Enovis(ENOV) - 2020 Q4 - Annual Report

Part I Business Colfax operates as a diversified technology company with two main segments, Fabrication Technology and Medical Technology, pursuing growth through acquisitions and continuous improvement - Colfax operates as a diversified technology company with two primary brands: ESAB (Fabrication Technology) and DJO (Medical Technology)[17] - The company completed the acquisition of DJO Global, Inc. on February 22, 2019, creating a new growth platform in the orthopedic solutions market[18] - The Air and Gas Handling business was divested on September 30, 2019, for approximately $1.8 billion, with proceeds used to pay down debt[19] - The COVID-19 pandemic, declared in March 2020, has caused widespread economic disruption and reduced demand for the Company's products, creating uncertainty in financial estimates[23][25] Reportable Segments Colfax reports operations through Fabrication Technology (ESAB) and Medical Technology (DJO) segments, offering welding products and medical devices respectively 2020 Sales Mix by Segment | Segment | Product Category | % of Segment Net Sales | | :--- | :--- | :--- | | Fabrication Technology | Consumables | ~69% | | | Equipment & Other | ~31% | | Medical Technology | Prevention & Rehabilitation | 70% | | | Reconstructive | 30% | - The Fabrication Technology segment, primarily under the ESAB brand, develops and supplies consumable products and equipment for cutting, joining, and automated welding[27] - The Medical Technology segment offers a broad range of products for orthopedic bracing, reconstructive implants, rehabilitation, and pain management, addressing the full continuum of patient care[28] Industry and Competition Both segments operate in highly competitive, fragmented markets, with competition based on product quality, innovation, and support - The Fabrication Technology segment faces competition from major players such as Lincoln Electric and the welding business of Illinois Tool Works, Inc[30] - The Medical Technology segment competes with large, diversified corporations including Stryker and DePuy Synthes (a Johnson & Johnson company)[33] International Operations Colfax has a significant global presence, with 59% of 2020 net sales outside the U.S., including 31% from emerging markets - For the year ended December 31, 2020, approximately 59% of the company's Net sales were to locations outside the U.S[36] - Sales to emerging markets accounted for approximately 31% of total Net sales in 2020[36] Research and Development The company focuses R&D on innovation and new product development, with expenses steadily increasing over the past three years Research and Development Expense (2018-2020) | Year | R&D Expense (in millions) | | :--- | :--- | | 2020 | $68.6 | | 2019 | $61.8 | | 2018 | $34.2 | Regulatory Environment The Medical Technology segment faces extensive and complex regulation by the U.S. FDA and global authorities, with costly compliance requirements - Medical device products are extensively regulated by the U.S. FDA and other governmental authorities, covering development, manufacturing, marketing, and sales[45] - The business is subject to healthcare fraud and abuse laws, including the federal False Claims Act, Stark law, and HIPAA, which constrain financial arrangements with healthcare professionals[50][51] - Increasingly stringent regulations outside the U.S., such as the new Medical Device Regulation (MDR) in the EU, will require significant additional costs to ensure compliance[49] Human Capital Management As of December 31, 2020, Colfax employed approximately 15,400 people globally, with 49% represented by foreign trade unions Employee Statistics (as of Dec 31, 2020) | Metric | Number/Percentage | | :--- | :--- | | Total Employees | ~15,400 | | U.S. Employees | ~3,100 | | Non-U.S. Employees | ~12,300 | | Represented by Foreign Unions/Councils | ~49% | Risk Factors The company faces significant risks including the COVID-19 pandemic's impact, acquisition integration challenges, substantial indebtedness, and regulatory complexities in Medical Technology Risks Related to Business and Operations Key operational risks include the COVID-19 pandemic's impact, acquisition integration challenges, $2.2 billion in indebtedness, and potential goodwill impairment - The COVID-19 pandemic has materially affected operations, causing delays in medical procedures and reduced industrial investment, with the full future impact remaining uncertain[76][77][79] - The company's growth strategy relies on acquisitions, which involve risks such as integration difficulties, potential loss of key personnel, and failure to realize anticipated benefits[62][64][65] - As of December 31, 2020, the company had $2.2 billion of outstanding indebtedness, which could adversely affect its financial condition and limit operational flexibility due to restrictive covenants[70][71] - A significant portion of the company's total assets consists of goodwill and intangible assets, which are subject to impairment risk if future operating performance declines[85][86][88] - International operations accounted for approximately 58% of sales in 2020, exposing the company to risks such as economic instability, trade protection measures, and currency fluctuations[101][102] Risks Related to Medical Technology Business The Medical Technology business faces unique risks related to third-party payor reimbursement, extensive government regulation, and maintaining relationships with healthcare professionals - Sales of medical device products depend heavily on coverage and adequate reimbursement from government programs (Medicare, Medicaid) and private payors, which are subject to cost-control measures[133][134] - The business is subject to extensive government regulation regarding product safety, efficacy, manufacturing, and marketing, with non-compliance potentially leading to recalls, fines, or operational shutdowns[146][147] - The success of surgical implant products relies on maintaining strong relationships with leading surgeons who assist in product development and testing[152][153] - The company uses a mix of direct sales forces and third-party distributors, and failure to effectively manage these channels could adversely impact growth[155][156] Risks Related to Litigation and Regulatory Compliance The company faces significant litigation and regulatory risks, including asbestos-related claims, U.S. sanctions, and environmental compliance - Certain subsidiaries are defendants in numerous lawsuits claiming personal injury from asbestos exposure. The company has estimated future liabilities and insurance recoveries, but these estimates are subject to significant uncertainty[164][165][166] - The company's international operations are subject to U.S. sanctions, embargoes, and export control laws. A foreign subsidiary engaged in transactions that may have violated these laws, and a voluntary disclosure has been submitted to U.S. government agencies[169][174] - Operations are subject to extensive environmental, health, and safety laws, and failure to comply could result in costly penalties and remediation liabilities[175][176] Properties Colfax's corporate headquarters are leased, with Fabrication Technology operating 38 global production facilities and Medical Technology operating 6 facilities Production Facilities by Segment (as of Dec 31, 2020) | Segment | Location | Owned Space (million sq. ft.) | Leased Space (million sq. ft.) | Total Facilities | | :--- | :--- | :--- | :--- | :--- | | Fabrication Technology | U.S. | 0.6 | 0.7 | 5 | | | Outside U.S. | 7.1 | 2.0 | 33 | | Medical Technology | U.S. | 0.1 | 0.2 | 4 | | | Outside U.S. | 0.0 | 0.3 | 2 | Information about our Executive Officers This section provides biographical information for the company's key executive officers, including the President and CEO, CFO, and segment leaders - Matthew L. Trerotola has served as President and Chief Executive Officer since July 2015[198] - Christopher M. Hix has served as Executive Vice President, Finance, and Chief Financial Officer since December 2019[199] - Brady Shirley was appointed CEO of DJO in November 2016, prior to its acquisition by Colfax[203] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Colfax common stock trades on the NYSE, with $100 million remaining authorized for share repurchases as of December 31, 2020 - The company's Board of Directors has authorized a total of $300 million for common stock repurchases. In 2018, 6.45 million shares were repurchased for $200.0 million[211][212] - As of December 31, 2020, approximately $100 million remains available under the stock repurchase authorization, with no repurchases made during 2020[212][213] Selected Financial Data Selected financial data reflects significant strategic changes, with 2020 net sales at $3.1 billion and net income from continuing operations at $64.1 million Selected Financial Data (2018-2020) | (in thousands, except per share data) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net sales | $3,070,769 | $3,327,458 | $2,193,083 | | Operating income | $162,291 | $203,612 | $151,536 | | Net income from continuing operations | $64,082 | $18,863 | $121,872 | | Net income per share from continuing ops - diluted | $0.44 | $0.10 | $1.00 | | Total assets | $7,351,549 | $7,386,832 | $6,615,958 | | Total debt, including current portion | $2,231,243 | $2,311,826 | $1,197,428 | | Net cash provided by operating activities | $301,935 | $130,948 | $226,367 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 2020 financial performance, noting a 7.7% sales decrease to $3.1 billion due to COVID-19, offset by DJO acquisition, and $301.9 million operating cash flow Results of Operations Consolidated net sales decreased 7.7% to $3.1 billion in 2020 due to COVID-19, partially offset by the DJO acquisition, with operating income declining to $162.3 million Consolidated Net Sales Change (2019 vs. 2020) | Component | Change (in millions) | % Change | | :--- | :--- | :--- | | 2019 Net Sales | $3,327.5 | | | Existing businesses | ($389.5) | (11.7)% | | Acquisitions | $206.6 | 6.2% | | Foreign currency translation | ($73.8) | (2.2)% | | Total Change | ($256.7) | (7.7)% | | 2020 Net Sales | $3,070.8 | | Key Operating Results (2019 vs. 2020) | (in millions) | 2020 | 2019 | | :--- | :--- | :--- | | Gross profit | $1,288.1 | $1,401.1 | | Gross profit margin | 41.9% | 42.1% | | Operating income | $162.3 | $203.6 | | Operating income margin | 5.3% | 6.1% | | Net income from continuing operations | $64.1 | $18.9 | - The effective tax rate for 2020 was (10.4)%, significantly lower than the 21% U.S. statutory rate, due to benefits from U.S. tax credits, state tax losses, and changes to federal tax returns[268] Liquidity and Capital Resources Liquidity is driven by $301.9 million in operating cash flow and a $975 million revolving credit facility, with total debt at $2.23 billion as of December 31, 2020 Cash Flow Summary (2019 vs. 2020) | (in millions) | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $301.9 | $130.9 | | Net cash used in investing activities | ($175.1) | ($1,632.8) | | Net cash provided by (used in) financing activities | ($131.7) | $1,369.5 | - As of December 31, 2020, the company had total debt of $2.23 billion and was in compliance with all covenants under its Credit Facility, which includes a $975 million revolving credit facility[285][520] - Key cash outflows from operations in 2020 included $39.2 million for restructuring initiatives and $5.1 million for strategic transaction costs[297][298] Critical Accounting Policies Critical accounting policies involve significant estimates for asbestos liabilities, goodwill and intangible asset impairment testing, and income tax accounting - The company estimates its asbestos liability for pending and future claims over a 15-year forecast period, as it believes this is the longest period that can be reasonably estimated[312][313] - Goodwill and indefinite-lived intangible assets are tested for impairment annually. In 2020, a quantitative test was performed for both the Fabrication Technology and Medical Technology reporting units due to the COVID-19 pandemic, with no impairment found. The fair value of the Medical Technology unit exceeded its carrying value by approximately 12%[328] - Accounting for income taxes requires significant judgment, particularly in evaluating the need for a valuation allowance against deferred tax assets and assessing liabilities for unrecognized tax benefits[332][335] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rates, foreign currency exchange rates, and commodity prices, mitigated by derivative instruments - A hypothetical 1.00% increase in interest rates during 2020 would have increased interest expense on variable-rate debt by approximately $9.0 million[346] - A hypothetical 10% depreciation in major foreign currencies against the U.S. dollar as of December 31, 2020, would result in a reduction in Equity of approximately $166 million[348] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2020, including statements of operations, balance sheets, and cash flows, with unqualified audit opinions Consolidated Statements of Operations In 2020, net sales were $3.07 billion, operating income $162.3 million, and net income from continuing operations $64.1 million 2020 Consolidated Statement of Operations Highlights | Metric (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Net sales | $3,070,769 | $3,327,458 | | Gross profit | $1,288,105 | $1,401,056 | | Operating income | $162,291 | $203,612 | | Net income from continuing operations | $64,082 | $18,863 | | Net income (loss) attributable to Colfax | $42,625 | ($527,646) | Consolidated Balance Sheets As of December 31, 2020, total assets were $7.35 billion, with $3.31 billion in goodwill and $2.23 billion in total debt Balance Sheet Highlights (as of Dec 31, 2020) | (in thousands) | Amount | | :--- | :--- | | Total Current Assets | $1,361,829 | | Goodwill | $3,314,541 | | Intangible assets, net | $1,663,446 | | Total Assets | $7,351,549 | | Total Current Liabilities | $811,658 | | Long-term debt, less current portion | $2,204,169 | | Total Liabilities | $3,763,675 | | Total Colfax Corporation Equity | $3,543,387 | Consolidated Statements of Cash Flows In 2020, the company generated $301.9 million in operating cash flow, used $175.1 million in investing, and $131.7 million in financing activities 2020 Statement of Cash Flows Highlights | (in thousands) | Amount | | :--- | :--- | | Net cash provided by operating activities | $301,935 | | Net cash used in investing activities | ($175,079) | | Net cash provided by (used in) financing activities | ($131,651) | | Decrease in Cash and cash equivalents | ($8,563) | Note 4: Discontinued Operations This note details the 2019 sale of the Air and Gas Handling business as a discontinued operation, including a $449 million goodwill impairment - The Air and Gas Handling business was sold on September 30, 2019, for total consideration of $1.8 billion[455] - A goodwill impairment charge of $449 million and a valuation allowance of $32 million were recorded in the second quarter of 2019 related to the sale[455] - Loss from retained asbestos-related contingencies was $9.5 million in 2020 and $19.0 million in 2019, which is included in discontinued operations[464] Note 5: Acquisitions This note details five Medical Technology acquisitions in 2020 totaling $67.5 million, and finalizes accounting for the 2019 DJO acquisition of $3.15 billion - During 2020, five acquisitions were completed in the Medical Technology segment for total consideration of $67.5 million, adding $21.4 million in goodwill[465][467] - The acquisition of DJO was completed on February 22, 2019, for a net purchase price of $3.15 billion. The purchase accounting was finalized in Q1 2020 with an increase to goodwill[469][470] Note 18: Commitments and Contingencies This note details asbestos-related liabilities of $253.1 million and a corresponding $264.5 million insurance asset as of December 31, 2020, with ongoing litigation Asbestos-Related Balances (as of Dec 31, 2020) | (in thousands) | Amount | | :--- | :--- | | Long-term asbestos insurance asset & receivable | $264,527 | | Long-term asbestos liability | $253,144 | - The company projects future asbestos-related liability costs for pending and future claims over the next 15 years, as it believes this is the longest period that can be reasonably estimated[628] - In 2020, the company recorded an $11.6 million increase in asbestos liabilities and a corresponding $3.9 million increase in the insurance asset, resulting in a net pre-tax charge of $7.7 million[638] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[666] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020, based on the COSO 2013 framework[671] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the company's 2021 Proxy Statement - Information regarding Directors, the Audit Committee, and Section 16(a) compliance is incorporated by reference from the company's definitive proxy statement for its 2021 annual meeting[674] Executive Compensation Details on executive and director compensation are incorporated by reference from the company's 2021 Proxy Statement - Details on executive compensation are incorporated by reference from the 2021 Proxy Statement[676] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the company's 2021 Proxy Statement - Details on security ownership and equity compensation plans are incorporated by reference from the 2021 Proxy Statement[676] Certain Relationships and Related Transactions, and Director Independence Details on related person transactions and director independence are incorporated by reference from the company's 2021 Proxy Statement - Details on related transactions and director independence are incorporated by reference from the 2021 Proxy Statement[677] Principal Accountant Fees and Services Information on principal accountant fees and Audit Committee pre-approval policies is incorporated by reference from the company's 2021 Proxy Statement - Details on principal accountant fees and services are incorporated by reference from the 2021 Proxy Statement[677] Part IV Exhibits and Financial Statement Schedules This section provides an index of all financial statements, schedules, and exhibits filed as part of the Form 10-K report - This section provides an index of all financial statements, schedules, and exhibits filed with the Form 10-K[680][687]