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Colfax (CFX) Q1 Earnings Top Estimates, Gain From Buyouts

Zacks Equity Research

Colfax Corporation CFX reported better-than-expected results for the first quarter of 2019, with earnings surpassing estimates by 8.2%. This was the 14th consecutive quarter of impressive results recorded by the company.

This machinery company’s adjusted earnings in the reported quarter were 53 cents per share, surpassing the Zacks Consensus Estimate of 49 cents. Moreover, the bottom line increased 10.4% from the year-ago figure of 48 cents, primarily on the back of growth in existing businesses, benefits from acquired assets and margin improvement.

Benefits From Acquired Assets Drive Revenues

In the quarter under review, Colfax’s net sales were $1,007.7 million, reflecting growth of 14.4% from the year-ago quarter. The improvement was driven by 1.6% growth in existing businesses and 19.2% benefit from acquired assets, partially offset by adverse impact of 6.4% from foreign currency movements.

However, the top line lagged the Zacks Consensus Estimate of $1,032 million by 2.4%.

In February 2019, the company completed the acquisition of DJO Global, Inc. Post this, it revised its reportable segment from the earlier two segments — Air and Gas Handling, and Fabrication Technology — to the existing three segments — Air and Gas Handling, Fabrication Technology, and Medical Technology.

Further, the company is looking for options for the Air & Gas Handling platform.

The segmental information is briefly discussed below:

Revenues from the Air and Gas Handling segment were $323.7 million, decreasing 6.8% year over year. Results were adversely affected by impacts of 2.8% from existing businesses and 5.8% impact of unfavorable movements in foreign currency translations. However, acquired assets had a positive impact of 1.8%.

This segment’s orders were worth $384.3 million in the reported quarter, reflecting year-over-year growth of 17.5%. The improvement was driven by rise in industrial, mining, power generation, and oil, gas & petrochemical orders. Backlog at the end of the quarter was $893 million, up 0.4% year over year.
    
Revenues from Fabrication Technology totaled $560.4 million, increasing 5.1% year over year on the back of solid product portfolio and favorable pricing.

It is worth mentioning here that favorable pricing had a positive 5.1% impact on sales growth while acquisitions added 7.3%. This was partially offset by 6.7% negative impact of foreign currency translations and a 0.6% decline in volume.

Revenues from Medical Technology totaled $123.5 million. This segment includes the results of DJO Global.

Margins Improve Y/Y

In the quarter under review, Colfax’s cost of sales increased 6.4% year over year to $649.4 million. It represented 64.4% of net sales compared with 69.3% in the year-ago quarter. Gross margin increased 490 basis points (bps) year over year to 35.6% on the back of synergistic gains from acquired assets, operational improvements, and gains from restructuring actions. Selling, general and administrative expenses increased 58.7% year over year to $318.1 million. It represented 31.6% of net sales.

Adjusted earnings before interest, tax and amortization (EBITA) in the quarter under review increased 39.6% year over year to $126.7 million. Also, adjusted EBITA margin grew 230 bps to 12.6%. Interest expenses in the quarter grew 203.7% year over year to $29.1 million.

Balance Sheet and Cash Flow

Exiting the first quarter, Colfax had cash and cash equivalents of $242.4 million, roughly 1.6% below $245 million at the end of the last reported quarter. Long-term debt balance increased substantially to $4,037.1 million from $1,192.4 million in the previous quarter.

In the reported quarter, the company used net cash of $72.3 million for operating activities, significantly above $2.7 million used in the prior-year quarter. Capital used for purchasing property, plant and equipment totaled $24.4 million, reflecting year-over-year growth of 119.5%.

Outlook

For the first half of 2019, Colfax anticipates adjusted earnings per share of $1.11-$1.14, high compared with $1.09 recorded in the year-ago comparable period. The results will benefit from healthy operating performance in the Air & Gas Handling and Fabrication Technology segments as well as from synergistic gains of acquired assets.

Also, the company noted that tax rate will be high in the first half of 2019 and forex woes will continue to adversely influence results.

For 2019, it maintained the previously provided adjusted earnings guidance at $2.55-$2.65 per share. This suggests an improvement of more than $2.31 recorded in 2018.

The company anticipates the Air & Gas Handling segment’s core sales to grow in a mid to high-single digit. For the Fabrication Technology segment, core sales are likely to grow in a mid-single digit. It believes that effective pricing activities will offset adverse impacts of forex woes and inflation.

Colfax Corporation Price, Consensus and EPS Surprise

 

Colfax Corporation Price, Consensus and EPS Surprise | Colfax Corporation Quote

Zacks Rank & Stock to Consider

With a market capitalization of approximately $3.3 billion, Colfax currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the industry are Roper Technologies, Inc. ROP, DXP Enterprises, Inc. DXPE and Dover Corporation DOV. While Roper currently sports a Zacks Rank #1 (Strong Buy), DXP Enterprises and Dover carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for all three stocks have improved for the current year. Further, average earnings surprise for the last four quarters was positive 48.47% for DXP Enterprises, 8.43% for Roper and 8.61% for Dover.

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