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COLFAX CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of Colfax Corporation ("Colfax," "the Company," "we," "our," and "us") should be read in conjunction with the Condensed Consolidated Financial Statements and related footnotes included in Part I. Item 1."Financial Statements" of this Quarterly Report on Form 10-Q for the quarterly period ended March 28, 2014 (this "Form 10-Q") and the Consolidated Financial Statements and related footnotes included in Part II. Item 8. "Financial Statements and Supplementary Data" of our Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 Form 10-K") filed with the Securities and Exchange Commission (the "SEC") on February 12, 2014. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements contained in this Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Form 10-Q is filed with the SEC. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements regarding: projections of revenue, profit margins, expenses, tax provisions and tax rates, earnings or losses from operations, impact of foreign exchange rates, cash flows, pension and benefit obligations and funding requirements, synergies or other financial items; plans, strategies and objectives of management for future operations including statements relating to potential acquisitions, compensation plans or purchase commitments; developments, performance or industry or market rankings relating to products or services; future economic conditions or performance; the outcome of outstanding claims or legal proceedings including asbestos-related liabilities and insurance coverage litigation; potential gains and recoveries of costs; assumptions underlying any of the foregoing; and any other statements that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future. Forward-looking statements may be characterized by terminology such as "believe," "anticipate," "should," "would," "intend," "plan," "will," "expect," "estimate," "project," "positioned," "strategy," "targets," "aims," "seeks," "sees," and similar expressions. These statements are based on assumptions and assessments made by our management in light of their experience and perception of historical trends, current conditions, expected future developments and other factors we believe to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties, including but not limited to the following: • changes in the general economy, as well as the cyclical nature of the markets we serve; • our ability to identify, finance, acquire and successfully integrate attractive acquisition targets; • our exposure to unanticipated liabilities resulting from acquisitions; • our ability and the ability of our customers to access required capital at a reasonable cost; • our ability to accurately estimate the cost of or realize savings from our restructuring programs; • the amount of and our ability to estimate our asbestos-related liabilities; • the solvency of our insurers and the likelihood of their payment for asbestos-related costs; • material disruptions at any of our manufacturing facilities; • noncompliance with various laws and regulations associated with our international operations, including anti-bribery laws, export control regulations and United States ("U.S.") sanctions and embargoes on certain foreign countries; • risks associated with our international operations; • risks associated with the representation of our employees by trade unions and work councils; • our exposure to product liability claims; 20 -------------------------------------------------------------------------------- • potential costs and liabilities associated with environmental laws and regulations; • failure to maintain and protect our intellectual property rights; • the loss of key members of our leadership team; • restrictions in our credit agreement by and among the Company, Colfax UK Holdings Ltd, the other subsidiaries of the Company party thereto, the lenders party thereto and Deutsche Bank AG New York Branch, as administrative agent, as amended (the "Deutsche Bank Credit Agreement") that may limit our flexibility in operating our business; • impairment in the value of intangible assets; • the funding requirements or obligations of our defined benefit pension plans and other post-retirement benefit plans; • significant movements in foreign currency exchange rates; • availability and cost of raw materials, parts and components used in our products; • new regulations and customer preferences reflecting an increased focus on environmental, social and governance issues, including new regulations related to the use of conflict minerals; • service interruptions, data corruption, cyber-based attacks or network security breaches affecting our information technology infrastructure; • risks arising from changes in technology; • the competitive environment in our industry; • changes in our tax rates or exposure to additional income tax liabilities; • our ability to manage and grow our business and execution of our business and growth strategies; • the level of capital investment and expenditures by our customers in our strategic markets; • our financial performance; and • other risks and factors, listed in Item 1A. "Risk Factors" in Part I of our 2013 Form 10-K. Any such forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ materially from those envisaged by such forward-looking statements. These forward-looking statements speak only as of the date this Form 10-Q is filed with the SEC. We do not assume any obligation and do not intend to update any forward-looking statement except as required by law. See Part I. Item 1A. "Risk Factors" in our 2013 Form 10-K for a further discussion regarding some of the reasons that actual results may be materially different from those that we anticipate. Overview We report our operations through the following reportable segments: • Gas & Fluid Handling - a global supplier of a broad range of gas- and fluid-handling products, including pumps, fluid-handling systems and controls, specialty valves, heavy-duty centrifugal and axial fans, rotary heat exchangers and gas compressors, which serves customers in the power generation, oil, gas and petrochemical, mining, marine (including defense) and general industrial and other end markets; and • Fabrication Technology - a global supplier of welding equipment and consumables, cutting equipment and consumables and automated welding and cutting systems. Certain amounts not allocated to the two reportable segments and intersegment eliminations are reported under the heading "Corporate and other." 21 -------------------------------------------------------------------------------- Colfax has a global geographic footprint, with production facilities in Europe, North America, South America, Asia, Australia and Africa. Through our reportable segments, we serve a global customer base across multiple markets through a combination of direct sales and third-party distribution channels. Our customer base is highly diversified and includes commercial, industrial and government customers. We employ a comprehensive set of tools that we refer to as the Colfax Business System ("CBS"). CBS is our business management system. It is a repeatable, teachable process that we use to create superior value for our customers, shareholders and associates. Rooted in our core values, it is our culture. CBS provides the tools and techniques to ensure that we are continuously improving our ability to meet or exceed customer requirements on a consistent basis. Outlook On April 14, 2014, Colfax completed the acquisition of Victor Technologies Holdings, Inc. ("Victor") from Irving Place Capital ("IPC") for total consideration of $947.3 million, including the assumption of debt, subject to certain adjustments (the "Victor Acquisition"). Victor is a pre-eminent global manufacturer of cutting, gas control and specialty welding solutions. The acquisition will complement the geographic footprint of our fabrication technology segment, as well as expand our product portfolio into new segments and applications. During the year ended December 31, 2013, Victor had net sales and operating income of $486.8 million and $64.0 million, respectively. Certain deferred tax assets at the acquisition date will be reassessed in light of the impact of the acquired business on expected future income or loss by country and future tax planning. Due to the additional income in the U.S. as a result of the Victor Acquisition, we expect that this assessment may result in a decrease in our valuation allowance against U.S. deferred tax assets during the second quarter of 2014, which is likely to result in a significant Benefit from income taxes. Results of Operations The following discussion of Results of Operations addresses the comparison of the periods presented. The Company's management evaluates the operating results of each of its reportable segments based upon Net sales and segment operating income (loss), which represents Operating income before Restructuring and other related charges. Items Affecting Comparability of Reported Results The comparability of our operating results for the first quarter of 2014 to the comparable 2013 period is affected by the following additional significant items: Strategic Acquisitions We complement our organic growth with strategic acquisitions. Acquisitions can significantly affect our reported results and can complicate period to period comparisons of results. As a consequence, we report the change in our Net sales between periods both from existing and acquired businesses. Orders and order backlog are presented only for the gas- and fluid-handling segment, where this information is relevant. The change in Net sales due to acquisitions represents the change in sales due to the following acquisitions: Gas and Fluid Handling On July 9, 2013, Colfax completed the acquisition of the common stock of Clarus Fluid Intelligence LLC ("Clarus"), for $13.2 million, which includes the fair value of an estimated additional contingent cash payment of $2.5 million at the acquisition date. The additional contingent payment will be paid during the year ending December 31, 2016 subject to the achievement of certain performance goals. Clarus is a domestic supplier of flushing services for marine applications primarily to U.S. government agencies, with primary operations based in Bellingham, Washington. On September 30, 2013, the Company completed the acquisitions of TLT-Babcock Inc. ("TLT-Babcock") and Alphair Ventilating Systems Inc. ("Alphair"), for an aggregate purchase price of $55.7 million. TLT-Babcock and Alphair are suppliers of heavy duty and industrial fans in Akron, Ohio and Winnepeg, Ontario, respectively. On November 1, 2013, the Company completed the acquisition of ?KD Kompresory a.s. ("?KDK"), for $69.4 million, including the assumption of debt. ?KDK is a supplier of multi-stage centrifugal compressors to the oil & gas, petrochemical, power and steel industries, based in Prague, Czech Republic. 22 -------------------------------------------------------------------------------- On November 25, 2013, the Company increased its ownership of Sistemas Centrales de Lubrication S.A. de C.V. ("Sicelub"), previously a less than wholly owned subsidiary in which the Company did not have a controlling interest, from 44% to 100%. Sicelub provides flushing services primarily in Central and South America serving the the oil, gas and petrochemical end market. On November 29, 2013, the Company completed the acquisition of the global infrastructure and industry division of Fläkt Woods Group ("GII"), for $246.0 million, including the assumption of debt, subject to certain adjustments. GII has operations around the world and will expand the Company's product offerings in the heavy duty industrial and cooling fan market. Foreign Currency Fluctuations A significant portion of our Net sales, approximately 80% for the first quarter of 2014, is derived from operations outside the U.S., with the majority of those sales denominated in currencies other than the U.S. dollar. Because much of our manufacturing and employee costs are outside the U.S., a significant portion of our costs are also denominated in currencies other than the U.S. dollar. Changes in foreign exchange rates can impact our results of operations and are quantified when significant to our discussion. Seasonality As our gas- and fluid-handling customers seek to fully utilize capital spending budgets before the end of the year, historically our shipments have peaked during the fourth quarter. Also, all of our European operations typically experience a slowdown during the July and August holiday season. General economic conditions may, however, impact future seasonal variations. Sales, Orders and Backlog Our consolidated Net sales increased from $947.1 million in the first quarter of 2013 to $1.054 billion in the first quarter of 2014. The following table presents components of our consolidated Net sales and, for our gas- and fluid-handling segment, order and backlog growth: Net Sales Orders(1) Backlog at Period End $ % $ % $ % (In millions) As of and for the three months ended March 29, 2013 $ 947.1 $ 502.1 $ 1,438.5 Components of Change: Existing businesses(2) 53.5 5.6 % 11.1 2.2 % (87.5 ) (6.1 )% Acquisitions(3) 85.1 9.0 % 72.1 14.4 % 243.5 16.9 % Foreign currency translation(4) (31.4 ) (3.3 )% (1.9 ) (0.4 )% (2.5 ) (0.1 )% 107.2 11.3 % 81.3 16.2 % 153.5 10.7 % As of and for the three months ended March 28, 2014 $ 1,054.3 $ 583.4 $ 1,592.0 (1) Represents contracts for products or services, net of cancellations for the period, for our gas- and fluid-handling operating segment. (2) Excludes the impact of foreign exchange rate fluctuations and acquisitions, thus providing a measure of growth due to factors such as price, product mix and volume. (3) Represents the incremental sales, orders and order backlog as a result of our acquisitions of Clarus, TLT-Babcock and Alphair, ?KDK, Sicelub and GII. (4) Represents the difference between prior year sales and orders valued at the actual prior year foreign exchange rates and prior year sales and orders valued at current year foreign exchange rates. The increase in Net sales from existing businesses during the first quarter of 2014 compared to the first quarter of 2013 was attributable to an increase of $66.4 million in our gas- and fluid-handling segment, partially offset by a decrease of $12.9 million in our fabrication technology segment. Orders, net of cancellations, from existing businesses for our gas- and fluid-handling segment increased during the first quarter of 2014 in comparison to the first quarter of 2013 due to growth in all end markets except oil, gas and petrochemical. 23 --------------------------------------------------------------------------------Business Segments As discussed further above, the Company reports results in two reportable segments: gas and fluid handling and fabrication technology. The following table summarizes Net sales by reportable segment for each of the following periods: Three Months Ended March 28, 2014 March 29, 2013 (In millions) Gas and Fluid Handling $ 573.9 $ 425.1 Fabrication Technology 480.4 522.0 Total Net sales $ 1,054.3 $ 947.1 Gas and Fluid Handling We design, manufacture, install and maintain gas- and fluid-handling products for use in a wide range of markets, including power generation, oil, gas and petrochemical, mining, marine (including defense) and general industrial and other. Our gas-handling products are principally marketed under the Howden brand name. Howden's primary products are heavy-duty fans, rotary heat exchangers and compressors. The fans and heat exchangers are used in coal-fired and other types of power stations, both in combustion and emissions control applications, underground mines, steel sintering plants and other industrial facilities that require movement of large volumes of air in harsh applications. Howden's compressors are mainly used in the oil, gas and petrochemical end market. Our fluid-handling products are marketed by Colfax Fluid Handling under a portfolio of brands including Allweiler and Imo. Colfax Fluid Handling is a supplier of a broad range of fluid-handling products, including pumps, fluid-handling systems and controls, and specialty valves. The following table summarizes selected financial data for our gas- and fluid-handling segment: Three Months Ended March 28, 2014 March 29, 2013 (Dollars in millions) Net sales $ 573.9 $ 425.1 Gross profit 162.5 127.0 Gross profit margin 28.3 % 29.9 % Restructuring and other related charges $ 2.9 $ 1.3 Selling, general and administrative expense 106.5 84.5 Selling, general and administrative expense as a percentage of Net sales 18.6 % 19.9 % Segment operating income $ 56.0 $ 42.5 Segment operating income margin 9.8 % 10.0 % The $66.4 million Net sales increase due to existing businesses during the first quarter of 2014 in comparison to the first quarter of 2013, as discussed and defined under "Sales, Orders and Backlog" above, was primarily due to growth in the gas-handling products and in all end markets except mining. Additionally, Net sales increased by $85.1 million due to acquisition-related growth and decreased by $2.7 million due to changes in foreign exchange rates. Gross profit increased in the first quarter of 2014 reflecting the positive impact of higher volumes. In addition, the increase in Gross profit reflects the impact of acquisitions which have a lower average gross profit margin, as well as shortfalls in the higher gross margin services and aftermarket portions of the fluid-handling business, which resulted in a reduction of total gross profit margin in the segment for the quarter. Selling, general and administrative expense for the first quarter of 2014 increased compared to the first quarter of 2013 primarily as a result of acquisitions. Fabrication Technology We formulate, develop, manufacture and supply consumable products and equipment for use in the cutting and joining of steels, aluminum and other metals and metal alloys. Our fabrication technology products are principally marketed under the ESAB brand name, which we believe is a leading international welding company with roots dating back to the invention of the covered welding electrode. ESAB's comprehensive range of welding consumables includes electrodes, cored and solid wires and fluxes. ESAB's fabrication technology equipment ranges from portable units to large custom systems. Products are sold into a wide range of end markets, including wind power, shipbuilding, pipelines, mobile/off-highway equipment and mining. 24 -------------------------------------------------------------------------------- The following table summarizes selected financial data for our fabrication technology segment: Three Months Ended March 28, 2014 March 29, 2013 (Dollars in millions) Net sales $ 480.4 $ 522.0 Gross profit 163.1 163.7 Gross profit margin 34.0 % 31.4 % Restructuring and other related charges $ 3.4 $ 2.9 Selling, general and administrative expense 109.3 119.2 Selling, general and administrative expense as a percentage of Net sales 22.8 % 22.8 % Segment operating income $ 53.9 $ 44.5 Segment operating income margin 11.2 % 8.5 % The $41.6 million Net sales decrease during the first quarter of 2014 compared to the first quarter of 2013 was primarily the result of changes in foreign exchange rates which had a negative impact of $28.7 million. The $12.9 million Net sales decline due to existing businesses during the first quarter of 2014 in comparison to the first quarter of 2013, as discussed and defined under "Sales, Orders and Backlog" above, was primarily the result of decreases in consumable volumes in most geographies. In the first quarter of 2014, Gross profit remained relatively consistent with the first quarter of 2013 as a result of weaker volumes and changes in foreign exchange rates, offset by stronger gross profit margin due to cost control activities. The decrease in Selling, general and administrative expense during the first quarter of 2014 compared to the first quarter of 2013 was primarily due to restructuring and indirect cost reduction initiatives. Selling, general and administrative expense for the first quarter of 2013 includes the impact of the devaluation of the Venezuelan bolivar fuerte, which resulted in a foreign currency transaction loss of $2.9 million. Gross Profit - Total Company Three Months Ended March 28, 2014 March 29, 2013 (Dollars in millions) Gross profit $ 325.6 $ 290.7 Gross profit margin 30.9 % 30.7 % The $34.9 million increase in Gross profit during the first quarter of 2014 in comparison to the first quarter of 2013 was attributable to an increase of $35.5 million in our gas- and fluid-handling segment, partially offset by a decrease of $0.6 million in our fabrication technology segment. Gross profit increased during the first quarter of 2014 primarily due to the impact of higher overall volumes and acquisition-related growth. Gross profit margin remained relatively consistent with the first quarter of 2013 as the impact of higher volumes was offset by the lower margins associated with the acquired businesses. Changes in foreign exchange rates during the first quarter of 2014 had an $8.4 million negative impact on Gross profit in comparison to the first quarter of 2013. Operating Expenses - Total Company Three Months Ended March 28, 2014 March 29, 2013 (Dollars in millions)Selling, general and administrative expense $ 231.6 $ 214.2 Selling, general and administrative expense as a percentage of Net sales 22.0 % 22.6 % Restructuring and other related charges $ 6.3 $ 4.2 Selling, general and administrative expense increased $17.4 million during the first quarter of 2014 in comparison to the first quarter of 2013 primarily due to the addition of the operations associated with the gas- and fluid-handling acquisitions during 2013. 25--------------------------------------------------------------------------------Interest Expense - Total Company Three Months Ended March 28, 2014 March 29, 2013 (In millions) Interest expense $ 12.3 $ 23.3 The decrease in Interest expense during the first quarter of 2014 in comparison to the comparable 2013 period was primarily attributable to the favorable impact of lower borrowing rates associated with the amendments to Deutsche Bank Credit Agreement during 2013, which reduced Interest expense by approximately $2.7 million, and lower outstanding borrowing levels (including the repayment of $420.0 million of borrowings with the proceeds of the February 2014 equity offering), which reduced Interest expense by approximately $3.7 million. In addition, Interest expense during the first quarter of 2013 included $3.1 million of charges related to the Second Amendment to the Deutsche Bank Credit Agreement on February 22, 2013. Provision for Income Taxes - Total Company The effective tax rate for the first quarter of 2014 was 27.3% compared to an effective income tax rate of 34.2% for the first quarter of 2013. The effective tax rate for the first quarter of 2014 was lower than the U.S. federal statutory tax rate primarily due foreign earnings where international tax rates are lower than the U.S. tax rate, offset in part by losses in certain jurisdictions where a tax benefit is not expected to be recognized in 2014. The effective tax rate for the first quarter of 2013 was lower than the U.S. federal statutory tax rate primarily due to foreign earnings where international tax rates are lower than the U.S. tax rate, offset in part by losses in certain jurisdictions where a tax benefit was not expected to be recognized in 2013. Liquidity and Capital Resources Overview Historically, we have financed our capital and working capital requirements through a combination of cash flows from operating activities, borrowings under our bank credit facilities and the issuances of equity. We expect that our primary ongoing requirements for cash will be for working capital, funding of acquisitions, capital expenditures, asbestos-related cash outflows and funding of our pension plans. If additional funds are needed for strategic acquisitions or other corporate purposes, we believe we could raise additional funds in the form of debt or equity. Equity Capital On January 15, 2014, we contributed 183,000 shares of newly issued Colfax Common stock to our U.S. defined benefit pension plan. We entered into a Conversion Agreement with BDT CF Acquisition Vehicle, LLC (the "BDT Investor"), pursuant to which the BDT Investor exercised its option to convert its 13,877,552 shares of Series A Perpetual Convertible Preferred Stock into 12,173,291 shares of our Common stock plus cash in lieu of a .22807018 share interest, which conversion occurred on February 12, 2014. As consideration for the BDT Investor's agreement to exercise its optional conversion right, we paid approximately $23.4 million to the BDT Investor, of which $19.6 million represents the Preferred stock conversion inducement payment in the Condensed Consolidated Statement of Operations for the first quarter of 2014. On February 20, 2014, we sold 9,200,000 shares of newly issued Colfax Common stock to underwriters for public resale pursuant to a shelf registration statement for an aggregate purchase price of $632.5 million. In conjunction with this issuance, we recognized $22.1 million in equity issuance costs, which were recorded as a reduction to Additional paid-in capital during the first quarter of 2014. 26--------------------------------------------------------------------------------Borrowing Arrangements As of March 28, 2014, the weighted-average interest rate of borrowings under the Deutsche Bank Credit Agreement, as amended, was 2.01%, excluding accretion of original issue discount, and there was $897.9 million available on the revolving credit subfacilities, including $199.9 million available on a letter of credit subfacility. The Company is also party to additional letter of credit facilities with total capacity of $673.4 million. Total letters of credit of $451.4 million were outstanding as of March 28, 2014. In connection with the Deutsche Bank Credit Agreement, the Company has pledged substantially all of its domestic subsidiaries' assets and 65% of the shares of certain first tier international subsidiaries as collateral against borrowings to its U.S. companies. In addition, subsidiaries in certain foreign jurisdictions have guaranteed the Company's obligations on borrowings of one of its European subsidiaries, as well as pledged substantially all of their assets for such borrowings to this European subsidiary under the Deutsche Bank Credit Agreement. The Deutsche Bank Credit Agreement contains customary covenants limiting the Company's ability to, among other things, pay dividends, incur debt or liens, redeem or repurchase equity, enter into transactions with affiliates, make investments, merge or consolidate with others or dispose of assets. In addition, the Deutsche Bank Credit Agreement contains financial covenants requiring the Company to maintain a total leverage ratio, as defined therein, of not more than 4.75 to 1.0 and a minimum interest coverage ratio, as defined therein, of 2.50 to 1.0, measured at the end of each quarter, through the year ending December 31, 2014. The minimum interest coverage ratio increases by 25 basis points each year until it reaches 3.0 to 1.0 for the year ending December 31, 2016 and each year thereafter. The maximum total leverage ratio decreases by 25 basis points each year until it reaches 4.25 to 1.0 for the year ending December 31, 2016 and each year thereafter. The Deutsche Bank Credit Agreement contains various events of default, including failure to comply with the financial covenants referenced above, and upon an event of default the lenders may, subject to various customary cure rights, require the immediate payment of all amounts outstanding under the term loans and the revolving credit subfacilities and foreclose on the collateral. The Company is in compliance with all such covenants as of March 28, 2014. We believe that our sources of liquidity, including the Deutsche Bank Credit Agreement, are adequate to fund our operations for the next twelve months. Cash Flows As of March 28, 2014, we had $482.2 million of Cash and cash equivalents, an increase of $170.9 million from $311.3 million as of December 31, 2013. The following table summarizes the change in Cash and cash equivalents during the periods indicated: Three Months Ended March 28, 2014 March 29, 2013 (In millions) Net cash used in operating activities $ (67.0 ) $ (13.4 ) Purchases of fixed assets, net (12.6 ) (18.0 ) Net cash used in investing activities (12.6 ) (18.0 ) Repayments of borrowings, net (337.0 ) (200.3 ) Proceeds from issuance of common stock, net 611.7 0.8 Preferred stock conversion inducement payment (19.6 ) - Other (8.0 ) (11.1 ) Net cash provided by (used in) financing activities 247.1 (210.6 ) Effect of foreign exchange rates on Cash and cash equivalents 3.4 (5.6 ) Increase (decrease) in Cash and cash equivalents $ 170.9 $ (247.6 ) Cash flows from operating activities can fluctuate significantly from period to period due to changes in working capital and the timing of payments for items such as pension funding and asbestos-related costs. Changes in significant operating cash flow items are discussed below. • Net cash received or paid for asbestos-related costs, net of insurance proceeds, including the disposition of claims, defense costs and legal expenses related to litigation against our insurers, creates variability in our operating cash flows. We had net cash outflows of $12.6 million and $13.9 million during the first quarters of 2014 and 2013, respectively. 27 --------------------------------------------------------------------------------• Funding requirements of our defined benefit plans, including pension plans and other post-retirement benefit plans, can vary significantly from period to period due to changes in the fair value of plan assets and actuarial assumptions. For the first quarters of 2014 and 2013, cash contributions for defined benefit plans were $15.2 million and $13.4 million, respectively. • During the first quarters of 2014 and 2013, cash payments of $9.7 million and $10.3 million, respectively, were made related to our restructuring initiatives. • Changes in net working capital also affected the operating cash flows for the periods presented. We define working capital as Trade receivables, net and Inventories, net reduced by Accounts payable. During the first quarter of 2014, net working capital increased by $147.2 million, primarily due to a decrease in payables as well as increases in inventory and receivable levels, which reduced our cash flows from operating activities. While increased working capital in the first quarter is in line with seasonal trends, the 2014 increase was much higher than normal. The principal contributors to this higher than normal increase were the reduction in payables from high levels at year-end and significant costs in excess of billings on long-term contracts as of March 28, 2014. During the first quarter of 2013, net working capital increased, primarily due to an increase in inventory and receivable levels, which reduced our cash flows from operating activities. Cash flows from financing activities for the first quarter of 2014 were impacted by the sale of newly issued Common stock and the conversion of the Series A Perpetual Convertible Preferred Stock further discussed above under "-Equity Capital." Our Cash and cash equivalents as of March 28, 2014 includes $289.3 million held in jurisdictions outside the U.S., which may be subject to U.S. income tax if repatriated into the U.S. and other restrictions. Contractual Obligations On April 14, 2014, Colfax completed the Victor Acquisition for total consideration of $947.3 million, including the assumption of debt, subject to certain adjustments. We funded the acquisition through net proceeds of $610.4 million from our February 2014 equity offering and $336.9 million of additional borrowings under the Deutsch Bank Credit Agreement. Critical Accounting Policies The methods, estimates and judgments that we use in applying our critical accounting policies have a significant impact on our results of operations and financial position. We evaluate our estimates and judgments on an ongoing basis. Our estimates are based upon our historical experience, our evaluation of business and macroeconomic trends and information from other outside sources, as appropriate. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what our management anticipates and different assumptions or estimates about the future could have a material impact on our results of operations and financial position. There have been no significant additions to the methods, estimates and judgments included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" in our 2013 Form 10-K. |