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Colfax (CFX) Tops Earnings Estimates in Q2, Raises '18 View

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Colfax Corporation (CFX - Free Report) reported better-than-expected bottom-line results for the second quarter of 2018, delivering a positive earnings surprise of 15.1%. This is the company’s third consecutive quarter of impressive results.

This machinery company’s adjusted earnings in the reported quarter were 61 cents per share, surpassing the Zacks Consensus Estimate of 53 cents. Moreover, the bottom line increased 35.6% from the year-ago tally of 45 cents, primarily on the back of sales growth and a lower tax rate.

Buyout and Forex Gains Drive Revenues

In the quarter under review, Colfax’s net sales were $925.3 million, reflecting growth of 9.1% from the year-ago quarter. The improvement was driven by 8.3% gain from acquired assets and a 1.6% positive impact from foreign currency movements, partially offset by a 0.7% decline in existing businesses.

However, the top line lagged the Zacks Consensus Estimate of $952.1 million by 2.8%.

The company reports its net sales in two segments — Air and Gas Handling, and Fabrication Technology. The segmental information is briefly discussed below:

Revenues from the Air and Gas Handling segment were $364.4 million, increasing 3.2% year over year. Results were driven by 12.1% gain from acquired assets and 4.2% positive impact from foreign currency translations, partially offset by a 13.1% decline in existing businesses.

This segment’s orders were worth $359.6 million in the reported quarter, reflecting year-over-year growth of 5.8%. The improvement was driven by growth in mining, and general industrial & other orders, partially offset by weakness in power generation, and oil, gas & petrochemical markets.

Backlog at the end of the first half of 2018 was $837.5 million, down 4.2% year over year.

Revenues from Fabrication Technology totaled $560.9 million, increasing 13.4% year over year. The improvement came on the back of 4.6% positive impact from price, 5.5% gain from acquired assets and 3.6% rise in volume, partially offset by 0.3% negative impact from foreign currency translations.

During the reported quarter, the company signed an agreement to acquire Europe-based Gas Control Equipment. This industrial equipment supplier is projected to generate in excess of $100 million annualized revenues, post the completion of the transaction in the third quarter of 2018.

Mixed Margin Profile

In the quarter under review, Colfax’s cost of sales increased 8.1% year over year to $637.9 million. It represented 68.9% of net sales compared with 69.6% in the year-ago quarter. Gross margin increased 70 basis points (bps) year over year to 31.1% on the back of synergistic gains from acquired assets and gains from restructuring actions. Selling, general and administrative expenses increased 15.8% year over year to $204.8 million. It represented 22.1% of net sales.

Adjusted operating income in the quarter under review increased 1.8% year over year to $82.7 million. However, adjusted operating margin slipped 70 bps to 8.9%. Effective tax rate was 15% versus 29.6% in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the second quarter, Colfax had cash and cash equivalents of $257.7 million, roughly 4% below $268.3 million at the end of the last-reported quarter. Long-term debt balance decreased 4.9%, sequentially, to $1,067.4 million.

In the first half of 2018, the company generated net cash of $33.7 million from its operating activities, reflecting 65.8% fall from the year-ago comparable period. Capital used for purchasing fixed assets totaled $24.8 million, reflecting a year-over-year decline of 7.3%.

During the second quarter, the company used $143.9 million for repurchasing roughly 4.6 million common shares.

Outlook

In the second half of 2018, Colfax anticipates strong performance, backed by strengthening Fabrication Technology business, margin growth in Air & Gas Handling business, and gains from restructuring initiatives. Furthermore, meaningful acquisitions will support growth in unexplored markets and new business platforms.

Based on the impressive second-quarter results and outlook for the second half of 2018, the company increased adjusted earnings per share projection to $2.15-$2.30 from the previous forecast of $2.05-$2.20. The revised guidance reflects at least 24% year-over-year growth potential.

Effective tax rate for the year is predicted to be 20-22% versus the earlier prediction of 23-24%.

Colfax Corporation Price, Consensus and EPS Surprise
 

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

Zacks Rank & Stocks to Consider

With a market capitalization of approximately $4.1 billion, Colfax currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the industry are Altra Industrial Motion Corp. (AIMC - Free Report) , Chart Industries, Inc. (GTLS - Free Report) and Barnes Group Inc. (B - Free Report) . While both Altra Industrial Motion and Chart Industries sport a Zacks Rank #1 (Strong Buy), Barnes Group carries 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 each of these stocks improved for the current year and the next year. The average positive earnings surprise for the last four quarters was 4.01% for Altra Industrial Motion, 29.36% for Chart Industries and 6.88% for Barnes Group.

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