Enovis CORP 10-Q

Item 1. Financial Statements ENOVIS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Dollars in thousands, except per share amounts (Unaudited) Three Months Ended Nine Months Ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 Net sales $ 383,814 $ 359,923 $ 1,154,388 $ 1,027,130 Cost of sales 167,990 162,047 516,758 457,379 Gross profit 215,824 197,876 637,630 569,751 Selling, general and administrative expense 182,187 168,270 564,324 487,220 Research and development expense 15,599 12,458 46,102 33,860 Amortization of acquired intangibles 31,993 31,025 94,603 88,067 Insurance settlement (gain) loss 975 — ( 32,059 ) — Restructuring and other charges 2,989 2,230 7,653 5,193 Operating loss ( 17,919 ) ( 16,107 ) ( 42,993 ) ( 44,589 ) Interest expense, net 6,334 4,122 17,944 22,751 Debt extinguishment charges — — 20,104 29,870 Unrealized (gain) loss on investment in ESAB Corporation 63,125 — ( 72,412 ) — Realized gain on cost basis investment ( 8,800 ) — ( 8,800 ) — Other income ( 300 ) — ( 300 ) — Income (loss) from continuing operations before income taxes ( 78,278 ) ( 20,229 ) 471 ( 97,210 ) Income tax benefit ( 12,329 ) ( 6,651 ) ( 16,176 ) ( 9,651 ) Net income (loss) from continuing operations ( 65,949 ) ( 13,578 ) 16,647 ( 87,559 ) Income (loss) from discontinued operations, net of taxes ( 527 ) 40,435 10,163 164,358 Net income (loss) ( 66,476 ) 26,857 26,810 76,799 Less: net income attributable to noncontrolling interest from continuing operations - net of taxes 136 191 533 836 Less: net income attributable to noncontrolling interest from discontinued operations - net of taxes — 818 966 2,399 Net income (loss) attributable to Enovis Corporation $ ( 66,612 ) $ 25,848 $ 25,311 $ 73,564 Net income (loss) per share - basic Continuing operations $ ( 1.22 ) $ ( 0.26 ) $ 0.30 $ ( 1.76 ) Discontinued operations $ ( 0.01 ) $ 0.75 $ 0.17 $ 3.22 Consolidated operations $ ( 1.23 ) $ 0.49 $ 0.47 $ 1.46 Net income (loss) per share - diluted Continuing operations $ ( 1.22 ) $ ( 0.26 ) $ 0.30 $ ( 1.76 ) Discontinued operations $ ( 0.01 ) $ 0.75 $ 0.17 $ 3.22 Consolidated operations $ ( 1.23 ) $ 0.49 $ 0.46 $ 1.46 See Notes to Condensed Consolidated Financial Statements. 2 ENOVIS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Dollars in thousands (Unaudited) Three Months Ended Nine Months Ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 Net income (loss) $ ( 66,476 ) $ 26,857 $ 26,810 $ 76,799 Other comprehensive income (loss): Foreign currency translation, net of tax expense of $ — , $ 1,948 , $ 338 , and $ 5,124 ( 28,836 ) ( 57,176 ) ( 113,173 ) ( 101,573 ) Unrealized gain on hedging activities, net of tax expense of $ — , $ 2,203 , $ 2,711 , $ 5,709 — 6,424 9,028 16,655 Amounts reclassified from Accumulated other comprehensive loss: Amortization of pension and other post-retirement net actuarial gain, net of tax expense of $ — , $ 327 , $ 199 , $ 958 — 1,093 629 3,193 Other comprehensive income (loss) ( 28,836 ) ( 49,659 ) ( 103,516 ) ( 81,725 ) Comprehensive income ( 95,312 ) ( 22,802 ) ( 76,706 ) ( 4,926 ) Less: comprehensive income (loss) attributable to noncontrolling interest ( 1,030 ) 1,373 ( 1,438 ) 2,046 Comprehensive loss attributable to Enovis Corporation $ ( 94,282 ) $ ( 24,175 ) $ ( 75,268 ) $ ( 6,972 ) See Notes to Condensed Consolidated Financial Statements. 3 ENOVIS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS Dollars in thousands, except share amounts (Unaudited) September 30, 2022 December 31, 2021 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 54,957 $ 680,252 Trade receivables, less allowance for credit losses of $ 7,516 and $ 6,589 258,823 254,958 Inventories, net 416,872 356,233 Prepaid expenses 28,992 26,046 Other current assets 48,293 29,176 Investment in ESAB Corporation 200,274 — Total current assets associated with discontinued operations — 956,614 Total current assets 1,008,211 2,303,279 Property, plant and equipment, net 225,176 235,113 Goodwill 1,959,795 1,934,258 Intangible assets, net 1,116,539 1,154,028 Lease asset - right of use 67,084 76,485 Other assets 68,013 74,700 Total non-current assets associated with discontinued operations — 2,738,049 Total assets $ 4,444,818 $ 8,515,912 LIABILITIES AND EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 449,223 $ 7,701 Accounts payable 179,672 155,208 Accrued liabilities 225,021 225,391 Total current liabilities associated with discontinued operations — 635,284 Total current liabilities 853,916 1,023,584 Long-term debt, less current portion — 2,078,625 Non-current lease liability 52,032 56,549 Other liabilities 130,668 122,159 Total non-current liabilities associated with discontinued operations — 573,562 Total liabilities 1,036,616 3,854,479 Equity: Common stock, $ 0.001 par value; 133,333,333 shares authorized; 54,148,315 and 52,083,078 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively 54 52 Additional paid-in capital 2,908,913 4,544,315 Retained earnings 614,335 589,024 Accumulated other comprehensive loss ( 116,611 ) ( 516,013 ) Total Enovis Corporation equity 3,406,691 4,617,378 Noncontrolling interest 1,511 44,055 Total equity 3,408,202 4,661,433 Total liabilities and equity $ 4,444,818 $ 8,515,912 See Notes to Condensed Consolidated Financial Statements. 4 ENOVIS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF EQUITY Dollars in thousands, except share amounts (Unaudited) Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Noncontrolling Interest Total Shares Amount Balance at December 31, 2021 52,083,078 $ 52 $ 4,544,315 $ 589,024 $ ( 516,013 ) $ 44,055 $ 4,661,433 Net income — — — 15,068 — 1,233 16,301 Distributions to noncontrolling owners — — — — — ( 941 ) ( 941 ) Other comprehensive loss, net of tax of $ 3,248 — — — — ( 43,466 ) ( 338 ) ( 43,804 ) Conversion of tangible equity units into common stock 1,691,845 2 ( 2 ) — — — — Common stock-based award activity 255,957 — 11,056 — — — 11,056 Balance at April 1, 2022 54,030,880 54 4,555,369 604,092 ( 559,479 ) 44,009 4,644,045 Net income — — — 76,855 — 130 76,985 Other comprehensive loss, net of tax of $ — — — — — ( 29,443 ) ( 1,433 ) ( 30,876 ) Distribution of ESAB Corporation — — ( 1,666,732 ) — 499,981 ( 40,510 ) ( 1,207,261 ) Common stock-based award activity 80,238 — 8,570 — — — 8,570 Balance at July 1, 2022 54,111,118 54 2,897,207 680,947 ( 88,941 ) 2,196 3,491,463 Net loss — — — ( 66,612 ) — 136 ( 66,476 ) Other comprehensive loss, net of tax of $ — — — — — ( 27,670 ) ( 1,166 ) ( 28,836 ) Adjustments to distribution of ESAB Corporation — — 2,451 — — — 2,451 Acquisition — — — — — 345 345 Common stock-based award activity 37,197 — 9,255 — — — 9,255 Balance at September 30, 2022 54,148,315 $ 54 $ 2,908,913 $ 614,335 $ ( 116,611 ) $ 1,511 $ 3,408,202 See Notes to Condensed Consolidated Financial Statements. 5 ENOVIS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF EQUITY Dollars in thousands, except share amounts (Unaudited) Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Noncontrolling Interest Total Shares Amount Balance at December 31, 2020 39,498,896 $ 40 $ 3,478,086 $ 517,367 $ ( 452,106 ) $ 44,487 $ 3,587,874 Net income — — — 19,074 — 1,166 20,240 Distributions to noncontrolling owners — — — — — ( 1,054 ) ( 1,054 ) Other comprehensive loss, net of tax of $ 6,840 — — — — ( 39,621 ) ( 124 ) ( 39,745 ) Conversion of tangible equity units into common stock 114,804 — — — — — — Common stock offering, net of issuance costs 5,366,666 5 711,316 — — — 711,321 Common stock-based award activity 218,744 — 12,433 — — — 12,433 Balance at April 2, 2021 45,199,110 45 4,201,835 536,441 ( 491,727 ) 44,475 4,291,069 Net income — — — 28,642 — 1,060 29,702 Other comprehensive income (loss), net of tax of $ 473 — — — — 9,108 ( 1,429 ) 7,679 Conversion of tangible equity units into common stock 2,058,000 2 ( 2 ) — — — — Common stock-based award activity 190,105 — 23,510 — — — 23,510 Balance at July 2, 2021 47,447,215 47 4,225,343 565,083 ( 482,619 ) 44,106 4,351,960 Net income — — — 25,848 — 1,009 26,857 Distributions to noncontrolling owners — — — — — ( 1,496 ) ( 1,496 ) Other comprehensive income (loss), net of tax of $ 4,478 — — — — ( 50,023 ) 364 ( 49,659 ) Conversion of tangible equity units into common stock 1,845,700 2 ( 2 ) — — — — Common stock issued for acquisition, net of issuance costs 2,181,507 3 285,678 — — — 285,681 Common stock-based award activity 119,525 — 17,181 — — — 17,181 Balance at October 1, 2021 51,593,947 $ 52 $ 4,528,200 $ 590,931 $ ( 532,642 ) $ 43,983 $ 4,630,524 See Notes to Condensed Consolidated Financial Statements. 6 ENOVIS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Dollars in thousands (Unaudited) Nine Months Ended September 30, 2022 October 1, 2021 Cash flows from operating activities: Net income $ 26,810 $ 76,799 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation, amortization and other impairment charges 167,453 197,641 Stock-based compensation expense 27,799 26,235 Non-cash interest expense 3,021 3,757 Unrealized gain on investment in ESAB Corporation ( 72,412 ) — Realized gain on cost basis investment ( 8,800 ) — Debt extinguishment charges 20,104 29,870 Deferred income tax expense (benefit) ( 3,458 ) ( 5,904 ) (Gain)/Loss on sale of property, plant and equipment 352 ( 1,483 ) Changes in operating assets and liabilities: Trade receivables, net ( 43,315 ) ( 70,407 ) Inventories, net ( 119,145 ) ( 130,348 ) Accounts payable 34,147 143,694 Other operating assets and liabilities ( 52,459 ) ( 9,971 ) Net cash (used in) provided by operating activities ( 19,903 ) 259,883 Cash flows from investing activities: Purchases of property, plant and equipment and intangibles ( 68,668 ) ( 73,595 ) Proceeds from sale of property, plant and equipment 2,746 2,908 Acquisitions, net of cash received, and investments ( 73,390 ) ( 222,961 ) Net cash used in investing activities ( 139,312 ) ( 293,648 ) Cash flows from financing activities: Proceeds from borrowings on term credit facility 450,000 515,696 Payments under term credit facility ( 785,000 ) — Repayments of borrowings on revolving credit facilities and other ( 608,877 ) ( 409,961 ) Repayments of borrowings on Senior notes ( 300,000 ) ( 700,000 ) Repayments of borrowings on Euro senior notes ( 386,278 ) — Distribution from ESAB Corporation, net 1,143,369 — Payment of debt issuance costs ( 2,938 ) — Proceeds from issuance of common stock, net 2,530 738,177 Payment of debt extinguishment costs ( 12,704 ) ( 24,375 ) Deferred consideration payments and other ( 6,857 ) ( 7,700 ) Net cash (used in) provided by financing activities ( 506,755 ) 111,837 Effect of foreign exchange rates on Cash and cash equivalents and Restricted Cash 1,557 ( 1,659 ) (Decrease) increase in Cash and cash equivalents and Restricted cash ( 664,413 ) 76,413 Cash and cash equivalents and Restricted Cash, beginning of period 719,370 101,069 Cash and cash equivalents, end of period $ 54,957 $ 177,482 Supplemental disclosures: Common stock issued for acquisition, net of issuance costs $ — $ 285,681 7 See Notes to Condensed Consolidated Financial Statements. 8 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. General Enovis Corporation (the “Company” or “Enovis”) was previously Colfax Corporation (“Colfax”) until its separation into two differentiated, independent, and publicly traded companies on April 4, 2022, as discussed below. Colfax was a leading diversified technology company that provided fabrication technology and medical device products and services to customers around the world, principally under the ESAB and DJO brands. On April 4, 2022 (the “Distribution Date”), the Company completed the separation of its fabrication technology business (the “Separation”) through a tax-free, pro-rata distribution of 90 % of the outstanding common stock of ESAB Corporation (“ESAB”) to Colfax stockholders. To affect the Separation, Colfax distributed to its stockholders one share of ESAB common stock for every three shares of Colfax common stock held at the close of business on March 22, 2022, with the Company retaining 10 % of the shares of ESAB common stock immediately following the Separation. At September 30, 2022, the Company’s investment in ESAB was measured at fair value based on ESAB’s closing stock price, and was valued at $ 200.3 million. The Company intends to divest its retained stake in ESAB, in a tax-efficient exchange for its outstanding debt no later than 12 months after the Distribution Date. Upon completion of the Separation, Colfax, which retained the Company’s specialty medical technology business, changed its name to Enovis Corporation. On April 5, 2022, the Company began trading under the stock symbol “ENOV” on the New York Stock Exchange. Since the Separation occurred in the second quarter of 2022, Enovis has classified its fabrication technology business as a discontinued operation in its historical financial statements for all periods presented. Following the completion of the Separation, the Company revised its reporting structure to now conduct its business through two operating segments, “Prevention and Recovery”, which consists of the Company’s bracing, recovery sciences, and footcare product lines, and “Reconstructive”, which includes the Company’s surgical implant product lines. In connection with the Separation, ESAB issued $ 1.2 billion of new debt securities, the proceeds from which were used to fund a $ 1.2 billion cash distribution to Enovis. The distribution proceeds were used by Enovis in conjunction with $ 450 million of borrowings on a term loan (the “Enovis Term Loan”) under the new Enovis credit facility (the “Enovis Credit Agreement”), and $ 52.3 million of cash on hand to repay $ 1.4 billion of outstanding debt and accrued interest under the Company’s previous credit agreement, which was legally extinguished upon completion of the Separation, $ 302.8 million of outstanding debt and accrued interest on its 2026 Notes at a redemption price of 103.188 % of the principal amount, and other fees and expenses due at closing. Additionally, on April 7, 2022, the Company completed a full redemption of its € 350 million principal 3.250 % Euro Senior Notes due 2025 using cash on hand at a redemption price of 100.813 % of the principal amount. Immediately following the Separation, the Company effected a one-for-three reverse stock split of all issued and outstanding shares of Enovis common stock. As a result of the reverse stock split, prior-period share and per share figures contained in the accompanying Condensed Consolidated Financial Statements have been retroactively restated as if the reverse stock split occurred at the beginning of the periods presented. The Condensed Consolidated Financial Statements included in this quarterly report have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and reflect, in the opinion of management, all adjustments, which consist solely of normal recurring adjustments, necessary to present fairly the Company’s financial position and results of operations as of and for the periods indicated. Certain prior period amounts have been reclassified to conform to the current period presentation. The Condensed Consolidated Balance Sheet as of December 31, 2021 is derived from the Company’s audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the SEC’s rules and regulations for interim financial statements. The Condensed Consolidated Financial Statements included herein should be read in conjunction with the audited financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”), filed with the SEC on February 22, 2022. The Company makes certain estimates and assumptions in preparing its Condensed Consolidated Financial Statements in accordance with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the Condensed Consolidated Financial Statements, and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from those estimates. COVID-19, which was characterized as a pandemic by the World Health Organization on March 11, 2020, has caused increased uncertainty in estimates and assumptions affecting the reported amounts of assets and liabilities in the Condensed Consolidated Financial Statements as periodic surges in cases, the extent and period of recovery, and related economic disruption are difficult to 9 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) forecast. Furthermore, historical seasonality trends have been disrupted by the commercial impacts caused by the COVID-19 pandemic. 2. Recently Issued Accounting Pronouncements The Company has not adopted any new accounting standards during the nine months ended September 30, 2022. There are no recently issued accounting pronouncements that are expected to have a material effect on the Company’s financial position, results of operations or cash flows. 3. Discontinued Operations Separation of Fabrication Technology Business On April 4, 2022, the Company completed the Separation of its fabrication technology business into an independent, publicly traded company: ESAB, a global organization that develops, manufactures and supplies consumable welding and cutting products and equipment, as well as gas control equipment, into diversified end markets such as medical and alternative energy. The spin-off was effected through a pro-rata distribution of 90 % of the 60,034,311 outstanding common shares of ESAB to Enovis stockholders of record at the close of business on March 22, 2022 (the “Record Date”). Enovis stockholders received one share of ESAB for every three shares of Enovis stock they owned on the Record Date. The carrying value of the assets and liabilities of the Company’s former fabrication technology business’ discontinued operations, other contributed legal entities, discontinued operations containing asbestos, and certain pension assets and liabilities, as of December 31, 2021 were as follows: December 31, 2021 ASSETS (in thousands) Cash and cash equivalents $ 39,118 Trade receivables, net 383,742 Inventories, net 420,062 Prepaid expenses 52,140 Other current assets 61,552 Total current assets associated with discontinued operations 956,614 Property, plant and equipment, net 286,278 Goodwill 1,533,037 Other intangibles, net 521,434 Lease asset - right of use 107,944 Other assets 289,356 Total assets associated with discontinued operations (1) $ 3,694,663 LIABILITIES Current portion of long-term debt $ 613 Accounts payable 348,965 Accrued liabilities 285,706 Total current liabilities associated with discontinued operations 635,284 Long-term debt, less current portion 54 Non-current lease liability 88,777 Deferred tax liabilities 116,198 Other liabilities 368,533 Total liabilities associated with discontinued operations (1) $ 1,208,846 (1) Total assets and liabilities include asbestos-related contingencies and insurance coverages previously reported as discontinued operations. See Asbestos Contingencies section below for more information. 10 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) The financial results of the discontinued operations for the three and nine months ended September 30, 2022 and October 1, 2021 include the fabrication technology business through the date of Separation and separation-related costs incurred and are presented as income from discontinued operations, net of income taxes, on the Company’s Consolidated Statements of Operations. The following table presents the financial results of the Company’s discontinued operations: Three Months Ended Nine Months Ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 (in thousands) Net sales $ — $ 605,968 $ 647,911 $ 1,803,900 Cost of sales — 398,973 423,580 1,178,719 Selling, general and administrative expense 527 124,313 175,191 382,037 Restructuring and other charges — 4,227 5,304 10,790 Operating income (loss) ( 527 ) 78,455 43,836 232,354 Interest expense — 9,417 8,035 34,254 Pension settlement gain — — — ( 11,208 ) Income (loss) from discontinued operations before income taxes ( 527 ) 69,038 35,801 209,308 Income tax expense — 28,603 25,638 44,950 Income (loss) from discontinued operations, net of taxes $ ( 527 ) $ 40,435 $ 10,163 $ 164,358 Total income attributable to noncontrolling interest related to ESAB, net of taxes was $ 1.0 million for the nine months ended September 30, 2022, and $ 0.8 million and $ 2.4 million for the three and nine months ended October 1, 2021, respectively. Cash used in operating activities related to discontinued operations for the nine months ended September 30, 2022 was $ 31.9 million. Cash provided by operating activities related to discontinued operations for the nine months ended October 1, 2021 was $ 198.8 million. Cash used in investing activities related to discontinued operations for the nine months ended September 30, 2022 and October 1, 2021 was $ 3.2 million and $ 22.7 million, respectively. Asbestos Contingencies The Company retained certain asbestos-related contingencies and insurance coverages from its previously divested businesses for which it did not retain an interest in the ongoing operations except for the contingencies. The net costs and cash flows associated with these contingencies and coverages were reported by the Company as discontinued operations. In conjunction with the Separation, all asbestos-related contingencies and insurance coverages from its divested businesses were transferred fully to ESAB. The Company has classified asbestos-related selling, general and administrative activity through the the date of Separation in its Condensed Consolidated Statements of Operations as part of Loss from discontinued operations, net of taxes. Subsequent to the Separation, the asbestos-related selling, general and administrative activity and asbestos assets and liabilities are no longer reflected in the Enovis financial statements. 11 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) 4. Acquisitions and Investments 2022 Acquisitions During the nine months ended September 30, 2022, the Company completed four asset acquisitions, two business combinations, and one investment, which is carried at cost as it does not have a readily determinable fair value. Two of these transactions were completed by the Company’s Reconstructive segment, and the other five transactions were completed by the Prevention & Recovery segment. The asset acquisitions broaden the Company’s product offering and distribution network. Aggregate purchase consideration for the four asset acquisitions was $ 22.3 million, of which $ 12.6 million was paid in cash and $ 9.6 million consists of deferred and contingent consideration. The investment was acquired for $ 10.0 million in cash consideration. On May 6, 2022, the Company completed a business acquisition in its Reconstructive segment of KICo Knee Innovation Company Pty Limited and subsidiaries, an Australian private company doing business as 360 Med Care, by acquiring 100 % of its equity interests. 360 Med Care is a medical device distributor that bundles certain computer-assisted surgery and patient experience enhancement programs to add value to its device supply arrangements with surgeons, hospitals, and insurers. The acquisition is accounted for under the acquisition method of accounting, and accordingly, the Condensed Consolidated Financial Statements include the financial position and results of operations from the acquisition date. The Company paid $ 14.3 million for the acquisition, net of cash received, and recorded estimated contingent consideration at fair value of $ 12.8 million related to expected results over future revenue targets. The Company has preliminarily allocated $ 13 million to goodwill and $ 18.2 million to intangible assets acquired. Purchase accounting procedures are ongoing and revisions to contingent consideration, intangible assets acquired, and adjustments for working capital true-ups may be recorded in future periods during the measurement period. The 360 Med Care acquisition broadens our customer base in Australia and adds to our overall product offerings. On July 5, 2022, the Reconstructive segment of the Company acquired a controlling interest of Insight Medical Systems (“Insight”). Insight’s flagship solution, ARVIS, is an FDA-cleared augmented reality solution precisely engineered for the specific needs of hip and knee replacement surgery. The ARVIS navigation unit consists of a hands-free heads-up display worn by the surgeon which provides surgical guidance at the point of care in a streamlined, space-conserving, and cost-effective manner compared to traditional robotic offerings. The acquisition is accounted for under the acquisition method of accounting as a step-acquisition, and accordingly, the Condensed Consolidated Financial Statements include the financial position and results of operations from the acquisition date. Enovis made initial investments in Insight in 2020 and 2021, which were carried at cost. During the quarter, the Company acquired an additional 53.7 % interest in Insight for $ 34.2 million net of cash received, and recorded contingent consideration of $ 5.0 million, which is the maximum payable under the agreement based on Insight’s achievement of certain milestones related to ARVIS. As of September 30, 2022, Enovis holds 99.5 % interest in Insight and recognizes $ 0.3 million noncontrolling equity interest in its financial statements attributed to Insight. The Company has preliminarily allocated $ 36.3 million to goodwill and $ 38.4 million to intangible assets acquired. Goodwill is primarily driven by expected synergies between ARVIS’ augmented reality surgical guidance system and our existing customer base and existing products. The Company does not expect any of the goodwill to be deductible for tax purposes. Purchase accounting procedures are ongoing and revisions to contingent consideration, intangible assets acquired, and adjustments for working capital true-ups may be recorded in future periods during the measurement period. As a result of obtaining control of Insight, the Company remeasured its initial investments to its fair value resulting in a $ 8.8 million gain. Investments As of September 30, 2022, the balance of investments held by the company without readily determinable fair values was $ 16.5 million. The investments are carried at cost minus impairments, if any, plus adjustments for fair value indicators from observable price changes in orderly transactions for the identical or similar investment of the same issuer. There have been no impairments or upward adjustments in the current year or since acquisition of the investments except for the gain on our previously held equity investment in Insight discussed above. As a result of acquiring control of Insight, Enovis now consolidates the assets, liabilities, and results of operations of Insight and therefore current year and previous investments in Insight of $ 16.6 million are no longer recorded as cost basis investments. 12 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) The Company holds equity securities in ESAB Corporation with a total value of $ 200.3 million, which are recorded at fair value. During the three and nine months ended September 30, 2022, the Company recorded an unrealized loss of $ 63.1 million and an unrealized gain of $ 72.4 million over cost basis, respectively. The Company does not hold other equity securities measured at fair value. 2021 Acquisitions During the nine months ended October 1, 2021, the Company completed three business combinations and one asset acquisition in its Reconstructive segment for aggregate net cash consideration of $ 196.4 million and one asset acquisition in its Prevention and Recovery segment for cash consideration of $ 4 million. The acquisitions are accounted for under the acquisition method of accounting, and accordingly, the Condensed Consolidated Financial Statements include the financial position and results of operations from the respective acquisition date of each business combination. The Reconstructive segment acquired Trilliant Surgical (“Trilliant”), a provider of foot and ankle orthopedic implants, in the first quarter of 2021 for net cash consideration of $ 79.6 million. The Reconstructive segment’s acquisitions in the second quarter of 2021 included MedShape, Inc. (“MedShape”), a provider of innovative surgical solutions for foot and ankle surgeons, which was acquired for net cash consideration of $ 124.6 million. The Trilliant and MedShape acquisitions further expand the Company’s U.S. foot and ankle product lines. The purchase accounting for all acquisitions made in the nine months ended October 1, 2021 has been completed. The Company also made two investments in medical technology businesses during the nine months ended October 1, 2021 for a total of $ 14.8 million, one of which was a previous investment in Insight for $ 13.3 million. The Insight investment is now consolidated as part of the acquisition discussed above and the other investment is carried at cost as of September 30, 2022, as it does not have a readily determinable fair value. During the second half of 2021, the Reconstructive segment acquired Mathys AG Bettlach for total acquisition equity consideration of $ 285.7 million, which included cash acquired of $ 14.7 million. Purchase accounting procedures for this acquisition have been completed and the finalized allocation is presented below. For further information on prior year acquisitions and investments, refer to Note 5. “Acquisitions” in the Notes to the Consolidated Financial Statements in the Company’s 2021 Form 10-K. July 28, 2021 (In thousands) Trade receivables $ 19,578 Inventories 76,824 Property, plant and equipment 58,465 Goodwill 92,438 Intangible assets 106,000 Accounts payable ( 4,808 ) Other assets and liabilities, net ( 77,494 ) Consideration, net of cash acquired $ 271,003 5. Revenue The Company provides orthopedic solutions, including products and services spanning the full continuum of patient care, from injury prevention to rehabilitation. Substantially all its revenue is recognized at a point in time. The Company disaggregates its revenue into the following segments: 13 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) Three Months Ended Nine Months Ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 (In thousands) Prevention and Recovery $ 256,502 $ 256,229 $ 765,121 $ 757,822 Reconstructive 127,312 103,694 389,267 269,308 Total $ 383,814 $ 359,923 $ 1,154,388 $ 1,027,130 Given the nature of the Company’s business, the total amount of unsatisfied performance obligations with an original contract duration of greater than one year as of September 30, 2022 is immaterial. The nature of the Company’s contracts gives rise to certain types of variable consideration, including rebates, implicit price concessions, and other discounts. The Company includes estimated amounts of variable consideration in the transaction price to the extent that it is probable there will not be a significant reversal of revenue. Allowance for Credit Losses The Company’s estimate of current expected credit losses on trade receivables considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. In calculating and applying its current expected credit losses, the Company disaggregates trade receivables into business segments due to risk characteristics unique to each segment given the individual lines of business and market. The business segments are further disaggregated based on either geography or product type. The Company uses a loss rate methodology in calculating its current expected credit losses, leveraging historical write-offs over a defined lookback period in deriving a historical loss rate. The expected credit loss model further considers current conditions and reasonable and supportable forecasts using an adjustment for current and projected macroeconomic factors. A summary of the activity in the Company’s allowance for credit losses included within Trade receivables in the Condensed Consolidated Balance Sheets is as follows: Nine Months Ended September 30, 2022 Balance at Beginning of Period Charged to Expense, net Write-Offs, Deductions and Other, net Foreign Currency Translation Balance at End of Period (In thousands) Allowance for credit losses $ 6,589 $ 3,345 $ ( 2,027 ) $ ( 391 ) $ 7,516 14 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) 6. Net Income Per Share from Continuing Operations Net income per share from continuing operations was computed as follows: Three Months Ended Nine Months Ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 (In thousands, except share and per share data) Computation of Net income (loss) per share from continuing operations - basic: Net income (loss) from continuing operations attributable to Enovis Corporation (1) $ ( 66,085 ) $ ( 13,769 ) $ 16,114 $ ( 88,395 ) Weighted-average shares of Common stock outstanding – basic 54,136,889 53,031,128 54,025,144 50,274,020 Net income (loss) per share from continuing operations – basic $ ( 1.22 ) $ ( 0.26 ) $ 0.30 $ ( 1.76 ) Computation of Net income (loss) per share from continuing operations - diluted: Net income (loss) from continuing operations attributable to Enovis Corporation (1) $ ( 66,085 ) $ ( 13,769 ) $ 16,114 $ ( 88,395 ) Weighted-average shares of Common stock outstanding – basic 54,136,889 53,031,128 54,025,144 50,274,020 Net effect of potentially dilutive securities - stock options and restricted stock units — — 434,859 — Weighted-average shares of Common stock outstanding – diluted 54,136,889 53,031,128 54,460,003 50,274,020 Net income (loss) per share from continuing operations – diluted $ ( 1.22 ) $ ( 0.26 ) $ 0.30 $ ( 1.76 ) (1) Net income (loss) from continuing operations attributable to Enovis Corporation for the respective periods is calculated using Net income (loss) from continuing operations less the continuing operations component of the income attributable to noncontrolling interest, net of taxes, of $ 0.1 million and $ 0.5 million for the three and nine months ended September 30, 2022, respectively, and $ 0.2 million and $ 0.8 million for the three and nine months ended October 1, 2021, respectively. As a result of the reverse stock split following the Separation, prior-period share and per share figures contained in the Condensed Consolidated Financial Statements have been retroactively restated as if the reverse stock split occurred at the beginning of the periods presented. For the three and nine months ended September 30, 2022 and the three and nine months ended October 1, 2021, the weighted-average shares of Common stock outstanding - basic includes the impact of 6.1 million shares, as adjusted for the reverse stock split, for the actual or potential issuance of shares from tangible equity unit purchase contracts. In January 2022, the final remaining amount of tangible equity unit purchase contracts were converted into approximately 1.7 million shares of the Company’s common stock, as adjusted for the reverse stock split. All the issued shares are included in the Common stock issued and outstanding as of September 30, 2022. See Note 8, “Equity” for details. The weighted-average computation of the dilutive effect of potentially issuable shares of Common stock under the treasury stock method for the three and nine months ended September 30, 2022 excludes 0.5 million and 0.4 million, respectively, of outstanding stock-based compensation awards as their inclusion would be anti-dilutive. The weighted-average computation of the dilutive effect of potentially issuable shares of Common stock under the treasury stock method for the three and nine months ended October 1, 2021 excludes 0.3 million and 0.4 million, respectively, of outstanding stock-based compensation awards as their inclusion would be anti-dilutive. 7. Income Taxes 15 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) During the three and nine months ended September 30, 2022, Income (loss) from continuing operations before income taxes was $( 78.3 ) million and $ 0.5 million, respectively, while Income tax benefit was $ 12.3 million and $ 16.2 million, respectively. The effective tax rate was 15.8 % and ( 3,434.4 )% for the three and nine months ended September 30, 2022, both of which differed from the 2022 federal statutory 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. During the three and nine months ended October 1, 2021, Loss from continuing operations before income taxes was $ 20.2 million and $ 97.2 million, respectively, while Income tax benefit was $ 6.7 million and $ 9.7 million, respectively. The effective tax rate was 32.9 % and 9.9 % for the three and nine months ended October 1, 2021, respectively, both of which differed from the 2021 U.S. federal statutory rate of 21% mainly due to U.S. taxation on international operations and other non-deductible expenses. 16 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) 8. Equity Outstanding shares As discussed in Note 1, the Company effected a reverse stock split immediately following the Separation on April 4, 2022 and all share and per share figures contained in the accompanying Condensed Consolidated Financial Statements have been retroactively restated as if the reverse stock split occurred at the beginning of the periods presented. As of December 31, 2021, the outstanding shares for the Company after the reverse stock split were 52,083,078 . Share Repurchase Program In 2018, the Company’s Board of Directors authorized the repurchase of shares of the Company’s Common stock from time-to-time on the open market or in privately negotiated transactions. No repurchases of the Company’s Common stock have been made under this plan since the third quarter of 2018. As of September 30, 2022, the remaining stock repurchase authorization provided by the Board of Directors was $ 100 million. The timing, amount and method of shares repurchased is determined by management based on its evaluation of market conditions and other factors. There is no term associated with the remaining repurchase authorization. Accumulated Other Comprehensive Loss The following tables present the changes in the balances of each component of Accumulated other comprehensive loss including reclassifications out of Accumulated other comprehensive loss for the nine months ended September 30, 2022 and October 1, 2021. All amounts are net of tax and noncontrolling interest, if any. Accumulated Other Comprehensive Loss Components Net Unrecognized Pension and Other Post-Retirement Benefit Cost Foreign Currency Translation Adjustment Unrealized Gain on Hedging Activities Total (In thousands) Balance at January 1, 2022 $ ( 85,559 ) $ ( 475,125 ) $ 44,671 $ ( 516,013 ) Other comprehensive income (loss) before reclassifications: Foreign currency translation adjustment 470 ( 88,927 ) — ( 88,457 ) Loss on long-term intra-entity foreign currency transactions — ( 21,779 ) — ( 21,779 ) Gain on net investment hedges — — 9,028 9,028 Other comprehensive income (loss) before reclassifications 470 ( 110,706 ) 9,028 ( 101,208 ) Amounts reclassified from Accumulated other comprehensive income (loss) 629 — — 629 Net Other comprehensive income (loss) 1,099 ( 110,706 ) 9,028 ( 100,579 ) Distribution of ESAB Corporation 84,460 469,220 ( 53,699 ) 499,981 Balance at September 30, 2022 $ — $ ( 116,611 ) $ — $ ( 116,611 ) 17 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) Accumulated Other Comprehensive Loss Components Net Unrecognized Pension and Other Post-Retirement Benefit Cost Foreign Currency Translation Adjustment Unrealized Gain on Hedging Activities Total (In thousands) Balance at January 1, 2021 $ ( 112,783 ) $ ( 360,977 ) $ 21,654 $ ( 452,106 ) Other comprehensive income (loss) before reclassifications: Foreign currency translation adjustment 1,089 ( 124,824 ) ( 2,582 ) ( 126,317 ) Gain on long-term intra-entity foreign currency transactions — 25,933 — 25,933 Gain on net investment hedges — — 16,655 16,655 Other comprehensive income (loss) before reclassifications 1,089 ( 98,891 ) 14,073 ( 83,729 ) Amounts reclassified from Accumulated other comprehensive loss 3,193 — — 3,193 Net Other comprehensive income (loss) 4,282 ( 98,891 ) 14,073 ( 80,536 ) Balance at October 1, 2021 $ ( 108,501 ) $ ( 459,868 ) $ 35,727 $ ( 532,642 ) Tangible equity unit offering On January 11, 2019, the Company issued 4.6 million in Tangible Equity Units (“TEUs”) at the stated amount of $ 100 per unit. Net cash of $ 447.7 million was received upon closing. The gross proceeds and deferred finance costs from the issuance of the TEUs were allocated 84.4 % to equity (the “TEU prepaid stock purchase contracts”) and 15.6 % to debt (the “TEU amortizing notes”) based on the relative fair value of the respective components of each TEU. See Note 10, “Debt” for additional information on the TEU amortizing notes. The TEU prepaid stock purchase contracts were mandatorily converted into shares of Company common stock on January 15, 2022, unless previously settled at the holder’s option. All the TEU prepaid stock purchase contracts converted at the minimum settlement rate. Approximately 1.3 million and 3.0 million TEU prepaid stock purchase contracts were settled into approximately 1.7 million and 4.0 million shares of Company common stock as adjusted for the reverse split, during the nine months ended September 30, 2022 and October 1, 2021, respectively. Since the 4.6 million TEU prepaid stock purchase contracts were mandatorily converted into shares of Company common stock at the minimum settlement rate or greater, 6.1 million shares, as adjusted for the reverse split, are included in basic net income per share calculations for all periods presented. See Note 6, “Net Income Per Share from Continuing Operations” for additional information. 9. Inventories, Net Inventories, net consisted of the following: September 30, 2022 December 31, 2021 (In thousands) Raw materials $ 98,384 $ 66,824 Work in process 28,021 29,506 Finished goods 338,956 298,450 465,361 394,780 Less: allowance for excess, slow-moving and obsolete inventory ( 48,489 ) ( 38,547 ) $ 416,872 $ 356,233 18 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) 10. Debt Long-term debt consisted of the following: September 30, 2022 December 31, 2021 (In thousands) Term loan $ 449,223 $ 782,435 Euro senior notes — 395,552 2026 notes — 297,906 TEU amortizing notes — 6,501 Revolving credit facilities and other — 603,932 Total debt 449,223 2,086,326 Less: current portion ( 449,223 ) ( 7,701 ) Long-term debt $ — $ 2,078,625 Debt Redemptions In conjunction with the Separation which occurred on April 4, 2022, the Company repaid all obligations under its previous credit agreement and entered into a new credit agreement (the “Enovis Credit Agreement”) with certain of its existing bank lenders. Additionally, on April 7, 2022 after the completion of the Separation, the Company completed the redemptions of its 3.25 % Euro Senior Notes due 2025 and its 6.375 % Senior Notes due 2026. As a result of these changes, the Company recorded Debt extinguishment charges of $ 20.1 million in the second quarter of 2022, comprised of $ 12.7 million in redemption premiums and $ 7.4 million in noncash write-offs of original issue discount and deferred financing fees. Enovis Term Loan and Revolving Credit Facility The new Enovis Credit Agreement became effective on April 4, 2022 and consists of a $ 900 million revolving credit facility (the “Revolver”) with an April 4, 2027 maturity date and a term loan with an initial aggregate principal amount of $ 450 million and an April 4, 2023 maturity date (the “Enovis Term Loan”). The Revolver contains a $ 50 million swing line loan sub-facility. Certain U.S. subsidiaries of the Company guarantee the obligations under the Credit Facility. The Enovis Credit Agreement contains customary covenants limiting the ability of the Company and its subsidiaries to, among other things, incur debt or liens, merge or consolidate with others, dispose of assets, make investments or pay dividends. In addition, the Enovis Credit Agreement contains financial covenants requiring the Company to maintain (i) a maximum total leverage ratio of not more than 4.50 :1.00, with a step-down to, on the date on which the Company and its subsidiaries have transferred any retained shares of ESAB common stock to one or more unaffiliated third parties, 4.00 :1.00, commencing with the fiscal quarter ending June 30, 2023, 3.75 :1.00 and commencing with the fiscal quarter ending June 30, 2024, 3.50 :1.00, and (ii) a minimum interest coverage ratio of 3.00 :1:00. The Enovis Credit Agreement contains various events of default (including failure to comply with the covenants under the Enovis Credit Agreement and related agreements) 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 Enovis Term Loan and the Enovis Revolver. As of September 30, 2022, the Company was in compliance with the covenants under the Enovis Credit Agreement. As of September 30, 2022, the weighted-average interest rate of borrowings under the Enovis Credit Agreement was 3.98 %, excluding accretion of original issue discount and deferred financing fees, and there was $ 900 million available on the Revolver. Euro Senior Notes The Company had senior unsecured notes with an aggregate principal amount of € 350 million due in May 2025, with an interest rate of 3.25 %. The Euro Senior Notes were redeemed on April 7, 2022 at a 100.813 % redemption premium after the completion of the Separation. TEU Amortizing Notes 19 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) The Company previously had 6.50 % TEU amortizing notes at an initial principal amount of $ 15.6099 per note with equal quarterly cash installments of $ 1.4375 per note representing a payment of interest and partial payment of principal. The Company 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. The final installment payment was made on January 15, 2022. 2026 Notes The Company had senior notes with a remaining principal amount of $ 300 million, which were due on February 15, 2026 and had an interest rate of 6.375 %. The 2026 Notes were redeemed on April 7, 2022 at a 103.188 % redemption premium after the completion of the Separation. Other Indebtedness In addition to the debt agreements discussed above, the Company is party to overdraft facilities with a borrowing capacity of $ 30.0 million. The Company is party to a letter of credit facility with a capacity of $ 15.0 million. Total letters of credit of $ 6.6 million were outstanding as of September 30, 2022. Deferred Financing Fees In total, the Company had deferred financing fees of $ 5.6 million included in its Condensed Consolidated Balance Sheet as of September 30, 2022, which will be charged to Interest expense, net, primarily using the effective interest method, over the life of the applicable debt agreements. In conjunction with the Separation-related debt redemptions and extinguishment of its prior credit facility in the second quarter of 2022, the Company recorded $ 7.4 million of noncash write-offs of original issue discounts and deferred financing fees. Additionally, the Company deferred $ 2.9 million of financing costs in the second quarter of 2022 in connection with the new Enovis Credit Facility. 11. Accrued Liabilities Accrued liabilities in the Condensed Consolidated Balance Sheets consisted of the following: September 30, 2022 December 31, 2021 (In thousands) Accrued compensation and related benefits $ 66,662 $ 66,290 Accrued taxes 12,675 12,970 Accrued freight 7,448 5,299 Contingent consideration - current portion 8,737 1,816 Warranty liability 2,608 2,503 Accrued restructuring liability 1,711 2,170 Accrued third-party commissions 25,128 22,362 Customer advances and billings in excess of costs incurred 3,113 9,203 Lease liability - current portion 23,847 21,936 Accrued interest 633 11,066 Accrued rebates 10,449 12,584 Accrued professional fees 14,946 13,711 Accrued royalties 4,839 5,045 Other 42,225 38,436 $ 225,021 $ 225,391 20 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) Accrued Restructuring Liability The Company’s restructuring programs include a series of actions to reduce the structural costs of the Company. A summary of the activity in the Company’s restructuring liability included in Accrued liabilities and Other liabilities in the Condensed Consolidated Balance Sheets is as follows: Nine Months Ended September 30, 2022 Balance at Beginning of Period Provisions Payments Balance at End of Period (In thousands) Restructuring and other charges: Termination benefits (1) $ 2,470 $ 2,606 $ ( 3,430 ) $ 1,646 Facility closure costs and other (2) 358 5,299 ( 5,592 ) 65 Total $ 2,828 7,905 $ ( 9,022 ) $ 1,711 Non-cash charges (2) 592 Total Provisions (3) $ 8,497 (1) Includes severance and other termination benefits, including outplacement services. (2) Includes the cost of relocating associates, relocating equipment, lease termination expense and other costs in connection with the closure and optimization of facilities, site cost structures, and product lines. (3) For the nine months ended September 30, 2022 , $ 4.7 million and $ 3.8 million of the Company’s total provisions were related to the Prevention and Recovery and Reconstructive segments, respectively. Restructuring and other charges includes $ 0.8 million of expense classified as Cost of sales on the Company’s Condensed Consolidated Statements of Operations for the nine months ended September 30, 2022. 12. Financial Instruments and Fair Value Measurements The carrying values of financial instruments, including trade receivables, other receivables and accounts payable, approximate their fair values due to their short-term maturities. The estimated fair value of the Company’s debt, which was $ 0.4 billion and $ 2.1 billion as of September 30, 2022 and December 31, 2021, respectively, was based on current interest rates for similar types of borrowings and is in Level Two of the fair value hierarchy. The estimated fair values may not represent actual values of the financial instruments that could be realized as of the balance sheet date or that will be realized in the future. As of September 30, 2022, the Company held $ 29.4 million in Level Three liabilities arising from contingent consideration related to acquisitions. The fair value of the contingent consideration liabilities is determined using unobservable inputs and the inputs vary based on the nature of the purchase agreements. These inputs can include the estimated amount and timing of projected cash flows, the risk-adjusted discount rate used to present value the projected cash flows, and the probability of the acquired company attaining certain targets stated within the purchase agreements. A change in these unobservable inputs to a different amount might result in a significantly higher or lower fair value measurement at the reporting date due to the nature of uncertainty inherent to the estimates. During the nine months ended September 30, 2022 the company recorded contingent consideration of $ 24.4 million in conjunction with current acquisitions. There were no transfers in or out of Level One, Two or Three during the nine months ended September 30, 2022. Investment in ESAB On April 4, 2022, the Company completed the Separation and retained 10 % of the shares of ESAB common stock. The Company did not retain a controlling interest in ESAB and, therefore, the fair value of the retained shares is included in the assets of continuing operations on the Company’s Condensed Consolidated Balance Sheet as of September 30, 2022, and the subsequent fair value changes are included in results from continuing operations on the Company’s Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022. At September 30, 2022, the Company’s investment in ESAB was measured at fair value based on ESAB’s closing stock price, and it is classified as Level 1 in the fair value hierarchy. The fair value of the ESAB investment as of September 30, 2022 was $ 200.3 million, and there was an 21 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) unrealized loss on investment of $ 63.1 million for the three months ended September 30, 2022 and an unrealized gain on investment of $ 72.4 million for the nine months ended September 30, 2022. Deferred Compensation Plans The Company maintains deferred compensation plans for the benefit of certain employees and non-executive officers. As of September 30, 2022 and December 31, 2021 the fair value of these plans were $ 9.4 million and $ 11.2 million, respectively. These plans are deemed to be Level Two within the fair value hierarchy. Foreign Currency Contracts As of September 30, 2022 and December 31, 2021, the Company had foreign currency contracts related to purchases and sales with notional values of $ 2.8 million and $ 7.6 million, respectively. During the nine months ended September 30, 2022, the Company recognized an unrealized loss of $ 0.2 million related to its derivative instruments. During the three and nine months ended September 30, 2022, the Company recognized realized losses of $ 0.1 million and $ 0.3 million, respectively, on its Condensed Consolidated Statements of Operations related to its derivative instruments. 13. Commitments and Contingencies The Company is involved in various pending legal proceedings arising out of the ordinary course of the Company’s business. None of these legal proceedings are expected to have a material adverse effect on the financial condition, results of operations or cash flow of the Company. With respect to these proceedings, management of the Company believes that it will either prevail, has adequate insurance coverage or has established appropriate accruals to cover potential liabilities. Legal costs related to proceedings or claims are recorded as incurred. Other costs that management estimates may be paid related to the claims are accrued when the liability is considered probable and the amount can be reasonably estimated. There can be no assurance, however, as to the ultimate outcome of any of these matters, and if all or substantially all of these legal proceedings were to be determined adverse to the Company, there could be a material adverse effect on the financial condition, results of operations or cash flow of the Company. In conjunction with the Separation, all asbestos-related contingencies and insurance coverages from the divested industrial businesses were transferred fully to ESAB. The historical asbestos-related activity and balances are presented in discontinued operations on the Condensed Consolidated Statements of Operations and in assets/liabilities associated with discontinued operations on the Condensed Consolidated Balance Sheets, respectively. For further description of the Company’s litigation and contingencies, reference is made to Note 18, “Commitments and Contingencies” in the Notes to Consolidated Financial Statements in the Company’s 2021 Form 10-K. 14. Segment Information The Company conducts its continuing operations through the Prevention and Recovery and Reconstructive operating segments, which also represent the Company’s reportable segments. ▪ Prevention and Recovery - a leader in orthopedic solutions and recovery sciences, providing devices, software and services across the patient care continuum from injury prevention to rehabilitation after surgery, injury, or from degenerative disease. • Reconstructive - an innovation-driven leader offering a comprehensive suite of reconstructive joint products for the hip, knee, shoulder, elbow, foot, ankle, and finger. In conjunction with revising its reporting structure, the Company allocated $ 1.1 billion and $ 0.8 billion of goodwill to the Prevention and Recovery and Reconstructive segments, respectively. The total segment assets as of the beginning of the second quarter were $ 2.8 billion and $ 1.8 billion for the Prevention and Recovery and Reconstructive segments, respectively. There have not been any material changes to the segment assets since the start of the second quarter. 22 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) The Company’s management evaluates the operating results of each of its reportable segments based upon Net sales and Adjusted EBITDA, which excludes 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 from the operating income of the Company’s operating segments. The amounts presented below have been recast for the change in operating segments for all periods presented. The Company’s segment results were as follows: Three Months Ended Nine Months Ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 (In thousands) Net sales: Prevention and Recovery $ 256,502 $ 256,229 $ 765,121 $ 757,822 Reconstructive 127,312 103,694 389,267 269,308 $ 383,814 $ 359,923 $ 1,154,388 $ 1,027,130 Segment Adjusted EBITDA (1) : Prevention and Recovery $ 39,532 $ 40,432 $ 101,050 $ 94,982 Reconstructive 17,677 16,040 60,076 49,389 $ 57,209 $ 56,472 $ 161,126 $ 144,371 (1) The following is a reconciliation of Operating loss to Adjusted EBITDA: Three Months Ended Nine Months Ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 (In thousands) Operating loss (GAAP) $ ( 17,919 ) $ ( 16,107 ) $ ( 42,993 ) $ ( 44,589 ) Restructuring and other charges (1) 2,989 2,230 8,497 5,193 MDR and other costs (2) 3,600 1,902 10,648 5,574 Strategic transaction costs 8,146 11,362 32,549 15,780 Stock-based compensation 7,205 6,253 21,734 19,000 Depreciation and other amortization 18,159 18,397 56,109 51,639 Amortization of acquired intangibles 31,993 31,025 94,603 88,067 Insurance settlement (gain) loss (3) 975 — ( 32,059 ) — Inventory step-up 2,061 1,410 12,038 3,707 Adjusted EBITDA (non-GAAP) $ 57,209 $ 56,472 $ 161,126 $ 144,371 (1) Restructuring and other charges includes $ 0.8 million of expense classified as Cost of sales on the Company’s 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 Medical Devices Regulation. These costs are classified as Selling, general and administrative expense on our Condensed Consolidated Statements of Operations. (3) Insurance settlement (gain) loss is related to the 2019 acquisition of DJO. 23 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) 15. Related Party Transactions Related Party Agreements On April 4, 2022, in connection with the Separation, the Company entered into several agreements with ESAB that govern the Separation and provide a framework for the future relationship between the parties, including a separation and distribution agreement, a transition services agreement (the “Separation Agreement”), tax matters agreement, employee matters agreements, a stockholder’s and registration rights agreement, and an intellectual property matters agreement. The Separation and Distribution Agreement The Company entered into the Separation Agreement with ESAB immediately prior to the distribution of ESAB’s common stock to Enovis stockholders. The Separation Agreement sets forth the Company’s agreements with ESAB regarding the principal actions to be taken in connection with the Separation. The Separation agreement contains provisions that, among other things, relate to (i) assets, liabilities and contracts to be transferred, assumed and assigned to each of ESAB and Enovis as part of the Separation; (ii) the cash distribution made to Enovis in partial consideration of the transfer of ESAB Assets in connection with the Separation; and, (iii) cross-indemnities principally designed to place financial responsibility for obligations and liabilities with either Enovis or ESAB, depending on the responsible party. Transition Services Agreement The transition services agreement ("TSA") sets forth the terms and conditions pursuant to which the Company and its subsidiaries and ESAB’s and its subsidiaries will provide various services to each other. The services to be provided include human resources, payroll, certain information technology services, treasury services and financial reporting services. The charges for the transition services generally are expected to allow the providing company to fully recover all actual internal and external costs and expenses in connection with providing the service (including a reasonable allocation of overhead) provided in the manner and at a level substantially consistent with that provided by the respective providing company immediately preceding the Separation. Tax Matters Agreement The tax matters agreement governs the Company’s and ESAB’s respective rights, responsibilities and obligations after the Separation with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and certain other matters regarding taxes. Employee Matters Agreement The employee matters agreement sets forth, among other things, the allocation of assets, liabilities and responsibilities relating to employee compensation and benefit plans, and programs and other related matters in connection with the Separation, including the treatment of outstanding equity and other incentive awards and certain retirement and welfare benefit obligations. Stockholders and Registration Rights Agreement The stockholders and registration rights agreement sets forth the terms and conditions pursuant to which ESAB has granted Company and its affiliates certain registration rights with respect to the shares of ESAB common stock owned by the Company. Upon the request of the Company or certain subsequent transferees as further defined in the agreement, ESAB will use its reasonable best efforts to effect the registration under applicable federal and state securities laws of any shares of ESAB common stock retained by the Company. Under the agreement, the Company has agreed to vote any shares of ESAB common stock retained by it immediately after the Separation in proportion to the votes cast by ESAB’s other stockholders. Intellectual Property Matters Agreement The intellectual property matters agreement sets forth the terms and conditions pursuant to which, among other things, the Company and ESAB have granted each other a non-exclusive, royalty-free, fully paid-up, irrevocable, sublicenseable (subject to certain limitations) and worldwide license to use certain intellectual property rights retained by the other party. The term of the intellectual property matters agreement is perpetual . 24