Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the Quarter
ended July 3, 2009
OR
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period
from to
Commission
file number - 001-34045
Colfax
Corporation
(Exact
name of registrant as specified in its charter)
Delaware
|
|
54-1887631
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
Number)
|
|
|
|
8730
Stony Point Parkway, Suite 150
Richmond,
Virginia
|
|
23235
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(804) 560-4070
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90
days. Yes þ No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o Accelerated
filer o
|
|
Non-accelerated
filer þ
(Do not check if a smaller reporting
company) Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No þ
As of
July 3, 2009, there were 43,229,104 shares of the registrant’s common stock, par
value $.001 per share, outstanding.
COLFAX
CORPORATION
FORM
10-Q
INDEX
|
|
PART
I – FINANCIAL INFORMATION
|
|
Item
1. Financial Statements
|
1
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
15
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
26
|
Item
4. Controls and Procedures
|
27
|
|
|
PART II – OTHER
INFORMATION
|
27
|
Item
1. Legal Proceedings
|
27
|
Item
1A. Risk Factors
|
27
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
28
|
Item
3. Defaults Upon Senior Securities
|
28
|
Item
4. Submission of Matters to a Vote of Security Holders
|
28
|
Item
5. Other Information
|
29
|
Item
6. Exhibits
|
30
|
|
|
SIGNATURES
|
31
|
PART
I – FINANCIAL INFORMATION
Item 1.
Financial Statements
COLFAX
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
Dollars
in thousands, except per share amounts
(unaudited)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 3, 2009
|
|
|
June 27, 2008
|
|
|
July 3, 2009
|
|
|
June 27, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
129,185 |
|
|
$ |
161,431 |
|
|
$ |
265,508 |
|
|
$ |
292,082 |
|
Cost
of sales
|
|
|
84,630 |
|
|
|
104,654 |
|
|
|
172,938 |
|
|
|
187,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
44,555 |
|
|
|
56,777 |
|
|
|
92,570 |
|
|
|
104,955 |
|
Initial
public offering related costs
|
|
|
- |
|
|
|
57,017 |
|
|
|
- |
|
|
|
57,017 |
|
Selling,
general and administrative expenses
|
|
|
28,586 |
|
|
|
35,776 |
|
|
|
58,112 |
|
|
|
64,283 |
|
Research
and development expenses
|
|
|
1,680 |
|
|
|
1,571 |
|
|
|
3,087 |
|
|
|
2,952 |
|
Restructuring
and other related charges
|
|
|
486 |
|
|
|
- |
|
|
|
1,147 |
|
|
|
- |
|
Asbestos
liability and defense costs (income)
|
|
|
1,482 |
|
|
|
(715 |
) |
|
|
3,127 |
|
|
|
(437 |
) |
Asbestos
coverage litigation expenses
|
|
|
4,027 |
|
|
|
3,970 |
|
|
|
6,993 |
|
|
|
7,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
8,294 |
|
|
|
(40,842 |
) |
|
|
20,104 |
|
|
|
(25,969 |
) |
Interest
expense
|
|
|
1,786 |
|
|
|
3,236 |
|
|
|
3,632 |
|
|
|
7,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
6,508 |
|
|
|
(44,078 |
) |
|
|
16,472 |
|
|
|
(33,702 |
) |
Provision
(benefit) for income taxes
|
|
|
2,142 |
|
|
|
(12,679 |
) |
|
|
5,245 |
|
|
|
(9,101 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
4,366 |
|
|
$ |
(31,399 |
) |
|
$ |
11,227 |
|
|
$ |
(24,601 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share—basic and diluted
|
|
$ |
0.10 |
|
|
$ |
(1.01 |
) |
|
$ |
0.26 |
|
|
$ |
(0.99 |
) |
See
accompanying notes to condensed consolidated financial
statements.
COLFAX
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
Dollars
in thousands
|
|
July 3,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
38,047 |
|
|
$ |
28,762 |
|
Trade
receivables, less allowance for doubtful accounts of $3,220 and
$2,486
|
|
|
87,267 |
|
|
|
101,064 |
|
Inventories,
net
|
|
|
81,561 |
|
|
|
80,327 |
|
Deferred
income taxes, net
|
|
|
6,271 |
|
|
|
6,327 |
|
Asbestos
insurance asset
|
|
|
26,178 |
|
|
|
26,473 |
|
Asbestos
insurance receivable
|
|
|
35,351 |
|
|
|
36,371 |
|
Prepaid
and other current assets
|
|
|
15,566 |
|
|
|
15,533 |
|
Total
current assets
|
|
|
290,241 |
|
|
|
294,857 |
|
Deferred
income taxes, net
|
|
|
53,320 |
|
|
|
53,428 |
|
Property,
plant and equipment, net
|
|
|
91,649 |
|
|
|
92,090 |
|
Goodwill
|
|
|
166,165 |
|
|
|
165,530 |
|
Intangible
assets, net
|
|
|
11,758 |
|
|
|
13,516 |
|
Long-term
asbestos insurance asset
|
|
|
271,390 |
|
|
|
277,542 |
|
Deferred
loan costs, pension and other assets
|
|
|
15,584 |
|
|
|
16,113 |
|
|
|
$ |
900,107 |
|
|
$ |
913,076 |
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt and notes payable
|
|
$ |
6,510 |
|
|
$ |
5,420 |
|
Accounts
payable
|
|
|
37,283 |
|
|
|
52,138 |
|
Accrued
asbestos liability
|
|
|
28,260 |
|
|
|
28,574 |
|
Accrued
payroll
|
|
|
17,597 |
|
|
|
19,162 |
|
Accrued
taxes
|
|
|
9,667 |
|
|
|
11,457 |
|
Other
accrued liabilities
|
|
|
41,254 |
|
|
|
37,535 |
|
Total
current liabilities
|
|
|
140,571 |
|
|
|
154,286 |
|
Long-term
debt, less current portion
|
|
|
87,727 |
|
|
|
91,701 |
|
Long-term
asbestos liability
|
|
|
320,271 |
|
|
|
328,684 |
|
Pension
and accrued post-retirement benefits
|
|
|
128,438 |
|
|
|
130,188 |
|
Deferred
income tax liability
|
|
|
7,309 |
|
|
|
7,685 |
|
Other
liabilities
|
|
|
32,357 |
|
|
|
33,601 |
|
Total
liabilities
|
|
|
716,673 |
|
|
|
746,145 |
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock: $0.001 par value; authorized 200,000,000; issued and outstanding
43,229,104 and 43,211,026
|
|
|
43 |
|
|
|
43 |
|
Additional
paid-in capital
|
|
|
401,497 |
|
|
|
400,259 |
|
Retained
deficit
|
|
|
(102,074 |
) |
|
|
(113,301 |
) |
Accumulated
other comprehensive loss
|
|
|
(116,032 |
) |
|
|
(120,070 |
) |
Total
shareholders’ equity
|
|
|
183,434 |
|
|
|
166,931 |
|
|
|
$ |
900,107 |
|
|
$ |
913,076 |
|
See
accompanying notes to condensed consolidated financial
statements.
COLFAX
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars
in thousands
(unaudited)
|
|
Six Months Ended
|
|
|
|
July 3, 2009
|
|
|
June 27, 2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
11,227 |
|
|
$ |
(24,601 |
) |
Adjustments
to reconcile net income (loss) to cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
6,911 |
|
|
|
7,650 |
|
Noncash
stock-based compensation
|
|
|
1,238 |
|
|
|
10,315 |
|
Write
off of deferred loan costs
|
|
|
- |
|
|
|
4,614 |
|
Amortization
of deferred loan costs
|
|
|
338 |
|
|
|
607 |
|
(Gain)
loss on sale of fixed assets
|
|
|
(12 |
) |
|
|
47 |
|
Deferred
income taxes
|
|
|
(820 |
) |
|
|
(18,935 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
14,608 |
|
|
|
(8,314 |
) |
Inventories
|
|
|
(653 |
) |
|
|
(19,562 |
) |
Accounts
payable and accrued liabilities, excluding asbestos-related accrued
expenses
|
|
|
(19,903 |
) |
|
|
(4,915 |
) |
Other
current assets
|
|
|
(849 |
) |
|
|
485 |
|
Change
in asbestos liability and asbestos-related accrued expenses, net of
asbestos insurance asset and receivable
|
|
|
4,721 |
|
|
|
(9,591 |
) |
Changes
in other operating assets and liabilities
|
|
|
1,126 |
|
|
|
5,241 |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
17,932 |
|
|
|
(56,959 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of fixed assets
|
|
|
(5,886 |
) |
|
|
(9,053 |
) |
Proceeds
from sale of fixed assets
|
|
|
72 |
|
|
|
23 |
|
Net
cash used in investing activities
|
|
|
(5,814 |
) |
|
|
(9,030 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings
under term credit facility
|
|
|
- |
|
|
|
100,000 |
|
Payments
under term credit facility
|
|
|
(2,500 |
) |
|
|
(206,528 |
) |
Proceeds
from borrowings on revolving credit facilities
|
|
|
- |
|
|
|
28,185 |
|
Repayments
of borrowings on revolving credit facilities
|
|
|
- |
|
|
|
(28,158 |
) |
Payments
on capital leases
|
|
|
(363 |
) |
|
|
(187 |
) |
Payments
for deferred loan costs
|
|
|
- |
|
|
|
(2,863 |
) |
Proceeds
from the issuance of common stock, net of offering costs
|
|
|
- |
|
|
|
193,020 |
|
Dividends
paid to preferred shareholders
|
|
|
- |
|
|
|
(38,546 |
) |
Net
cash (used in) provided by financing activities
|
|
|
(2,863 |
) |
|
|
44,923 |
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rates on cash
|
|
|
30 |
|
|
|
106 |
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
9,285 |
|
|
|
(20,960 |
) |
Cash
and cash equivalents, beginning of period
|
|
|
28,762 |
|
|
|
48,093 |
|
Cash
and cash equivalents, end of period
|
|
$ |
38,047 |
|
|
$ |
27,133 |
|
See
accompanying notes to condensed consolidated financial
statements.
COLFAX
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollars
in thousands, unless otherwise noted
1. Organization and Nature of
Operations
Colfax
Corporation (the “Company”, “Colfax”, “we” or “us”) is a global supplier of a
broad range of fluid handling products, including pumps, fluid handling systems
and controls, and specialty valves. We believe that we are a leading
manufacturer of rotary positive displacement pumps, which include screw pumps,
gear pumps and progressive cavity pumps. We have a global manufacturing
footprint, with production facilities in Europe, North America and Asia, as well
as worldwide sales and distribution channels. Our products serve a variety of
applications in five strategic markets: commercial marine, oil and gas, power
generation, global navy and general industrial. We design and engineer our
products to high quality and reliability standards for use in critical fluid
handling applications where performance is paramount. We also offer customized
fluid handling solutions to meet individual customer needs based on our in-depth
technical knowledge of the applications in which our products are used. Our
products are marketed principally under the Allweiler, Fairmount, Houttuin, Imo,
LSC, Portland Valve, Tushaco, Warren, and Zenith brand names. We believe that
our brands are widely known and have a premium position in our industry.
Allweiler, Houttuin, Imo and Warren are among the oldest and most recognized
brands in the fluid handling industry, with Allweiler dating back to
1860.
2. General
The
unaudited condensed consolidated financial statements included in this quarterly
report have been prepared by the Company according to the rules and regulations
of the Securities and Exchange Commission (“SEC”) and according to accounting
principles generally accepted in the United States of America (“GAAP”) for
interim financial statements. The accompanying balance sheet information as of
December 31, 2008 is derived from our audited financial statements. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with GAAP have been omitted in accordance with the SEC’s
rules and regulations for interim financial statements. The unaudited condensed
consolidated financial statements included herein should be read in conjunction
with the audited financial statements and related footnotes included in our
Annual Report on Form 10-K for the year ended December 31, 2008 filed with the
SEC on March 6, 2009. Subsequent events were evaluated through August 4, 2009,
the date these financial statements were issued.
The
financial statements reflect, in the opinion of management, all adjustments
which consist solely of normal recurring adjustments necessary to present fairly
the Company’s financial position and results of operations as of and for the
periods indicated. Significant intercompany transactions and accounts are
eliminated in consolidation.
We make
certain estimates and assumptions in preparing our condensed consolidated
financial statements in accordance with GAAP. These estimates and assumptions
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses for the periods presented. Actual
results may differ from those estimates.
Certain
prior period amounts have been reclassified to conform to current year
presentations.
The
results of operations for the three and six months ended July 3, 2009 are not
necessarily indicative of the results of operations that may be achieved for the
full year. Information for quarterly periods is affected by seasonal variations
in our fluid handling business. As our customers seek to fully utilize capital
spending budgets before the end of the year, historically our shipments have
peaked during the fourth quarter. Also, our European operations typically
experience a slowdown during the July and August holiday season. Further,
general economic conditions as well as backlog levels may impact future
periods.
3.
Recent Accounting Pronouncements
In May
2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments, which amends SFAS No. 107, Disclosures about Fair Values of
Financial Instruments, to require disclosures about fair value of
financial instruments in interim financial statements as well as in annual
financial statements. The FSP also amends APB Opinion No. 28, Interim Financial Reporting,
to require those disclosures in all interim financial statements. The FSP is
effective for interim periods ending after June 15, 2009. The Company adopted
FSP SFAS 107-1 and APB 28-1 and has provided the additional disclosures
required. See Note 12.
In
June 2009, the FASB issued SFAS No. 168, The “FASB Accounting
Standards CodificationTM” and the Hierarchy of Generally
Accepted Accounting Principles, a replacement of FASB Statement
No. 162 (SFAS No. 168), which establishes the FASB Accounting
Standards Codification as the source of authoritative accounting principles
recognized by the FASB to be applied in the preparation of financial statements
in conformity with generally accepted accounting principles. SFAS No. 168
explicitly recognizes rules and interpretive releases of the Securities and
Exchange Commission under federal securities laws as authoritative GAAP for SEC
registrants. SFAS No. 168 will become effective in the third quarter of 2009 and
will have no impact on the Company’s consolidated financial position or results
of operations.
4. Warranty Costs
Estimated
expenses related to product warranties are accrued at the time products are sold
to customers and recorded as part of cost of sales. Estimates are established
using historical information as to the nature, frequency, and average costs of
warranty claims.
Warranty
activity for the six months ended July 3, 2009 and June 27, 2008 consisted of
the following:
|
|
Six
Months Ended
|
|
|
|
July
3,
|
|
|
June
27,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Warranty
liability at beginning of the period
|
|
$ |
3,108 |
|
|
$ |
2,971 |
|
Accrued
warranty expense, net of adjustments
|
|
|
860 |
|
|
|
710 |
|
Cost
of warranty service work performed
|
|
|
(370 |
) |
|
|
(519 |
) |
Foreign
exchange translation effect
|
|
|
45 |
|
|
|
119 |
|
|
|
|
|
|
|
|
|
|
Warranty
liability at end of the period
|
|
$ |
3,643 |
|
|
$ |
3,281 |
|
5. Income Taxes
For the
three and six months ended July 3, 2009, the Company earned approximately $6.5
million and $16.5 million, respectively, before taxes and had $2.1 million and
$5.2 million, respectively, of income tax expense. The effective tax rates of
32.9% and 31.8%, respectively, for the three and six months ended July 3, 2009
represent the estimated annual tax rate for the year applied to the current
period income before tax plus the tax effect of any significant unusual items,
discrete items or changes in tax law. These effective tax rates differ from the
U.S. federal statutory tax rate primarily due to international tax rates which
are lower than the U.S. tax rate, including the impact of the reduction in 2009
of the Swedish tax rate from 28.0% to 26.3% that is applied to our Swedish
operations, offset in part by a net increase to our valuation allowance and
unrecognized tax benefit liability.
For the
three and six months ended June 27, 2008, the Company had losses before income
taxes of $44.1 million and $33.7 million, respectively and had income tax
benefits of $12.7 million and $9.1 million, respectively. These effective tax
rates of 28.8% and 27.0% were lower than the U.S. statutory rate primarily due
to an $11.8 million payment to reimburse certain selling shareholders for
underwriting discounts that are not deductible for tax purposes, offset in part
by an expected lower overall rate on normal operations due to reductions in the
German corporate tax rates in 2008, other foreign tax rates that are lower than
the U.S. tax rate, and changes in overall profitability.
The
Company is subject to income tax in the U.S., state and international locations.
The Company’s significant operations outside the U.S. are located in Germany and
Sweden. In Sweden tax years from 2003 to 2008 and in Germany tax years 2003 and
2006 to 2008 remain subject to examination. In the U.S., tax years from 2005 and
beyond generally remain open for examination by U.S. and state tax authorities
as well as tax years ending in 1997, 1998, 2000 and 2003 that have U.S. net
operating loss tax attributes that have been carried forward to open tax years
or are available to be carried forward to future tax years.
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, we
estimate it is reasonably possible the expiration of various statutes of
limitations and resolution of tax audits may reduce our tax expense in the next
12 months from zero to $1.1 million.
6. Restructuring and Other Related
Charges
The
Company has initiated a series of restructuring actions during 2009 in response
to current and expected future economic conditions. As a result, the Company
recorded pre-tax restructuring and related costs of $0.5 million and $1.1
million for three and six month periods ended July 3, 2009, respectively. As of
July 3, 2009, we have reduced our company-wide workforce by approximately 150
associates from December 31, 2008. Additionally, 628 associates participate in a
German government-sponsored furlough program in which the government pays the
wage-related costs of workers that work less than a full work week. We expect to
incur an additional $0.3 million of social costs and taxes for employees
participating in the furlough program during the second half of 2009. We have
also closed a repair facility in Aberdeen, NC.
We
recognize termination benefits as they are incurred over the remaining expected
future service period. We record asset impairment charges to reduce the carrying
amount of long-lived assets that will be sold or disposed of to their estimated
fair values. A summary of restructuring activity for the six months ended July
3, 2009 is shown below.
|
|
Six
Months Ended
|
|
|
Reserve
|
|
|
|
July
3, 2009
|
|
|
Balance
at
|
|
|
|
Provisions
|
|
|
Payments
|
|
|
July
3, 2009
|
|
Restructuring
Charges:
|
|
|
|
|
|
|
|
|
|
Termination
benefits
|
|
$ |
752 |
|
|
$ |
(645 |
) |
|
$ |
107 |
|
Other
charges
|
|
|
225 |
|
|
|
(225 |
) |
|
|
- |
|
Total
Restructuring
|
|
|
977 |
|
|
$ |
(870 |
) |
|
$ |
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Related Charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairment charges
|
|
|
170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Restructuring and Other Related Charges
|
|
$ |
1,147 |
|
|
|
|
|
|
|
|
|
By the
end of 2009, we expect to close an additional facility in Sanford, NC and move
the production operations to the Company’s facilities in Charlotte, NC and
Columbia, Ky. Cash expenses associated with the facility closing are expected to
be approximately $2.3 million ($1.4 million after tax or $0.03 per share). The
Company anticipates recognizing these charges in 2009. Of the total cash
expenses, severance and other employee termination-related costs are expected to
be approximately $1.1 million and employee and equipment relocation costs are
expected to be approximately $1.2 million. The fair value of the facility and
equipment are currently being evaluated which may result in the recognition of
noncash asset impairment charges in the third quarter of 2009.
7. Earnings per
Share
The
following table presents the computation of basic and diluted earnings (loss)
per share:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
July
3,
|
|
|
June
27,
|
|
|
July
3,
|
|
|
June
27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
4,366 |
|
|
$ |
(31,399 |
) |
|
$ |
11,227 |
|
|
$ |
(24,601 |
) |
Dividends
on preferred stock
|
|
|
- |
|
|
|
(3,492 |
) |
|
|
- |
|
|
|
(3,492 |
) |
Income
(loss) available to common shareholders
|
|
$ |
4,366 |
|
|
$ |
(34,891 |
) |
|
$ |
11,227 |
|
|
$ |
(28,093 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares of common stock outstanding – basic
|
|
|
43,221,555 |
|
|
|
34,525,984 |
|
|
|
43,216,233 |
|
|
|
28,311,879 |
|
Net
income (loss) per share - basic
|
|
$ |
0.10 |
|
|
$ |
(1.01 |
) |
|
$ |
0.26 |
|
|
$ |
(0.99 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares of common stock outstanding - basic
|
|
|
43,221,555 |
|
|
|
34,525,984 |
|
|
|
43,216,233 |
|
|
|
28,311,879 |
|
Net
effect of potentally dilutive securities
(1)
|
|
|
24,435 |
|
|
|
- |
|
|
|
21,623 |
|
|
|
- |
|
Weighted-average
shares of common stock outstanding - diluted
|
|
|
43,245,990 |
|
|
|
34,525,984 |
|
|
|
43,237,856 |
|
|
|
28,311,879 |
|
Net
income (loss) per share - diluted
|
|
$ |
0.10 |
|
|
$ |
(1.01 |
) |
|
$ |
0.26 |
|
|
$ |
(0.99 |
) |
(1) Potentially
dilutive securities consist of options and restricted stock units.
In the three and six months ended July
3, 2009, respectively, approximately 1.5 million and 0.7 million potentially
dilutive stock options, restricted stock units and deferred stock units were
excluded from the calculation of diluted earnings per share, since their effect
would have been anti-dilutive. In the three and six months ended June 27, 2008,
0.6 million potentially dilutive stock options and restricted stock units were
excluded from the calculation of diluted earnings per share, since their effect
would have been anti-dilutive.
8.
Comprehensive Income (Loss)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
July
3,
|
|
|
June
27,
|
|
|
July
3,
|
|
|
June
27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
4,366 |
|
|
$ |
(31,399 |
) |
|
$ |
11,227 |
|
|
$ |
(24,601 |
) |
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation, net of tax
|
|
|
8,876 |
|
|
|
160 |
|
|
|
1,621 |
|
|
|
4,057 |
|
Unrecognized
pension and post-retirement benefit plan
costs, net of tax
|
|
|
616 |
|
|
|
431 |
|
|
|
1,216 |
|
|
|
862 |
|
Unrecognized
gains (losses) on hedging activities, net
of tax
|
|
|
311 |
|
|
|
(722 |
) |
|
|
1,201 |
|
|
|
(722 |
) |
Other
comprehensive income (loss)
|
|
|
9,803 |
|
|
|
(131 |
) |
|
|
4,038 |
|
|
|
4,197 |
|
Comprehensive
income (loss)
|
|
$ |
14,169 |
|
|
$ |
(31,530 |
) |
|
$ |
15,265 |
|
|
$ |
(20,404 |
) |
9. Inventories
Inventories
consisted of the following:
|
|
July
3,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$ |
32,456 |
|
|
$ |
34,074 |
|
Work
in process
|
|
|
36,114 |
|
|
|
33,691 |
|
Finished
goods
|
|
|
23,937 |
|
|
|
21,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
92,507 |
|
|
|
89,365 |
|
Less-Customer
progress billings
|
|
|
(3,095 |
) |
|
|
(2,115 |
) |
Less-Allowance
for excess, slow-moving and obsolete inventory
|
|
|
(7,851 |
) |
|
|
(6,923 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
81,561 |
|
|
$ |
80,327 |
|
10. Net Periodic Benefit Cost –
Defined Benefit Plans
The
following sets forth the components of net periodic benefit cost of the
non-contributory defined benefit pension plans and the Company’s other
post-retirement employee benefit plans for periods presented.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
July
3,
|
|
|
June
27,
|
|
|
July
3,
|
|
|
June
27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits - U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Interest
cost
|
|
|
3,470 |
|
|
|
3,576 |
|
|
|
6,940 |
|
|
|
7,151 |
|
Expected
return on plan assets
|
|
|
(4,566 |
) |
|
|
(4,774 |
) |
|
|
(9,132 |
) |
|
|
(9,549 |
) |
Amortization
|
|
|
702 |
|
|
|
585 |
|
|
|
1,404 |
|
|
|
1,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit credit
|
|
$ |
(394 |
) |
|
$ |
(613 |
) |
|
$ |
(788 |
) |
|
$ |
(1,228 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits - Non U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
297 |
|
|
$ |
251 |
|
|
$ |
570 |
|
|
$ |
542 |
|
Interest
cost
|
|
|
1,115 |
|
|
|
887 |
|
|
|
2,161 |
|
|
|
1,934 |
|
Expected
return on plan assets
|
|
|
(313 |
) |
|
|
(224 |
) |
|
|
(539 |
) |
|
|
(478 |
) |
Amortization
|
|
|
176 |
|
|
|
106 |
|
|
|
350 |
|
|
|
226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$ |
1,275 |
|
|
$ |
1,020 |
|
|
$ |
2,542 |
|
|
$ |
2,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Post-Retirement Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Interest
cost
|
|
|
131 |
|
|
|
108 |
|
|
|
262 |
|
|
|
215 |
|
Amortization
|
|
|
88 |
|
|
|
37 |
|
|
|
176 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$ |
219 |
|
|
$ |
145 |
|
|
$ |
438 |
|
|
$ |
290 |
|
11.
Share-Based Payments
During
the first quarter of 2009, the Company granted 336,096 performance-based
restricted stock units to selected executives and key employees. The vesting of
the stock units is based on whether the Company achieves the performance
criterion for the year ending December 31, 2009, established by the Compensation
Committee of the Board of Directors. If the performance criterion is satisfied,
the units are subject to additional time vesting requirements, by which units
will vest fully in two equal installments on the fourth and fifth anniversary of
the grant date, provided the individual remains an employee during this period.
The Company no longer believes it is probable that the performance criterion
will be achieved and accordingly, no compensation expense for these units has
been recognized in the six months ended July 3, 2009.
In the
three months ended July 3, 2009, there were 51,723 director restricted stock
units granted at a fair value of $8.12 per unit on the date of grant.
Unrecognized compensation cost of $0.4 million for these units is expected to be
recognized over a period of 2.9 years.
12.
Financial Instruments
The
carrying values of financial instruments, including accounts receivable,
accounts payable and other accrued liabilities, approximate their fair values
due to their short-term maturities. The fair value of long-term debt is
estimated to approximate the carrying amount based on current interest rates for
similar types of borrowings. 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.
The
Company periodically enters into foreign currency, interest rate swap, and
commodity derivative contracts. The Company uses interest rate swaps to manage
exposure to interest rate fluctuations. Foreign currency contracts are used to
manage exchange rate fluctuations and generally hedge transactions between the
Euro and the U.S. dollar. Commodity futures contracts are used to manage
costs of raw materials used in the Company’s production processes.
The
Company enters into such contracts with financial institutions of good standing,
and the total credit exposure related to non-performance by those institutions
is not material to the operations of the Company. The Company does not enter
into contracts for trading purposes.
We
designate a portion of our derivative instruments as cash flow hedges for
accounting purposes. For all derivatives designated as hedges, we formally
document 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. We assess whether the hedging relationship between the derivative
and the hedged item is highly effective at offsetting changes in the cash flows
both at inception of the hedging relationship and on an ongoing basis. Any
change in the fair value of the derivative that is not effective at offsetting
changes in the cash flows or fair values of the hedged item is recognized
currently in earnings.
Interest
rate swaps and other derivative contracts are recognized on the balance sheet as
assets and liabilities, measured at fair value on a recurring basis using
significant observable inputs, which is Level 2 as defined in the Statement of
Financial Accounting Standards No. 157, Fair Value Measurements, fair
value hierarchy. For transactions in which we are hedging the variability of
cash flows, changes in the fair value of the derivative are reported in
accumulated other comprehensive income (loss) (AOCI), to the extent they are
effective at offsetting changes in the hedged item, until earnings are affected
by the hedged item. Changes in the fair value of derivatives not designated as
hedges are recognized currently in earnings.
On June
24, 2008, the Company entered into an interest rate swap with an aggregate
notional value of $75 million whereby it exchanged its LIBOR-based variable rate
interest for a fixed rate of 4.1375%. The notional value decreases to $50
million and then $25 million on June 30, 2010 and June 30, 2011, respectively,
and expires on June 29, 2012. The fair values of the swap agreement were
liabilities of $3.7 million at July 3, 2009 and $5.0 million at December 31,
2008, and are recorded in “Other long-term liabilities” on the consolidated
balance sheets. The swap agreement has been designated as a cash flow hedge, and
therefore changes in its fair value are recorded as an adjustment to other
comprehensive income. There has been no ineffectiveness related to this
arrangement since its inception. During the three and six months ended July 3,
2009, $0.7 million and $1.4 million of losses on the swap were reclassified from
AOCI to interest expense. At July 3, 2009, the Company expects to reclassify
$2.7 million of net losses on the interest rate swap from accumulated other
comprehensive income to earnings during the next twelve months.
The
Company had copper and nickel futures contracts with notional values of $1.7
million at July 3, 2009 and $3.6 million at December 31, 2008. The fair values
of the contracts were liabilities of $0.4 million at July 3, 2009 and $2.1
million at December 31, 2008, and are recorded in “Other accrued
liabilities” on the consolidated balance sheets. The Company has not elected
hedge accounting for these contracts, and therefore changes in the fair value
are recognized in earnings. For the three and six months ended July 3, 2009,
respectively, the consolidated statements of operations include $0.7 million and
$1.6 million of unrealized gains as a result of changes in the fair value of
these commodity contracts. For the three and six months ended June 28, 2008,
respectively, the consolidated statements of operations include $0.2 million of
unrealized losses and $0.4 million of unrealized gains as a result of changes in
the fair value of these commodity contracts. Realized losses on these commodity
contracts of $0.3 million and $0.7 million were recognized in the three and six
months ended July 3, 2009, respectively, and less than $0.1 million of realized
gains were recognized in the both the three and six months ended June 27,
2008.
The
Company had foreign currency contracts with notional values of $11.0 million at
July 3, 2009 and $16.5 million at December 31, 2008. The fair values of the
contracts were assets of $0.1 million at July 3, 2009 and $1.1 million at
December 31, 2008, and are recorded in “Other current assets” on the
consolidated balance sheets. The Company has not elected hedge accounting for
these contracts, and therefore changes in the fair value are recognized in
earnings. For the three and six months ended July 3, 2009, respectively, the
consolidated statements of operations include $0.1 million of unrealized gains
and $0.9 million of unrealized losses as a result of changes in the fair value
of these contracts. The consolidated statements of operations include less than
$0.1 million of unrealized losses for both the three and six months ended June
27, 2008, respectively, as a result of changes in the fair value of these
contracts. Realized gains on these contracts of $0.2 million and $0.4 million
were recognized in the three and six months ended July 3, 2009, respectively,
and less than $0.1 million of realized losses were recognized in both the three
and six months ended June 27, 2008.
13. Commitments and
Contingencies
Asbestos Liabilities and Insurance
Assets
Two of
our 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 our 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. Of the 29,279 pending claims,
approximately 7,500 of such claims have been brought in various federal and
state courts in Mississippi; approximately 3,000 of such claims have been
brought in the Supreme Court of New York County, New York; approximately 200 of
such claims have been brought in the Superior Court, Middlesex County, New
Jersey; and approximately 1,600 claims have been filed in state courts in
Michigan and the U.S. District Court, Eastern and Western Districts of Michigan.
The remaining pending claims have been filed in state and federal courts in
Alabama, California, Kentucky, Louisiana, Pennsylvania, Rhode Island, Texas,
Virginia, the U.S. Virgin Islands and Washington.
In most
instances, the subsidiaries settle asbestos claims for amounts management
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. Management 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.
Claims
activity related to asbestos is as follows(1):
|
|
Six
Months Ended
|
|
|
|
July
3,
|
|
|
June
27,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Claims
unresolved at the beginning of the period
|
|
|
35,357 |
|
|
|
37,554 |
|
Claims
filed(2)
|
|
|
1,776 |
|
|
|
2,390 |
|
Claims
resolved(3)
|
|
|
(7,854 |
) |
|
|
(3,324 |
) |
|
|
|
|
|
|
|
|
|
Claims
unresolved at the end of the period
|
|
|
29,279 |
|
|
|
36,620 |
|
(1)
|
Excludes
claims filed by one legal firm that have been “administratively
dismissed.”
|
(2)
|
Claims
filed include all asbestos claims for which notification has been received
or a file has been opened.
|
(3)
|
Claims
resolved include asbestos claims that have been settled or dismissed or
that are in the process of being settled or dismissed based upon
agreements or understandings in place with counsel for the
claimants.
|
The
Company 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 the standard approach used by most
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 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, not expected to be recovered from
insurers, 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, substantial primary, excess and umbrella insurance
coverage resulting from the independent corporate history of each entity. In its
evaluation of the insurance asset, the Company used different insurance
allocation methodologies for each subsidiary based upon the state law that will
or is likely to apply for that subsidiary.
For one
of the subsidiaries, although presently no cost sharing or allocation agreement
is in place with the Company’s excess insurers, the Company believes that, based
upon application of an insurance allocation methodology, which is used in
certain states, including Florida and Massachusetts, and in accordance with
prevailing law, recovery is probable from such insurers for approximately 67% of
the liability and defense costs after the exhaustion of primary and umbrella
layers of insurance. Presently, this subsidiary is having all of its liability
and defense costs covered in full by its primary and umbrella insurance
carrier. In addition to the primary and umbrella insurance coverage, the
subsidiary has a substantial amount of excess insurance coverage available to it
from solvent carriers.
In 2003,
the other subsidiary brought legal action against a large number of its insurers
and its former parent to resolve a variety of disputes concerning insurance for
asbestos bodily injury claims asserted against it. Although none of these
defendants insurance companies contested coverage, they disputed the timing,
reasonableness and allocation of payments. For this subsidiary it was determined
by court ruling in the fourth quarter of 2007, that the allocation methodology
mandated by the New Jersey courts will apply. Based upon this ruling and upon a
series of other favorable rulings regarding interpretation of certain policy
provisions related to deductibles, the number of occurrences, the Company
expects to recover approximately 88.5% of all liability and defense
costs.
Certain
insurance carriers have agreed to settle with this subsidiary by reimbursing the
subsidiary for amounts it paid for liability and defense costs as well as
entering into formal agreements detailing the payments of future liability and
defense costs in an agreed to allocation. In addition, a number of non-settling
insurance carriers have paid significant amounts for liability and defense costs
paid by the subsidiary in the past and continue to pay a share of costs as they
are incurred. Presently, certain insurers are paying approximately 22.7% of
costs for current asbestos-related liability and defense costs as they are
incurred.
The
Company has established reserves of $348.5 million and $357.3 million as of
July 3, 2009 and December 31, 2008, respectively, for the probable and
reasonably estimable asbestos-related liability cost it believes the
subsidiaries will pay through the next 15 years. It has also established
recoverables of $297.6 million and $304.0 million as of July 3, 2009
and December 31, 2008, respectively, for the insurance recoveries that are
deemed probable during the same time period. Net of these recoverables, the
Company’s expected cash outlay on a non-discounted basis for asbestos-related
bodily injury claims over the next 15 years was $51.0 million and
$53.3 million as of July 3, 2009 and December 31, 2008, respectively.
In addition the Company has recorded a receivable for liability and defense
costs it had previously paid in the amount of $35.4 million and $36.4 million as
of July 3, 2009 and December 31, 2008, respectively, for which insurance
recovery is deemed probable. The Company has recorded the reserves for the
asbestos liabilities as “Accrued asbestos liability” and “Long-term asbestos
liability” and the related insurance recoveries as “Asbestos insurance asset”
and “Long-term asbestos insurance asset” while the receivable for previously
paid liability and defense costs is recorded in “Asbestos insurance receivable”
in the accompanying condensed consolidated balance sheets.
The
expense related to these liabilities and legal defense was $1.5 million and $3.1
million, net of estimated insurance recoveries, for the three and six months
ended July 3, 2009, respectively, compared to income of $0.7 million and $0.4
million for the three and six months ended June 27, 2008, respectively. Legal
costs related to the subsidiaries’ action against their asbestos insurers was
$4.0 million and $7.0 million for the three and six months ended July 3, 2009,
respectively, compared to $4.0 million and $7.1 million for the three and six
months ended June 28, 2008, respectively.
Management’s
analyses are based on currently known facts and a number of assumptions.
However, projecting future events, such as new claims to be filed each year, the
average cost of resolving each claim, coverage issues among layers of insurers,
the method in which losses will be allocated to the various insurance policies,
interpretation of the effect on coverage of various policy terms and limits and
their interrelationships, the continuing solvency of various insurance
companies, the amount of remaining insurance available, as well as the numerous
uncertainties inherent in asbestos litigation could cause the actual liabilities
and insurance recoveries to be higher or lower than those projected or recorded
which could materially affect our financial condition, results of operations or
cash flow.
Guarantees
At July
3, 2009, there were $14.2 million of letters of credit
outstanding. Additionally, at July 3, 2009, we had issued $9.4
million of bank guarantees securing primarily customer prepayments, performance,
and product warranties in our European and Asian operations.
General
Litigation
On
June 3, 1997, one of our subsidiaries was served with a complaint in a case
brought by Litton Industries, Inc. in the Superior Court of New Jersey which
alleges damages in excess of $10.0 million incurred as a result of losses under
a government contract bid transferred in connection with the sale of its former
Electro-Optical Systems business. In the third quarter of 2004, this case was
tried and the jury rendered a verdict of $2.1 million for the plaintiffs.
Plaintiffs have argued that they are entitled to a refund of their attorney’s
fees and costs of trial as a matter of law and contract. The subsidiary believes
it is not obligated to pay these costs. In November 2006, the Court entered an
Amended Final Judgment in favor of the plaintiffs in the amount of $8.9 million,
including prejudgment interest. This amount plus accrued interest is recorded in
“Other liabilities” in the accompanying consolidated balance sheets. The
judgment is secured by a bond as well as a letter of credit under our existing
credit facility. Both the subsidiary and the plaintiffs appealed. On
January 28, 2008, the Appellate Division of the New Jersey Superior Court
affirmed the total award and ordered a new trial on certain portions of the
plaintiffs’ claim. The subsidiary and the plaintiffs each petitioned for
certification of the judgment which was granted by the Supreme Court of New
Jersey on May 15, 2008 and a hearing with oral argument occurred on
December 2, 2008. The Supreme Court will issue an opinion at its convenience.
The subsidiary intends to continue to defend this matter
vigorously.
In April
1999, the Company’s Imo Industries subsidiary resolved through a settlement the
matter of Young v. Imo Industries Inc. that was pending in the United States
District Court for the District of Massachusetts. This matter had been brought
on behalf of a class of retirees of one of the subsidiary’s divisions relating
to retiree health care obligations. On June 15, 2005, a motion was filed
seeking an order that certain of the features of the plan as implemented by the
Company were in violation of the settlement agreement. On December 16, 2008, the
parties executed a Memorandum of Understanding, memorializing the principal
terms of a new settlement agreement that will resolve the litigation in its
entirety. As a result of the parties’ efforts in this regard, the
case has been removed from the trial calendar, pending the filing of a final
settlement agreement with the court. A final settlement agreement was
signed on July 17, 2009 which will supersede and replace the Stipulation and
Agreement of Settlement and Dismissal of Claims entered into by the parties on
November 30, 1998. The parties will seek preliminary approval from the court of
the settlement agreement and thereafter proceed to a fairness
hearing. At July 3, 2009, the Company’s consolidated balance sheet
includes an accumulated post retirement benefit obligation of $2.4 million for
this matter.
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 reserves 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 adversely to the Company, there could be a material adverse
effect on the financial condition, results of operations or cash flow of the
Company.
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of our
financial condition and results of operations should be read in conjunction with
the financial statements and notes included in Part I, Item I “Financial
Statements” of this quarterly report and the audited financial statements and related
footnotes included in our Annual Report on Form 10-K for the year ended December
31, 2008 filed with the SEC on March 6, 2009.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of
the statements contained in this Form 10-Q that are not historical facts are
forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 (the “Exchange Act”). We intend such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in Section 21E of the Exchange Act.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date this Form 10-Q is filed with the
SEC. All statements other than statements of historical fact are statements that
could be deemed forward-looking statements, including statements regarding:
projections of revenue, profit margins, expenses, tax provisions and tax rates,
earnings or losses from operations, impact of foreign exchange rates, cash
flows, pension and benefit obligations and funding requirements, synergies or
other financial items; plans, strategies and objectives of management for future
operations including statements relating to potential acquisitions, compensation
plans, 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,” and similar expressions. These
statements are based on assumptions and assessments made by our management in
light of their experience and perception of historical trends, current
conditions, expected future developments and other factors we believe to be
appropriate. These forward-looking statements are subject to a number of risks
and uncertainties, including but not limited to the following:
|
•
|
risks
associated with our international
operations;
|
|
•
|
significant
movements in foreign currency exchange
rates;
|
|
•
|
changes
in the general economy, including the current global economic downturn as
well as the cyclical nature of our
markets;
|
|
•
|
our
ability to accurately estimate the cost of or realize savings from
restructuring programs;
|
|
•
|
availability
and cost of raw materials, parts and components used in our
products;
|
|
•
|
the
competitive environment in our
industry;
|
|
•
|
our
ability to identify, acquire and successfully integrate attractive
acquisition targets;
|
|
•
|
the
amount of and our ability to estimate our asbestos-related
liabilities;
|
|
•
|
material
disruption at any of our significant manufacturing
facilities;
|
|
•
|
the
solvency of our insurers and the likelihood of payment for
asbestos-related claims;
|
|
•
|
our
ability to manage and grow our business and execution of our business and
growth strategies;
|
|
•
|
loss
of key management;
|
|
•
|
our
ability and the ability of customers to access required capital at a
reasonable cost;
|
|
•
|
our
ability to expand our business in our targeted
markets;
|
|
•
|
our
ability to cross-sell our product portfolio to existing
customers;
|
|
•
|
the
level of capital investment and expenditures by our customers in our
strategic markets;
|
|
•
|
our
financial performance; and
|
|
•
|
others
risks and factors, listed under the “Risk Factors” section of this Form
10-Q as well as our Annual Report on Form 10-K for the year ended December
31, 2008 filed with the SEC on March 6,
2009.
|
Any such
forward-looking statements are not guarantees of future performance and actual
results, developments and business decisions may differ materially from those
envisaged by such forward-looking statements. These forward-looking statements
speak only as of the date this Form 10-Q is filed with the SEC. We do not assume
any obligation and do not intend to update any forward-looking statement except
as required by law.
Overview
We are a
global supplier of a broad range of fluid handling products, including pumps,
fluid handling systems and controls, and specialty valves. We believe that we
are a leading manufacturer of rotary positive displacement pumps, which include
screw pumps, gear pumps and progressive cavity pumps. We have a global
manufacturing footprint, with production facilities in Europe, North America and
Asia, as well as worldwide sales and distribution channels. Our products serve a
variety of applications in five strategic markets: commercial marine, oil and
gas, power generation, global navy and general industrial. We design and
engineer our products to high quality and reliability standards for use in
critical fluid handling applications where performance is paramount. We also
offer customized fluid handling solutions to meet individual customer needs
based on our in-depth technical knowledge of the applications in which our
products are used. Our products are marketed principally under the
Allweiler, Fairmount, Houttuin, Imo, LSC, Portland Valve, Tushaco, Warren and
Zenith brand names. We believe that our brands are widely known and have a
premium position in our industry. Allweiler, Houttuin, Imo and Warren are among
the oldest and most recognized brands in the markets in which we participate,
with Allweiler dating back to 1860.
We
believe that one of our most significant competitive advantages comes through a
comprehensive set of tools and processes we employ that we refer to as the
Colfax Business System (“CBS”). CBS is a disciplined strategic planning and
execution methodology designed to achieve excellence and world-class financial
performance in all aspects of our business by focusing on the Voice of the Customer and
continuously improving quality, delivery and cost.
Outlook
The
economic downturn had a significant impact our sales and cash flow in the second
quarter of 2009. In addition, our order rates are down significantly and
if current economic conditions continue, our business results will continue to
be negatively affected. We will continue to monitor global economic
conditions and presently expect the following market conditions in
2009:
|
•
|
In
the commercial marine industry, we expect international trade and demand
for crude oil and other commodities as well as the age of the global
merchant fleet to continue to create demand for new ship construction,
although we expect new orders to be significantly lower than in the past
two years and we are also likely to have additional order cancellations.
We expect sales to grow primarily from existing orders, but at a lower
growth rate than we experienced in the first half of 2009. We also believe
the increase in the size of the global fleet will create an opportunity to
supply aftermarket parts and
service.
|
|
•
|
We
expect activity within the crude oil market to remain favorable as long
term capacity constraints and global demand drive further development of
heavy oil fields, but we are experiencing project delays. In pipeline
applications, we expect demand for our highly efficient products to remain
strong as our customers continue to focus on total cost of
ownership. In refinery applications, we believe a reduction in
capital investment by our customers will reduce the demand for our
products in 2009.
|
|
•
|
In
the power generation industry, we expect activity in Asia and the Middle
East to remain strong as economic growth and fundamental undersupply of
power generation capacity continues to drive investment in energy
infrastructure projects. In the world’s developed economies, we
expect efficiency improvements will continue to drive
demand.
|
|
•
|
In
the U.S., we expect Congress to continue to appropriate funds for new ship
construction as older naval vessels are decommissioned. We also
expect increased demand for integrated fluid handling systems for both new
ship platforms and existing ship classes that reduce operating costs and
improve efficiency as the U.S. Navy seeks to man vessels with fewer
personnel. Outside of the U.S., we expect other sovereign nations will
continue to expand their fleets as they address national security
concerns. We expect both increased sales and orders over the remainder of
2009.
|
|
•
|
In
the general industrial market, we expect that global infrastructure
development will drive capital investment over the long term and will
benefit local suppliers as well as international exporters of fluid
handling equipment. However, demand has softened across the board and has
declined significantly in several portions of this market, including
chemical, building products, diesel engine, waste water, machinery support
and distribution, primarily in Europe and North
America.
|
Based on
declining orders and our culture of continuous improvement, we initiated a
series of restructuring actions during 2009 to better position the Company’s
cost structure for future periods. As a result, the Company recorded pre-tax
restructuring and other related costs of $0.5 million and $1.1 million for three
and six month periods ended July 3, 2009, respectively. As of July 3, 2009, we
have reduced our company-wide workforce by approximately 150 associates from
December 31, 2008. Additionally, 628 associates participate in a
German government-sponsored furlough program in which the government pays the
wage-related costs of workers that work less than a full work
week. We closed a repair facility in Aberdeen, NC and by the end of
2009, expect to close an additional facility in Sanford, NC and move the
production operations to two of our other facilities. We continue to
monitor our order rates and will adjust our manufacturing capacity and cost
structure as demand warrants.
Key
Performance Measures
The
discussion of our results of operations that follows focuses on some of the key
financial measures that we use to evaluate our business. We evaluate growth
using several measures described below, including net sales, orders and order
backlog. Our sales growth is affected by many factors, particularly the impact
of acquisitions, the impact of fluctuating foreign exchange rates and growth in
our existing businesses. To facilitate the comparison between reporting periods,
we describe the impact of each of these three factors, to the extent they impact
the periods presented, on our sales growth below in tabular format under the
heading “Sales and Orders.”
Orders
and order backlog are highly indicative of our future revenue and thus a key
measure of anticipated performance. Orders consist of orders for products or
services from our customers, net of cancellations. Order backlog consists of
unfilled orders.
Seasonality
We
experience seasonality in our fluid handling business. As our customers seek to
fully utilize capital spending budgets before the end of the year, our shipments
generally peak during the fourth quarter. Also, our European operations
typically experience a slowdown during the July and August holiday
season.
Results
of Operations
Items
Affecting Comparability of Reported Results
Our
results for the six months ended July 3, 2009 include the impact of two
additional business days as compared to the six months ended June 27, 2008. The
second quarter of 2009 had two fewer business days as compared to
2008. The fourth quarter of 2009 will have four fewer business days
than the fourth quarter of 2008. The comparability of our operating results for
the three and six months ended July 3, 2009 and June 27, 2008 is affected
by the following significant items:
Foreign Currency
Fluctuations
A
significant portion of our sales, approximately 64% and 67%, respectively, for
the three and six months ended July 3, 2009, is denominated in currencies other
than the U.S. dollar, most notably the Euro and the Swedish Krona. 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 and is
quantified, when significant, in our discussion of the results of our
operations.
Restructuring and Other
Related Charges
Our
results for the three and six months ended July 3, 2009 include $0.5 million and
$1.1 million, respectively, of restructuring and other related charges incurred
to better position the Company’s cost structure for future periods.
IPO-related
Costs
Results
for the three and six months ended June 27, 2008 include $57.0 million of
nonrecurring costs associated with our initial public offering in May
2008.
Legacy Legal
Adjustment
Selling,
general and administrative expenses for the three and six months ended June 27,
2008 include a $4.1 million charge to legacy legal reserves related to a
non-asbestos legal matter that was settled in the third quarter of
2008.
Asbestos-related
Expense
Asbestos-related
expense includes all asbestos-related costs and is comprised of projected
indemnity cost, changes in the projected asbestos liability, changes in the
probable insurance recovery of the projected asbestos-related liability, changes
in the probable recovery of asbestos liability and defense costs paid in prior
periods, and actual defense costs expensed in the period (“Asbestos liability
and defense costs”). It also includes legal costs related to the actions against
two of our subsidiaries’ respective insurers and a former parent company of one
of the subsidiaries (“Asbestos coverage litigation expenses”).
The table
below presents asbestos-related expense for the periods indicated:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 3,
|
|
|
June 27,
|
|
|
July 3,
|
|
|
June 27,
|
|
(Amounts in millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asbestos
liability and defense costs (income)
|
|
$ |
1.5 |
|
|
$ |
(0.7 |
) |
|
$ |
3.1 |
|
|
$ |
(0.4 |
) |
Asbestos
coverage litigation expenses
|
|
|
4.0 |
|
|
|
4.0 |
|
|
|
7.0 |
|
|
|
7.1 |
|
Asbestos-related
expense
|
|
$ |
5.5 |
|
|
$ |
3.3 |
|
|
$ |
10.1 |
|
|
$ |
6.7 |
|
Asbestos
liability and defense costs were $1.5 million and $3.1 million for the three and
six months ended July 3, 2009, respectively, compared to income of $0.7 million
and $0.4 million for the three and six months ended June 27, 2008, respectively.
The increase in asbestos liability and defense costs for the three and six
months ended July 3, 2009 relates primarily to two items: (i) the receipt of
$0.9 million in the first quarter of 2008 from an insurer previously considered
insolvent, which resulted in a gain in that period and (ii) an increase to the
insurance receivable in the second quarter of 2008 based upon an acknowledgement
by an insurer of additional solvent coverage.
Legal
costs related to the subsidiaries’ action against their asbestos insurers were
$4.0 million and $7.0 million for the three and six months ended July 3, 2009,
respectively, compared to $4.0 million and $7.1 million for the three and six
months ended June 27, 2008, respectively. See Note 13 to our Condensed
Consolidated Financial Statements for a further discussion of recent
developments in asbestos litigation.
Sales
and Orders
Our sales
growth is affected by many factors including the impact of fluctuating foreign
exchange rates and growth in our existing businesses. To facilitate the
comparison between reporting periods, we disclose the impact of each of these
factors to the extent they impact the periods presented. The impact of foreign
currency translation is the difference between sales from existing businesses
valued at current-year foreign exchange rates and the same sales valued at
prior-year foreign exchange rates. Sales growth from existing businesses
excludes the impact of foreign exchange rate fluctuations, thus providing a
measure of growth due to factors such as price, mix and volume.
Orders
and order backlog are highly indicative of our future revenue and thus key
measures of anticipated performance. Orders consist of orders for products or
services from our customers, net of cancellations, during a period. Order
backlog consists of unfilled orders at the end of a period. The components of
order growth are presented on the same basis as sales growth.
The
following tables present components of our sales and order growth, as well as
sales by fluid handling product for the periods indicated:
|
|
Sales
|
|
|
Orders
|
|
(Amounts
in millions)
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 27, 2008
|
|
$ |
161.4 |
|
|
|
|
|
$ |
188.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
of Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing
Businesses
|
|
|
(16.4 |
) |
|
|
(10.2 |
)% |
|
|
(72.3 |
) |
|
|
(38.3 |
)% |
Foreign
Currency Translation
|
|
|
(15.8 |
) |
|
|
(9.8 |
)% |
|
|
(12.4 |
) |
|
|
(6.6 |
)% |
Total
Growth
|
|
|
(32.2 |
) |
|
|
(20.0 |
)% |
|
|
(84.7 |
) |
|
|
(44.9 |
)% |
Three
Months Ended July 3, 2009
|
|
$ |
129.2 |
|
|
|
|
|
|
$ |
104.1 |
|
|
|
|
|
|
|
Sales
|
|
|
Orders
|
|
|
Backlog at
|
|
|
|
|
(Amounts
in millions)
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Period End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 27, 2008
|
|
$ |
292.1 |
|
|
|
|
|
$ |
369.1 |
|
|
|
|
|
$ |
384.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
of Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing
Businesses
|
|
|
7.0 |
|
|
|
2.4 |
% |
|
|
(118.2 |
) |
|
|
(32.0 |
)% |
|
|
(63.8 |
) |
|
|
(16.6 |
)% |
Foreign
Currency Translation
|
|
|
(33.6 |
) |
|
|
(11.5 |
)% |
|
|
(26.0 |
) |
|
|
(7.0 |
)% |
|
|
(27.9 |
) |
|
|
(7.3 |
)% |
Total
Growth
|
|
|
(26.6 |
) |
|
|
(9.1 |
)% |
|
|
(144.2 |
) |
|
|
(39.1 |
)% |
|
|
(91.7 |
) |
|
|
(23.9 |
)% |
Six
Months Ended July 3, 2009
|
|
$ |
265.5 |
|
|
|
|
|
|
$ |
224.9 |
|
|
|
|
|
|
$ |
292.3 |
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 3,
|
|
|
June 27,
|
|
|
July 3,
|
|
|
June
27,
|
|
(Amounts in millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
Sales by Product:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pumps,
including aftermarket parts and service
|
|
$ |
108.2 |
|
|
$ |
139.7 |
|
|
$ |
229.6 |
|
|
$ |
255.9 |
|
Systems,
including installation service
|
|
|
18.8 |
|
|
|
18.3 |
|
|
|
31.3 |
|
|
|
29.0 |
|
Valves
|
|
|
1.8 |
|
|
|
2.2 |
|
|
|
3.4 |
|
|
|
3.9 |
|
Other
|
|
|
0.4 |
|
|
|
1.2 |
|
|
|
1.2 |
|
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales
|
|
$ |
129.2 |
|
|
$ |
161.4 |
|
|
$ |
265.5 |
|
|
$ |
292.1 |
|
As
detailed above, for the three months ended July 3, 2009, sales from existing
businesses were down 10.2%, primarily due to a significant decline in sales
volume in the general industrial and power generation end markets, as well as
customer requested project delays. The decline in the general industrial
market results from the global economic downturn, while the power generation
market decline is primarily the result of project timing. For the six
month period, sales from existing businesses increased 2.4%, as increased sales
volume in the commercial marine, global navy and oil and gas end markets were
substantially offset by declines in the general industrial and power generation
end markets, as well as customer requested project delays. The decline in the
general industrial market results from the global economic downturn, while the
power generation decline is primarily the result of project timing.
Foreign currency translation negatively impacted sales and orders for both the
three and six month periods ending July 3, 2009, primarily due to the
strengthening of the U.S. dollar against the Euro.
Orders,
net of cancellations, from existing businesses for the three and six months
ended July 3, 2009 declined 38.3% and 32.0%, respectively, over the comparable
period in the prior year. In both periods, the declines in orders
from existing businesses were primarily attributable to a significant decline in
demand in the commercial marine and general industrial end
markets. We experienced commercial marine project cancellations of
approximately $9 million and $15 million for the three and six months ended July
3, 2009, respectively, as a result of the economic downturn. Backlog
as of July 3, 2009 of $292.3 million decreased $63.8 million, or 16.6%,
excluding the impact of foreign currency translation, as compared to $384.0
million at June 27, 2008. Since April 3, 2009, backlog decreased $26.6 million,
or 8.7%, excluding the impact of foreign currency translation which had a
positive impact of $13.2 million.
Gross
Profit
The
following table presents our gross profit figures for the periods
indicated:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 3,
|
|
|
June 27,
|
|
|
July 3,
|
|
|
June 27,
|
|
(Amounts in millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
$ |
44.6 |
|
|
$ |
56.8 |
|
|
$ |
92.6 |
|
|
$ |
105.0 |
|
Gross
Profit Margin
|
|
|
34.5 |
% |
|
|
35.2 |
% |
|
|
34.9 |
% |
|
|
35.9 |
% |
Gross
profit decreased $12.2 million to $44.6 million for the three months ended July
3, 2009. Gross profit from existing businesses decreased $6.7 million, with an
additional $5.5 million negative impact of foreign exchange rates. Gross profit
margin decreased 70 basis points to 34.5% for the three months ended July 3,
2009 from 35.2% for the three months ended June 27, 2008. The margin decline was
primarily driven by decreased production resulting in lower absorption of fixed
manufacturing costs. Our aggressive cost reduction efforts helped to
minimize the impact of lower revenues in the quarter.
Gross
profit for the six months ended July 3, 2009 decreased $12.4 million to $92.6
million, primarily due to a $12.1 million negative impact of foreign exchange
rates. The margin decline was primarily driven by decreased production resulting
in lower absorption of fixed manufacturing costs which more than offset
favorable pricing and product mix in the commercial marine and general
industrial markets.
Selling,
General and Administrative Expenses (“SG&A”)
The following table presents our
selling, general and administrative expenses for the periods indicated:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 3,
|
|
|
June 27,
|
|
|
July 3,
|
|
|
June 27,
|
|
(Amounts in millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A
Expenses
|
|
$ |
28.6 |
|
|
$ |
35.8 |
|
|
$ |
58.1 |
|
|
$ |
64.3 |
|
SG&A
Expenses as a percentage of sales
|
|
|
22.1 |
% |
|
|
22.2 |
% |
|
|
21.9 |
% |
|
|
22.0 |
% |
Selling,
general and administrative expenses decreased $7.2 million to $28.6 million for
the three months ended July 3, 2009 compared to $35.8 million for the three
months ended June 27, 2008. The impact of foreign exchange rates reduced
SG&A expenses by $3.1 million. Excluding this impact, selling,
general and administrative expenses for the three months ended July 3, 2009 were
$4.1 million lower than the prior year period, primarily due to lower charges
for legacy legal matters. In addition, unrealized income on raw
material futures and foreign currency contracts for which we did not elect hedge
accounting was $1.1 million higher than the prior year
quarter. Higher costs associated with becoming a public company of
$0.8 million, including $0.4 million of additional stock compensation expense,
were partially offset by lower commission expense of $0.6 million.
Selling,
general and administrative expenses decreased $6.2 million to $58.1 million for
the six months ended July 3, 2009 compared to $64.3 million for the six months
ended June 27, 2008, due primarily to the impact of foreign exchange
rates. An additional $2.4 million of professional fees and other
costs associated with becoming a public company, including $1.0 million of
higher stock compensation costs, and increased selling expenses of $1.2 million
were offset by lower charges for legacy legal matters.
Operating
Income
The table
below presents operating income data for the periods indicated:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 3,
|
|
|
June 27,
|
|
|
July 3,
|
|
|
June 27,
|
|
(Amounts in millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$ |
8.3 |
|
|
$ |
(40.8 |
) |
|
$ |
20.1 |
|
|
$ |
(26.0 |
) |
Operating
margin
|
|
|
6.4 |
% |
|
|
(25.3 |
)% |
|
|
7.6 |
% |
|
|
(8.9 |
)% |
Operating
income for the three months ended July 3, 2009 increased $49.1 million to
$8.3 million from a loss of $40.8 million for the three months ended June 27,
2008. This increase was primarily due to the absence of $57.0 million of initial
public offering-related costs incurred in the second quarter of 2008. The impact
of foreign exchange rates reduced operating income by $2.3
million. Excluding these impacts, operating income was $5.6 million
lower than the prior year quarter, with lower gross profit from existing
businesses and higher legacy asbestos expenses partially offset by lower
SG&A expenses.
Operating
income for the six months ended July 3, 2009 increased $46.1 million to
$20.1 million from a loss of $26.0 million for the six months ended June 27,
2008. This increase was primarily due to the absence of $57.0 million of initial
public offering-related costs incurred in the second quarter of
2008. The impact of foreign exchange rates reduced operating income
by $5.6 million. Excluding these impacts, operating income was $5.4
million lower than the six months ended June 27, 2008, primarily due to higher
legacy asbestos expenses and restructuring charges incurred in the current-year
period.
Interest
Expense
For a
description of our outstanding indebtedness, please refer to “—Liquidity and
Capital Resources” below.
Interest
expense for the three months ended July 3, 2009 decreased $1.5 million to $1.8
million from $3.2 million for the three months ended June 27,
2008. The decrease was due to lower debt levels during the second
quarter of 2009 compared to the same period in 2008 as a result of debt
repayments of $105.4 million from a portion of the IPO proceeds in the second
quarter of 2008. An increase in the weighted-average interest rate on
our variable rate borrowings from 5.3% for the three months ended June 27, 2008
to 5.6% for the three months ended July 3, 2009 contributed $0.1 million of
additional interest expense.
Interest
expense for the six months ended July 3, 2009 decreased $4.1 million to $3.6
million from $7.7 million for the six months ended June 27, 2008. The
decrease was primarily due to lower debt levels during 2009 compared to 2008 as
a result of debt repayments of $105.4 million from a portion of the IPO proceeds
in the second quarter of 2008. A decrease in the weighted-average
interest rate on our variable rate borrowings from 6.3% for the six months ended
June 27, 2008 to 5.6% for the six months ended July 3, 2009 contributed
approximately $0.4 million to the decrease in interest expense.
Provision
for Income Taxes
The
effective income tax rates for the three and six months ended July 3, 2009 were
32.9% and 31.8%, respectively. Our effective tax rates for the three and six
months ended July 3, 2009 were lower than the U.S. federal statutory rate
primarily due to international tax rates which are lower than the U.S. tax rate,
including the impact of the reduction in 2009 of the Swedish tax rate from 28%
to 26.3% that is applied to our Swedish operations, offset in part by a net
increase to our valuation allowance and unrecognized tax benefit
liability.
The
effective income tax rates for the three and six months ended June 27, 2008 were
28.8% and 27.0%, respectively. Our effective tax rates for the three and six
months ended June 27, 2008 were lower than the U.S. federal statutory rate
primarily due to a $11.8 million payment to reimburse certain selling
shareholders for underwriters discounts that are not deductible for tax
purposes, offset in part by an expected lower overall rate on normal operations
due to reductions in the German corporate tax rates in 2008, other foreign tax
rates that are lower than the U.S. tax rate and changes in overall
profitability.
Liquidity
and Capital Resources
Overview
Historically,
we have financed our capital and working capital requirements through a
combination of cash flows from operating activities and borrowings under our
credit facility. We expect that our primary ongoing requirements for cash will
be for working capital, funding for potential acquisitions, capital
expenditures, asbestos-related outflows and pension plan funding. If additional
funds are needed for strategic acquisitions or other corporate purposes, we
believe we could raise additional funds in the form of debt or
equity.
Borrowings
During
the six months ended July 3, 2009, we made principal payments of $2.5 million on
our Term A Note, leaving $93.8 million outstanding at the end of the
period. At July 3, 2009, the interest rate on the Term A Note was
2.56% inclusive of 2.25% margin and the annual commitment fee on our $150.0
million revolver was 0.4%. At July 3, 2009, there was $14.2 million outstanding
on the letter of credit sub-facility, leaving approximately $136 million
available under the revolver loan. Of the total $136 million
available, it is unlikely that we would be able to draw on Lehman Brothers’ $6.0
million commitment due to their bankruptcy and resulting default under the terms
of the revolver.
Substantially
all assets and stock of the Company’s domestic subsidiaries and 65% of the
shares of certain European subsidiaries are pledged as collateral against
borrowings under our credit agreement. Certain European assets are pledged
against borrowings directly made to our European subsidiary. Our credit
agreement contains customary covenants limiting the Company’s ability to, among
other things, pay cash dividends, incur debt or liens, redeem or repurchase
Company stock, enter into transactions with affiliates, make investments, merge
or consolidate with others or dispose of assets. In addition, our credit
agreement contains financial covenants requiring the Company to maintain a total
leverage ratio of not more than 3.25 to 1.0 and a fixed charge coverage ratio of
not less than 1.5 to 1.0, measured at the end of each quarter. If the Company
does not comply with the various covenants under our credit agreement and
related agreements, the lenders may, subject to various customary cure rights,
require the immediate payment of all amounts outstanding under the Term A Note
and revolver and foreclose on the collateral. The Company believes it is in
compliance with all such covenants as of July 3, 2009 and expects to be in
compliance for the next 12 months.
Comparative
Cash Flows
The table
below presents selected cash flow data for the periods indicated:
|
|
Six Months Ended
|
|
|
|
July 3,
|
|
|
June 27,
|
|
(Amounts in millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
$ |
17.9 |
|
|
$ |
(57.0 |
) |
|
|
|
|
|
|
|
|
|
Purchases
of fixed assets
|
|
|
(5.9 |
) |
|
|
(9.1 |
) |
Other
sources, net
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
$ |
(5.8 |
) |
|
$ |
(9.0 |
) |
|
|
|
|
|
|
|
|
|
Proceeds
and repayments of borrowings, net
|
|
|
(2.5 |
) |
|
|
(106.5 |
) |
Net
proceeds from IPO
|
|
|
- |
|
|
|
193.0 |
|
Dividends
paid to preferred shareholders
|
|
|
- |
|
|
|
(38.5 |
) |
Payments
made for loan costs
|
|
|
- |
|
|
|
(2.9 |
) |
Other
uses, net
|
|
|
(0.4 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
$ |
(2.9 |
) |
|
$ |
44.9 |
|
Cash
flows from operating activities can fluctuate significantly from period to
period as working capital needs, the timing of payments for items such as
pension funding decisions and other items impact reported cash flows. Changes in
significant operating cash flow items are discussed below.
|
Ÿ
|
Cash
paid for asbestos liabilities (net of cash received from settlements with
our asbestos insurance carriers), including the disposition of claims,
defense costs and legal expenses related to litigation against our
insurers, was a significant cash outflow. For the six months ended July 3,
2009 and June 27, 2008 net cash paid for asbestos liabilities, net of
insurance settlements received, was $5.4 million and $16.3 million,
respectively.
|
|
Ÿ
|
Funding
requirements of our defined benefit plans, including both pensions and
other post-retirement benefits, can vary significantly among periods due
to changes in the fair value of plan assets and actuarial assumptions. For
the six months ended July 3, 2009 and June 27, 2008, cash contributions
for defined benefit plans were $2.0 million and $2.6 million,
respectively.
|
|
Ÿ
|
Net
cash used in operating activities for the six months ended June 27,
2008 includes cash paid for nonrecurring IPO-related costs of $42.4
million ($30.6 million of special bonuses and related fringe costs paid
under previously adopted executive compensation plans and $11.8 million to
reimburse the selling stockholders for the underwriting discount on the
shares sold by them in the IPO).
|
|
Ÿ
|
Changes
in working capital also affected the operating cash flows for the periods
presented. We define working capital as trade receivables plus inventories
less accounts payable.
|
|
Ÿ
|
Working
capital, excluding the effect of foreign currency translation, increased
$0.8 million from December 31, 2008 to July 3, 2009. A $14.6 million
reduction in trade receivables was more than offset by a $14.8 million
decrease in accounts payable and a $0.7 million increase in
inventory.
|
|
Ÿ
|
Net
working capital as a percentage of sales is a key ratio that we use to
measure working capital efficiency. For the six months ended July 3, 2009
and June 27, 2008, net working capital as a percentage of annualized sales
was 25.0% and 23.3%, respectively.
|
Investing
activities consist primarily of purchases of fixed assets.
|
Ÿ
|
In
all periods presented, capital expenditures were invested in new and
replacement machinery, equipment and information technology. We generally
target capital expenditures at approximately 2.0% to 2.5% of
revenues.
|
Financing
cash flows consist primarily of borrowings and repayments of indebtedness,
payment of dividends to shareholders and redemptions of stock.
|
Ÿ
|
During
the six months ended July 3, 2009, we repaid $2.5 million of long-term
borrowings.
|
|
Ÿ
|
Net
IPO proceeds of $193.0 million were received in the first six months of
2008. We used these proceeds to: (i) repay approximately $105.4
million of indebtedness outstanding under our credit facility existing at
that time, (ii) pay dividends to existing preferred stockholders of record
immediately prior to the consummation of the IPO in the amount of $38.5
million, (iii) pay $11.8 million to the selling stockholders in the IPO as
reimbursement for the underwriting discount incurred on the shares sold by
them, and (iv) pay special bonuses of approximately $27.8 million to
certain of our executives under previously adopted executive compensation
plans. The remainder of the proceeds was applied to working
capital.
|
|
Ÿ
|
We
paid approximately $2.9 million in deferred loan costs related to our new
credit facility entered into in May
2008.
|
Critical
Accounting Estimates
The
methods, estimates and judgments we use in applying our critical accounting
policies have a significant impact on the results we report in our financial
statements. 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 change our
reported results.
There
have been no significant changes for the six months ended July 3, 2009 to the
items that we disclosed as our critical accounting policies and estimates in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the year ended December 31,
2008 filed with the SEC on March 6, 2009.
Recent
Accounting Pronouncements
See Note
3 to our Condensed Consolidated Financial Statements for a discussion of
recently issued and adopted accounting pronouncements.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
We are
exposed to market risk from changes in 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.
Information
concerning market risk for the six months ended July 3, 2009 is discussed
below.
Interest
Rate Risk
We are
subject to exposure from changes in interest rates based on our financing
activities. Under our credit facility, all of our borrowings at July 3, 2009 are
variable rate facilities based on LIBOR or EURIBOR. In order to mitigate our
interest rate risk, we periodically enter into interest rate swap or collar
agreements. A hypothetical increase in the interest rate of 1.00% on
the portion of our variable rate debt that is not hedged during the six months
ended July 3, 2009 would have increased our interest cost by approximately $0.1
million.
On June
24, 2008, we entered into an interest rate swap with an aggregate notional value
of $75 million whereby we exchanged our LIBOR-based variable rate interest for a
fixed rate of 4.1375%. The notional value decreases to $50 million
and then $25 million on June 30, 2010 and June 30, 2011, respectively and
expires on June 29, 2012. The fair value of the swap agreement, based on
third-party quotes, was a liability of $3.7 million at July 3,
2009. The swap agreement has been designated as a cash flow hedge,
and therefore changes in its fair value are recorded as an adjustment to other
comprehensive income.
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
the three and six months ended July 3, 2009, approximately 64.1% and 67.4%,
respectively, of our sales were derived from operations outside the U.S., with
approximately 60.9% and 64.2%, respectively, generated from our European
operations. In particular, we have more sales in European currencies than we
have expenses in those currencies. Therefore, when European currencies
strengthen or weaken against the U.S. dollar, operating profits increase or
decrease, respectively. To assist with the matching of revenues and expenses and
assets and liabilities in foreign currencies, we may periodically enter into
derivative instruments such as cross currency swaps or forward contracts. To
illustrate the potential impact of changes in foreign currency exchange rates,
assuming a 10% increase in average foreign exchange rates compared to the U.S.
dollar, income before income taxes for the three and six months ended July 3,
2009, would have increased by $1.0 million and $2.5 million,
respectively.
Commodity
Price Risk
We are
exposed to changes in the prices of raw materials used in our production
processes. Commodity futures contracts are periodically used to manage such
exposure. As of July 3, 2009, we had copper and nickel futures contracts with
notional values of $1.7 million that were in an unrealized loss position of $0.4
million. We have not elected hedge accounting for these futures contracts, and
therefore changes in their fair value are included in net
income.
Item
4. 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 the end of the period covered by this report. 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 has been recorded, processed, summarized and reported as of the end
of the period covered by this report.
Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by us in reports we
file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commissions rules and forms, 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
There was
no change 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 period covered by this
report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II – OTHER
INFORMATION
Item
1. Legal Proceedings
Discussion of legal matters is
incorporated by reference to Part I, Item 1, Note 13, “Commitments and
Contingencies,” in the Notes to the Condensed Consolidated Financial
Statements.
Item
1A. Risk Factors
An
investment in our common stock involves a high degree of risk. The
following risk factor is provided to supplement and update the Risk Factors
previously disclosed in the Risk Factors section of our Annual Report on Form
10-K for the year ended December 31, 2008 filed with the SEC on March 6,
2009.
Changes
in the general economy, including the current global financial crisis and
economic downturn, and the cyclical nature of our markets could 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. Any sustained weakness
in demand, downturn or uncertainty in the global economy could reduce our sales
and profitability, and result in restructuring efforts. Restructuring efforts
are inherently risky and we may not be able to predict the cost and timing of
such actions accurately or properly estimate the impact on demand, if any.
We also may not be able to realize the anticipated savings we expected from
restructuring activities. The current global economic downturn may
materially affect demand for our products and we may not be able to predict the
effect on our results. In addition, our products are sold in many industries,
some of which are cyclical and may experience periodic downturns. Cyclical
weakness in the industries we serve could lead to reduced demand for our
products and affect our profitability and financial
performance.
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 the current conditions impacting the credit
markets and general economy are prolonged, demand for our products may be
negatively affected and orders may be canceled, which could materially impact
our financial position, results of operations and cash flow. Further, lack
of liquidity by our customers could impact our ability to collect amounts owed
to us and lack of liquidity by financial institutions could impact our ability
to fully access our existing credit facility.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds
None.
Item 3.
Defaults Upon Senior Securities
None.
Item 4.
Submission of Matters to a Vote of Security Holders
A summary
of matters voted upon at our Annual Stockholders Meeting that was held on
May 12, 2009 are listed below:
Election of
Directors
Directors
were elected to the Board of Directors until next year’s annual meeting and
until their successors are duly elected and qualified.
Nominee
|
|
Votes
For
|
|
Votes
Against
|
|
Votes
Abstained
|
Patrick
W. Allender
|
|
42,116,686
|
|
115,070
|
|
87,624
|
C.
Scott Brannan
|
|
42,122,224
|
|
109,432
|
|
87,724
|
Joseph
O. Bunting III
|
|
42,163,473
|
|
68,283
|
|
87,624
|
Thomas
S. Gayner
|
|
42,118,045
|
|
113,612
|
|
87,724
|
Rhonda
L. Jordan
|
|
42,111,015
|
|
118,741
|
|
89,624
|
Clay
Kiefaber
|
|
42,111,071
|
|
120,686
|
|
87,624
|
Mitchell
P. Rales
|
|
42,150,112
|
|
85,555
|
|
83,714
|
Rajiv
Vinnakota
|
|
42,102,247
|
|
127,429
|
|
89,705
|
John
A. Young
|
|
42,177,278
|
|
58,388
|
|
83,714
|
Appointment of Independent
Auditors
The
appointment of Ernst & Young LLP as our independent auditors for 2009 was
ratified by our stockholders as follows:
Votes
For
|
|
Votes
Against
|
|
Votes
Abstained
|
42,073,484
|
|
148,230
|
|
97,666
|
Approval of Colfax
Corporation’s Annual Incentive Plan
The
Annual Incentive Plan was approved by our stockholders as follows:
Votes
For
|
|
Votes
Against
|
|
Votes
Abstained
|
|
Broker
Non-Votes
|
37,218,497
|
|
501,337
|
|
96,366
|
|
4,503,181
|
Item 5.
Other Information
None.
Item
6. Exhibits
Exhibit No.
|
|
Exhibit Description
|
|
|
|
10.1
|
|
Colfax
Corporation Annual Incentive Plan
|
|
|
|
31.01
|
|
Certification
of Chief Executive 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.
|
|
|
|
31.02
|
|
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.
|
|
|
|
32.01
|
|
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.
|
|
|
|
32.02
|
|
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.
|
SIGNATURES
Pursuant
to the requirements 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.
Registrant: Colfax
Corporation
By:
|
|
|
|
|
|
|
|
|
|
/s/ John
A. Young
|
|
President
and Chief Executive Officer
|
|
August
4, 2009
|
John
A. Young
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/ G.
Scott
Faison
|
|
Senior
Vice President, Finance and
|
|
August
4, 2009
|
G.
Scott Faison
|
|
Chief
Financial Officer
|
|
|
|
|
(Principal
Financial and Accounting Officer)
|
|
|