What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-02 compared with 2022-08-04 · 163 added, 146 removed, 337 unchanged (48% of the section changed)

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The following discussion of the financial condition and results of operations of Enovis Corporation (“Enovis,” “the Company,” “we,” “our,” and “us”) should be read in conjunction with the Condensed Consolidated Financial Statements and related footnotes included in Part I.

“Financial Statements” of this Quarterly Report on Form 10-Q for the quarterly period ended July 1, 2022 (this “Form 10-Q”) and the Consolidated Financial Statements and related footnotes included in Part II.

“Financial Statements” of this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2022 (this “Form 10-Q”) and the Consolidated Financial Statements and related footnotes included in Part II.

“Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 22, 2022.

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All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements regarding:

the separation of our fabrication and medical technology businesses into two differentiated, independent publicly traded companies (the “Separation”);

the recently completed spin-off of ESAB Corporation (“ESAB”) into an independent publicly traded company (the “Separation”);

the anticipated benefits of the Separation;

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• risks related to the Separation, including our ability to realize the anticipated benefits of the Separation;

the potential to incur significant liability if the separation and distribution of ESAB is determined to be a taxable transaction;

potential indemnification liabilities to ESAB pursuant to the separation and distribution agreement and related agreements entered into in connection with the Separation and the financial and operating performance of each company following the Separation;

the potential to incur significant liability if the separation and distribution of ESAB is determined to be a taxable transaction or the remaining portion of our investment in ESAB is monetized in a taxable manner;

potential indemnification liabilities to ESAB pursuant to the separation and distribution agreement and related agreements entered into in connection with the Separation;

the financial and operating performance of each company following the Separation;

and volatility associated with ESAB’s share price and the related value of our investment in ESAB;

• volatility in the commodity markets and certain commodity prices due to economic disruptions from the COVID-19 pandemic and various geopolitical events, including the ongoing conflict between Russia and Ukraine;

• changes in the general economy, including as a result of inflationary pressures, a general economic slowdown or a recession, increased interest rates or changes in monetary policy, as well as the cyclical nature of the markets we serve;

• supply chain constraints and backlogs, including risks affecting raw material, part and component availability, labor shortages and inefficiencies, freight and logistical challenges, and inflation in raw material, part, component, freight and delivery costs;

• significant movements in foreign currency exchange rates;

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• our ability to accurately estimate the cost of or realize savings from our restructuring programs;

• disruptions in the global economy caused by the ongoing conflict between Russia and Ukraine (including any political or economic responses and counter-responses);

• disruptions in the global economy caused by the ongoing conflict between Russia and Ukraine (including rising utilities costs in the European market as well as any other political or economic response to the conflict and counter-responses);

• material disruptions at any of our manufacturing facilities;

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• impairment in the value of intangible assets;

• 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;

• new regulations and customer preferences reflecting an increased focus on environmental, social and governance issues;

• service interruptions, data corruption, cyber-based attacks or network security breaches affecting our information technology infrastructure;

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Items Affecting Comparability of Reported Results

The comparability of our operating results for the three and six months ended July 1, 2022 to the comparable period in 2021 is affected by the following significant items:

The comparability of our operating results for the three and nine months ended September 30, 2022 to the comparable period in 2021 is affected by the following significant items:

The Separation

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We intend to divest the retained shares in ESAB in a tax-efficient exchange for outstanding debt no later than 12 months after the Distribution Date.

Until the remaining shares are sold, we record unrealized gains or losses in earnings due to changes in the investment’s fair value.

Since the disposition occurred in the second quarter of 2022, we began classifying our fabrication technology business as a discontinued operation in our financial statements beginning in the second quarter of 2022.

Accordingly, the results of our fabrication technology businesses are excluded from continuing operations in the accompanying financials for the three and six months ended July 1, 2022 and July 2, 2021.

Accordingly, the results of our fabrication technology businesses are excluded from continuing operations in the accompanying financials for the three and nine months ended September 30, 2022 and October 1, 2021.

We expect that the Separation will allow each company to:

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Refer to the accompanying Notes to the Condensed Consolidated Financial Statements for more information regarding the Separation.

The COVID-19 Pandemic

The COVID-19 pandemic has cause economic disruptions since its emergence in 2020.

The COVID-19 Pandemic and Other Market Dynamics

The COVID-19 pandemic has caused economic disruptions since its emergence in 2020.

Despite increased access to vaccines, the emergence of variants and outbreaks have caused some volatility, including spikes in the second half of 2021 and second quarter of 2022, which slowed the pace of recovery in 2022.

As reflected in the discussions that follow, the pandemic and actions taken in response to it have had a variety of impacts on our results of operations during 2021 and 2022, including sales levels, inflation and supply chain challenges.

As reflected in the discussions that follow, the pandemic and actions taken in response to it and other market dynamics have had a variety of impacts on our results of operations during 2021 and 2022, including sales levels, inflation and supply chain challenges.

There may be developments outside our control that require us to further adjust our operations.

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Acquisitions can significantly affect our reported results, and we report the change in our Net sales between periods both from existing and acquired businesses.

The change in

Net sales due to acquisitions for the six months ended July 1, 2022 presented in this filing represents the incremental sales subsequent to the beginning of the prior year periods.

During this period the Reconstructive segment completed one business combination for aggregate consideration of $27.1 million and the Prevention & Recovery segment completed three asset acquisitions for aggregate consideration of $18.2 million.

The acquired business, 360 Med Care, is an Australian medical device distributor that bundles certain computer assisted surgery and patient experience enhancement programs to add value to the device supply arrangements with surgeons, hospitals, and insurers.

During 2021, we completed five acquisitions in our Reconstructive segment for net cash consideration of $201.6 million and equity consideration of $285.7 million.

The change in Net sales due to acquisitions for the nine months ended September 30, 2022 presented in this filing represents the incremental sales subsequent to the beginning of the prior year periods.

During this period the Reconstructive segment completed two business combinations for aggregate consideration of $92.1 million and the Prevention & Recovery segment completed four asset acquisitions for aggregate consideration of $22.3 million.

The acquired businesses include Insight, whose flagship product is the ARVIS surgical navigation system, and 360 Med Care, an Australian medical device distributor that bundles certain computer assisted surgery and patient experience enhancement programs to add value to the device supply arrangements with surgeons, hospitals, and insurers.

We previously held investments in Insight without a readily determinable fair value which were marked to fair value upon the acquisition and resulted in a one-time realized gain of $8.8 million on our previous investment.

Refer to Note 4 “Acquisitions and Investments” for further details regarding these acquisitions.

During 2021, we completed four acquisitions in our Reconstructive segment and one acquisition in our Prevention and Recovery segment for net cash consideration of $201.6 million and equity consideration of $285.7 million.

The largest of these acquisitions include Trilliant Surgical, a provider of foot and ankle orthopedic implants;

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Foreign Currency Fluctuations

Approximately 31% and 25% of our Net sales from continuing operations for the six months ended July 1, 2022 and July 2, 2021, respectively, were derived from sales denominated in currencies other than the U.S.

Approximately 30% and 26% of our Net sales from continuing operations for the nine months ended September 30, 2022 and October 1, 2021, respectively, were derived from sales denominated in currencies other than the U.S.

Our costs are also exposed to currencies other than the U.S.

Changes in foreign exchange rates can impact our results of operations and are quantified when significant.

For the six months ended July 1, 2022 compared to the six months ended July 2, 2021, fluctuations in foreign currencies reduced Net sales and Gross profit by approximately 2% and reduced Selling, general and administrative expenses by 1%.

The changes in foreign exchange rates since December 31, 2021 also decreased net assets by approximately 1% as of July 1, 2022.

Our sales typically peak in the fourth quarter, however, the business impact caused by the COVID-19 pandemic has distorted the effects of historical seasonality patterns.

For the nine months ended September 30, 2022 compared to the nine months ended October 1, 2021, fluctuations in foreign currencies unfavorably reduced Net sales and Gross profit by approximately 2.0% and 2.0%, respectively, and favorably reduced Selling, general and administrative expenses by less than 2.0%.

The changes in foreign exchange rates since December 31, 2021 also decreased net assets by approximately 2.0% as of September 30, 2022.

Our sales typically peak in the fourth quarter;

however, the business impact caused by the COVID-19 pandemic has distorted the effects of historical seasonality patterns.

Non-GAAP Measures

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Adjusted EBITDA and Adjusted EBITDA margin, two non-GAAP performance measures, are included in this report because they are key metrics used by our management to assess our operating performance.

Adjusted EBITDA and Adjusted EBITDA margin exclude from Operating income (loss) the effect of restructuring and other related charges, MDR and related costs, strategic transaction costs, stock-based compensation, depreciation and other amortization charges, amortization of acquired intangibles, insurance settlement gains, and inventory step-up.

Adjusted EBITDA and Adjusted EBITDA margin exclude from Operating income (loss) the effect of restructuring and other charges, MDR and related costs, strategic transaction costs, stock-based compensation, depreciation and other amortization charges, amortization of acquired intangibles, insurance settlement gains, and inventory step-up.

We also present Adjusted EBITDA and Adjusted EBITDA margin by operating segment, which are subject to the same adjustments.

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The following tables set forth a reconciliation of Operating income (loss), the most directly comparable GAAP financial measure, to Adjusted EBITDA.

Three Months Ended Six Months Ended

July 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021

Three Months Ended Nine Months Ended

September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021

(Dollars in millions)

Operating income (loss) (GAAP) $ 5.6 $ (10.4) $ (25.1) $ (28.5)

Operating loss (GAAP) $ (17.9) $ (16.1) $ (43.0) $ (44.6)

Adjusted to add (deduct):

Restructuring and other related charges (1)

Restructuring and other charges (1)

3.0 2.2 8.5 5.2

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Amortization of acquired intangibles 32.0 31.0 94.6 88.1

Insurance settlement gain (4)

Insurance settlement (gain) loss (4)

1.0 — (32.1) —

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Adjusted EBITDA (non-GAAP) $ 57.2 $ 56.5 $ 161.1 $ 144.4

Operating loss margin (4.7) % (4.5) % (3.7) % (4.3) %

Adjusted EBITDA margin (non-GAAP) 14.9 % 15.7 % 14.0 % 14.1 %

(1) Restructuring and other related charges includes $0.3 million and $0.8 million of expense classified as Cost of sales on our Condensed Consolidated Statements of Operations for the three and six months ended July 1, 2022, respectively.

(1) Restructuring and other charges includes $0.8 million of expense classified as Cost of sales on our Condensed Consolidated Statements of Operations for the nine months ended September 30, 2022.

(2) Primarily related to costs specific to compliance with medical device reporting regulations and other requirements of the European Union MDR.

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(3) Strategic transaction costs includes costs related to the Separation and certain transaction and integration costs related to recent acquisitions.

(4) Insurance settlement gain related to the Company’s 2019 acquisition of DJO.

The following tables set forth a reconciliation of operating income (loss), the most directly comparable financial statement measure, to Adjusted EBITDA by segment for the three and six months ended July 1, 2022 and July 2, 2021, respectively.

Three Months Ended July 1, 2022 Six Months Ended July 1, 2022

(4) Insurance settlement loss (gain) is related to our 2019 acquisition of DJO.

The following tables set forth a reconciliation of operating income (loss), the most directly comparable financial statement measure, to Adjusted EBITDA by segment for the three and nine months ended September 30, 2022 and October 1, 2021, respectively.

Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022

Prevention and Recovery Reconstructive Total Prevention and Recovery Reconstructive Total

(Dollars in millions)

Operating income (loss) (GAAP) $ 13.4 $ (7.9) $ 5.6 $ (1.0) $ (24.1) $ (25.1)

Operating loss (GAAP) $ (0.4) $ (17.5) $ (17.9) $ (1.4) $ (41.6) $ (43.0)

Adjusted to add (deduct):

Restructuring and other related charges (1)

Restructuring and other charges (1)

1.3 1.7 3.0 4.7 3.8 8.5

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Amortization of acquired intangibles 19.8 12.2 32.0 58.4 36.3 94.6

Insurance settlement gain (2)

Insurance settlement (gain) loss (2)

0.7 0.3 1.0 (21.4) (10.6) (32.1)

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Adjusted EBITDA (non-GAAP) $ 39.5 $ 17.7 $ 57.2 $ 101.1 $ 60.1 $ 161.1

Operating loss margin (0.2) % (13.8) % (4.7) % (0.2) % (10.7) % (3.7) %

Adjusted EBITDA margin (non-GAAP) 15.4 % 13.9 % 14.9 % 13.2 % 15.4 % 14.0 %

(1) Restructuring and other charges includes $0.8 million of expense classified as Cost of sales on our Condensed Consolidated Statements of Operations for the nine months ended September 30, 2022.

(2) Amounts are allocated to the segments as a percentage of revenue as the costs or gain are not discrete to either segment.

Three Months Ended July 2, 2021 Six Months Ended July 2, 2021

Three Months Ended October 1, 2021 Nine Months Ended October 1, 2021

Prevention and Recovery Reconstructive Total Prevention and Recovery Reconstructive Total

(Dollars in millions)

Operating loss (GAAP) $ (1.8) $ (8.5) $ (10.4) $ (13.5) $ (14.9) $ (28.5)

Operating income (loss) (GAAP) $ 1.5 $ (17.6) $ (16.1) $ (12.1) $ (32.5) $ (44.6)

Adjusted to add (deduct):

Restructuring and other related charges 1.3 0.7 2.0 2.0 0.9 3.0

Restructuring and other charges 1.7 0.5 2.2 3.7 1.5 5.2

MDR and other costs (1)

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Adjusted EBITDA (non-GAAP) $ 40.4 $ 16.0 $ 56.5 $ 95.0 $ 49.4 $ 144.4

Operating income (loss) margin 0.6 % (17.0) % (4.5) % (1.6) % (12.1) % (4.3) %

Adjusted EBITDA margin (non-GAAP) 15.8 % 15.5 % 15.7 % 12.5 % 18.3 % 14.1 %

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Total Company

Net sales for the three and six months ended July 1, 2022 increased from the three and six months ended July 2, 2021.

Net sales for the three and nine months ended September 30, 2022 increased from the three and nine months ended October 1, 2021.

The following table presents the components of changes in our consolidated Net sales.

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

Net Sales Change % Net Sales Change %

(Dollars in millions)

For the three and six months ended July 2, 2021 $ 356.1 $ 667.2

For the three and nine months ended October 1, 2021 $ 359.9 $ 1,027.1

Components of Change:

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23.8 6.6 % 127.2 12.4 %

For the three and six months ended July 1, 2022 $ 395.1 $ 770.6

For the three and nine months ended September 30, 2022 $ 383.8 $ 1,154.3

(1) Excludes the impact of foreign exchange rate fluctuations and acquisitions, thus providing a measure of change due to factors such as price, product mix and volume.

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(3) Represents the difference between prior year sales valued at the actual prior year foreign exchange rates and prior year sales valued at current year foreign exchange rates.

The increase in Net sales during the three and six months ended July 1, 2022 compared to the prior year periods was primarily attributable to sales from acquired businesses and increases from our existing businesses.

Existing business sales in our Reconstructive segment increased $5.1 million and $13.8 million, during the three and six months ended July 1, 2022 respectively, due to higher surgical sales volumes compared to the prior year period despite some delays in elective surgeries in the second quarter of 2022 due to a rise in COVID-19 cases.

Existing business sales in our Prevention and Recovery segment increased $5.4 million and $19.9 million during the three and six months ended July 1, 2022, respectively, and included inflation-related pricing increases and improved sales volumes.

Net sales from acquisitions increased in the three and six months ended July 1, 2022 due to acquisitions in our Reconstructive segment that closed since the beginning of the prior year period in 2021.

The increase in Net sales during the three and nine months ended September 30, 2022 compared to the prior year periods was primarily attributable to an increase in sales from existing businesses across both of our segments and sales from acquired businesses in our Reconstructive segment, partially offset by foreign currency headwinds.

Existing business sales in our Reconstructive segment increased $15.5 million and $29.4 million, during the three and nine months ended September 30, 2022 respectively, due to significantly higher sales volumes compared to the prior year periods across all product lines driven by market outperformance and recovery from COVID-related surges in 2021.

Existing business sales in our Prevention and Recovery segment increased $9.5 million and $29.4 million, during the three and nine months ended September 30, 2022 respectively, due to improved sales volumes and inflation-related pricing increases.

Net sales from acquisitions increased in the three and nine months ended September 30, 2022 due to acquisitions in our Reconstructive segment that closed since the beginning of the prior year period.

The strengthening of the U.S.

dollar relative to other currencies resulted in $8.8 million and $13.4 million unfavorable foreign currency translation impacts during the three and six months ended July 1, 2022, respectively.

dollar relative to other currencies resulted in $10.3 million and $23.6 million unfavorable foreign currency translation impacts during the three and nine months ended September 30, 2022, respectively.

Operating Results

The following table summarizes our results of continuing operations for the comparable periods.

Three Months Ended Six Months Ended

July 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021

Three Months Ended Nine Months Ended

September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021

(Dollars in millions)

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Research and development expense $ 15.6 $ 12.5 $ 46.1 $ 33.9

Operating income (loss) $ 5.6 $ (10.4) $ (25.1) $ (28.5)

Operating income (loss) margin 1.4 % (2.9) % (3.3) % (4.3) %

Operating loss $ (17.9) $ (16.1) $ (43.0) $ (44.6)

Operating loss margin (4.7) % (4.5) % (3.7) % (4.3) %

Net income (loss) from continuing operations $ (65.9) $ (13.6) $ 16.6 $ (87.6)

Net income (loss) margin from continuing operations (GAAP) 30.5 % (11.8) % 10.7 % (11.1) %

Net income (loss) from continuing operations margin (GAAP) (17.2) % (3.8) % 1.4 % (8.5) %

Adjusted EBITDA (non-GAAP) $ 57.2 $ 56.5 $ 161.1 $ 144.4

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Amortization of acquired intangibles $ 32.0 $ 31.0 $ 94.6 $ 88.1

Insurance settlement gain $ (33.0) $ — $ (33.0) $ —

Insurance settlement (gain) loss $ 1.0 $ — $ (32.1) $ —

Inventory step-up $ 2.1 $ 1.4 $ 12.0 $ 3.7

Unrealized gain on investment in ESAB Corporation $ (135.5) $ — $ (135.5) $ —

Unrealized (gain) loss on investment in ESAB Corporation $ 63.1 $ — $ (72.4) $ —

Realized gain on cost basis investment $ (8.8) $ — $ (8.8) $ —

Interest expense, net $ 6.3 $ 4.1 $ 17.9 $ 22.8

Debt extinguishment charges $ — $ — $ 20.1 $ 29.9

Income tax expense (benefit) $ (4.2) $ (3.8) $ (3.8) $ (3.0)

Second Quarter of 2022 Compared to Second Quarter of 2021

Gross profit increased in the second quarter of 2022 compared with the prior year period due to a $19.9 million increase in our Reconstructive segment, partially offset by a $4.7 million decrease in our Prevention and Recovery segment.

The Gross profit increase was primarily attributable to acquisitions and increased sales from existing businesses, partially offset by increased supply chain and logistic costs and $4.5 million of higher inventory step-up charges related to recent acquisitions.

Gross profit margin decreased slightly due to supply chain, logistics and other cost inflation that exceeded pricing and other benefits.

Selling, general and administrative expense increased $27.6 million in the second quarter of 2022 compared to the prior year period due to $17.4 million from acquired businesses and $8.7 million increase in strategic transaction costs driven by higher Separation-related costs.

Research and development costs also increased compared to the prior year period primarily due to recent acquisitions.

Amortization of acquired intangibles and Depreciation and other amortization also increased compared to the prior year period due to acquisition-related increases.

During the second quarter of 2022, we recorded an insurance settlement gain of $33.0 million related to the 2019 acquisition of DJO.

Following the Separation, the Company retained 10% of the shares of ESAB common stock, which is recorded at fair value.

During the second quarter of 2022, we recorded a $135.5 million gain related to this investment.

Debt extinguishment charges of $20.1 million were recorded in the second quarter of 2022 due to debt redemptions in conjunction with the Separation and recapitalization, while charges of $29.9 million were recorded in the second quarter of 2021 due to an early redemption of certain senior notes.

Interest expense, net decreased in the second quarter of 2022 due to a reduction in debt balances due to the Separation-related debt redemptions at the beginning of the second quarter of 2022.

The effective tax rate for Net income from continuing operations during the second quarter of 2022 was (3.6)%, which was lower than the 2022 U.S.

federal statutory tax rate of 21%, mainly due to non-taxable unrealized gains on the investment in ESAB offset by non-deductible costs related to the tax-free separation transaction.

The effective tax rate for the second quarter of 2021 was 8.2%, which was lower than the 2021 U.S.

Income tax benefit $ (12.3) $ (6.7) $ (16.2) $ (9.7)

Other income $ (0.3) $ — $ (0.3) $ —

(1) Restructuring and other charges includes $0.8 million of expense classified as Cost of sales on our Condensed Consolidated Statements of Operations for the nine months ended September 30, 2022.

Third Quarter of 2022 Compared to Third Quarter of 2021

Gross profit increased in the third quarter of 2022 compared with the prior year period due to a $16.7 million increase in our Reconstructive segment and a $1.2 million increase in our Prevention and Recovery segment.

The Gross profit increase was primarily attributable to increased sales from existing businesses and contributions from recent acquisitions, partially offset by inflation of supply chain, logistics, and other costs, unfavorable foreign currency translation, and $0.7 million of higher inventory step-up charges related to recent acquisitions.

Gross profit margin increased due to segment performance, including pricing and other benefits, offset by inflation of supply chain, logistics, and other costs.

Selling, general and administrative expense increased $13.9 million in the third quarter of 2022 compared to the prior year period due to $8.3 million from acquired businesses, offset by a $3.2 million decrease in strategic transaction costs driven by lower Separation-related costs.

Research and development costs also increased compared to the prior year period primarily due

to recent acquisitions and investments in new product development.

Amortization of acquired intangibles also increased compared to the prior year period due to acquisitions.

Following the Separation, we retained 10% of the shares of ESAB common stock, which is recorded at fair value.

During the third quarter of 2022, we recorded a $63.1 million loss related to this investment.

During the third quarter of 2022, we recorded an insurance settlement loss of $1.0 million which, along with the aforementioned $63.1 million loss on our retained investment in ESAB, significantly impacted our results.

Interest expense, net increased in the third quarter of 2022 due to higher interest rates and non-cash interest accretion on acquisition-related contingent consideration.

The effective tax rate for Net income from continuing operations during the third quarter of 2022 was 15.8%, which was lower than the 2022 U.S.

federal statutory tax rate of 21%, mainly due to non-taxable unrealized gains on the investment in ESAB and non-taxable realized gain on cost basis investment offset by non-deductible costs related to the tax-free separation transaction.

The effective tax rate for the third quarter of 2021 was 32.9%, which was higher than the 2021 U.S.

federal statutory tax rate of 21% mainly due to U.S.

taxation on international operations and other non-deductible expenses.

Net income from continuing operations increased in the second quarter of 2022 compared with the prior year period primarily due to the gain on the retained ESAB common stock, as well as the insurance settlement gain and acquisition-related sales, offset by costs associated with the Separation, debt extinguishment charges and acquisition-related costs.

Net income margin from continuing operations increased due to the aforementioned factors.

Adjusted EBITDA increased primarily due to increased sales and lower operating expenses in existing businesses, partially offset by higher supply chain and logistic costs.

Adjusted EBITDA margin stayed even period-over-period, and positive impacts were partially offset by recent acquisitions in our Reconstructive segment which were dilutive to the margin by approximately 70 basis points and are expected to be accretive to margins in future years.

Six months ended July 1, 2022 Compared to Six months ended July 2, 2021

Gross profit increased in the six months ended July 1, 2022 compared with the prior year period due to a $49.6 million increase in our Reconstructive segment and a $0.2 million increase in our Prevention and Recovery segment.

The Gross profit increase was attributable to the benefit from business acquisitions and growth in our existing businesses, partially offset by higher inventory step-up charges of $7.7 million and increased supply chain and logistic costs.

Gross profit margin decreased slightly due to supply chain, logistics and other cost inflation that exceeded pricing and other benefits.

Selling, general and administrative expense increased $68.7 million in the six months ended July 1, 2022 compared to the prior year period due to $39.7 million of costs included in acquired businesses and a $20.0 million increase in strategic transaction costs driven by higher Separation-related costs.

Net income from continuing operations decreased in the third quarter of 2022 compared with the prior year period primarily due to the unrealized loss on the retained ESAB common stock, offset by existing business and acquisition growth.

Net income margin from continuing operations decreased due to the aforementioned factors.

Adjusted EBITDA increased primarily due to existing business and acquisition growth, offset by inflation of supply chain, logistics, and other costs.

Adjusted EBITDA margin of the core business, excluding the effects of recent acquisitions and foreign currency pressures increased by approximately 40 basis points.

Our recent acquisitions mainly in our Reconstructive segment, which were dilutive to the margin by approximately 100 basis points, are expected to be accretive to margins in future years.

Other income increased due to the receipt of a dividend payment from our investment in ESAB.

Nine months ended September 30, 2022 Compared to Nine months ended October 1, 2021

Gross profit increased in the nine months ended September 30, 2022 compared with the prior year period due to a $66.4 million increase in our Reconstructive segment and a $1.3 million increase in our Prevention and Recovery segment.

The Gross profit increase was attributable to contribution from recent business acquisitions and increased sales in our existing businesses, partially offset by inflation of supply chain, logistics, and other costs, unfavorable foreign currency translation, and higher inventory step-up charges of $8.3 million.

Gross profit margin decreased primarily due to inflation of supply chain, logistics, and other costs that exceeded customer pricing and other benefits.

Selling, general and administrative expense increased $77.1 million in the nine months ended September 30, 2022 compared to the prior year period primarily due to $48.0 million of costs included in acquired businesses and $16.8 million more strategic transaction costs, driven by costs incurred in the first quarter of 2022.

Research and development costs also increased compared to the prior year period primarily due to increased spend within recently acquired businesses in our Reconstructive segment.

Amortization of acquired intangibles and Depreciation and other amortization also increased compared to the prior year period due to business acquisition-related increases.

As discussed above, during the second quarter of 2022, we recorded an insurance settlement gain of $33.0 million and a $135.5 million gain on our retained investment in ESAB, which significantly impacted our results for the six months ended July 1, 2022.

Interest expense, net decreased in the six months ended July 1, 2022 compared to the prior year period due to a reduction in debt balances as a result of the Separation-related debt redemptions at the beginning of the second quarter of 2022.

The effective tax rate for Net income from continuing operations during the six months ended July 1, 2022 was (4.9)%, which was lower than the 2022 U.S.

federal statutory tax rate of 21%, mainly due to non-taxable unrealized gains on the investment in ESAB offset by non-deductible costs related to the tax-free separation transaction.

The effective tax rate for the six months ended July 2, 2021 was 3.9%, which was lower than the 2021 U.S.

Following the Separation, we retained 10% of the shares of ESAB common stock, which is recorded at fair value.

During the nine months ended September 30, 2022, we recorded a $72.4 million gain related to this investment.

During the nine months ended September 30, 2022, we recorded an insurance settlement gain of $32.1 million which, along with the aforementioned gain on our retained investment in ESAB, significantly impacted our results for the nine months ended September 30, 2022.

Interest expense, net decreased in the nine months ended September 30, 2022 compared to the prior year period due to a reduction in debt balances as a result of the Separation-related debt redemptions at the beginning of the second quarter of 2022.

The effective tax rate for Net income from continuing operations during the nine months ended September 30, 2022 was (3,434.4)%, which differed from the 2022 U.S.

The effective tax rate for the nine months ended October 1, 2021 was 9.9%, which was lower than

the 2021 U.S.

federal statutory tax rate of 21% mainly due to U.S.

taxation on international operations and other non-deductible expenses.

Net income from continuing operations increased in the six months ended July 1, 2022 compared with the prior year period, primarily due to the gain on the retained ESAB common stock, as well as the insurance settlement gain and acquisition-related sales, offset by costs associated with the Separation, debt extinguishment charges and acquisition-related costs.

Net income margin from continuing operations increased by over 20 points due to the aforementioned factors.

Adjusted EBITDA increased due to organic growth and lower operating expenses in existing businesses, partially offset by higher supply chain and logistic costs.

Adjusted EBITDA margin increased 30 basis points for the same reasons;

excluding acquisitions, margins increased by 70 basis points.

Net income from continuing operations increased in the nine months ended September 30, 2022 compared with the prior year period, primarily due to the gain on the retained ESAB common stock, as well as the insurance settlement gain and acquisition-related sales, offset by costs associated with the Separation and acquisition-related costs.

Net income margin from continuing operations increased by 990 points due to the aforementioned factors.

Adjusted EBITDA increased due to organic growth and lower operating expenses in existing businesses, partially offset by inflation of supply chain, logistics, and other costs.

Adjusted EBITDA margin of the core business, excluding the effects of recent acquisitions and foreign currency pressures, increased by approximately 80 basis points.

Our recent acquisitions, primarily in our Reconstructive segment, which were dilutive to the margin by approximately 70 basis points, are expected to be accretive to margins in future years.

Other income increased due to the receipt of a dividend payment from our investment in ESAB.

Business Segments

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Prevention and Recovery

We develop, manufacture, and distribute rigid bracing products, orthopedic soft goods, vascular systems and compression garments, and hot and cold therapy products, and offer robust recovery sciences products in the clinical rehabilitation and sports medicine markets such as bone growth stimulators and electrical stimulators used for pain management.

Our Prevention and Recovery products are marketed under several brand names, most notably DJO and Don-Joy, to orthopedic specialists, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers, and other healthcare professionals who treat patients with a variety of treatment needs including musculoskeletal conditions resulting from degenerative diseases, deformities, traumatic events and sports-related injuries.

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The following table summarizes selected financial results for our Prevention and Recovery segment:

Three Months Ended Six Months Ended

July 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021

Three Months Ended Nine Months Ended

September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021

(Dollars in millions)

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Items excluded from Adjusted EBITDA:

Restructuring and other related charges $ 1.3 $ 1.3 $ 3.4 $ 2.0

Restructuring and other charges $ 1.3 $ 1.7 $ 4.7 $ 3.7

MDR and other costs $ 2.4 $ 1.4 $ 7.1 $ 4.1

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Amortization of acquired intangibles $ 19.8 $ 18.1 $ 58.4 $ 55.6

Insurance settlement gain $ (22.1) $ — $ (22.1) $ —

Insurance settlement (gain) loss $ 0.7 $ — $ (21.4) $ —

Inventory step up $ — $ — $ — $ 0.7

Second Quarter of 2022 Compared to Second Quarter of 2021

Net sales in our Prevention and Recovery segment decreased $3.1 million, or 1%, in the second quarter of 2022 compared with the prior year period driven primarily by $8.5 million foreign currency translation headwinds and fewer selling days, partially offset by inflation-related pricing increases.

Gross profit decreased $4.7 million, and Gross profit margin decreased 120 basis points, due to inflation-driven supply chain and logistics cost increases, partially offset by pricing increases.

Selling, general and administrative expense decreased primarily due to decreased central cost allocations, partially offset by costs incurred related to the Separation.

Operating income (loss) improved due to an insurance settlement gain recorded in the second quarter of 2022 and lower Selling, general and administrative expenses, partially offset by increases in supply chain costs and strategic transaction costs related to the Separation.

Adjusted EBITDA and Adjusted EBITDA margin increased primarily due to the reduced Selling, general and administrative expenses compared to the prior period, partially offset by increased inflation and supply chain costs.

Six months ended July 1, 2022 Compared to Six months ended July 2, 2021

Net sales in our Prevention and Recovery segment increased $7.0 million, or 1%, in the six months ended July 1, 2022 compared with the prior year period driven primarily by organic growth in existing businesses which was aided by pricing increases to mitigate inflation, partially offset by unfavorable foreign currency translation of $12.9 million.

Gross profit increased $0.2 million due to the improved sales, offset by inflation-driven supply chain cost increases.

Gross profit margin decreased 60 basis points due to inflation-related customer pricing and cost increases, which compressed the margin.

Selling, general and administrative expense decreased primarily due to a decreased central cost allocation, partially offset by increased costs related to the Separation.

Adjusted EBITDA and Adjusted EBITDA margin increased due to the reduction in central cost allocations, partially offset by increased inflation and supply chain costs during the six months ended July 1, 2022 compared to the prior year period.

(1) Restructuring and other charges includes $0.8 million of expense classified as Cost of sales on our Condensed Consolidated Statements of Operations for the nine months ended September 30, 2022.

Third Quarter of 2022 Compared to Third Quarter of 2021

Net sales in our Prevention and Recovery segment increased $0.3 million in the third quarter of 2022 compared with the prior year period driven primarily by an increase in existing business sales of $9.5 million, offset by $9.2 million in foreign currency pressures.

Gross profit and Gross profit margin increased primarily due to volume growth in our higher margin product lines and partially offset by the effect of unfavorable foreign currency.

Selling, general and administrative expense decreased primarily due to decreased central cost allocations.

Operating income decreased due to inflation of supply chain, logistics, and other costs and the effect of unfavorable foreign currency.

Nine months ended September 30, 2022 Compared to Nine months ended October 1, 2021

Net sales in our Prevention and Recovery segment increased $29.4 million, or 3.9%, before currency translation pressure of $22.1 million in the nine months ended September 30, 2022 compared with the prior year period, driven by organic growth in existing businesses which was aided by pricing increases to mitigate inflation.

Gross profit increased $1.3 million due to the improved sales, offset by inflation of supply chain, logistics, and other costs and the effect of unfavorable foreign currency.

Gross profit margin decreased 30 basis points due to inflation-related customer pricing and cost increases and the effect of unfavorable foreign currency.

Selling, general and administrative expense increased primarily due to increased costs related to the Separation, offset by lower allocated central costs.

Operating income (loss) improved due to an insurance settlement gain recorded in the second quarter of 2022 and lower Selling, general and administrative expenses, partially offset by inflation of supply chain, logistics, and other costs as well as increases in strategic transaction costs related to the Separation.

Adjusted EBITDA and Adjusted EBITDA margin increased due to the reduction in central cost allocations, partially offset by inflation of supply chain, logistics, and other costs during the nine months ended September 30, 2022 compared to the prior year period.

Reconstructive

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The following table summarizes the selected financial results for our Reconstructive segment:

Three Months Ended Six Months Ended

July 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021

Three Months Ended Nine Months Ended

September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021

(Dollars in millions)

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Amortization of acquired intangibles $ 12.2 $ 12.9 $ 36.3 $ 32.5

Insurance settlement gain $ (11.0) $ — $ (11.0) $ —

Insurance settlement (gain) loss $ 0.3 $ — $ (10.6) $ —

Inventory step up $ 2.1 $ 1.4 $ 12.0 $ 3.0

Second Quarter of 2022 Compared to Second Quarter of 2021

Net sales increased in our Reconstructive segment in the second quarter of 2022 compared with the prior year period primarily due to acquisition-related sales growth of $37.4 million and organic growth in existing businesses in the current year period, partially offset by fewer selling days in comparison to the prior year.

Gross profit increased due to acquisitions and existing business-related growth, partially offset by increased supply chain and logistic costs.

Gross profit margin decreased due to increased supply chain and logistics costs.

Selling, general and administrative expense increased over the same period primarily due to $17.4 million from acquired businesses including integration costs for the newly-acquired businesses and, to a lesser extent, costs associated with the Separation.

Third Quarter of 2022 Compared to Third Quarter of 2021

Net sales increased in our Reconstructive segment in the third quarter of 2022 compared with the prior year period primarily due to $15.5 million of organic sales growth and of $9.0 million acquisition-related sales growth.

Gross profit and Gross profit margin increased due to sales growth mentioned previously, partially offset by inflation of supply chain, logistics, and other costs.

Selling, general and administrative expense increased over the same period primarily due to $8.3 million from acquired businesses including integration costs for the newly-acquired businesses.

Adjusted EBITDA increased primarily due to existing business-related growth.

Recent acquisitions drove a reduction in the Adjusted EBITDA margin, as the recent acquisitions were dilutive to the margin by approximately 320 basis points and are expected to be accretive to margins in future years.

Six months ended July 1, 2022 Compared to Six months ended July 2, 2021

Net sales increased in our Reconstructive segment in the six months ended July 1, 2022 compared with the prior year period primarily due to acquisition-related sales growth of $83.0 million and organic growth in existing businesses of $13.8 million.

Gross profit increased in the six months ended July 1, 2022 compared to the six months ended July 2, 2021 primarily due to acquisition and existing business growth, partially offset by increased supply chain and logistic costs and acquisition-related inventory valuation step-up charges of $8.4 million, which also led to a decrease in Gross profit margin.

Nine months ended September 30, 2022 Compared to Nine months ended October 1, 2021

Net sales increased in our Reconstructive segment in the nine months ended September 30, 2022 compared with the prior year period, primarily due to acquisition-related sales growth of $92.0 million and existing business sales growth of $29.4 million.

Gross profit increased in the nine months ended September 30, 2022 compared to the nine months ended October 1, 2021, primarily due to acquisition and existing business growth, partially offset by inflation of supply chain, logistics, and other costs and acquisition-related inventory valuation step-up charges of $9.0 million, which also led to a decrease in Gross profit margin.

Selling, general and administrative expense increased over the same period primarily due to $48.0 million of costs from acquisitions, including integration costs for the newly-acquired businesses, as well as increased central cost allocations and costs associated with the Separation.

Operating income decreased in the six months ended July 1, 2022 compared to the six months ended July 2, 2021 primarily due to the increases in Selling, general and administrative expenses from acquisitions.

Adjusted EBITDA increased primarily due to growth in existing businesses, partially offset by increased supply chain and logistic costs.

Recent acquisitions drove a reduction in the Adjusted EBITDA margin, as they were dilutive to the margin by approximately 250 basis points and are expected to be accretive to margins in future years.

Operating income decreased in the nine months ended September 30, 2022 compared to the nine months ended October 1, 2021, primarily due to the increase in Selling, general and administrative expenses from acquisitions.

Adjusted EBITDA increased primarily due to growth in existing businesses, partially offset by inflation of supply chain, logistics, and other costs.

Without the impact of recent acquisition, Adjusted EBITDA margins were

flat compared to prior year.

Recent acquisitions were dilutive to the margin by approximately 270 basis points, but are expected to be accretive to margins in future years.

Liquidity and Capital Resources

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No stock repurchases have been made under this plan since the third quarter of 2018.

As of July 1, 2022, the remaining stock repurchase authorization provided by our Board of Directors was $100.0 million.

As of September 30, 2022, the remaining stock repurchase authorization provided by our Board of Directors was $100.0 million.

The timing, amount, and method of shares repurchased is determined by management based on its evaluation of market conditions and other factors.

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The Revolver will be used to provide funds for the Company’s ongoing working capital requirements and for general corporate purposes.

As of July 1, 2022, there was $900 million available on the Revolver.

As of September 30, 2022, there was $900 million available on the Revolver.

The Term Loan bears interest, at the election of the Company, at either the base rate (as defined in the Enovis Credit Agreement) or at the term SOFR rate plus an adjustment (as defined in the Enovis Credit Agreement), in each case, plus the applicable interest rate margin.

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On January 15, 2022, we made the final installment payment on our TEU amortizing notes, which had an initial principal amount of $15.6099 per unit and an interest rate of 6.50% per annum.

We paid $6.5 million and $12.3 million of principal on the TEU amortizing notes in the six months ended July 1, 2022 and July 2, 2021, respectively.

We paid $6.5 million and $18.6 million of principal on the TEU amortizing notes in the nine months ended September 30, 2022 and October 1, 2021, respectively.

We had senior notes with an aggregate principal amount of $300 million, which were due on February 15, 2026 and had an interest rate of 6.375%.

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Other Indebtedness

In addition, we are party to bilateral credit facilities with a borrowing capacity of $30.0 million.

As of July 1, 2022, there were $0.9 million in outstanding borrowings under these facilities.

In addition, we are party to overdraft facilities with a borrowing capacity of $30.0 million.

We are also party to a letter of credit facility with an aggregate capacity of $15.0 million.

Total letters of credit of $2.3 million were outstanding as of July 1, 2022.

Total letters of credit of $6.6 million are outstanding as of September 30, 2022.

We believe that our sources of liquidity are adequate to fund our operations for the next twelve months.

As of July 1, 2022, we had $95.6 million of Cash and cash equivalents, a decrease of $623.8 million from the balance as of December 31, 2021 of $719.4 million.

As of September 30, 2022, we had $55.0 million of Cash and cash equivalents, a decrease of $664.4 million from the balance as of December 31, 2021 of $719.4 million.

The Cash and cash equivalents as of December 31, 2021 include $39.1 million related to ESAB which was part of the Separation and are reported in Total current assets associated with discontinued operations in the Condensed Consolidated Balance Sheets.

The following table summarizes the change in Cash and cash equivalents during the periods indicated:

Six Months Ended

July 1, 2022 July 2, 2021

Nine Months Ended

September 30, 2022 October 1, 2021

(Dollars in millions)

Net cash provided by (used in) operating activities $ (19.9) $ 259.9

Purchases of property, plant and equipment (47.8) (44.6)

Purchases of property, plant and equipment and intangibles (68.7) (73.6)

Proceeds from sale of property, plant and equipment 2.7 2.9

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• Year-to-date 2022 cash used in operating activities also reflects $31.9 million of outflows for discontinued operations, which includes $42.6 million of net outflows related to the Separation.

Cash provided by operating activities related to discontinued operations for the six months ended July 2, 2021 was $122.6 million, which included no net outflows related to the Separation.

• During the six months ended July 1, 2022, cash payments of $53.8 million were made related to the Separation, of which $41.2 million is related to discontinued operations.

The comparable amounts for the 2021 period were immaterial.

• Year-to-date 2022 cash used in operating activities also include $27.0 million of outflows relating to the Company’s former capital structure before giving effect to the completion of the refinancing transactions in connection with the Separation.

The first six months of 2021 included $55.6 million of comparable outflows.

Cash provided by operating activities related to discontinued operations for the nine months ended October 1, 2021 was $198.8 million.

• During the nine months ended September 30, 2022, cash payments of $59.7 million were made related to the Separation, of which $42.6 million is related to discontinued operations.

Separation related payments made during the comparable 2021 period were $6.3 million.

• Year-to-date 2022 cash used in operating activities includes $33.4 million of cash interest payments, of which $28.3 million relates to the Company’s former capital structure before giving effect to the completion of the refinancing transactions in connection with the Separation.

At the time of the Separation, the Company’s total debt of $2.1 billion was repaid and replaced with $450 million of term loan A proceeds.

The first nine months of 2021 included cash interest payments of $72.0 million.

• Prior year net cash provided by operating activities included a one-time cash inflow from a $36.0 million U.S.

federal tax refund received in the first quarter of 2021.

• During the six months ended July 1, 2022 and July 2, 2021, cash payments of $5.2 million and $3.4 million, respectively, were made related to our restructuring initiatives within our continuing operations.

Cash flows used in investing activities during the six months ended July 1, 2022 of $80.2 million decreased compared with the $272.1 million in the prior year period due to lower outlays for acquisitions and investments.

The amounts included in Purchases of property, plant and equipment related to discontinued operations for the six-month periods ended July 1, 2022 and July 2, 2021 were $5.9 million and $10.9 million, respectively.

The amounts included in Proceeds from sale of property, plant and equipment related to discontinued operations for the six-month periods ended July 1, 2022 and July 2, 2021 were $2.7 million and $1.4 million, respectively.

The amount included in Acquisitions, net of cash received, and investments related to discontinued operations for the six-month period ended July 2, 2021 was $4.9 million.

Cash flows used in financing activities during the six months ended July 1, 2022 included $1.6 billion repayment of borrowings, which included the outstanding debt on our existing credit facility, 2026 Notes and Euro Senior Notes, partially offset by borrowings on a term loan under the new credit facility.

• During the nine months ended September 30, 2022 and October 1, 2021, cash payments of $9.0 million and $4.9 million, respectively, were made related to our restructuring initiatives within our continuing operations.

Cash flows used in investing activities during the nine months ended September 30, 2022 of $139.3 million decreased compared with the $293.6 million in the prior year period due to lower outlays for acquisitions and investments.

The amounts included in Purchases of property, plant and equipment related to discontinued operations for the nine-month periods ended September 30, 2022 and October 1, 2021 were $5.9 million and $18.9 million, respectively.

The amounts included in Proceeds from sale of property, plant and equipment related to discontinued operations for the nine-month periods ended September 30, 2022 and October 1, 2021 were $2.7 million and $1.1 million, respectively.

The amount included in Acquisitions, net of cash received, and investments related to discontinued operations for the nine-month period ended October 1, 2021 was $4.9 million.

Cash flows used in financing activities during the nine months ended September 30, 2022 included $1.6 billion repayment of borrowings, which included the outstanding debt on our existing credit facility, 2026 Notes and Euro Senior Notes, partially offset by borrowings on a term loan under the new credit facility.

The repayments were primarily funded by a $1.2 billion cash distribution from ESAB to us upon Separation.

Cash flows provided by financing activities for the six months ended July 2, 2021 included the $711.3 million net proceeds from the public offering of our Common stock on March 19, 2021.

The net proceeds were used for the $600 million full redemption of our 2024 Notes and the $100 million partial redemption of our 2026 Notes in the second quarter of 2021.

Cash flows provided by financing activities for the nine months ended October 1, 2021 included the $711.3 million net proceeds from the public offering of our Common stock on March 19, 2021.

The net proceeds were used for the $600 million full redemption of our 2024 Notes and the $100 million partial redemption of our 2026 Notes in the third quarter of 2021.

Critical Accounting Policies

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis