Colfax Continues to Improve Margins in Second Quarter


Colfax experienced continued weak demand levels during the second quarter, consistent with what we have heard from other diversified industrial companies’ results. Year-over-year organic revenue was flat though represented a positive inflection from 3% down quarters the past two quarters.

Margin gains were impressive, with year-over-year adjusted operating margin expansion of 160 basis points (to 10.9%), up from a 120-basis-point expansion in the prior quarter. Analysts have raised operating margin assumptions at fabrication technology, or ESAB, by 50 basis points across our forecast years (to 12% mid-cycle) given the solid progress to date in applying its Colfax Business System to the former Charter business.

First-quarter results were weak on revenue and strong on margins. Total organic revenue was flat, as the company experienced declines in oil and gas, mining, and general industrial end markets within gas and fluid handling, and soft demand in short-cycle welding (fabrication technology). Offsetting the weakness was continued strong results within power generation, driven by environmental upgrades in China and U.S. power plants and strong pump sales to natural gas-combined cycle power stations. On the conference call management noted that its full year revenue guidance was still intact, but would likely come in at the low end given the overall subdued demand environment.

Colfax also raised the midpoint of its 2013 EPS guidance by $0.04 to $1.95-$2.10 because cost reductions have been slightly better than planned year to date. The company has followed up its seven plant closures in 2012 with nine distribution plant closures so far this year. Investors believe the company is tracking well to its $55 million-$65 million cost-cut forecast for 2013, and are confident that further $70 million of cost cuts over the following two years is doable. Still, most analysts continue to model some margin conservatism relative to management’s long-term guidance given the continued tepid demand environment.


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