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Colfax (CFX) Q2 Earnings Top Estimates, Sales Gain on Buyouts

Zacks Equity Research

Colfax Corporation CFX kept its earnings streak alive in the second quarter of 2019, with earnings surpassing estimates by 6.7%. This was the company’s 15th consecutive quarter of impressive results.

The machinery company’s adjusted earnings (fully consolidated) in the reported quarter were 64 cents per share, surpassing the Zacks Consensus Estimate of 60 cents. Moreover, the bottom line gained 4.9% from the year-ago figure of 61 cents on growth in existing businesses, benefits from acquired assets and margin improvement.

Notably, adjusted earnings from continuing operations in the quarter were 54 cents per share, higher than the year-ago quarter figure of 37 cents.

Benefits From Acquired Assets Drive Revenues

In the quarter under review, Colfax’s net sales were $908.6 million, reflecting growth of 62% from the year-ago quarter. The improvement was driven by 3.6% growth in existing businesses and 63% benefit from acquired assets, partially offset by adverse impact of 4.6% from foreign currency movements.

However, its net sales lagged the Zacks Consensus Estimate of $1,247 million by 27.15%.

It is worth mentioning here that the company, in May 2019, entered an agreement to divest its Air and Gas Handling segment to KPS Capital Partners, LP. The deal is subject to regulatory clearance and projected to close by the second half of 2019. The business has been classified as discontinued operations. The segment’s orders were worth $404.2 million in the reported quarter, reflecting year-over-year growth of 12.4%.
    
The company currently reports under two business segments — Fabrication Technology and Medical Technology. The segmental information is briefly discussed below:

Revenues from Fabrication Technology totaled $592.7 million, increasing 5.7% year over year. Favorable pricing and volume growth had a positive 3.7% impact on sales growth while acquisitions added 6.6%. This was partially offset by a 4.6% negative impact of foreign currency translations.

The segment benefited from innovation efforts, commercial strategy and efficient customer service in the quarter.

Revenues from Medical Technology totaled $315.9 million, reflecting year-over-year growth of 3%. Organic sales in the quarter rose 3.4% on strength in reconstructive products and improvement in prevention & rehabilitation products.

Notably, the segment includes the results of DJO Global — acquired by Colfax in February 2019. The acquisition marks Colfax's entry into the orthopedic solutions industry. Integration process is on track.

Margins Improve Y/Y

In the quarter under review, Colfax’s cost of sales grew 44.4% year over year to $532.6 million. It represented 58.6% of net sales compared with 65.8% in the year-ago quarter. Gross margin rose 720 basis points (bps) year over year to 41.4%. Selling, general and administrative expenses grew 126.5% year over year to $307.9 million. It represented 33.9% of net sales.

Adjusted earnings before interest, tax and amortization (EBITA) in the quarter under review rose 95.1% year over year to $127.2 million. Also, adjusted EBITA margin grew 240 bps to 14%. Interest expenses in the quarter grew 156.4% year over year to $33.2 million.

Balance Sheet and Cash Flow

Exiting the second quarter, Colfax had cash and cash equivalents of $131.9 million, roughly 45.6% below $242.4 million at the end of the last reported quarter. Long-term debt balance rose 1% sequentially to $4,078.2 million.

In the first half of 2019, the company generated net cash of $10.4 million from operating activities, significantly below $33.7 million generated in the prior-year period. Capital used for purchasing property, plant and equipment was roughly $64 million, reflecting year-over-year growth of 157.8%.

Outlook

Colfax noted that it is well placed for achieving fully consolidated adjusted earnings of $2.55-$2.65 per share or adjusted earnings from continuing operations of $1.90-$2.00 in 2019. For the third quarter, the company believes that adjusted earnings from continuing operations will be 45-50 cents. Tax rate in the year will likely be 22-23%.

For the Fabrication Technology segment, organic sales are likely to grow in a low-single digit in the second half of 2019. Volume is predicted to be flat while acquired assets will likely be beneficial.

Colfax Corporation Price, Consensus and EPS Surprise

 

Colfax Corporation Price, Consensus and EPS Surprise

Colfax Corporation price-consensus-eps-surprise-chart | Colfax Corporation Quote

Zacks Rank & Stock to Consider

With a market capitalization of approximately $2.9 billion, Colfax currently carries a Zacks Rank #5 (Strong Sell).

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

In the past 60 days, earnings estimates for these stocks have improved for the current year. Further, earnings surprise for the last quarter was 0.99% for Roper, 100% for Hickok and 0.65% for Dover.

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