 |
|
| Exercisable at December 31, 2017 | 1,576,311 |
| | $ | 42.61 |
| | 3.26 | | $ | 8,230 |
|
The total intrinsic value of options exercised during the years ended December 31, 2020, 2019 and 2018 was $1.1 million, $2.0 million and $1.4 million, respectively. The fair value of options vested during the years ended December 31, 2020, 2019 and 2018 was $11.9 million, $10.9 million and $8.5 million, respectively.
| |
(1)
| The aggregate intrinsic value is based upon the difference between the Company’s closing stock price at the date of the Consolidated Balance Sheet and the exercise price of the stock option for in-the-money stock options. The intrinsic value of outstanding stock options fluctuates based upon the trading value of the Company’s Common stock. |
Restricted Stock Units
Under the 20162020 Plan, the Compensation Committee of the Board of Directors may award performance-based restricted stock units (“PRSUs”), the vesting of which is contingent upon meeting service conditions and various performance goals.
During the years ended December 31, 2020 and 2019, the Company granted certain employees PRSUs, the vesting of which is fully based on the Company’s total shareholder return (“TSR”) ranking among a peer group over a three-year performance period. The awards also have a service requirement that equals the respective performance periods.
During the year ended December 31, 2018, PRSUs were awarded under the 2016 Plan based upon two discrete measures: a profit performance metric and relative total shareholder return (TSR). The profit performance metric, which accounts for 50% of the PRSU award upon issuance, is measured upon the completion of a three-year performance period ending December 31, 2020. The vesting of the stock units is determined based on whether the Company achieves the applicable performance criteria established by the Compensation Committee of the Board of Directors. The remaining 50% of the PRSU award is tied exclusively to relative TSR performance, which will be measured against the three-year TSR of a custom index of companies. TSR relative to peers is considered a market condition under applicable authoritative guidance, while the profit performance metric is considered a performance condition. If the market condition or performance criteriagoals are satisfied,achieved, the units aremay be subject to an additional time vesting requirementsholding period requirement as determined at the time of grant.
PRSUs with TSR conditions are valued at grant date using a binomial-lattice model (i.e., Monte Carlo simulation model), while PRSUs with a profit performance metric are valued at the market value of a share of Common stock on the date of grant taking into consideration the probability of achieving the specified performance goal. The Company estimates the ultimate payout of PRSUs with a profit performance metric and adjusts the cumulative expense based on its estimate and the percent of the requisite service period that has elapsed. PRSUs with TSR conditions are recognized on a straight-line basis over the performance periods regardless of the performance condition achievement because the probability is factored into the valuation of the award. The related compensation expense for each of the awards is recognized, on a straight-line basis, over the vesting period. Based on the results of the profit performance metric, 2018 PRSUs are expected to vest above target. The performance period for the 2018 PRSUs with TSR conditions does not end until March 7, 2021 and they are expected to vest below target
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Under the 20162020 Plan, the Compensation Committee of the Board of Directors may also award non-performance-based restricted stock units (“RSUs”) to select executives, employees and outside directors.directors, which typically vest three years after the date of grant.With limited exceptions, the employee must remain in service until the vesting date. The Compensation Committee determines the terms and conditions of each award, including the restriction period and other criteria applicable to the awards. Directors may also elect to defer their annual board fees into RSUs with immediate vesting. Delivery of the shares underlying these director restricted stock units is deferred until termination of the director’s service on the Company’s Board of Directors. The fair value of PRSUs and RSUs is equal to the market value of a share of Common stock on the date of grant and the related compensation expense is recognized ratably over the requisite service period and, for PRSUs, when it is expected that any of the performance criterion will be achieved.
During the year ended December 31, 2017, we granted certain employees PRSUs, the vesting of which is based on the Company’s total shareholder return (“TSR”) ranking among a peer group over a three-year performance period. The awards also have a service requirement that equals to the respective performance periods. For these awards subject to market conditions, a binomial-lattice model (i.e., Monte Carlo simulation model) is used to calculate the fair value at grant date. The related compensation expense is recognized, on a straight-line basis, over the vesting period.
The performance criteria have not yet been met for the PRSUs granted during the years ended December 31, 2017, 2016 and 2015.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The activity in the Company’s PRSUs and RSUs is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | PRSUs | | RSUs |
| | Number
of Units | | Weighted-
Average
Grant-Date
Fair Value | | Number
of Units | | Weighted-
Average
Grant-Date
Fair Value |
| Nonvested at January 1, 2020 | 741,375 | | | $ | 30.87 | | | 595,376 | | | $ | 29.25 | |
| Granted | 142,987 | | | 50.91 | | | 554,192 | | | 34.80 | |
| Vested | (103,629) | | | 29.90 | | | (226,912) | | | 30.30 | |
| Forfeited and expired | (49,332) | | | 27.93 | | | (88,693) | | | 29.52 | |
| Nonvested at December 31, 2020 | 731,401 | | | 35.12 | | | 833,963 | | | 32.52 | |
|
| | | | | | | | | | | | | |
| | PRSUs | | RSUs |
| | Number
of Units | | Weighted-
Average
Grant Date
Fair Value | | Number
of Units | | Weighted-
Average
Grant Date
Fair Value |
| Nonvested at January 1, 2017 | 627,316 |
| | $ | 36.25 |
| | 583,898 |
| | $ | 34.54 |
|
| Granted | 100,811 |
| | 40.42 |
| | 251,949 |
| | 40.04 |
|
| Vested | (53,498 | ) | | 41.06 |
| | (146,794 | ) | | 39.94 |
|
| Forfeited and expired | (25,956 | ) | | 68.30 |
| | (173,254 | ) | | 36.50 |
|
| Nonvested at December 31, 2017 | 648,673 |
| | $ | 35.22 |
| | 515,799 |
| | $ | 35.03 |
|
The weighted-average grant-date fair value of PRSUs granted during the years ended December 31, 2019 and 2018 was $24.77 and $33.92, respectively. The weighted-average grant-date fair value of RSUs granted during the years ended December 31, 2019 and 2018 was $27.58 and $32.92, respectively.
The fair value of shares vested during the years ended December 31, 2017, 20162020, 2019 and 20152018 was $7.3$9.7 million, $10.9 million and $10.0 million, respectively.
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 and an option to purchase up to an additional 600,000 tangible equity units at the stated amount of $100 per unit, which 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 initially 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 was recorded in Additional paid-in capital in the 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. Upon the issuance of the TEUs, $47.3 million was initially recorded in Long-term debt, less current portion, and $22.6 million was initially recorded in Current portion of long-term debt in the 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 Consolidated Balance Sheets and are being amortized over its term. As of December 31, 2020, the TEU amortizing notes were recorded with $6.5 million in long-term debt and $8.9$25.0 million respectively.in Current portion of long-term debt in the Consolidated Balance Sheets.
COLFAX CORPORATION
13.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 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, 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, the Company pays equal quarterly cash installments of $1.4375 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 Company has paid $26.5 million representing a partial payment of principal and interest on the TEU amortizing notes in 2020. 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 2019, the Company repurchased all of the noncontrolling interest shares of its South Africa consolidated subsidiary from existing shareholders under a general offer. As a part of the Air and Gas Handling business, this subsidiary was subsequently sold on September 30, 2019, and its results of operations are included in discontinued operations for all periods presented.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
15. Accrued Liabilities
Accrued liabilities in the Consolidated Balance Sheets consisted of the following:
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| (In thousands) |
| Accrued compensation and related benefits | $ | 98,455 | | | $ | 100,290 | |
| Accrued taxes | 57,286 | | | 55,258 | |
| Accrued asbestos-related liability | 41,626 | | | 64,394 | |
| Warranty liability - current portion | 15,543 | | | 15,513 | |
| Accrued restructuring liability - current portion | 7,889 | | | 6,961 | |
| Accrued third-party commissions | 25,480 | | | 30,768 | |
| Customer advances and billings in excess of costs incurred | 36,737 | | | 16,009 | |
| Lease liability - current portion | 39,695 | | | 40,021 | |
| Accrued interest | 27,153 | | | 27,333 | |
| Other | 104,469 | | | 113,343 | |
| Accrued liabilities | $ | 454,333 | | | $ | 469,890 | |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | (In thousands) |
| Accrued payroll | $ | 98,132 |
| | $ | 87,045 |
|
| Accrued taxes | 53,939 |
| | 35,429 |
|
| Accrued asbestos-related liability | 50,311 |
| | 51,166 |
|
| Warranty liability - current portion | 32,428 |
| | 29,233 |
|
| Accrued restructuring liability - current portion | 12,509 |
| | 10,783 |
|
| Accrued third-party commissions | 14,014 |
| | 10,432 |
|
| Other | 97,299 |
| | 87,238 |
|
| Accrued liabilities | $ | 358,632 |
| | $ | 311,326 |
|
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accrued Restructuring Liability
The Company’s restructuring programs include a series of restructuring 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 Consolidated Balance Sheets is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| Balance at Beginning of Period | | | | Provisions | | Payments | | Foreign Currency Translation | | Balance at End of Period(3) |
| (In thousands) |
| Restructuring and other related charges: |
| Fabrication Technology: | | | | | | | | | | | |
Termination benefits(1) | $ | 1,638 | | | | | $ | 11,381 | | | $ | (7,698) | | | $ | 15 | | | $ | 5,336 | |
Facility closure costs(2) | 1,284 | | | | | 8,358 | | | (9,060) | | | 9 | | | 591 | |
| Subtotal | 2,922 | | | | | 19,739 | | | (16,758) | | | 24 | | | 5,927 | |
Non-cash charges(2) | | | | | 1,894 | | | | | | | |
| Fabrication Technology total provisions | | | | | 21,633 | | | | | | | |
| | | | | | | | | | | |
| Medical Technology: | | | | | | | | | | | |
Termination benefits(1) | 3,919 | | | | | 3,284 | | | (5,405) | | | 86 | | | 1,884 | |
Facility closure costs(2) | 257 | | | | | 17,125 | | | (17,085) | | | 0 | | | 297 | |
| Subtotal | 4,176 | | | | | 20,409 | | | (22,490) | | | 86 | | | 2,181 | |
Non-cash charges(2) | | | | | 2,985 | | | | | | | |
| Medical Technology total provisions | | | | | 23,394 | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total | $ | 7,098 | | | | | 40,148 | | | $ | (39,248) | | | $ | 110 | | | $ | 8,108 | |
Non-cash charges(2) | | | | | 4,879 | | | | | | | |
| Total Colfax provisions | | | | | $ | 45,027 | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | Balance at Beginning of Period | | Provisions | | Payments | | Foreign Currency Translation | | Balance at End of Period(3) |
| | (In thousands) |
| Restructuring and other related charges: |
| Air and Gas Handling: | | | | | | | | | |
Termination benefits(1) | $ | 4,855 |
| | $ | 21,605 |
| | $ | (14,929 | ) | | $ | 507 |
| | $ | 12,038 |
|
Facility closure costs(2) | 1,234 |
| | 3,961 |
| | (5,397 | ) | | (15 | ) | | (217 | ) |
| | 6,089 |
| | 25,566 |
| | (20,326 | ) | | 492 |
| | 11,821 |
|
Non-cash charges(2) | | | 26,628 |
| | | | | | |
| | | | 52,194 |
| | | | | | |
| Fabrication Technology: | | | | | | | | | |
Termination benefits(1) | 3,712 |
| | 5,590 |
| | (8,732 | ) | | 90 |
| | 660 |
|
Facility closure costs(2) | 981 |
| | 6,198 |
| | (7,150 | ) | | 13 |
| | 42 |
|
| | 4,693 |
| | 11,788 |
| | (15,882 | ) | | 103 |
| | 702 |
|
Non-cash charges(2) | | | 4,369 |
| | | | | | |
| | | | 16,157 |
| | | | | | |
| Corporate and Other: | | | | | | | | | |
Facility closure costs(2) | 203 |
| | — |
| | (133 | ) | | 14 |
| | 84 |
|
| | 203 |
| | — |
| | (133 | ) | | 14 |
| | 84 |
|
| Total | $ | 10,985 |
| | 37,354 |
| | $ | (36,341 | ) | | $ | 609 |
| | $ | 12,607 |
|
Non-cash charges(2) | | | 30,997 |
| | | | | | |
| | | | $ | 68,351 |
| | | | | | |
(1) Includes severance and other termination benefits, including outplacement services. The Company recognizes the cost of involuntary termination benefits at the communication date or ratably over any remaining expected future service period. Voluntary termination benefits are recognized as a liability and an expense when employees accept the offer and the amount can be reasonably estimated.
(2) Includes the cost of relocating associates, relocating equipment and lease termination expense in connection with the closure of facilities. During the year ended December 31, 2017,2020, the Company recorded a $4.4total of $1.9 million and $3.0 million non-cash impairment chargecharges for a facilityfacilities in ourthe Fabrication Technology segment, that was previously closedand Medical Technology segments, respectively, as part of restructuring activities. The Company recorded a $26.6 million non-cash impairment charge for a facility in our Air and Gas Handling segment as part of the Corporate approved restructuring activities. Restructuring charges in the Medical Technology segment during the year ended December 31, 2020 include costs related to product and distribution channel transformations, facilities optimization, and integration charges, as well as $6.6 million classified as Cost of sales on the Company’s Consolidated Statements of Operations for the year ended December 31, 2020.
(3) As of December 31, 2017, $12.52020, $7.9 million and $0.1$0.2 million of the Company’s restructuring liability was included in Accrued liabilities and Other liabilities, respectively.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 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: |
| Fabrication Technology: | | | | | | | | | | | |
Termination benefits(1) | $ | 5,494 | | | | | $ | 7,131 | | | $ | (10,588) | | | $ | (399) | | | $ | 1,638 | |
Facility closure costs(2) | 662 | | | | | 11,711 | | | (11,136) | | | 47 | | | 1,284 | |
| 6,156 | | | | | 18,842 | | | (21,724) | | | (352) | | | 2,922 | |
| Non-cash charges | | | | | 4,198 | | | | | | | |
| | | | | 23,040 | | | | | | | |
| Medical Technology: | | | | | | | | | | | |
Termination benefits(1) | 0 | | | 6,096 | | | 5,449 | | | (7,626) | | | 0 | | | 3,919 | |
Facility closure costs(2) | 0 | | | 298 | | | 45,258 | | | (45,299) | | | 0 | | | 257 | |
| 0 | | | 6,394 | | | 50,707 | | | (52,925) | | | 0 | | | 4,176 | |
| | | | | | | | | | | |
| Total | $ | 6,156 | | | $ | 6,394 | | | 69,549 | | | $ | (74,649) | | | $ | (352) | | | $ | 7,098 | |
Non-cash charges(2) | | | | | 4,198 | | | | | | | |
| | | | | $ | 73,747 | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | Balance at Beginning of Period | | Provisions | | Payments | | Foreign Currency Translation | | Balance at End of Period(3) |
| | (In thousands) |
| Restructuring and other related charges: |
| Air and Gas Handling: | | | | | | | | | |
Termination benefits(1) | $ | 5,656 |
| | $ | 13,599 |
| | $ | (14,502 | ) | | $ | 102 |
| | $ | 4,855 |
|
Facility closure costs(2) | 894 |
| | 9,159 |
| | (8,702 | ) | | (117 | ) | | 1,234 |
|
| | 6,550 |
| | 22,758 |
| | (23,204 | ) | | (15 | ) | | 6,089 |
|
| Non-cash charges | | | 3,668 |
| | | | | | |
| | | | 26,426 |
| | | | | | |
| Fabrication Technology: | | | | | | | | | |
Termination benefits(1) | 6,031 |
| | 23,104 |
| | (25,263 | ) | | (160 | ) | | 3,712 |
|
Facility closure costs(2) | 426 |
| | 7,261 |
| | (6,611 | ) | | (95 | ) | | 981 |
|
| | 6,457 |
| | 30,365 |
| | (31,874 | ) | | (255 | ) | | 4,693 |
|
| Non-cash charges | | | 1,323 |
| | | | | | |
| | | | 31,688 |
| | | | | | |
| Corporate and Other: | | | | | | | | | |
Facility closure costs(2) | 625 |
| | — |
| | (344 | ) | | (78 | ) | | 203 |
|
| | 625 |
| | — |
| | (344 | ) | | (78 | ) | | 203 |
|
| Total | $ | 13,632 |
| | 53,123 |
| | $ | (55,422 | ) | | $ | (348 | ) | | $ | 10,985 |
|
Non-cash charges(2) | | | 4,991 |
| | | | | | |
| | | | $ | 58,114 |
| | | | | | |
(1) Includes severance and other termination benefits, including outplacement services. The Company recognizes the cost of involuntary termination benefits at the communication date or ratably over any remaining expected future service period. Voluntary termination benefits are recognized as a liability and an expense when employees accept the offer and the amount can be reasonably estimated.
(2) Includes the cost of relocating associates, relocating equipment and lease termination expense in connection with the closure of facilities. During the year ended December 31, 2019, the Company recorded a $4.2 million non-cash impairment charge for facilities in our Fabrication Technology segment as part of Corporate approved restructuring activities. Restructuring charges in the Medical Technology segment also include $8.5 million classified as Cost of sales on the Company’s Consolidated Statements of Operations for the year ended December 31, 2019.
(3) As of December 31, 2016, $10.82019, $7.0 million and $0.2$0.1 million of the Company’s restructuring liability was included in Accrued liabilities and Other liabilities, respectively.
The Company expects to incur Restructuring and other related charges of approximately $32.9 million during the year ending December 31, 2018 related to its restructuring activities.
14.16. Defined Benefit Plans
The Company sponsors various defined benefit plans, defined contribution plans and other post-retirement benefits plans, including health and life insurance, for certain eligible employees or former employees. The Company uses December 31st as the measurement date for all of its employee benefit plans.
In connection with the sale of the FluidAir and Gas Handling business, the Buyerpurchaser assumed the FluidAir and Gas Handling liability for all foreign defined benefit plans specific to the FluidAir and Gas Handling business, a portion of the U.S. defined benefit plan, and certain other postretirement obligations.business. Net benefit cost for the Fluidyears ended December 31, 2019 and 2018 for the Air and Gas Handling business is included in Net income (loss) from discontinued operations, net of taxes, within the Consolidated Statements of Income.Operations. See Note 4, “Discontinued Operations” for further information.
During the year ended December 31, 2017, we2019, the Company settled a foreigntwo non-U.S. pension plan - Charter Pension Scheme (CPS) -plans, one in connection with aour Fabrication
Technology segment and one in our Air and Gas Handling segment through third-party buyout arrangement.arrangements. As a result of these settlements, the settlement, we areCompany has no longer responsible for any liabilitiesfurther funding obligations under CPSthese two plans and recognized a loss of $46.5$77.4 million was recognized forin 2019, which is partly reflected in Pension settlement loss in the Consolidated Statements of Operations. As the Company divested its Air and Gas Handling segment during the year ended December 31, 2017.2019, the related settlement loss of $43.8 million is included in Net income (loss) from discontinued operations, net of taxes, within the Consolidated Statements of Operations. See Note 4, “Discontinued Operations” for further information.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the total changes in the Company’s pension and accrued post-retirement benefits and plan assets and includes a statement of the plans’ funded status:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Post-Retirement Benefits |
| | Year Ended December 31, | | Year Ended December 31, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (In thousands) |
| Change in benefit obligation: | | | | | | | |
| Projected benefit obligation, beginning of year | $ | 361,146 | | | $ | 867,345 | | | $ | 13,057 | | | $ | 13,844 | |
| Acquisitions | 0 | | | 2,264 | | | 0 | | | 0 | |
| Service cost | 1,933 | | | 2,462 | | | 8 | | | 5 | |
| Interest cost | 7,454 | | | 16,556 | | | 313 | | | 445 | |
| Plan amendment | 95 | | | 464 | | | 0 | | | 15 | |
Actuarial loss (gain) (1) | 21,642 | | | 183,084 | | | 1,139 | | | (382) | |
| Foreign exchange effect | 9,757 | | | (912) | | | (3) | | | (4) | |
| Benefits paid | (24,105) | | | (40,131) | | | (1,170) | | | (866) | |
| Divestitures | 0 | | | (50,468) | | | 0 | | | 0 | |
| Settlements | (418) | | | (619,756) | | | 0 | | | 0 | |
| Other | 1,791 | | | 238 | | | 0 | | | 0 | |
| Projected benefit obligation, end of year | $ | 379,295 | | | $ | 361,146 | | | $ | 13,344 | | | $ | 13,057 | |
| Accumulated benefit obligation, end of year | $ | 375,267 | | | $ | 356,741 | | | $ | 13,344 | | | $ | 13,057 | |
| Change in plan assets: | | | | | | | |
| Fair value of plan assets, beginning of year | $ | 251,291 | | | $ | 850,024 | | | $ | 0 | | | $ | 0 | |
| | | | | | | |
| Actual return on plan assets | 26,123 | | | 88,869 | | | 0 | | | 0 | |
| Employer contribution | 9,830 | | | 10,793 | | | 1,170 | | | 866 | |
| Foreign exchange effect | 2,806 | | | 1,236 | | | 0 | | | 0 | |
| Benefits paid | (24,105) | | | (40,131) | | | (1,170) | | | (866) | |
| Divestitures | 0 | | | (39,897) | | | 0 | | | 0 | |
| Settlements | (418) | | | (619,756) | | | 0 | | | 0 | |
| Other | 1,727 | | | 153 | | | 0 | | | 0 | |
| Fair value of plan assets, end of year | $ | 267,254 | | | $ | 251,291 | | | $ | 0 | | | $ | 0 | |
| Funded status, end of year | $ | (112,041) | | | $ | (109,855) | | | $ | (13,344) | | | $ | (13,057) | |
| Amounts recognized on the Consolidated Balance Sheet at December 31: | | | | | | | |
| Non-current assets | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| | | | | | | |
| Current liabilities | (3,800) | | | (3,596) | | | (1,028) | | | (1,177) | |
| Non-current liabilities | (108,241) | | | (106,259) | | | (12,316) | | | (11,880) | |
| | | | | | | |
| | | | | | | |
| Total | $ | (112,041) | | | $ | (109,855) | | | $ | (13,344) | | | $ | (13,057) | |
(1) The reported actuarial loss in 2020 is primarily due to the decrease in discount rates in most markets. The reported actuarial loss in 2019 is primarily due to the settlements of two pension plans and decrease in discount rates in most markets.
For pension plans with accumulated benefit obligations in excess of plan assets, the accumulated benefit obligation and fair value of plan assets were $367.4 million and $259.1 million, respectively, as of December 31, 2020 and $345.1 million and $238.9 million, respectively, as of December 31, 2019.
For pensions plans with projected benefit obligations in excess of plan assets, the projected benefit obligation and fair value of plan assets were $376.0 million and $263.9 million, respectively, as of December 31, 2020 and $359.5 million and $249.6 million, respectively, as of December 31, 2019.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Post-Retirement Benefits |
| | Year Ended December 31, | | Year Ended December 31, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (In thousands) |
| Change in benefit obligation: | |
| | |
| | |
| | |
|
| Projected benefit obligation, beginning of year | $ | 1,475,276 |
| | $ | 1,550,643 |
| | $ | 26,295 |
| | $ | 33,093 |
|
| Acquisitions | 42,830 |
| | — |
| | 310 |
| | — |
|
| Service cost | 4,951 |
| | 4,059 |
| | 11 |
| | 39 |
|
| Interest cost | 42,177 |
| | 51,638 |
| | 951 |
| | 1,038 |
|
| Plan amendment | 19,389 |
| | — |
| | 35 |
| | — |
|
| Actuarial loss (gain) | 78,124 |
| | 126,505 |
| | 1,307 |
| | (5,689 | ) |
| Foreign exchange effect | 82,425 |
| | (158,453 | ) | | 6 |
| | — |
|
| Benefits paid | (93,009 | ) | | (97,488 | ) | | (1,875 | ) | | (2,186 | ) |
| Divestitures | (340,614 | ) | | — |
| | (11,751 | ) | | — |
|
| Settlements | (354,647 | ) | | (1,591 | ) | | — |
| | — |
|
| Other | 367 |
| | (37 | ) | | — |
| | — |
|
| Projected benefit obligation, end of year | $ | 957,269 |
| | $ | 1,475,276 |
| | $ | 15,289 |
| | $ | 26,295 |
|
| Accumulated benefit obligation, end of year | $ | 947,803 |
| | $ | 1,452,000 |
| | $ | 15,289 |
| | $ | 26,295 |
|
| Change in plan assets: | |
| | |
| | |
| | |
|
| Fair value of plan assets, beginning of year | $ | 1,297,900 |
| | $ | 1,337,405 |
| | $ | — |
| | $ | — |
|
| Acquisitions | 36,538 |
| | — |
| | — |
| | — |
|
| Actual return on plan assets | 111,630 |
| | 191,562 |
| | — |
| | — |
|
| Employer contribution | 35,996 |
| | 32,347 |
| | 1,875 |
| | 2,186 |
|
| Foreign exchange effect | 74,565 |
| | (164,316 | ) | | — |
| | — |
|
| Benefits paid | (93,009 | ) | | (97,488 | ) | | (1,875 | ) | | (2,186 | ) |
| Divestitures | (204,673 | ) | | — |
| | — |
| | — |
|
| Settlements | (354,647 | ) | | (1,591 | ) | | — |
| | — |
|
| Other | 46 |
| | (19 | ) | | — |
| | — |
|
| Fair value of plan assets, end of year | $ | 904,346 |
| | $ | 1,297,900 |
| | $ | — |
| | $ | — |
|
| Funded status, end of year | $ | (52,923 | ) | | $ | (177,376 | ) | | $ | (15,289 | ) | | $ | (26,295 | ) |
| Amounts recognized on the Consolidated Balance Sheet at December 31: | |
| | |
| | |
| | |
|
| Non-current assets | $ | 65,060 |
| | $ | 85,347 |
| | $ | — |
| | $ | — |
|
| Assets held for sale, less current portion | — |
| | 481 |
| | — |
| | — |
|
| Current liabilities | (4,171 | ) | | (4,026 | ) | | (1,507 | ) | | (961 | ) |
| Non-current liabilities | (113,812 | ) | | (111,736 | ) | | (13,782 | ) | | (14,294 | ) |
| Current portion of liabilities held for sale | — |
| | (1,047 | ) | | — |
| | (1,213 | ) |
| Liabilities held for sale, less current portion | — |
| | (146,395 | ) | | — |
| | (9,827 | ) |
| Total | $ | (52,923 | ) | | $ | (177,376 | ) | | $ | (15,289 | ) | | $ | (26,295 | ) |
The accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $0.4 billion and $0.2 billion, respectively, as of December 31, 2017 and $0.6 billion and $0.4 billion, respectively, as of December 31, 2016.
The projected benefit obligation and fair value of plan assets for the pension plans with projected benefit obligations in excess of plan assets were $0.4 billion and $0.2 billion, respectively, as of December 31, 2017 and $0.6 billion and $0.4 billion, respectively, as of December 31, 2016. $0.3 billion of the projected benefit obligation and $0.2 billion of the fair value of plan assets were included in assets held for sale and liabilities held for sale, respectively, in the Consolidated Balance Sheets as of December 31, 2016.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the changes in the Company’s foreign pension benefit obligation, which is determined based upon an employee’s expected date of separation, and plan assets, included in the table above, and includes a statement of the plans’ funded status:
| | | | | | | | | | | |
| | Foreign Pension Benefits |
| | Year Ended December 31, |
| | 2020 | | 2019 |
| | (In thousands) |
| Change in benefit obligation: | | | |
| Projected benefit obligation, beginning of year | $ | 144,739 | | | $ | 661,084 | |
| Acquisitions | 0 | | | 2,264 | |
| Service cost | 1,933 | | | 2,340 | |
| Interest cost | 2,315 | | | 9,376 | |
| Plan amendments | 95 | | | 464 | |
Actuarial loss (1) | 5,778 | | | 164,888 | |
| Foreign exchange effect | 9,757 | | | (912) | |
| Benefits paid | (8,795) | | | (24,779) | |
| Divestitures | 0 | | | (50,468) | |
| Settlements | (418) | | | (619,756) | |
| Other | 1,791 | | | 238 | |
| Projected benefit obligation, end of year | $ | 157,195 | | | $ | 144,739 | |
| Accumulated benefit obligation, end of year | $ | 153,167 | | | $ | 140,335 | |
| Change in plan assets: | | | |
| Fair value of plan assets, beginning of year | $ | 67,535 | | | $ | 691,758 | |
| Acquisitions | 0 | | | 0 | |
| Actual return on plan assets | 4,037 | | | 51,318 | |
| Employer contribution | 6,222 | | | 7,502 | |
| Foreign exchange effect | 2,806 | | | 1,236 | |
| Benefits paid | (8,795) | | | (24,779) | |
| Divestitures | 0 | | | (39,897) | |
| Settlements | (418) | | | (619,756) | |
| Other | 1,727 | | | 153 | |
| Fair value of plan assets, end of year | $ | 73,114 | | | $ | 67,535 | |
| Funded status, end of year | $ | (84,081) | | | $ | (77,204) | |
(1) The reported actuarial loss in 2020 is primarily due to the decrease in discount rates in most markets. The reported actuarial loss in 2019 is primarily due to the settlements of two pension plans and decrease in discount rates in most markets.
|
| | | | | | | |
| | Foreign Pension Benefits |
| | Year Ended December 31, |
| | 2017 | | 2016 |
| | (In thousands) |
| Change in benefit obligation: | |
| | |
|
| Projected benefit obligation, beginning of year | $ | 1,033,193 |
| | $ | 1,075,223 |
|
| Acquisitions | 42,830 |
| | — |
|
| Service cost | 4,804 |
| | 3,881 |
|
| Interest cost | 27,133 |
| | 34,298 |
|
| Plan amendments | 19,389 |
| | — |
|
| Actuarial loss (gain) | 70,849 |
| | 132,898 |
|
| Foreign exchange effect | 82,425 |
| | (158,453 | ) |
| Benefits paid | (60,510 | ) | | (53,028 | ) |
Divestitures
| (136,114 | ) | | — |
|
| Settlements | (354,647 | ) | | (1,591 | ) |
| Other | 41 |
| | (35 | ) |
| Projected benefit obligation, end of year | $ | 729,393 |
| | $ | 1,033,193 |
|
| Accumulated benefit obligation, end of year | $ | 719,927 |
| | $ | 1,009,916 |
|
| Change in plan assets: | |
| | |
|
| Fair value of plan assets, beginning of year | $ | 953,455 |
| | $ | 981,249 |
|
| Acquisitions | 36,538 |
| | — |
|
| Actual return on plan assets | 59,924 |
| | 158,992 |
|
| Employer contribution | 35,815 |
| | 32,168 |
|
| Foreign exchange effect | 74,565 |
| | (164,316 | ) |
| Benefits paid | (60,510 | ) | | (53,028 | ) |
Divestitures
| (28,102 | ) | | — |
|
| Settlements | (354,647 | ) | | (1,591 | ) |
| Other | 47 |
| | (19 | ) |
| Fair value of plan assets, end of year | $ | 717,085 |
| | $ | 953,455 |
|
| Funded status, end of year | $ | (12,308 | ) | | $ | (79,738 | ) |
Expected contributions to the Company’s pension and other post-employment benefit plans for the year ending December 31, 2018,2021, related to plans as of December 31, 2017,2020, are $40.5$6.9 million. The following benefit payments are expected to be paid during each respective fiscal year:
|
| | | | | | | | | | | |
| | Pension Benefits | | Other Post-Retirement Benefits |
| | All Plans | | Foreign Plans | |
| | (In thousands) |
| 2018 | $ | 54,204 |
| | $ | 37,715 |
| | $ | 1,507 |
|
| 2019 | 54,784 |
| | 38,495 |
| | 1,354 |
|
| 2020 | 55,179 |
| | 39,024 |
| | 1,205 |
|
| 2021 | 56,779 |
| | 40,866 |
| | 1,079 |
|
| 2022 | 56,773 |
| | 41,150 |
| | 1,008 |
|
| 2023- 2027 | 292,410 |
| | 200,091 |
| | 4,232 |
|
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Post-Retirement Benefits |
| | All Plans | | Foreign Plans | |
| | (In thousands) |
| 2021 | $ | 25,147 | | | $ | 9,276 | | | $ | 1,028 | |
| 2022 | 24,495 | | | 8,925 | | | 954 | |
| 2023 | 23,858 | | | 8,641 | | | 884 | |
| 2024 | 22,989 | | | 8,182 | | | 839 | |
| 2025 | 22,689 | | | 8,315 | | | 830 | |
| 2026 - 2030 | 105,337 | | | 40,832 | | | 3,731 | |
The Company’s primary investment objective for its pension plan assets is to provide a source of retirement income for the plans’ participants and beneficiaries. The assets are invested with the goal of preserving principal while providing a reasonable real rate of return over the long term. Diversification of assets is achieved through strategic allocations to various asset classes. Actual allocations to each asset class vary due to periodic investment strategy changes, market value fluctuations, the length of time it takes to fully implement investment allocation positions, and the timing of benefit payments and contributions. The asset allocation is monitored and rebalanced as required, as frequently as on a quarterly basis in some instances. The following are the actual and target allocation percentages for the Company’s pension plan assets:
| | | | Actual Asset Allocation
December 31, | |
Target | | Actual Asset Allocation
December 31, | |
Target |
| | 2017 | | 2016 | | Allocation | | 2020 | | 2019 | | Allocation |
| U.S. Plans: | | | | U.S. Plans: | | | |
| Equity securities: | |
| | |
| | | Equity securities: | | | | | |
| U.S. | 44 | % | | 44 | % | | 30% - 45% | U.S. | 44 | % | | 44 | % | | 30%-45% |
| International | 16 | % | | 15 | % | | 10% - 20% | International | 16 | % | | 15 | % | | 10% -20% |
| Fixed income | 39 | % | | 36 | % | | 30% - 50% | Fixed income | 39 | % | | 39 | % | | 30% -50% |
| Other | — | % | | 1 | % | | 0% - 20% | Other | 0 | % | | 0 | % | | 0%-20% |
| Cash and cash equivalents | 1 | % | | 4 | % | | 0% - 5% | Cash and cash equivalents | 1 | % | | 2 | % | | 0%-5% |
| Foreign Plans: | |
| | |
| | | Foreign Plans: | | | | | |
| Equity securities | 31 | % | | 32 | % | | 25%-40% | Equity securities | 27 | % | | 27 | % | | 0%-40% |
| Fixed income securities | 60 | % | | 65 | % | | 60%-75% | Fixed income securities | 10 | % | | 11 | % | | 0%-15% |
| Cash and cash equivalents | 1 | % | | 1 | % | | 0% - 25% | Cash and cash equivalents | 0 | % | | 0 | % | | 0%-25% |
| Other | 8 | % | | 2 | % | | 0% - 10% | Other | 63 | % | | 62 | % | | 55%-90% |
A summary of the Company’s pension plan assets for each fair value hierarchy level for the periods presented follows (see Note 15,17, “Financial Instruments and Fair Value Measurements” for further description of the levels within the fair value hierarchy):
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Measured at Net Asset Value(1) | | Level
One | | Level
Two | | Level
Three | |
Total |
| | (In thousands) |
| U.S. Plans: | | | |
| | |
| | |
| | |
|
| Cash and cash equivalents | $ | — |
| | $ | 1,591 |
| | $ | — |
| | $ | — |
| | $ | 1,591 |
|
| Equity securities: |
|
| | |
| | |
| | |
| | |
|
| U.S. large cap | 49,351 |
| | — |
| | — |
| | — |
| | 49,351 |
|
| U.S. small/mid cap | 20,396 |
| | 13,360 |
| | — |
| | — |
| | 33,756 |
|
| International | 29,236 |
| | — |
| | — |
| | — |
| | 29,236 |
|
| Fixed income mutual funds: |
|
| | |
| | |
| | |
| | |
|
| U.S. government and corporate | 72,313 |
| | — |
| | — |
| | — |
| | 72,313 |
|
Other(2) | — |
| | 1,015 |
| | — |
| | — |
| | 1,015 |
|
| Foreign Plans: |
|
| | |
| | |
| | |
| | |
|
| Cash and cash equivalents | — |
| | 3,636 |
| | — |
| | — |
| | 3,636 |
|
| Equity securities | 78,681 |
| | 142,152 |
| | — |
| | — |
| | 220,833 |
|
| Non-U.S. government and corporate bonds | — |
| | 430,546 |
| | 2,077 |
| | — |
| | 432,623 |
|
Other(2) | — |
| | 573 |
| | 59,419 |
| | — |
| | 59,992 |
|
| | $ | 249,977 |
| | $ | 592,873 |
| | $ | 61,496 |
| | $ | — |
| | $ | 904,346 |
|
| |
(1)
| Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient (the “NAV”) have not been classified in the fair value hierarchy. These investments, consisting of common/collective trusts, are valued using the NAV provided by the Trustee. The NAV is based on the underlying investments held by the fund, that are traded in an active market, less its liabilities. These investments are able to be redeemed in the near-term. |
| |
(2)
| Represents diversified portfolio funds, reinsurance contracts and money market funds. |
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | Measured at Net Asset Value(1) | | Level
One | | Level
Two | | Level
Three | |
Total |
| | (In thousands) |
| U.S. Plans: | | | | | | | | | |
| Cash and cash equivalents | $ | 0 | | | $ | 1,752 | | | $ | 0 | | | $ | 0 | | | 1,752 | |
| Equity securities: | | | | | | | | | |
| U.S. large cap | 51,728 | | | 0 | | | 0 | | | 0 | | | 51,728 | |
| U.S. small/mid cap | 21,175 | | | 12,895 | | | 0 | | | 0 | | | 34,070 | |
| International | 30,552 | | | 0 | | | 0 | | | 0 | | | 30,552 | |
| Fixed income mutual funds: | | | | | | | | | |
| U.S. government and corporate | 74,978 | | | 0 | | | 0 | | | 0 | | | 74,978 | |
| | | | | | | | | |
Other(2) | 0 | | | 1,060 | | | 0 | | | 0 | | | 1,060 | |
| Foreign Plans: | | | | | | | | | |
| Cash and cash equivalents | 0 | | | 239 | | | 0 | | | 0 | | | 239 | |
| Equity securities | — | | | 19,513 | | | 0 | | | 0 | | | 19,513 | |
| Non-U.S. government and corporate bonds | 0 | | | 5,331 | | | 1,922 | | | 0 | | | 7,253 | |
Other(2) | 0 | | | — | | | 46,109 | | | 0 | | | 46,109 | |
| | $ | 178,433 | | | $ | 40,790 | | | $ | 48,031 | | | $ | 0 | | | $ | 267,254 | |
(1)Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient (the “NAV”) have not been classified in the fair value hierarchy. These investments, consisting of common/collective trusts, are valued using the NAV provided by the Trustee. The NAV is based on the underlying investments held by the fund, that are traded in an active market, less its liabilities. These investments are able to be redeemed in the near-term.
(2)Represents diversified portfolio funds, reinsurance contracts and money market funds.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| | Measured at Net Asset Value(1) | | Level
One | | Level
Two | | Level
Three | |
Total |
| | (In thousands) |
| U.S. Plans: | | | | | | | | | |
| Cash and cash equivalents | $ | 0 | | | $ | 2,855 | | | $ | 0 | | | $ | 0 | | | $ | 2,855 | |
| Equity securities: | | | | | | | | | |
| U.S. large cap | 48,582 | | | 0 | | 0 | | | 0 | | | 48,582 | |
| U.S. small/mid cap | 20,093 | | | 12,268 | | | 0 | | | 0 | | | 32,361 | |
| International | 28,573 | | | 0 | | | 0 | | | 0 | | | 28,573 | |
| Fixed income mutual funds: | | | | | | | | | |
| U.S. government and corporate | 70,334 | | | 0 | | | 0 | | | 0 | | | 70,334 | |
Other(2) | 0 | | | 1,051 | | | 0 | | | 0 | | | 1,051 | |
| Foreign Plans: | | | | | | | | | |
| Cash and cash equivalents | 0 | | | 215 | | | 0 | | | 0 | | | 215 | |
| Equity securities | — | | | 18,462 | | | — | | | 0 | | | 18,462 | |
| Non-U.S. government and corporate bonds | 0 | | | 5,299 | | | 1,911 | | | 0 | | | 7,210 | |
Other(2) | 0 | | | — | | | 41,648 | | | 0 | | | 41,648 | |
| | $ | 167,582 | | | $ | 40,150 | | | $ | 43,559 | | | $ | 0 | | | $ | 251,291 | |
(1)Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient (the “NAV”) have not been classified in the fair value hierarchy. These investments, consisting primarily of common/collective trusts, are valued using
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Measured at Net Asset Value(1) | | Level
One | | Level
Two | | Level
Three | |
Total |
| | (In thousands) |
| U.S. Plans: | | | |
| | |
| | |
| | |
|
| Cash and cash equivalents | $ | — |
| | $ | 16,517 |
| | $ | — |
| | $ | — |
| | $ | 16,517 |
|
| Equity securities: | | | |
| | |
| | |
| | |
|
| U.S. large cap | $ | 97,530 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 97,530 |
|
| U.S. small/mid cap | 41,141 |
| | 12,116 |
| | — |
| | — |
| | 53,257 |
|
| International | 51,656 |
| | — |
| | — |
| | — |
| | 51,656 |
|
| Fixed income mutual funds: | | | |
| | |
| | |
| | |
|
| U.S. government and corporate | 123,663 |
| | — |
| | — |
| | — |
| | 123,663 |
|
Other(2) | — |
| | 1,822 |
| | — |
| | — |
| | 1,822 |
|
| Foreign Plans: | | | |
| | |
| | |
| | |
|
| Cash and cash equivalents | — |
| | 8,758 |
| | — |
| | — |
| | 8,758 |
|
| Equity securities | 129,525 |
| | 144,696 |
| | 32,966 |
| | — |
| | 307,187 |
|
| Non-U.S. government and corporate bonds | — |
| | 292,288 |
| | 321,657 |
| | — |
| | 613,945 |
|
Other(2) | — |
| | 592 |
| | 22,973 |
| | — |
| | 23,565 |
|
| | $ | 443,515 |
| | $ | 476,789 |
| | $ | 377,596 |
| | $ | — |
| | $ | 1,297,900 |
|
(2)Represents diversified portfolio funds, reinsurance contracts and money market funds.
| |
(1)
| Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient (the “NAV”) have not been classified in the fair value hierarchy. These investments, consisting primarily of common/collective trusts, are valued using the NAV provided by the Trustee. The NAV is based on the underlying investments held by the fund, that are traded in an active market, less its liabilities. These investments are able to be redeemed in the near-term. |
| |
(2)
| Represents diversified portfolio funds, reinsurance contracts and money market funds. |
The following table sets forth the components of net periodic benefit cost (income) and Other comprehensive income of the Company’s defined benefit pension plans and other post-retirement employee benefit plans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Post-Retirement Benefits |
| | Year Ended December 31, | | Year Ended December 31, |
| | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 |
| | (In thousands) |
| Components of Net Periodic Benefit Cost (Income): | | | | | | | | | | | |
| Service cost | $ | 1,933 | | | $ | 2,462 | | | $ | 2,770 | | | $ | 8 | | | $ | 5 | | | $ | 19 | |
| Interest cost | 7,454 | | | 16,556 | | | 21,574 | | | 313 | | | 445 | | | 452 | |
| Amortization | 4,960 | | | 3,385 | | | 4,282 | | | (231) | | | (255) | | | (28) | |
| Settlement loss (gain) | 99 | | | 77,390 | | | (39) | | | 0 | | | 0 | | | 0 | |
| Divestitures gain | 0 | | | (4,354) | | | 0 | | | 0 | | | — | | | 0 | |
| Other | 143 | | | 79 | | | (458) | | | 0 | | | 0 | | | 0 | |
| Expected return on plan assets | (12,773) | | | (19,774) | | | (29,306) | | | 0 | | | 0 | | | 0 | |
| Net periodic benefit cost (income) | $ | 1,816 | | | $ | 75,744 | | | $ | (1,177) | | | $ | 90 | | | $ | 195 | | | $ | 443 | |
| Change in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income: | | | | | | | | | | | |
| Current year net actuarial (gain) loss | $ | 10,379 | | | $ | 113,995 | | | $ | (11,816) | | | $ | 1,143 | | | $ | (380) | | | $ | (723) | |
| Current year prior service cost | 74 | | | 464 | | | 3,800 | | | 0 | | | 15 | | | 0 | |
| Less amounts included in net periodic benefit cost: | | | | | | | | | | | |
| Amortization of net (gain) loss | (4,914) | | | (3,285) | | | (4,330) | | | 231 | | | 270 | | | 31 | |
| Settlement/divestiture/other (gain) loss | (177) | | | (83,602) | | | 39 | | | 0 | | | 0 | | | 0 | |
| Amortization of prior service cost | (46) | | | (100) | | | 48 | | | 0 | | | (15) | | | (3) | |
| Total recognized in Other comprehensive income | $ | 5,316 | | | $ | 27,472 | | | $ | (12,259) | | | $ | 1,374 | | | $ | (110) | | | $ | (695) | |
Net periodic benefit cost (income) of $44.4 million and $(1.4) million for the years ended December 31, 2019 and 2018, respectively, are included in Income (loss) from discontinued operations, net of taxes. Net periodic benefit cost included in loss from discontinued operations for the year ended December 31, 2019 includes $43.8 million in settlement loss related to the Air and Gas Handling segment. Each component of Net periodic benefit cost from continuing operations, with the exception of Settlement loss, is included in Selling, general and administrative expense.
The following table sets forth the components of net periodic benefit cost and Other comprehensive loss (gain) of the Company’sforeign defined benefit pension plans, and other post-retirement employee benefit plans:
included in the table above:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Post-Retirement Benefits |
| | Year Ended December 31, | | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Components of Net Periodic Benefit Cost: | |
| | |
| | |
| | |
| | |
| | |
|
| Service cost | $ | 4,951 |
| | $ | 4,059 |
| | $ | 4,612 |
| | $ | 11 |
| | $ | 39 |
| | $ | 33 |
|
| Interest cost | 42,177 |
| | 51,638 |
| | 54,807 |
| | 951 |
| | 1,038 |
| | 1,170 |
|
| Amortization | 10,660 |
| | 8,334 |
| | 11,515 |
| | (839 | ) | | (407 | ) | | 259 |
|
| Settlement loss (gain) | 46,933 |
| | 48 |
| | (582 | ) | | — |
| | — |
| | — |
|
| Divestitures loss (gain) | (17,858 | ) | | — |
| | — |
| | (13,744 | ) | | — |
| | — |
|
| Other | — |
| | 37 |
| | 525 |
| | 207 |
| | — |
| | 174 |
|
| Expected return on plan assets | (48,484 | ) | | (57,169 | ) | | (58,107 | ) | | — |
| | — |
| | — |
|
| Net periodic benefit cost | $ | 38,379 |
| | $ | 6,947 |
| | $ | 12,770 |
| | $ | (13,414 | ) | | $ | 670 |
| | $ | 1,636 |
|
| Change in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Loss: | |
| | |
| | |
| | |
| | |
| | |
|
| Current year net actuarial (gain) loss | $ | 19,193 |
| | $ | (9,523 | ) | | $ | (33,558 | ) | | $ | 1,307 |
| | $ | (5,689 | ) | | $ | (6,410 | ) |
| Current year prior service cost | 19,389 |
| | — |
| | — |
| | 35 |
| | — |
| | — |
|
| Less amounts included in net periodic benefit cost: | |
| | |
| | |
| | |
| | |
| | |
|
| Amortization of net loss | (10,682 | ) | | (8,362 | ) | | (11,515 | ) | | 971 |
| | 655 |
| | (11 | ) |
| Settlement/divestiture/other (gain) loss | (163,199 | ) | | (74 | ) | | (952 | ) | | 1,787 |
| | — |
| | — |
|
| Amortization of prior service cost | 23 |
| | 28 |
| | — |
| | (132 | ) | | (248 | ) | | (248 | ) |
| Total recognized in Other comprehensive loss | $ | (135,276 | ) | | $ | (17,931 | ) | | $ | (46,025 | ) | | $ | 3,968 |
| | $ | (5,282 | ) | | $ | (6,669 | ) |
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | |
| | Foreign Pension Benefits |
| | Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | (In thousands) |
| Components of Net Periodic Benefit Cost: | |
| Service cost | $ | 1,933 | | | $ | 2,340 | | | $ | 2,634 | |
| Interest cost | 2,315 | | | 9,376 | | | 15,183 | |
| Amortization | 747 | | | 334 | | | 1,039 | |
| Settlement loss (gain) | 99 | | | 77,390 | | | (39) | |
| Divestitures gain | 0 | | | (4,354) | | | 0 | |
| Other | 143 | | | 79 | | | (458) | |
| Expected return on plan assets | (2,397) | | | (9,092) | | | (18,310) | |
| Net periodic benefit cost | $ | 2,840 | | | $ | 76,073 | | | $ | 49 | |
| Change in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Loss: | | | | | |
| Current year net actuarial loss (gain) | $ | 6,226 | | | $ | 122,667 | | | $ | (31,854) | |
| Current year prior service cost | 74 | | | 464 | | | 3,800 | |
| Less amounts included in net periodic benefit cost: | | | | | |
| Amortization of net loss | (701) | | | (234) | | | (1,087) | |
| Settlement/divestiture/other (gain) loss | (177) | | | (83,602) | | | 39 | |
| Amortization of prior service cost | (46) | | | (100) | | | 48 | |
| Total recognized in Other comprehensive loss | $ | 5,376 | | | $ | 39,195 | | | $ | (29,054) | |
Net periodic benefit cost of $7.7 million, $7.1 million and $8.6 million for the years ended December 31, 2017, 2016 and 2015, respectively, are included in Income (loss) from discontinued operations.
The following table sets forth the components of net periodic benefit cost and Other comprehensive loss of the foreign defined benefit pension plans, included in the table above:
|
| | | | | | | | | | | |
| | Foreign Pension Benefits |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Components of Net Periodic Benefit Cost: | |
| Service cost | $ | 4,804 |
| | $ | 3,881 |
| | $ | 4,506 |
|
| Interest cost | 27,133 |
| | 34,298 |
| | 37,253 |
|
| Amortization | 4,229 |
| | 1,870 |
| | 4,272 |
|
| Settlement loss (gain) | 45,110 |
| | 48 |
| | (582 | ) |
Divestitures loss (gain)
| (56,798 | ) | | — |
| | — |
|
| Other | — |
| | 37 |
| | 525 |
|
| Expected return on plan assets | (27,714 | ) | | (32,596 | ) | | (32,921 | ) |
| Net periodic benefit cost | $ | (3,236 | ) | | $ | 7,538 |
| | $ | 13,053 |
|
| Change in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Loss: | |
| | |
| | |
|
| Current year net actuarial loss (gain) | $ | 42,854 |
| | $ | 4,867 |
| | $ | (50,216 | ) |
| Current year prior service cost | 19,389 |
| | — |
| | — |
|
| Less amounts included in net periodic benefit cost: | |
| | |
| | |
|
| Amortization of net loss | (4,251 | ) | | (1,898 | ) | | (4,272 | ) |
| Settlement/divestiture/other (gain) loss | (96,331 | ) | | (74 | ) | | (952 | ) |
| Amortization of prior service cost | 23 |
| | 28 |
| | — |
|
| Total recognized in Other comprehensive loss | $ | (38,316 | ) | | $ | 2,923 |
| | $ | (55,440 | ) |
The components of net unrecognized pension and other post-retirement benefit cost included in Accumulated other comprehensive loss in the Consolidated Balance Sheets that have not been recognized as a component of net periodic benefit cost are as follows:
| | | | Pension Benefits | | Other Post-Retirement
Benefits | | Pension Benefits | | Other Post-Retirement
Benefits |
| | December 31, | | December 31, | | December 31, | | December 31, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 | | 2020 | | 2019 |
| | (In thousands) | | (In thousands) |
| Net actuarial loss (gain) | $ | 86,018 |
| | $ | 221,294 |
| | $ | (2,603 | ) | | $ | (6,878 | ) | Net actuarial loss (gain) | $ | 105,947 | | | $ | 100,659 | | | $ | (2,031) | | | $ | (3,405) | |
| Prior service cost | — |
| | — |
| | 3 |
| | 310 |
| Prior service cost | 477 | | | 449 | | | 0 | | | 0 | |
| Total | $ | 86,018 |
| | $ | 221,294 |
| | $ | (2,600 | ) | | $ | (6,568 | ) | Total | $ | 106,424 | | | $ | 101,108 | | | $ | (2,031) | | | $ | (3,405) | |
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of net unrecognized pension and other post-retirement benefit cost included in Accumulated other comprehensive loss in the Consolidated Balance Sheet that are expected to be recognized as a component of net periodic benefit cost during the year ending December 31, 20182021 are as follows:
|
| | | | | | | |
| | Pension Benefits | | Other Post-
Retirement
Benefits |
| | (In thousands) |
| Net actuarial loss (gain) | $ | 4,602 |
| | $ | (91 | ) |
| Prior service cost | — |
| | 3 |
|
| Total | $ | 4,602 |
| | $ | (88 | ) |
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | |
| | Pension Benefits | | Other Post-
Retirement
Benefits |
| | (In thousands) |
| Net actuarial loss (gain) | $ | 5,929 | | | $ | (74) | |
| Prior service cost | 55 | | | 0 | |
| Total | $ | 5,984 | | | $ | (74) | |
The key economic assumptions used in the measurement of the Company’s pension and other post-retirement benefit obligations are as follows:
| | | | Pension Benefits | | Other Post-Retirement
Benefits | | Pension Benefits | | Other Post-Retirement
Benefits |
| | December 31, | | December 31, | | December 31, | | December 31, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 | | 2020 | | 2019 |
| Weighted-average discount rate: | |
| | |
| | |
| | |
| Weighted-average discount rate: | | | | | | | |
| All plans | 2.6 | % | | 2.9 | % | | 3.4 | % | | 3.9 | % | All plans | 1.7 | % | | 2.5 | % | | 2.1 | % | | 3.0 | % |
| Foreign plans | 2.4 | % | | 2.6 | % | | — |
| | — |
| Foreign plans | 1.4 | % | | 1.9 | % | | — | % | | 0 | % |
| Weighted-average rate of increase in compensation levels for active foreign plans | 2.1 | % | | 1.6 | % | | — |
| | — |
| Weighted-average rate of increase in compensation levels for active foreign plans | 0.6 | % | | 0.8 | % | | — | % | | — | % |
The key economic assumptions used in the computation of net periodic benefit cost are as follows:
| | | | Pension Benefits | | Other Post-Retirement Benefits | | Pension Benefits | | Other Post-Retirement Benefits |
| | Year Ended December 31, | | Year Ended December 31, | | Year Ended December 31, | | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 |
| Weighted-average discount rate: | |
| | |
| | |
| | |
| | |
| | |
| Weighted-average discount rate: | | | | | | | | | | | |
| All plans | 2.9 | % | | 3.6 | % | | 3.3 | % | | 3.9 | % | | 4.0 | % | | 3.6 | % | All plans | 2.5 | % | | 3.0 | % | | 2.6 | % | | 3.0 | % | | 4.0 | % | | 3.4 | % |
| Foreign plans | 2.6 | % | | 3.5 | % | | 3.3 | % | | — |
| | — |
| | — |
| Foreign plans | 1.9 | % | | 2.7 | % | | 2.4 | % | | — | % | | — | % | | — | % |
| Weighted-average expected return on plan assets: | |
| | |
| | |
| | |
| | |
| | |
| Weighted-average expected return on plan assets: | | | | | | | | | | | |
| All plans | 4.1 | % | | 4.8 | % | | 4.7 | % | | — |
| | — |
| | — |
| All plans | 5.7 | % | | 3.1 | % | | 3.8 | % | | — | % | | — | % | | — | % |
| Foreign plans | 3.3 | % | | 4.1 | % | | 3.9 | % | | — |
| | — |
| | — |
| Foreign plans | 4.1 | % | | 2.4 | % | | 3.2 | % | | — | % | | — | % | | — | % |
| Weighted-average rate of increase in compensation levels for active foreign plans | 1.6 | % | | 1.5 | % | | 1.6 | % | | — |
| | — |
| | — |
| Weighted-average rate of increase in compensation levels for active foreign plans | 0.8 | % | | 1.8 | % | | 2.1 | % | | — | % | | — | % | | — | % |
In determining discount rates, the Company utilizes the single discount rate equivalent to discounting the expected future cash flows from each plan using the yields at each duration from a published yield curve as of the measurement date.
For measurement purposes, a weighted-average annual rate of increase in the per capita cost of covered health care benefits of approximately 6.3%6.5% was assumed. The rate was assumed to decrease gradually to 4.50%4.5% by 20272031 and remain at that level thereafter for benefits covered under the plans.
The expected long-term rate of return on plan assets was based on the Company’s investment policy target allocation of the asset portfolio between various asset classes and the expected real returns of each asset class over various periods of time that are consistent with the long-term nature of the underlying obligations of these plans.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A one-percentage point change in assumed health care cost trend rates would have the following pre-tax effects:
|
| | | | | | | |
| | 1% Increase | | 1% Decrease |
| | (In thousands) |
| Effect on total service and interest cost components for the year ended December 31, 2017 | $ | 88 |
| | $ | (72 | ) |
| Effect on post-retirement benefit obligation at December 31, 2017 | 809 |
| | (682 | ) |
| | | | | | | | | | | |
| | 1% Increase | | 1% Decrease |
| | (In thousands) |
| Effect on total service and interest cost components for the year ended December 31, 2020 | $ | 17 | | | $ | (14) | |
| Effect on post-retirement benefit obligation at December 31, 2020 | 695 | | | (591) | |
The Company maintains defined contribution plans covering certain union and non-union employees. The Company’s expense for the years ended December 31, 2017, 20162020, 2019 and 20152018 was $29.0$10.2 million, $22.9$6.9 million and $26.5$6.3 million, respectively. Total expense included in Income (loss) income from discontinued operations, net of taxes for the years ended December 31, 2017, 20162019 and 20152018 was $3.1 million, $2.8$4.2 million and $3.3 million.$5.9 million, respectively.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
15.17. Financial Instruments and Fair Value Measurements
The Company utilizes fair value measurement guidance prescribed by accounting standards to value its financial instruments. The guidance establishes a fair value hierarchy based on the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
Level One: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
Level Two: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level Three: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The carrying values of financial instruments, including Trade receivables, other receivables and Accounts payable, approximate their fair values due to their short-term maturities. The estimated fair value of the Company’s debt of $1.1 billion and $1.3$2.3 billion as of December 31, 20172020 and 2016, respectively,2019 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.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the Company’s assets and liabilities that are measured at fair value on a recurring basis for each fair value hierarchy level for the periods presented is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Level
One | | Level
Two | | Level
Three | | Total |
| (In thousands) |
| Assets: | | | | | | | |
| Cash equivalents | $ | 7,420 | | | $ | 0 | | | $ | 0 | | | $ | 7,420 | |
| | | | | | | |
| | | | | | | |
| Foreign currency contracts related to sales - not designated as hedges | 0 | | | 1,897 | | | 0 | | | 1,897 | |
| | | | | | | |
| Foreign currency contracts related to purchases - not designated as hedges | 0 | | | 297 | | | 0 | | | 297 | |
| Deferred compensation plans | 0 | | | 10,881 | | | 0 | | | 10,881 | |
| $ | 7,420 | | | $ | 13,075 | | | $ | 0 | | | $ | 20,495 | |
| | | | | | | |
| Liabilities: | | | | | | | |
| | | | | | | |
| Foreign currency contracts related to sales - not designated as hedges | $ | 0 | | | $ | 1,313 | | | $ | 0 | | | $ | 1,313 | |
| Foreign currency contracts related to purchases - designated as hedges | 0 | | | 468 | | | 0 | | | 468 | |
| | | | | | | |
| Deferred compensation plans | 0 | | | 10,881 | | | 0 | | | 10,881 | |
| | | | | | | |
| $ | 0 | | | $ | 12,662 | | | $ | 0 | | | $ | 12,662 | |
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | December 31, 2017 | | December 31, 2019 |
| | Level
One | | Level
Two | | Level
Three | | Total | | Level
One | | Level
Two | | Level
Three | | Total |
| | (In thousands) | | (In thousands) |
| Assets: | | | | | | | | Assets: | |
| Cash equivalents | $ | 24,083 |
| | $ | — |
| | $ | — |
| | $ | 24,083 |
| Cash equivalents | $ | 13,125 | | | $ | 0 | | | $ | 0 | | | $ | 13,125 | |
| Short term investments | — |
| | 149,608 |
| | — |
| | 149,608 |
| |
| Foreign currency contracts related to sales - designated as hedges | — |
| | 3,287 |
| | — |
| | 3,287 |
| |
| | Foreign currency contracts related to sales - not designated as hedges | — |
| | 43 |
| | — |
| | 43 |
| Foreign currency contracts related to sales - not designated as hedges | 0 | | | 74 | | | 0 | | | 74 | |
| Foreign currency contracts related to purchases - designated as hedges | — |
| | 493 |
| | — |
| | 493 |
| |
| | Foreign currency contracts related to purchases - not designated as hedges | — |
| | 1,038 |
| | — |
| | 1,038 |
| Foreign currency contracts related to purchases - not designated as hedges | 0 | | | 408 | | | 0 | | | 408 | |
| Deferred compensation plans | — |
| | 6,374 |
| | — |
| | 6,374 |
| Deferred compensation plans | 0 | | | 8,870 | | | 0 | | | 8,870 | |
| | $ | 24,083 |
| | $ | 160,843 |
| | $ | — |
| | $ | 184,926 |
| | $ | 13,125 | | | $ | 9,352 | | | $ | 0 | | | $ | 22,477 | |
| | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | Liabilities: | |
| Foreign currency contracts related to sales - designated as hedges | $ | — |
| | $ | 1,257 |
| | $ | — |
| | $ | 1,257 |
| |
| | Foreign currency contracts related to sales - not designated as hedges | — |
| | 740 |
| | — |
| | 740 |
| Foreign currency contracts related to sales - not designated as hedges | $ | 0 | | | $ | 328 | | | $ | 0 | | | $ | 328 | |
| Foreign currency contracts related to purchases - designated as hedges | — |
| | 1,332 |
| | — |
| | 1,332 |
| |
| | Foreign currency contracts related to purchases - not designated as hedges | — |
| | 449 |
| | — |
| | 449 |
| Foreign currency contracts related to purchases - not designated as hedges | 0 | | | 853 | | | 0 | | | 853 | |
| Deferred compensation plans | — |
| | 6,374 |
| | — |
| | 6,374 |
| Deferred compensation plans | 0 | | | 8,870 | | | 0 | | | 8,870 | |
| | $ | — |
| | $ | 10,152 |
| | $ | — |
| | $ | 10,152 |
| |
| | | $ | 0 | | | $ | 10,051 | | | $ | 0 | | | $ | 10,051 | |
|
| | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Level
One | | Level
Two | | Level
Three | | Total |
| | (In thousands) |
| Assets: | | | | | | | |
| Cash equivalents | $ | 24,603 |
| | $ | — |
| | $ | — |
| | $ | 24,603 |
|
| Short term investments | — |
| | — |
| | — |
| | — |
|
| Foreign currency contracts related to sales - designated as hedges | — |
| | 992 |
| | — |
| | 992 |
|
| Foreign currency contracts related to sales - not designated as hedges | — |
| | 1,285 |
| | — |
| | 1,285 |
|
| Foreign currency contracts related to purchases - designated as hedges | — |
| | 4,224 |
| | — |
| | 4,224 |
|
| Foreign currency contracts related to purchases - not designated as hedges | — |
| | 120 |
| | — |
| | 120 |
|
| Deferred compensation plans | — |
| | 4,586 |
| | — |
| | 4,586 |
|
| | $ | 24,603 |
| | $ | 11,207 |
| | $ | — |
| | $ | 35,810 |
|
| | | | | | | | |
| Liabilities: | | | | | | | |
| Foreign currency contracts related to sales - designated as hedges | $ | — |
| | $ | 11,280 |
| | $ | — |
| | $ | 11,280 |
|
| Foreign currency contracts related to sales - not designated as hedges | — |
| | 256 |
| | — |
| | 256 |
|
| Foreign currency contracts related to purchases - designated as hedges | — |
| | 469 |
| | — |
| | 469 |
|
| Foreign currency contracts related to purchases - not designated as hedges | — |
| | 1,004 |
| | — |
| | 1,004 |
|
| Deferred compensation plans | — |
| | 4,586 |
| | — |
| | 4,586 |
|
| | $ | — |
| | $ | 17,595 |
| | $ | — |
| | $ | 17,595 |
|
There were no transfers in or out of Level One, Two or Three during the yearyears ended December 31, 2017.2020 and 2019.
Cash Equivalents
The Company’s cash equivalents consist of investments in interest-bearing deposit accounts and money market mutual funds which are valued based on quoted market prices. The fair value of these investments approximate cost due to their short-term maturities and the high credit quality of the issuers of the underlying securities.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Short Term Investments
The short term investments held by the Company are CIRCOR Shares received as part of the consideration for the sale of Fluid Handling. Pursuant to the Purchase Agreement, the Company is prohibited from transferring any of the CIRCOR Shares for a period of six months following the date of closing (the “Lock-up Period”). Using available market inputs, the shares were valued and given an appropriate discount rate reflecting the Lock-up Period.
Derivatives
The Company periodically enters into foreign currency interest rate swap and commodity derivative contracts. As the Company has manufacturing sites throughout the world and sells its products globally, the Company is exposed to movements in the exchange rates of various currencies. As a result, the Company enters into crossforeign currency swaps and forward contracts to mitigate this exchange rate risk. Additionally, to mitigate a portion of the foreign exchange risk associated with the translation of the net assets of foreign subsidiaries, the Company’s DB Credit Agreement includes debtCompany has senior unsecured notes denominated in Euro which has been designated as a net investment hedge. See Note 11,13, “Debt” for details. As the Company’s borrowings under the DB Credit AgreementFacility include variable interest rates, the Company may periodically entersenter into interest rate swap or collar agreements to mitigate interest rate risk. Commodity futuresderivative contracts arecan be used to manage costs of raw materials used in the Company’s production processes. There were no changes during the periods presented in the Company’s valuation techniques used to measure asset and liability fair values on a recurring basis.
Foreign Currency Contracts
Foreign currency contracts are measured using broker quotations or observable market transactions in either listed or over-the-counter markets. The Company primarily uses foreign currency contracts to mitigate the risk associated with customer forward sale agreements denominated in currencies other than the applicable local currency, and to match costs and expected revenues where production facilities have a different currency than the selling currency.
As of December 31, 20172020 and 2016,2019, the Company had foreign currency contracts with the following notional values:
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| (In thousands) |
| Foreign currency contracts sold - not designated as hedges | $ | 152,504 | | | $ | 28,718 | |
| | | |
| Foreign currency contracts purchased - not designated as hedges | 97,897 | | | 107,090 | |
| | | |
| Total foreign currency derivatives | $ | 250,401 | | | $ | 135,808 | |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | (In thousands) |
| Foreign currency contracts sold - not designated as hedges | $ | 37,143 |
| | $ | 85,542 |
|
| Foreign currency contracts sold - designated as hedges | 174,194 |
| | 215,086 |
|
| Foreign currency contracts purchased - not designated as hedges | 103,975 |
| | 40,127 |
|
| Foreign currency contracts purchased - designated as hedges | 59,055 |
| | 84,604 |
|
| Total foreign currency derivatives | $ | 374,367 |
| | $ | 425,359 |
|
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company recognized the following in its Consolidated Financial Statements related to its derivative instruments:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| 2020 | | 2019 | | 2018 |
| (In thousands) |
| Contracts Designated as Hedges: | | | | | |
| | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Unrealized gain (loss) on net investment hedges(1) | $ | (26,268) | | | $ | 6,215 | | | $ | 16,745 | |
| Contracts Not Designated in a Hedge Relationship: | | | | | |
| | | | | |
| | | | | |
| Foreign Currency Contracts - related to customer sales contracts: | | | | | |
| Unrealized gain | 704 | | | (395) | | | 890 | |
| Realized gain (loss) | 941 | | | (1,565) | | | (1,083) | |
| Foreign Currency Contracts - related to supplier purchases contracts: | | | | | |
| Unrealized gain (loss) | 707 | | | (216) | | | (820) | |
| Realized gain (loss) | (936) | | | 523 | | | (407) | |
|
| | | | | | | | | | | |
| | Year Ended |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Contracts Designated as Hedges: | | | |
| Foreign Currency Contracts - related to customer sales contracts: | | | | | |
| Unrealized gain (loss) | $ | 3,812 |
| | $ | 1,847 |
| | $ | (2,350 | ) |
| Realized gain (loss) | 1,954 |
| | (4,771 | ) | | (512 | ) |
| Foreign Currency Contracts - related to supplier purchase contracts: | | | | | |
| Unrealized gain (loss) | 1,109 |
| | (1,269 | ) | | (1,173 | ) |
| Realized (loss) gain | (2,737 | ) | | 2,570 |
| | 756 |
|
Unrealized (loss) gain on net investment hedges(1) | (32,388 | ) | | 18,537 |
| | 14,537 |
|
| Contracts Not Designated in a Hedge Relationship: | | | | | |
| Foreign Currency Contracts - related to customer sales contracts: | | | | | |
| Unrealized (loss) gain | (1,725 | ) | | 1,464 |
| | 2,129 |
|
| Realized gain (loss) | 1,712 |
| | (285 | ) | | (5,164 | ) |
| Foreign Currency Contracts - related to supplier purchases contracts: | | | | | |
| Unrealized gain (loss) | 1,472 |
| | (1,095 | ) | | (214 | ) |
| Realized (loss) gain | (358 | ) | | (653 | ) | | 1,132 |
|
(1) The unrealized gain (loss) gain on net investment hedges is attributable to the change in valuation of Euro denominated debt.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. Concentrations of credit risk are considered to exist when there are amounts collectible from multiple counterparties with similar characteristics, which could cause their ability to meet contractual obligations to be similarly impacted by economic or other conditions. The Company performs credit evaluations of its customers prior to delivery or commencement of services and normally does not require collateral. Letters of credit are occasionally required when the Company deems necessary. Customers purchasing from our operations in China represented 23% and 25%There are no customers which represent more than 10% of the Company’s Accounts receivable, net as of December 31, 20172020 and 2016, respectively.2019.
16.18. Commitments and Contingencies
Asbestos and Other Product Liability Contingencies
Certain subsidiaries are each one of many defendants in a large number of lawsuits that claim personal injury as a result of exposure to asbestos from products manufactured with components that are alleged to have contained asbestos. Such components were acquired from third-party suppliers, and were not manufactured by any of the Company’s subsidiaries nor were the subsidiaries producers or direct suppliers of asbestos. The manufactured products that are alleged to have contained asbestos generally were provided to meet the specifications of the subsidiaries’ customers, including the U.S. Navy. The subsidiaries settle asbestos claims for amounts the Company considers reasonable given the facts and circumstances of each claim. The annual average settlement payment per asbestos claimant has fluctuated during the past several years. The Company expects such fluctuations to continue in the future based upon, among other things, the number and type of claims settled in a particular period and the jurisdictions in which such claims arise. To date, the majority of settled claims have been dismissed for no payment.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On September 24, 2017, we entered intoPursuant to the Purchase Agreement with CIRCOR, pursuant to which CIRCOR agreed to purchase certain subsidiaries and assets comprisingagreement from the Fluid Handling business. Pursuant to the Purchase Agreement,business divestiture, the Company will retainretained its asbestos-related contingencies and insurance coverages. However, as the Company willdoes not retain an interest in the ongoing operations of the business subject to the contingencies, the Company has classified asbestos-related activity in its Consolidated Statements of Incomeis classified as part of Income (loss) from discontinuingdiscontinued operations, net of taxes.taxes in its Consolidated Statements of Operations.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Claims activity since December 31 related to asbestos claims is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| 2020 | | 2019 | | 2018 |
| (Number of claims) |
| Claims unresolved, beginning of period | 16,299 | | | 16,417 | | | 17,737 | |
Claims filed(1) | 4,014 | | | 4,486 | | | 4,078 | |
Claims resolved(2) | (5,504) | | | (4,604) | | | (5,398) | |
| Claims unresolved, end of period | 14,809 | | | 16,299 | | | 16,417 | |
| (In dollars) |
Average cost of resolved claims(3) | $ | 12,055 | | | $ | 9,455 | | | $ | 7,497 | |
|
| | | | | | | | | | | |
| | Year Ended |
| | 2017 | | 2016 | | 2015 |
| | (Number of claims) |
Claims unresolved, beginning of period(1) | 20,567 |
| | 20,583 |
| | 21,681 |
|
Claims filed(2) | 4,543 |
| | 5,163 |
| | 4,821 |
|
Claims resolved(3) | (7,373 | ) | | (5,179 | ) | | (5,919 | ) |
| Claims unresolved, end of period | 17,737 |
| | 20,567 |
| | 20,583 |
|
| | (In dollars) |
Average cost of resolved claims(4) | $ | 6,154 |
| | $ | 8,872 |
| | $ | 6,056 |
|
(1) Excludes claims filed by one legal firm that have been “administratively dismissed.”
(2) Claims filed include all asbestos claims for which notification has been received or a file has been opened.
(3)(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.
(4) (3) Excludes claims settled in Mississippi for which the majority of claims have historically been resolved for no payment and insurance recoveries.
The Company has projected each subsidiary’s future asbestos-related liability costs with regard to pending and future unasserted claims based upon the Nicholson methodology. The Nicholson methodology is a standard approach used by experts and has been accepted by numerous courts. It is the Company’s policy to record a liability for asbestos-related liability costs for the longest period of time that it can reasonably estimate.
The Company believes that it can reasonably estimate the asbestos-related liability for pending and future claims that will be resolved in the next 15 years and has recorded that liability as its best estimate. While it is reasonably possible that the subsidiaries will incur costs after this period, the Company does not believe the reasonably possible loss or a range of reasonably possible losses is estimable at the current time. Accordingly, no accrual has been recorded for any costs which may be paid after the next 15 years. Defense costs associated with asbestos-related liabilities as well as costs incurred related to litigation against the subsidiaries’ insurers are expensed as incurred.
Each subsidiary has separate insurance coverage acquired prior to Company ownership of each independent entity. The Company has evaluated the insurance assets for each subsidiary based upon the applicable policy language and allocation methodologies, and law pertaining to the affected subsidiary’s insurance policies.
One of the subsidiaries was notified in 2010 by the primary and umbrella carrier who had been fully defending and indemnifying the subsidiary for 20 years that the limits of liability of its primary and umbrella layer policies had been exhausted. The subsidiary has sought coverage from certain excess layer insurers whose termscoverage obligations were disputed in Delaware state court, and conditions follow form towere the umbrella carrier, which parties’ dispute was resolvedsubject of various rulings, including a September 12, 2016 ruling on certain appealed issues by the Delaware state courts during 2016.Supreme Court. This litigation confirmed that asbestos-related costs should be allocated among excess insurers using an “all sums” allocation (which allows an insured to collect all sums paid in connection with a claim from any insurer whose policy is triggered, up to the policy’s applicable limits), that the subsidiary has rightsthe right to access coverage available under excess insurance policies purchased by a former owner of the business, and that, based on the September 12, 2016 ruling by the Delaware Supreme Court, the subsidiary has a right to immediately access the excess layer policies. Further, the Delaware Supreme Court ruled in the subsidiary’s favor on a “trigger of coverage” issue, holding that every policy in place during or after the date of a claimant’s first significant exposure to asbestos was “triggered” and potentially could be accessed to cover that claimant’s claim. The Court also largely affirmed andbut reversed in part some of the prior lower court rulings on defense obligations and whether payment of suchdefense costs erode policy limits or are payable in addition to policy limits.
Based upon these rulings, the Company currently estimates that the subsidiary’s future expected recovery percentage is approximately 91.8%90.7% of asbestos-related costs, with the subsidiary expected to be responsible for approximately 8.2%9.3% of its future asbestos-related costs.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Since approximately mid-2011, the Company had funded $142.8$173.4 million of the subsidiary’s asbestos-related defense and indemnity costs through December 31, 2017,2020, which it expects to recover from insurers. Based on the above-referenced court rulings, the Company requested that its insurers reimburse all of the $94.9 million that remained outstanding at the time of the ruling, and the Company currently expects to receivehas received substantially all of that amount. As of December 31, 2017, $60.1 million of that amount was reimbursed. Certain of the excess insurers have advised the subsidiary that they are still reviewing cost data relating to the other unreimbursed amounts. The subsidiary also has requested that certain
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
excess insurers provide ongoing coverage for future asbestos-related defense and/or indemnity costs. The insurers to which the vast majority of pending claims have been tendered have not yet responded to this request. To the extent any disagreements concerning excess insurers’ payment obligations under the Delaware Supreme Court’s rulings remain, they are expected to be resolved by Delaware court action, which is still pending and has been remanded to the Delaware Superior Court for any further proceedings. In the interim, and while not impacting the results of operations, the Company’s cash funding for future asbestos-related defense and indemnity costs for which it expects reimbursement from insurers could range up to $10 million per quarter.
In 2003, another subsidiary filed a lawsuit against a large number of its insurers and its former parent to resolve a variety of disputes concerning insurance for asbestos-related bodily injury claims asserted against it. Court rulings in 2007 and 2009 clarified the insurers allocation methodology as mandated by the New Jersey courts, the allocation calculation related to amounts currently due from insurers, and amounts the Company expects to be reimbursed for asbestos-related costs incurred in future periods.
A final judgment at the trial court level was rendered in 2011 and confirmed by the Appellate Division in 2014. In 2015, the New Jersey Supreme Court refused to grant certification of the appeals, effectively ending the matter. The subsidiary expects to be responsible for approximately 21.6%22.2% of all future asbestos-related costs.
During the year ended December 31, 2015,2018, the Company recorded a $4.1 million pre-tax charge due to an increase in mesothelioma and lung cancer claims and higher settlement values per claim that have occurred and are expected to continue to occur in certain jurisdictions. The pre-tax charge was comprised of an increase in asbestos-related liabilities of $20.2 million partially offset by an increase in expected insurance recoveries of $16.1 million. During the year ended December 31, 2016, the Company recorded an $8$5.9 million increase in asbestos-related liabilities due to the rate of filings and higher settlement values per claim.claim, relating to timing of the mix of claims resolved. The related insurance asset was accordingly increased $6.4$4.8 million, resulting in a net pre-tax charge of $1.6$1.1 million. During the year ended December 31, 2017,2019, the Company recorded an $8.3a $28.4 million increase in asbestos-related liabilities due to higher settlement values per claim.a revision in forecast assumptions for filing rates and resolution values. The related insurance asset was accordingly increased $6.7$15.1 million, resulting in a net pre-tax charge of $1.6$13.3 million. During the year ended December 31, 2020, the Company recorded a $11.6 million increase in asbestos-related liabilities due to a revision in forecast assumptions for filing rates and resolution values. The related insurance asset was accordingly increased $3.9 million, resulting in a net pre-tax charge of $7.7 million. For all periods, the net pre-tax charge is included in Income (loss) from discontinued operations, net of taxes in the Consolidated Statements of Income.Operations.
The Company’s Consolidated Balance Sheets included the following amounts related to asbestos-related litigation:
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| (In thousands) |
| | | |
Current asbestos insurance receivable(1) | $ | 0 | | | $ | 4,474 | |
Long-term asbestos insurance asset(2) | 232,712 | | | 281,793 | |
Long-term asbestos insurance receivable(2) | 31,815 | | | 41,629 | |
Accrued asbestos liability(3) | 41,626 | | | 64,394 | |
Long-term asbestos liability(4) | 253,144 | | | 286,105 | |
(1) Included in Other current assets in the Consolidated Balance Sheets.
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | (In thousands) |
Long-term asbestos insurance asset(1) | $ | 284,454 |
| | $ | 293,289 |
|
Long-term asbestos insurance receivable(1) | 73,489 |
| | 92,269 |
|
Accrued asbestos liability(2) | 50,311 |
| | 51,166 |
|
Long-term asbestos liability(3) | 310,326 |
| | 330,194 |
|
(1) (2)Included in Other assets in the Consolidated Balance Sheets.
(2) (3) Represents current accruals for probable and reasonably estimable asbestos-related liability costcosts that the Company believes the subsidiaries will pay, through the next 12 months, overpayments by certain insurers 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 Consolidated Balance Sheets.
(3) (4) Included in Other liabilities in the Consolidated Balance Sheets.
Management’s analyses are based on currently known facts and a number of assumptions. However, projecting future events, such as new claims to be filed each year, the average cost of resolving each claim, coverage issues among layers of insurers, the method in which losses will be allocated to the various insurance policies, interpretation of the effect on coverage of various policy terms and limits and their interrelationships, the continuing solvency of various insurance companies and the collectability of claims tendered, 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.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
General Litigation
The Company is also involved in various other pending legal proceedings arising out of the ordinary course of the Company’s business. None of these legal proceedings are expected to have a material adverse effect on the financial condition, results of operations or cash flow of the Company. With respect to these proceedings and the litigation and claims described in the preceding paragraphs, management of the Company believes that it will either prevail, has adequate insurance coverage or has established appropriate accruals to cover potential liabilities. Any costs that management estimates may be paid related to these proceedings or claims are accrued when the liability is considered probable and the amount can be reasonably estimated. There can be no assurance, however, as to the ultimate outcome of any of these matters, and if all or substantially all of these legal proceedings were to be determined adverse to the Company, there could be a material adverse effect on the financial condition, results of operations or cash flow of the Company.
Minimum Lease Obligations
The Company’s minimum obligations under non-cancelable operating leases are as follows:
| | | | | |
| | December 31, 2020 |
| | (In thousands) |
| 2021 | $ | 42,516 | |
| 2022 | 33,809 | |
| 2023 | 26,836 | |
| 2024 | 18,987 | |
| 2025 | 14,073 | |
| Thereafter | 71,838 | |
| Total | $ | 208,059 | |
|
| | | |
| | December 31, 2017 |
| | (In thousands) |
| 2018 | $ | 32,208 |
|
| 2019 | 24,579 |
|
| 2020 | 18,051 |
|
| 2021 | 13,706 |
|
| 2022 | 10,485 |
|
| Thereafter | 53,403 |
|
| Total | $ | 152,432 |
|
The Company’s operating leases extend for varying periods and, in some cases, contain renewal options that would extend the existing terms. During the years ended December 31, 2017, 20162020, 2019 and 2015,2018, the Company’s net rental expense related to operating leases was $38.5$38.0 million, $34.8$34.3 million and $35.6$26.6 million, respectively.
Off-Balance Sheet Arrangements
As of December 31, 2017,2020, the Company had $271.8$276.9 million of unconditional purchase obligations with suppliers, the majority of which is expected to be paid by December 31, 2018.2021.
17.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
19. Segment Information
Prior to the sale of the Fluid Handling business, theThe Company conducted its operations through three operating segments: Air and Gas Handling, Fluid Handling and Fabrication Technology. The Air and Gas Handling and Fluid Handling operating segments were aggregated into a single reportable segment. Subsequent to the sale, the Company now conducts its continuing operations through the AirFabrication Technology and Gas Handling and FabricationMedical Technology operating segments, which also represent the Company’s reportable segments.
| |
▪ | Air and Gas Handling - a global supplier of centrifugal and axial fans, rotary heat exchangers, gas compressors, ventilation control systems and software, and aftermarket services; and
|
• Fabrication Technology -a leading global supplier of consumable products and equipment for use in the cutting, joining and automated welding, as well as gas control equipment, providing a wide range of products with innovative technologies to solve challenges in a wide range of industries.
| |
▪ | 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 leader in orthopedic solutions, providing devices, software and services spanning the full continuum of patient care, from injury prevention to joint replacement to rehabilitation.
Certain amounts not allocated to the two2 reportable segments and intersegment eliminations are reported under the heading “Corporate and other.” The Company’s management evaluates the operating results of each of its reportable segments based upon Net sales and segment operating income (loss), which represents Operating income (loss) before restructuring and certain other charges.
The Company’s segment results were as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (In thousands)
|
| Net sales: | | | | | |
| Fabrication Technology | $ | 1,950,069 | | | $ | 2,247,026 | | | $ | 2,193,083 | |
| Medical Technology | 1,120,700 | | | 1,080,432 | | | 0 | |
| Total Net sales | $ | 3,070,769 | | | $ | 3,327,458 | | | $ | 2,193,083 | |
| | | | | |
Segment operating income (loss)(1): | | | | | |
| Fabrication Technology | $ | 246,011 | | | $ | 302,601 | | | $ | 249,934 | |
| Medical Technology | 29,079 | | | 96,170 | | | 0 | |
| Corporate and other | (60,840) | | | (121,412) | | | (69,321) | |
| Total segment operating income | $ | 214,250 | | | $ | 277,359 | | | $ | 180,613 | |
| | | | | |
| Depreciation, amortization and other impairment charges: | | | | | |
| Fabrication Technology | $ | 76,644 | | | $ | 80,072 | | | $ | 79,712 | |
| Medical Technology | 168,227 | | | 134,001 | | | 0 | |
| Corporate and other | 1,358 | | | 1,534 | | | 1,495 | |
| Total depreciation, amortization and other impairment charges | $ | 246,229 | | | $ | 215,607 | | | $ | 81,207 | |
| | | | | |
| Capital expenditures: | | | | | |
| Fabrication Technology | $ | 40,137 | | | $ | 44,454 | | | $ | 40,512 | |
| Medical Technology | 74,624 | | | 57,326 | | | 0 | |
| Corporate and other | 24 | | | 59 | | | 1,275 | |
| Total capital expenditures | $ | 114,785 | | | $ | 101,839 | | | $ | 41,787 | |
(1) The following is a reconciliation of Income (loss) before income taxes to segment operating income:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| | | | | |
| Income from continuing operations before income taxes | $ | 58,029 | | | $ | 50,493 | | | $ | 92,364 | |
| Loss on short-term investments | 0 | | | 0 | | | 10,128 | |
| Pension settlement loss (gain) | 0 | | | 33,616 | | | (39) | |
| Interest expense, net | 104,262 | | | 119,503 | | | 49,083 | |
Restructuring and other related charges(1)
| 45,027 | | | 73,747 | | | 29,077 | |
MDR and other costs(2) | 6,932 | | | 0 | | | 0 | |
| Segment operating income | $ | 214,250 | | | $ | 277,359 | | | $ | 180,613 | |
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The(1) Restructuring and other related charges includes $6.6 million and $8.5 million of expense classified as Cost of sales on the Company’s segment results were as follows:Consolidated Statements of Operations for the years ended December 31, 2020 and 2019, respectively.
(2) Primarily related to costs specific to compliance with medical device reporting regulations and other requirements of the European Union Medical Device Regulation of 2017. |
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands)
|
| Net sales: | | | |
| Air and Gas Handling | $ | 1,362,902 |
| | $ | 1,385,261 |
| | $ | 1,449,115 |
|
| Fabrication Technology | 1,937,282 |
| | 1,800,492 |
| | 1,985,237 |
|
| Total Net sales | $ | 3,300,184 |
| | $ | 3,185,753 |
| | $ | 3,434,352 |
|
| | | | | | |
Segment operating income (loss)(1): | | | | | |
| Air and Gas Handling | $ | 126,205 |
| | $ | 150,130 |
| | $ | 171,022 |
|
| Fabrication Technology | 224,362 |
| | 195,435 |
| | 199,823 |
|
| Corporate and other | (53,432 | ) | | (49,983 | ) | | (47,499 | ) |
| Total segment operating income | $ | 297,135 |
| | $ | 295,582 |
| | $ | 323,346 |
|
| | | | | | |
| Depreciation, amortization and other impairment charges: | | | | | |
| Air and Gas Handling | $ | 51,004 |
| | $ | 53,222 |
| | $ | 52,442 |
|
| Fabrication Technology | 71,372 |
| | 74,901 |
| | 83,427 |
|
| Corporate and other | 1,316 |
| | 704 |
| | 1,172 |
|
| Total depreciation, amortization and other impairment charges | $ | 123,692 |
| | $ | 128,827 |
| | $ | 137,041 |
|
| | | | | | |
| Capital expenditures: | | | | | |
| Air and Gas Handling | $ | 18,942 |
| | $ | 18,784 |
| | $ | 26,814 |
|
| Fabrication Technology | 34,167 |
| | 32,662 |
| | 35,261 |
|
| Corporate and other | 277 |
| | 3,595 |
| | 313 |
|
| Total capital expenditures | $ | 53,386 |
| | $ | 55,041 |
| | $ | 62,388 |
|
| | | | | | |
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| (In thousands) |
| Investments in Equity Method Investees: | | | |
| Fabrication Technology | $ | 32,409 | | | $ | 31,134 | |
| Medical Technology | 0 | | | 0 | |
| $ | 32,409 | | | $ | 31,134 | |
| | | |
| Total Assets: | | | |
| Fabrication Technology | $ | 3,390,747 | | | $ | 3,509,023 | |
| Medical Technology | 3,575,644 | | | 3,480,815 | |
| Corporate and other | 385,158 | | | 396,994 | |
| Total | $ | 7,351,549 | | | $ | 7,386,832 | |
(1) The following is a reconciliation of (Loss) income before income taxes to segment operating income:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
| (Loss) income from continuing operations before income taxes | $ | (11,986 | ) | | $ | 206,524 |
| | $ | 218,118 |
|
| Interest expense | 41,137 |
| | 30,276 |
| | 47,502 |
|
| Restructuring and other related charges | 68,351 |
| | 58,496 |
| | 56,822 |
|
| Goodwill and intangible asset impairment charge | 152,700 |
| | 238 |
| | 1,486 |
|
| Pension settlement loss (gain) | 46,933 |
| | 48 |
| | (582 | ) |
| Segment operating income | $ | 297,135 |
| | $ | 295,582 |
| | $ | 323,346 |
|
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | (In thousands) |
| Investments in Equity Method Investees: | | | |
| Air and Gas Handling | $ | 7,151 |
| | $ | 4,616 |
|
| Fabrication Technology | 41,754 |
| | 38,217 |
|
| $ | 48,905 |
| | $ | 42,833 |
|
| | | | |
| Total Assets: | | | |
| Air and Gas Handling | $ | 2,845,190 |
| | $ | 2,454,981 |
|
| Fabrication Technology | 3,291,205 |
| | 2,936,445 |
|
| Corporate and other | 573,302 |
| | 489,682 |
|
| Total | $ | 6,709,697 |
| | $ | 5,881,108 |
|
The detail of the Company’s operations by geography is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (In thousands) |
Net Sales by Origin(1): | | | | | |
| United States | $ | 1,283,651 | | | $ | 1,464,152 | | | $ | 540,533 | |
| Foreign locations | 1,787,118 | | | 1,863,306 | | | 1,652,550 | |
| Total | $ | 3,070,769 | | | $ | 3,327,458 | | | $ | 2,193,083 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
Net Sales by Origin(1): | | | | | |
| United States | $ | 782,200 |
| | $ | 794,008 |
| | $ | 738,051 |
|
| Foreign locations | 2,517,984 |
| | 2,391,745 |
| | 2,696,301 |
|
| Total Net sales | $ | 3,300,184 |
| | $ | 3,185,753 |
| | $ | 3,434,352 |
|
(1) The Company attributes revenues from external customers to individual countries based upon the country in which the sale was originated.
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| (In thousands) |
Property, Plant and Equipment, Net(1): | | | |
| United States | $ | 221,549 | | | $ | 222,293 | |
| Czech Republic | 65,188 | | | 62,469 | |
| India | 39,612 | | | 41,528 | |
| United Kingdom | 20,181 | | | 20,097 | |
| Russia | 19,490 | | | 23,149 | |
| Other Foreign locations | 120,940 | | | 121,705 | |
| Total | $ | 486,960 | | | $ | 491,241 | |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | (In thousands) |
Property, Plant and Equipment, Net(1): | | | |
| United States | $ | 121,023 |
| | $ | 136,707 |
|
| Germany | 63,055 |
| | 14,652 |
|
| Czech Republic | 61,281 |
| | 72,568 |
|
| India | 57,387 |
| | 38,900 |
|
| China | 55,455 |
| | 54,623 |
|
| Other Foreign Locations | 194,601 |
| | 187,981 |
|
| Property, plant and equipment, net | $ | 552,802 |
| | $ | 505,431 |
|
(1) As the Company does not allocate all long-lived assets, specifically intangible assets, to each individual country, evaluation of long-lived assets in total is impracticable.
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
18.20. Selected Quarterly Data—(unaudited)
Provided below is selected unaudited quarterly financial data for the years ended December 31, 20172020 and 2016.2019.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended |
| | April 3, 2020(1)(3) | | July 3, 2020(3) | | October 2,
2020 | | December 31, 2020(2)(3)(4) |
| | (In thousands, except per share data) |
| Net sales | $ | 816,356 | | | $ | 620,360 | | | $ | 805,931 | | | $ | 828,122 | |
| Gross profit | 348,214 | | | 241,086 | | | 344,120 | | | 354,685 | |
| Net income (loss) from continuing operations | 8,868 | | | (3,142) | | | 16,836 | | | 41,520 | |
| Loss from discontinued operations, net of taxes | (3,360) | | | (4,905) | | | (2,641) | | | (7,405) | |
| Net income (loss) attributable to Colfax Corporation | 4,481 | | | (8,474) | | | 13,406 | | | 33,212 | |
| | | | | | | |
| Net income (loss) per share - basic | | | | | | | |
| Continuing operations | $ | 0.06 | | | $ | (0.03) | | | $ | 0.12 | | | $ | 0.30 | |
| Discontinued operations | $ | (0.02) | | | $ | (0.04) | | | $ | (0.02) | | | $ | (0.05) | |
| Consolidated operations | $ | 0.03 | | | $ | (0.06) | | | $ | 0.10 | | | $ | 0.24 | |
| | | | | | | |
| Net income (loss) per share - diluted | | | | | | | |
| Continuing operations | $ | 0.06 | | | $ | (0.03) | | | $ | 0.12 | | | $ | 0.29 | |
| Discontinued operations | $ | (0.02) | | | $ | (0.04) | | | $ | (0.02) | | | $ | (0.05) | |
| Consolidated operations | $ | 0.03 | | | $ | (0.06) | | | $ | 0.10 | | | $ | 0.24 | |
(1) The results for the quarter ended April 3, 2020 include the impact of six additional days as compared to the quarter ended March 29, 2019 due to our accounting close schedule and leap year.
|
| | | | | | | | | | | | | | | |
| | Quarter Ended |
| | March 31,
2017(1) | | June 30,
2017 | | September 29,
2017(1) | | December 31,
2017 |
| | (In thousands, except per share data) |
| Net sales | $ | 733,630 |
| | $ | 847,962 |
| | $ | 844,509 |
| | $ | 874,083 |
|
| Gross profit | 239,829 |
| | 258,064 |
| | 263,899 |
| | 267,683 |
|
| Net income (Loss) from continuing operations | 38,390 |
| | 41,864 |
| | 49,622 |
| | (184,416 | ) |
Income from discontinued operations, net of taxes
| 3,097 |
| | 16,611 |
| | 2,082 |
| | 202,257 |
|
| Net income attributable to Colfax Corporation | 38,542 |
| | 53,394 |
| | 45,863 |
| | 13,291 |
|
|
|
| |
|
| |
|
| |
|
|
| Net income (loss) per share - basic |
|
| |
|
| |
|
| |
|
|
| Continuing operations | $ | 0.29 |
| | $ | 0.30 |
| | $ | 0.36 |
| | $ | (1.53 | ) |
| Discontinued operations | $ | 0.03 |
| | $ | 0.13 |
| | $ | 0.02 |
| | $ | 1.64 |
|
| Consolidated operations | $ | 0.31 |
| | $ | 0.43 |
| | $ | 0.37 |
| | $ | 0.11 |
|
|
|
| |
|
| |
|
| |
|
|
| Net income (loss) per share - diluted |
|
| |
|
| |
|
| |
|
|
| Continuing operations | $ | 0.29 |
| | $ | 0.30 |
| | $ | 0.35 |
| | $ | (1.53 | ) |
| Discontinued operations | $ | 0.03 |
| | $ | 0.13 |
| | $ | 0.02 |
| | $ | 1.63 |
|
| Consolidated operations | $ | 0.31 |
| | $ | 0.43 |
| | $ | 0.37 |
| | $ | 0.11 |
|
|
| | | | | | | | | | | | | | | |
| | Quarter Ended |
| | April 1,
2016 | | July 1,
2016 | | September 30,
2016 | | December 31,
2016 |
| | (In thousands, except per share data) |
| Net sales | $ | 765,707 |
| | $ | 841,117 |
| | $ | 766,521 |
| | $ | 812,408 |
|
| Gross profit | 241,692 |
| | 262,386 |
| | 238,314 |
| | 249,990 |
|
| Net Income from continuing operations | 26,997 |
| | 44,037 |
| | 40,548 |
| | 43,170 |
|
Income (loss) from discontinued operations, net of taxes
| (787 | ) | | (74 | ) | | (8,349 | ) | | (351 | ) |
| Net income attributable to Colfax Corporation | 22,615 |
| | 39,754 |
| | 27,970 |
| | 37,772 |
|
| | | | | | | | |
| Net income (loss) per share - basic | | | | | | | |
| Continuing operations | $ | 0.19 |
| | $ | 0.32 |
| | $ | 0.30 |
| | $ | 0.31 |
|
| Discontinued operations | $ | (0.01 | ) | | $ | — |
| | $ | (0.07 | ) | | $ | — |
|
| Consolidated operations | $ | 0.18 |
| | $ | 0.32 |
| | $ | 0.23 |
| | $ | 0.31 |
|
| | | | | | | | |
| Net income (loss) per share - diluted | | | | | | | |
| Continuing operations | $ | 0.19 |
| | $ | 0.32 |
| | $ | 0.30 |
| | $ | 0.31 |
|
| Discontinued operations | $ | (0.01 | ) | | $ | — |
| | $ | (0.07 | ) | | $ | — |
|
| Consolidated operations | $ | 0.18 |
| | $ | 0.32 |
| | $ | 0.23 |
| | $ | 0.31 |
|
(1) (3)The sum of the net income (loss) per share amounts may not add due to rounding.
(4) The results from continuing operations includes the impact from discrete income tax benefits mainly associated with internal entity structural changes and finalization of tax return filing positions.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended |
| | March 29,
2019 | | June 28,
2019 | | September 27,
2019 | | December 31,
2019 |
| | (In thousands, except per share data) |
| Net sales | $ | 683,919 | | | $ | 908,647 | | | $ | 846,519 | | | $ | 888,373 | |
| Gross profit | 261,013 | | | 376,058 | | | 368,142 | | | 395,843 | |
| Net income (loss) from continuing operations | (21,530) | | | 2,212 | | | 3,770 | | | 34,411 | |
Income (loss) from discontinued operations, net of taxes
| (26,472) | | | (468,817) | | | 9,024 | | | (49,744) | |
| Net income (loss) attributable to Colfax Corporation | (52,023) | | | (469,234) | | | 10,474 | | | (16,863) | |
| | | | | | | |
| Net income (loss) per share - basic | | | | | | | |
| Continuing operations | $ | (0.17) | | | $ | 0.01 | | | $ | 0.02 | | | $ | 0.24 | |
| Discontinued operations | $ | (0.22) | | | $ | (3.46) | | | $ | 0.06 | | | $ | (0.36) | |
| Consolidated operations | $ | (0.39) | | | $ | (3.45) | | | $ | 0.08 | | | $ | (0.12) | |
| | | | | | | |
| Net income (loss) per share - diluted | | | | | | | |
| Continuing operations | $ | (0.17) | | | $ | 0.01 | | | $ | 0.02 | | | $ | 0.24 | |
| Discontinued operations | $ | (0.22) | | | $ | (3.46) | | | $ | 0.06 | | | $ | (0.36) | |
| Consolidated operations | $ | (0.39) | | | $ | (3.45) | | | $ | 0.08 | | | $ | (0.12) | |
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
21. Subsequent Events
19. Subsequent Event
On February 12, 2018,January 19, 2021, the Company’s BoardCompany, through its wholly-owned subsidiary, DJO, acquired Trilliant Surgical (“Trilliant”), a national provider of Directors authorizedfoot and ankle orthopedic implants, for $82.0 million cash consideration. The leading product technologies of Trilliant support the repurchaseMedical Technology segment’s focused expansion into the adjacent high-growth $1 billion U.S. foot and ankle market. Trilliant has a broad product portfolio that covers the full universe of up to $100.0 millionfoot reconstructive and fixation procedures, and includes the novel Arsenal Foot Plating System, designed for greater flexibility and speed of implant placement. The estimated proforma annual revenues of the Company’s Common stock from time-to-time on the open market or in privately negotiated transactions. The timing and amountTrilliant acquisition are approximately 1% of shares repurchased is to be determined by management based on its evaluation of market conditions and other factors. The repurchase program has no expiration date and does not obligate the Company to acquire any specific number of shares. No shares have been repurchased to date.
Colfax consolidated revenues.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of December 31, 2017.2020. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective in providing reasonable assurance that the information required to be disclosed in this report on Form 10-K has been recorded, processed, summarized and reported as of the end of the period covered by this report on Form 10-K, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
ThereThe Company completed the DJO acquisition on February 22, 2019. Management considers this transaction to be material to the Company’s consolidated financial statements and believes that the internal controls and procedures of DJO have a material effect on the Company’s internal control over financial reporting. During the year ended December 31, 2020, the Company has completed the process of incorporating the internal controls and procedures of DJO into our internal controls over financial reporting and extending our compliance program under the Sarbanes-Oxley Act of 2002 to include DJO.
Other than the DJO acquisition noted above, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f)) identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during the most recently completed fiscal quarterperiod covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
The management of Colfax Corporation is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Internal control over financial reporting includes policies and procedures that:
| |
(i) | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; |
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;
| |
(ii) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with the authorization of management and directors of the Company; and |
| |
(iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with the authorization of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with existing policies or procedures may deteriorate.
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an assessment of the effectiveness of internal control over financial reporting as of December 31, 20172020 based on the criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework). Based on this assessment, our management has concluded that our internal control over financial reporting was effective as of December 31, 2017.2020.
Our independent registered public accounting firm is engaged to express an opinion on our internal control over financial reporting, as stated in its report which is included in Part II, Item 8 of this Form 10-K under the caption “Report of Independent Registered Public Accounting Firm—Internal Control Over Financial Reporting.”
Item 9B. Other Information
None.None
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information relating to our Executive Officers is set forth in Part I of this Form 10-K under the caption “Executive Officers of the Registrant.”“Information About Our Executive Officers”. Additional information regarding our Directors, Audit Committee and compliance with Section 16(a) of the Exchange Act, if necessary, is incorporated by reference to such information included in our proxy statement for our 20182021 annual meeting to be filed with the SEC within 120 days after the end of the fiscal year covered by this Form 10-K (the “2018“2021 Proxy Statement”) under the captions “Election of Directors”, “Board of Directors and its Committees - Audit Committee” and “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports”.
As part of our system of corporate governance, our Board of Directors has adopted a code of ethics that applies to all employees, including our principal executive officer, our principal financial andofficer, principal accounting officer or other persons performing similar functions. A copy of the code of ethics is available on the Corporate Governance page of the Investor Relations section of our website at www.colfaxcorp.com. We intend to satisfy any disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, a provision of our code of ethics by posting such information on our website at the address above.
Item 11. Executive Compensation
Information responsive to this item is incorporated by reference to such information included in our 20182021 Proxy Statement under the captions “Executive Compensation”,Compensation,” “Director Compensation”,Compensation,” “Compensation Discussion and Analysis”,Analysis,” “Compensation Committee Report”Report,” and “Compensation Committee Interlocks and Insider Participation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information responsive to this item is incorporated by reference to such information included in our 20182021 Proxy Statement under the captions “Beneficial Ownership of Our Common Stock” and “Equity Compensation Plan Information.”
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information responsive to this item is incorporated by reference to such information included in our 20182021 Proxy Statement under the captions “Certain Relationships and Related Person Transactions” and “Director Independence.”
Item 14. Principal Accountant Fees and Services
Information responsive to this item is incorporated by reference to such information included in our 20182021 Proxy Statement under the captions “Independent Registered Public Accounting Firm Fees and Services” and “Audit Committee’s Pre-Approval Policies and Procedures.”
PART IV
Item 15. Exhibits and Financial Statement Schedules
(A) The following documents are filed as part of this report.
(1) Financial Statements. The financial statements are set forth under “Item 8. Financial Statements and Supplementary Data” of this report on Form 10-K.
(2) Schedules. An index of Exhibits and Schedules begins on page
of this report. Schedules other than those listed below have been omitted from this Annual Report because they are not required, are not applicable or the required information is included in the financial statements or the notes thereto.
(3) Exhibits: See exhibits listed under Part (B) below.
(B) Exhibits.
INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA AND FINANCIAL STATEMENT SCHEDULE
EXHIBIT INDEX
|
| | | | |
Exhibit
No.
Schedule: | | Page Number in Form 10-K |
| Valuation and Qualifying Accounts | | |
EXHIBIT INDEX
Description
| | | | | | | | | | | | | | |
Exhibit
No. | |
Description | |
Location |
| | Purchase Agreement, dated as of September 24, 2017, by and between Colfax Corporation and CIRCOR International, Inc. | | Incorporated by reference to Exhibit 2.1 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on September 25, 2017 |
| | | | |
| | Agreement and Plan of Merger, dated as of November 19, 2018, by and among DJO Global, Inc. Colfax Corporation, Motion Merger Sub, Inc. and Grand Slam Holdings, LLC | | Incorporated by reference to Exhibit 2.1 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on November 19, 2018 |
| | Equity and Asset Purchase Agreement, dated as of May 15, 2019, by and among Colfax Corporation, the entities set forth on Schedule I-A thereto, Granite Holdings US Acquisition Co. International, Inc. and Brilliant 3047, GmbH | | Incorporated by reference to Exhibit 2.1 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on May 17, 2019 |
| | Amended and Restated Certificate of Incorporation of Colfax Corporation | | Incorporated by reference to Exhibit 3.01 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on January 30, 2012 |
| | | | |
| | Colfax Corporation Amended and Restated Bylaws | | Incorporated by reference to Exhibit 3.02 to Colfax Corporation’s Form 10-Q (File No. 001-34045) as filed with the SEC on July 23, 2015 |
| | | | |
| | Specimen Common Stock Certificate | | Incorporated by reference to Exhibit 4.1 to Colfax Corporation’s Form S-1 (File 333-148486) as filed with the SEC on May 1, 2008 |
| | | | |
| | Indenture, dated as of April 19, 2017, by and among Colfax Corporation, as issuer, the Subsidiary Guarantors named therein, Deutsche Trustee Company Limited, as trustee, Deutsche Bank AG, London Branch, as paying agent, and Deutsche Bank LuxemboughLuxembourg S.A., as transfer agent, registrar and authenticating agent, and Form of Global Note included therein | | Incorporated by reference to Exhibit 4.1 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on April 19, 2017 |
| | | | |
| | ConversionPurchase Contract Agreement dated February 12, 2014,as of January 11, 2019, by and between Colfax Corporation and BDT CF Acquisition Vehicle, LLCU.S. Bank National Association, as purchase contract agent, attorney-in-fact for holders of purchase contracts and trustee under the indenture | | Incorporated by reference to Exhibit 10.014.1 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on January 11, 2019 |
| | Indenture dated as of January 11, 2019, by and between Colfax Corporation and U.S. Bank National Association, as trustee | | Incorporated by reference to Exhibit 4.4 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on January 11, 2019 |
| | First Supplemental Indenture, dated as of January 11, 2019, between Colfax Corporation and U.S. Bank National Association, as trustee | | Incorporated by reference to Exhibit 4.5 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on January 11, 2019 |
| | Indenture, dated as of February 5, 2019, between CFX Escrow Corporation, as issuer, and Wilmington Trust, National Association, as trustee | | Incorporated by reference to Exhibit 4.1 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on February 12, 2014 |
| | | | 25, 2019 |
| | First Supplemental Indenture, dated as of February 22, 2019, by and among Colfax Corporation (as successor to CFX Escrow Corporation), the guarantors named therein and Wilmington Trust, National Association, as trustee | | Incorporated by reference to Exhibit 4.2 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on February 25, 2019 |
| | | | | | | | | | | | | | |
Exhibit
No. | |
Description | |
Location |
| | Description of Securities registered under Section 12 of the Exchange Act | | Incorporated by reference to Exhibit 4.8 to Colfax Corporation’s Form 10-K (File No. 001-34045) as filed with the SEC on February 24, 2020 |
| | Colfax Corporation 2008 Omnibus Incentive Plan* | | Incorporated by reference to Exhibit 10.1 to Colfax Corporation’s Form S-1 (File 333-148486) as filed with the SEC on April 23, 2008 |
| | | | |
| | Colfax Corporation 2008 Omnibus Incentive Plan, as amended and restated April 2, 2012* | | Incorporated by reference to Exhibit 10.07 to Colfax Corporation’s Form 10-Q (File No. 001-34045) as filed with the SEC on August 7, 2012 |
| | | | |
| | Colfax Corporation 2016 Omnibus Incentive Plan* | | Incorporated by reference to Exhibit 10.01 to Colfax Corporation’s Form 10-Q (File No. 001-34045) as filed with the SEC on July 28, 2016 |
| | | | |
| | Form of Non-Qualified Stock Option Agreement for officers * | | Incorporated by reference to Exhibit 10.5 to Colfax Corporation’s Form 10-K (File No. 001-34045) as filed with the SEC on February 14, 2017 |
| | | | |
| | Form of Non-Qualified Stock Option Agreement for officers with retirement provision * | | Incorporated by reference to Exhibit 10.6 to Colfax Corporation’s Form 10-K (File No. 001-34045) as filed with the SEC on February 24, 2020 |
| | Form of Non-Qualified Stock Option Agreement for non-officers * | | Incorporated by reference to Exhibit 10.6 to Colfax Corporation’s Form 10-K (File No. 001-34045) as filed with the SEC on February 14, 2017 |
| | | | |
| | Form of Non-Qualified Stock Option Agreement for non-officers with retirement provision* | | Incorporated by reference to Exhibit 10.8 to Colfax Corporation’s Form 10-K (File No. 001-34045) as filed with the SEC on February 24, 2020 |
| | Form of Performance Stock Unit Agreement* | | Incorporated by reference to Exhibit 10.7 to Colfax Corporation’s Form 10-K (File No. 001-34045) as filed with the SEC on February 14, 2017 |
| | | | |
|
| | | | |
Exhibit
| | DescriptionForm of Performance Stock Unit Agreement with retirement provision* | | Location
Incorporated by reference to Exhibit 10.10 to Colfax Corporation’s Form 10-K (File No. 001-34045) as filed with the SEC on February 24, 2020
|
| | Form of Restricted Stock Unit Agreement* | | Incorporated by reference to Exhibit 10.8 to Colfax Corporation’s Form 10-K (File No. 001-34045) as filed with the SEC on February 14, 2017 |
| | | | |
| | Form of Restricted Stock Unit Agreement with retirement provisions* | | Incorporated by reference to Exhibit 10.12 to Colfax Corporation’s Form 10-K (File No. 001-34045) as filed with the SEC on February 24, 2020 |
| | Form of Outside Director Deferred Stock Unit Agreement* | | Incorporated by reference to Exhibit 10.9 to Colfax Corporation’s Form 10-K (File No. 001-34045) as filed with the SEC on February 14, 2017 |
| | | | |
| | Form of Outside Director Restricted Stock Unit Agreement (no deferral)* | | Incorporated by reference to Exhibit 10.10 to Colfax Corporation’s Form 10-K (File No. 001-34045) as filed with the SEC on February 14, 2017 |
| | | | |
| | Form of Outside Director Deferred Stock Unit Agreement for deferral of grants of restricted stock * | | Incorporated by reference to Exhibit 10.11 to Colfax Corporation’s Form 10-K (File No. 001-34045) as filed with the SEC on February 14, 2017 |
| | | | |
| | Form of Outside Director Deferred Stock Unit Agreement for deferral of director fees* | | Incorporated by reference to Exhibit 10.12 to Colfax Corporation’s Form 10-K (File No. 001-34045) as filed with the SEC on February 14, 2017 |
|
| | | | |
| | Form of Outside Director Non-Qualified Stock Option Agreement* | | Incorporated by reference to Exhibit 10.13 to Colfax Corporation’s Form 10-K (File No. 001-34045) as filed with the SEC on February 14, 2017 |
| | | | |
| | Colfax Corporation 2020 Omnibus Incentive Plan* | | Incorporated by reference to Exhibit 10.1 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on May 27, 2020 |
| | | | |
| | | | | | | | | | | | | | |
Exhibit
No. | | Description | | Location |
| | Form of Non-Qualified Stock Option Agreement – Chief Executive Officer (2020 Plan)* | | Incorporated by reference to Exhibit 10.2 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on May 27, 2020 |
| | Form of Non-Qualified Stock Option Agreement – Officer (w/ Retirement) (2020 Plan)* | | Incorporated by reference to Exhibit 10.3 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on May 27, 2020 |
| | Form of Non-Qualified Stock Option Agreement – Outside Director (2020 Plan)* | | Incorporated by reference to Exhibit 10.4 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on May 27, 2020 |
| | Form of Performance Stock Unit Agreement – Chief Executive Officer (2020 Plan)* | | Incorporated by reference to Exhibit 10.5 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on May 27, 2020 |
| | Form of Performance Stock Unit Agreement – Officer (w/ Retirement) (2020 Plan)* | | Incorporated by reference to Exhibit 10.6 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on May 27, 2020 |
| | Form of Restricted Stock Unit Agreement – Chief Executive Officer (2020 Plan)* | | Incorporated by reference to Exhibit 10.7 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on May 27, 2020 |
| | Restricted Stock Unit Agreement – Officer (w/ Retirement) (2020 Plan)* | | Incorporated by reference to Exhibit 10.8 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on May 27, 2020 |
| | Form of Restricted Stock Unit Agreement – Outside Director (2020 Plan)* | | Incorporated by reference to Exhibit 10.9 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on May 27, 2020 |
| | Colfax Corporation Amended and Restated Excess Benefit Plan, effective as of January 1, 2013* | | Incorporated by reference to Exhibit 10.13 to Colfax Corporation’s Form 10-K (File No. 001-34045) as filed with the SEC on February 19, 2013 |
| | | | |
| | Amendment No. 1 to Colfax Corporation Amended and Restated Excess Benefit Plan, dated December 12, 2018* | | Incorporated by reference to Exhibit 10.19 to Colfax Corporation’s Form 10-K (File No. 001-34045) as filed with the SEC on February 24, 2020 |
| | Colfax Corporation Nonqualified Deferred Compensation Plan, as effective January 1, 2016* | | Incorporated by reference to Exhibit 10.15 to Colfax Corporation’s Form 10-K (File No. 001-34045) as filed with the SEC on February 16, 2016 |
| | | | |
| | Amendment No. 1 to Colfax Corporation Nonqualified Deferred Compensation Plan, effective as of February 13, 2017* | | Incorporated by reference to Exhibit 10.21 to Colfax Corporation’s Form 10-K (File No. 001-34045) as filed with the SEC on February 24, 2020 |
| | Amendment No. 2 to Colfax Corporation Nonqualified Deferred Compensation Plan, dated December 12, 2018* | | Incorporated by reference to Exhibit 10.22 to Colfax Corporation’s Form 10-K (File No. 001-34045) as filed with the SEC on February 24, 2020 |
| | Employment Agreement between Matthew L. Trerotola and Colfax Corporation* | | Incorporated by reference to Exhibit 10.0110.1 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on July 23, 2015 |
| | | | |
| | Letter Agreement between Colfax Corporation and Christopher Hix* | | Incorporated by reference to Exhibit 10.02 to Colfax Corporation’s Form 10-Q (File No. 001-34045) as filed with the SEC on July 28, 2016 |
| | | | |
| | Employment Agreement between Colfax Corporation and Daniel A. Pryor* | | Incorporated by reference to Exhibit 10.04 to Colfax Corporation’s Form 10-Q (File No. 001-34045) as filed with the SEC on August 7, 2012 |
| | | | |
| | Letter Agreement between Colfax Corporation and Shyam Kambeyanda* | | Incorporated by reference to Exhibit 10.02 to Colfax Corporation’s Form 10-Q (File No. 001-34045) as filed with the SEC on July 28, 2017 |
| | | | |
| | Employment Agreement, dated as of November 14, 2016, by and between DJO Global, Inc. and Brady Shirley* | | Filed herewith |
| | | | |
| | | | | | | | | | | | | | |
Exhibit
No. | | Description | | Location |
| | Form of Indemnification Agreement between the CompanyColfax Corporation and each of its directors and executive officersofficers* | | Incorporated by reference to Exhibit 10.3 to Colfax Corporation’s Form S-1 (File 333-148486) as filed with the SEC on May 1, 2008 |
| | | | |
| | Form of Change in Control Agreement* | | Incorporated by reference to Exhibit 10.01 to Colfax Corporation’s Form 10-Q (File No. 001-34045) as filed with the SEC on October 29, 2020 |
| | Colfax Corporation Annual Incentive Plan, as amended and restated April 2, 2012*3, 2020* | | Incorporated by reference to Exhibit 10.2410.1 to Colfax Corporation’s Form 10-K8-K (File No. 001-34045) as filed with the SEC on February 19, 2013 |
| | | | |
|
| | | | April 9, 2020 |
Exhibit
| | Description | | Location
|
| | Colfax Executive Officer Severance Plan* | | Incorporated by reference to Exhibit 10.02 to Colfax Corporation’s Form 10-Q (File No. 001-34045) as filed with the SEC on July 23, 2015 |
| | Colfax Corporation Director Deferred Compensation Plan* | | Incorporated by reference to Exhibit 10.9 to Colfax Corporation’s Form S-1 (File 333-148486) as filed with the SEC on April 23, 2008 |
| | | | |
| | Amendment No. 1 to the Colfax Corporation Director Deferred Compensation PlanPlan* | | Filed herewith |
| | | | Incorporated by reference to Exhibit 10.24 to Colfax Corporation’s Form 10-K (File 333-148486) as filed with the SEC on February 16, 2018 |
| | Credit Agreement, dated as of June 5, 2015,December 17, 2018, by and among Colfax Corporation, as the borrower, certain U.S. subsidiaries of Colfax Corporation identified therein, as guarantors, each of the lenders party thereto, and DeutscheJPMorgan Chase Bank, AG New York Branch,N.A., as administrative agent, swing line lenderCredit Suisse Loan Funding LLC, as syndication agent, and global coordinatorthe co-documentation agents named therein | | Incorporated by reference to Exhibit 99.1 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on June 5, 2015 |
| | | | December 18, 2018 |
| | IncreaseAmendment No. 1 to Credit Agreement dated as of September 25, 2015, among Colfax Corporation, as the borrower, the guarantors thereto, each of the lenders party thereto, Deutsche Bank AG New York Branch, as administrative agent, swing line leader and global coordinator and Deutsche Bank Securities, Inc., as lead arranger and bookrunnner2019. | | Incorporated by reference to Exhibit 10.0410.1 to Colfax Corporation’s Form 10-Q (File No. 001-34045) as filed with the SEC on October 22, 2015 |
|
| | | | 31, 2019 |
Exhibit
| | Description
| | Location
|
| | Second Amendment No. 2 to the Credit Agreement dated June 24, 2016, among Colfax Corporation, as the borrower, the guarantors party thereto, each of the lenders party thereto, and Deutsche Bank AG New York Branch, as administrative agent.December 6, 2019 | | Incorporated by reference to Exhibit 10.0210.1 to Colfax Corporation’s Form 10-Q8-K (File No. 001-34045) as filed with the SEC on July 28, 2016 |
| | | | December 11, 2019 |
| | Amendment No. 3 to Credit Agreement dated as of May 1, 2020 | | Incorporated by reference to Exhibit 10.1 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on May 7, 2020 |
| | Registration Rights Agreement, dated May 30, 2003, by and among Colfax Corporation, Colfax Capital Corporation, Janalia Corporation, Equity Group Holdings, L.L.C., and Mitchell P. Rales and Steven M. Rales | | Incorporated by reference to Exhibit 10.4 to Colfax Corporation’s Form S-1 (File 333-148486) as filed with the SEC on March 11, 2008
|
| | | | |
| | Amendment No. 1 to the Registration Rights Agreement, by and among Colfax Corporation and Mitchell P. Rales and Steven M. Rales, dated February 18, 2013 | | Incorporated by reference to Exhibit 10.30 to Colfax Corporation’s Form 10-K (File No. 001-34045) as filed with the SEC on February 19, 2013 |
| | | | |
| | Amendment No. 2 to the Registration Rights Agreement, by and among Colfax Corporation and Mitchell P. Rales and Steven M. Rales, dated February 15, 2016 | | Incorporated by reference to Exhibit 10.37 to Colfax Corporation’s Form 10-K (File No. 001-34045) as filed with the SEC on February 16, 2016 |
| | | | |
| | Securities PurchaseAmendment No. 3 to the Registration Rights Agreement, dated September 12, 2011, between BDT CF Acquisition Vehicle, LLCby and among Colfax Corporation and Mitchell P. Rales and Steven M. Rales, dated February 21, 2019 | | Incorporated by reference to Exhibit 99.210.40 to Colfax Corporation’s Form 8-K10-K (File No. 001-34045) as filed with the SEC on September 15, 2011 |
| | | | February 21, 2019 |
| | Securities Purchase Agreement, dated September 12, 2011, between Mitchell P. Rales and Colfax Corporation | | Incorporated by reference to Exhibit 99.3 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on September 15, 2011 |
| | | | |
| | Securities Purchase Agreement, dated September 12, 2011, between Steven M. Rales and Colfax Corporation | | Incorporated by reference to Exhibit 99.4 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on September 15, 2011 |
| | | | |
| | Securities Purchase Agreement, dated September 12, 2011, between Markel Corporation and Colfax Corporation | | Incorporated by reference to Exhibit 99.5 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on September 15, 2011 |
| | | | |
| | Registration Rights Agreement, dated as of January 24, 2012, between Colfax Corporation and BDT CF Acquisition Vehicle, LLC | | Incorporated by reference to Exhibit 10.01 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on January 30, 2012 |
| | | | |
|
| | | | |
Exhibit
No.
| | Description
| | Location
|
| | Registration Rights Agreement, dated as of January 24, 2012, between Colfax Corporation and Mitchell P. Rales | | Incorporated by reference to Exhibit 10.02 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on January 30, 2012 |
| | | | |
| | Registration Rights Agreement, dated as of January 24, 2012, between Colfax Corporation and Steven M. Rales | | Incorporated by reference to Exhibit 10.03 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on January 30, 2012 |
| | | | |
| | | | | | | | | | | | | | |
Exhibit
No. | | Description | | Location |
| | Registration Rights Agreement, dated as of January 24, 2012, between Colfax Corporation and Markel Corporation | | Incorporated by reference to Exhibit 10.04 to Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on January 30, 2012 |
| | | | |
| | Purchase Agreement, dated September 24, 2017, between Colfax Corporation and CIRCOR International, Inc.Subsidiaries of registrant | | Incorporated by reference to Exhibit 2.1 Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on September 25, 2017 |
| | | | Filed herewith |
| | Stockholder Agreement, dated December 11, 2017, between Colfax Corporation and CIRCOR International, Inc. | | Incorporated by reference to Exhibit 10.1 Colfax Corporation’s Form 8-K (File No. 001-34045) as filed with the SEC on December 15, 2017
|
| | | | |
| | Subsidiaries of registrant | | Filed herewith |
| | | | |
| | Consent of Independent Registered Public Accounting Firm | | Filed herewith |
| | | | |
| | Certification of Chief Executive Officer Pursuant to Item 601(b)(31)Rule 13a-14(a) under the
Securities Exchange Act of Regulation S-K,1934 | | Filed herewith |
| | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.2002 | | Filed herewith |
| | | | |
| | Certification of Chief Financial Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | Filed herewith |
| | | | |
| | Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | FiledFurnished herewith |
| | | | |
| | Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | FiledFurnished herewith |
| 101.INS | | | | |
101.INS | | Inline XBRL Instance Document | | Filed herewith |
|
| 101.SCH | | | | |
Exhibit
No.
| | Description
| | Location
|
101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | Filed herewith |
| 101.CAL | | | | |
101.CAL | | Inline XBRL Extension Calculation Linkbase Document | | Filed herewith |
| 101.DEF | | | | |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith |
| 101.LAB | | | | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | Filed herewith |
| 101.PRE | | | | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith |
| 104 | | Cover Page Interactive Data File - The cover page from this Annual Report on Form 10-K for the fiscal year ended December 31, 2020 is formatted in Inline XBRL (included as Exhibit 101). | | Filed herewith |
* Indicates management contract or compensatory plan, contract or arrangement.
Item 16. Form 10-K Summary
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 16, 2018.18, 2021.
COLFAX CORPORATION
By: /s/ MATTHEW L. TREROTOLA
Matthew L. Trerotola
President and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Date: February 16, 2018
|
| |
| /s/ MATTHEW L. TREROTOLA |
| Matthew L. Trerotola |
| President and Chief Executive Officer |
| (Principal Executive Officer) |
|
| /s/ CHRISTOPHER M. HIX |
| Christopher M. Hix |
SeniorExecutive Vice President, Finance and Chief Financial Officer and Treasurer |
| (Principal Financial Officer) |
|
| /s/ DOUGLAS J. PITTS |
| Douglas J. Pitts |
| Vice President, Controller and Chief Accounting Officer |
| (Principal Accounting Officer) |
|
| /s/ MITCHELL P. RALES |
| Mitchell P. Rales |
| Chairman of the Board |
|
| /s/ PATRICK W. ALLENDER |
| Patrick W. Allender |
| Director |
|
| /s/ THOMAS S. GAYNER |
| Thomas S. Gayner |
| Director |
|
| /s/ RHONDA L. JORDAN |
| Rhonda L. Jordan |
| Director |
|
/s/ SAN W. ORR, IIILIAM KELLY |
San W. Orr, IIILiam Kelly |
| Director |
|
| /s/ A. CLAYTON PERFALL |
| A. Clayton Perfall |
| Director |
|
| /s/ DIDIER TEIRLINCK |
| Didier Teirlinck |
| Director |
|
| /s/ RAJIV VINNAKOTA |
| Rajiv Vinnakota |
| Director |
|
| /s/ SHARON L. WIENBAR |
| Sharon L. Wienbar |
| Director |
COLFAX CORPORATION AND SUBSIDIARIES
SCHEDULE II–VALUATION AND QUALIFYING ACCOUNTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at
Beginning
of Period | | Charged to Cost and
Expense (1) | | Charged to Other
Accounts (2) | | Write-Offs Write-Downs and
Deductions | | | | Foreign
Currency
Translation | | Balance at
End of
Period |
| (Dollars in thousands) |
| Year Ended December 31, 2020: | | | | | | | | | | | | | |
Allowance for credit losses(3) | $ | 36,009 | | | $ | 7,574 | | | $ | 0 | | | $ | (5,165) | | | | | $ | (752) | | | $ | 37,666 | |
| Allowance for excess slow-moving and obsolete inventory | 36,231 | | | 35,836 | | | 0 | | | (9,346) | | | | | 119 | | | 62,840 | |
| Valuation allowance for deferred tax assets | 149,037 | | | 6,194 | | | 48,525 | | | 0 | | | | | (415) | | | 203,341 | |
| Year Ended December 31, 2019: | | | | | | | | | | | | | |
| Allowance for credit losses | $ | 35,152 | | | $ | 14,018 | | | $ | 0 | | | $ | (16,255) | | | | | $ | (281) | | | $ | 32,634 | |
| Allowance for excess slow-moving and obsolete inventory | 41,130 | | | 10,655 | | | 0 | | | (15,302) | | | | | (252) | | | 36,231 | |
| Valuation allowance for deferred tax assets | 148,023 | | | 11,250 | | | 9,100 | | | (18,636) | | | | | (700) | | | 149,037 | |
| Year Ended December 31, 2018: | | | | | | | | | | | | | |
| Allowance for credit losses | $ | 31,488 | | | $ | 13,258 | | | $ | 0 | | | $ | (7,381) | | | | | $ | (2,213) | | | $ | 35,152 | |
| Allowance for excess slow-moving and obsolete inventory | 34,960 | | | 20,446 | | | 0 | | | (12,113) | | | | | (2,163) | | | 41,130 | |
| Valuation allowance for deferred tax assets | 155,131 | | | 9,743 | | | 7,180 | | | (16,706) | | | | | (7,325) | | | 148,023 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at
Beginning
of Period | | Charged to Cost and
Expense (1) | | Charged to Other
Accounts (2) | | Write-Offs Write-Downs and
Deductions | | | Foreign
Currency
Translation | | Balance at
End of
Period |
| | (In thousands) |
| Year Ended December 31, 2017: | | | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 29,005 |
| | $ | 2,824 |
| | $ | — |
| | $ | (2,271 | ) | | | $ | 1,930 |
| | $ | 31,488 |
|
| Allowance for excess slow-moving and obsolete inventory | 34,625 |
| | 5,510 |
| | — |
| | (6,440 | ) | | | 1,266 |
| | 34,961 |
|
| Valuation allowance for deferred tax assets | 153,740 |
| | 17,269 |
| | (1,562 | ) | | (17,432 | ) | | | 3,116 |
| | 155,131 |
|
| Year Ended December 31, 2016: | | | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 27,582 |
| | $ | 7,420 |
| | $ | — |
| | $ | (6,536 | ) | | | $ | 539 |
| | $ | 29,005 |
|
| Allowance for excess slow-moving and obsolete inventory | 28,352 |
| | 22,764 |
| | — |
| | (16,492 | ) | | | 1 |
| | 34,625 |
|
| Valuation allowance for deferred tax assets | 161,030 |
| | 21,013 |
| | (1,751 | ) | | (14,813 | ) | | | (11,739 | ) | | 153,740 |
|
| Year Ended December 31, 2015: | | | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 24,779 |
| | $ | 5,219 |
| | $ | — |
| | $ | 691 |
| | | $ | (3,107 | ) | | $ | 27,582 |
|
| Allowance for excess slow-moving and obsolete inventory | 25,395 |
| | 7,488 |
| | — |
| | (1,007 | ) | | | (3,524 | ) | | 28,352 |
|
| Valuation allowance for deferred tax assets | 159,252 |
| | 11,461 |
| | (3,862 | ) | | (2,845 | ) | | | (2,976 | ) | | 161,030 |
|
| |
(1)
| Amounts charged to expense are net of recoveries for the respective period. |
| |
(2)
| Represents amount charge to Accumulated other comprehensive loss and reclassifications to deferred tax asset accounts. |
(2) Represents amounts charged to goodwill and reclassifications to deferred tax asset accounts.
(3) The Allowance for credit losses as of January 1, 2020 includes the cumulative-effect adjustment of the adoption of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
