Machinery company Colfax Corporation pulled off a positive earnings surprise in the fourth quarter of 2017 with adjusted earnings per share of 45 cents surpassing the Zacks Consensus Estimate of 44 cents by roughly 2.3%.

However, the adjusted bottom line fell 13.5% from the year-ago tally of 52 cents. Despite gains from lower taxes, profitability suffered from a decline in adjusted operating income and higher interest expenses.

For 2017, the company’s adjusted earnings were $1.74 per share, decreasing 3.3% year over year and also lagging the Zacks Consensus Estimate of $1.75.

Buyout and Forex Gains Drive Revenues

In the quarter, Colfax’s net sales grew 7.6% year over year to $874.1 million. The improvement was driven by 6.7% gain from acquired assets and 4% positive impact from foreign currency movements, partially offset by 3.1% decline in existing businesses.

However, the top line lagged the Zacks Consensus Estimate of $899.6 million by roughly 2.8%.

In December 2017, the company divested its Fluid Handling business to CIRCOR International. The company now reports its net sales under two segments — Air and Gas Handling and Fabrication Technology. The segmental information is briefly discussed below:

Revenues from Air and Gas Handling were $373.9 million, dipping 0.5% year over year. The results suffered from 14.9% decline in the existing businesses, offset by 9.9% gain from acquired assets and 4.5% positive impact from foreign currency translations.

The segment’s orders were worth $368.5 million at the end of the quarter, up 12.1% year over year. Orders were strong in the general industrial and oil & gas markets, partially offset by weakness in the power market.

Backlog at the end of the quarter was $893.4 million, up 12.2% year over year.

Revenues from Fabrication Technology totaled $500.2 million, increasing 14.5% year over year. The improvement came on the back of 1.9% positive impact from price, 4% gain from acquired assets, 5% rise in volume and 3.63% positive impact from foreign currency translations.

As noted, the segment’s North American businesses were solid. New products also helped boost the segment’s performance.

For 2017, the company’s net sales were $3,300.2 million, up 3.6% year over year. The figure, however, missed the Zacks Consensus Estimate of approximately $3.4 billion.

Margins Fall on Higher Costs and Expenses

In the quarter, Colfax’s cost of sales jumped 7.8% year over year, representing 69.4% of net sales compared with 69.2% in the year-ago quarter. Gross margin declined 20 basis points (bps) year over year to 30.6%. Selling, general and administrative expenses, roughly 22.7% of net sales, increased 17%.

Adjusted operating income decreased 13.9% to $68.9 million while margin slipped 200 bps to 7.9%.

Balance Sheet and Cash Flow

Exiting the fourth quarter, Colfax had cash and cash equivalents of $262 million, slightly above $260.4 million at the previous-quarter end. Long-term debt balance decreased 20.9% sequentially to $1,055.3 million.

In 2017, the company generated net cash of $218.8 million from its operating activities, decreasing 11.4% year over year. Capital spending totaled $68.8 million, up 8.7% year over year.

Outlook

For 2018, Colfax anticipates its Fabrication Technology business to gain from new products and initiatives directed to improve customer service and operational efficiency. Its Air & Gas Handling business will improve on the back of investment in growth markets and restructuring initiatives. Orders are likely to be better in the second half of the year. Also, the company expects meaningful acquisitions to support growth in unexplored markets and new business platforms.

Adjusted earnings per share projection were reaffirmed in the $2.00-$2.15 range. Organic revenue growth is predicted to be flat to up 2%. Interest expenses are estimated to be in the $30-$34 million range and tax rate is expected to be 24%. Restructuring measures will yield at least $25 million in savings.

Colfax Corporation Price, Consensus and EPS Surprise