What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-04 compared with 2022-11-02 · 185 added, 336 removed, 164 unchanged (76% 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 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.

“Financial Statements” of this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2023 (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, 2022 (the “2022 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2023.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements contained in this Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”).

We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Form 10-Q is filed with the Securities and Exchange Commission (the “SEC”).

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

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

the anticipated benefits of the Separation;

the expected financial and operating performance of, and future opportunities for, each company following the Separation;

the impact of the COVID-19 global pandemic, including the rise, prevalence and severity of variants of the virus, the actions by governments, businesses and individuals in response to the situation, on the global and regional economies, financial markets, and overall demand for our products;

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Form 10-Q is filed with the SEC.

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

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

the expected financial and operating performance of, and future opportunities for, the Company following the Separation;

the impact of the COVID-19 global pandemic;

projections of revenue, profit margins, expenses, tax provisions and tax rates, earnings or losses from operations, impact of foreign exchange rates, cash flows, synergies or other financial items;

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and any other statements that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future.

Forward-looking statements may be characterized by terminology such as “believe,” “anticipate,” “should,” “would,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy,” “targets,” “aims,” “seeks,” “sees,” and similar expressions.

Forward-looking statements may be characterized by terminology such as “believe,” “anticipate,” “should,” “would,” “could,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy,” “targets,” “aims,” “seeks,” “sees,” and similar expressions.

These statements are based on assumptions and assessments made by our management as of the filing of this Form 10-Q in light of their experience and perception of historical trends, current conditions, expected future developments and other factors we believe to be appropriate.

These forward-looking statements are subject to a number of risks and uncertainties and actual results could differ materially due to numerous factors, including but not limited to the following:

• risks related to the impact of the COVID-19 global pandemic, including the rise, prevalence and severity of variants of the virus, actions by governments, businesses and individuals in response to the situation, such as the scope and duration of the outbreak, the nature and effectiveness of government actions and restrictive measures implemented in response, delays and cancellations of medical procedures, supply chain disruptions, the impact on creditworthiness and financial viability of customers, and other impacts on the Company’s business and ability to execute business continuity plans;

• 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 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, the cost and availability of power in Europe, part, component, freight and delivery costs;

• an inability to identify, finance, acquire and successfully integrate attractive acquisition targets;

• the availability of additional capital and our inability to pursue our growth strategy without it;

• our indebtedness and our debt agreements, which contain restrictions that may limit our flexibility in operating our business;

• our restructuring activities, which may subject us to additional uncertainty in our operating results;

• any impairment in the value of our intangible assets, including goodwill;

• a material disruption at any of our manufacturing facilities;

• any failure to maintain, protect and defend our intellectual property rights;

• the effects of the COVID-19 global pandemic;

• significant movements in foreign currency exchange rates;

• our ability to identify, finance, acquire and successfully integrate attractive acquisition targets;

• our exposure to unanticipated liabilities resulting from acquisitions;

• our ability and the ability of our customers to access required capital at a reasonable cost;

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

• 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;

• noncompliance with various laws and regulations associated with our international operations, including anti-bribery laws, export control regulations and sanctions and embargoes;

• risks associated with our international operations, including risks from trade protection measures and other changes in trade relations;

• risks associated with the representation of our employees by trade unions and work councils;

• the availability of raw materials, as well as parts and components used in our products, as well as the impact of raw material, energy and labor price fluctuations and supply shortages;

• the competitive environment in which we operate;

• our reliance on a variety of distribution methods to market and sell our medical device products;

• extensive government regulation and oversight of our products;

• safety issues or recalls of our products;

• failure to comply with federal and state regulations related to the manufacture of our products;

• improper marketing or promotion of our products;

• risks associated with the clinical trial process;

• failure to comply with governmental regulations for products for which we obtain clearance or approval;

• our exposure to product liability claims;

• potential costs and liabilities associated with environmental, health and safety laws and regulations;

• failure to maintain, protect and defend our intellectual property rights;

• the loss of key members of our leadership team, or the inability to attract, develop, engage, and retain qualified employees;

• restrictions in our principal credit facility that may limit our flexibility in operating our business;

• impairment in the value of intangible assets;

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

• our inability to obtain coverage and adequate levels of reimbursement from third party payors for our medical device products;

• audits or denials of claims by government officials;

• federal and state health reform and cost control efforts;

• our failure or the failure of our employees or third parties with which we have relationships to comply with healthcare laws and regulations;

• our relationships with leading surgeons and our ability to comply with enhanced disclosure requirements regarding payments to physicians;

• actual or perceived failures to comply with applicable data protection, privacy and security laws, regulations, standards and other requirements;

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

• risks arising from changes in technology;

• the competitive environment in our industry;

• changes in our tax rates, realizability of deferred tax assets, or exposure to additional income tax liabilities;

• our ability to manage and grow our business and execution of our business and growth strategies;

• our financial performance;

• difficulties and delays in integrating or fully realizing projected cost savings and benefits of our acquisitions;

• noncompliance with anti-bribery laws, export control regulations, economic sanctions or other trade laws;

• our inability to achieve some or all of the expected benefits of the Separation;

• if the Separation and/or certain related transactions do not qualify as transactions that are generally tax-free for U.S.

federal income tax purposes, we and our stockholders could be subject to significant tax liabilities;

• potential indemnification liabilities to ESAB pursuant to the Separation and distribution agreement and other related agreements

• changes in the general economy;

• disruptions in the global economy caused by the ongoing conflict between Russia and Ukraine;

• the loss of key members of our leadership team, or the inability to attract, develop, engage, and retain qualified employees;

• other risks and factors listed in Item 1A.

“Risk Factors” in Part I of our 2021 Form 10-K and Part II.

“Risk Factors” in our Form 10-Q for the quarter ended April 1, 2022.

The effects of the COVID-19 pandemic, including the rise, prevalence and severity of variants of the virus and actions by governments, businesses and individuals in response to the situation, as well as inflationary pressures and the ongoing conflict between Russia and Ukraine, may give rise or contribute to or amplify the risks associated with many of these factors.

“Risk Factors” in Part I of our 2022 Form 10-K.

Any such forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ materially from those envisaged by such forward-looking statements.

These forward-looking statements speak only as of the date this Form 10-Q is filed with the SEC.

We do not assume any obligation and do not intend to update any forward-looking statement, except as required by law.

“Risk Factors” in our 2021 Form 10-K and Part II.

“Risk Factors” in our Form 10-Q for the quarter ended April 1, 2022 for a further discussion regarding some of the reasons that actual results may be materially different from those that we anticipate.

“Risk Factors” in our 2022 Form 10-K for a further discussion regarding some of the reasons that actual results may be materially different from those that we anticipate.

Please see Part I, Item 1.

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These businesses operated in distinct markets, with unique business opportunities and investment requirements.

Following the spin-off, the Company holds only the medical technology business reported through our Prevention and Recovery and Reconstructive segments.

On April 4, 2022, the Company changed its name from “Colfax Corporation” to “Enovis Corporation”, began operating its business as “Enovis” and, as of April 5, 2022, the Company’s common stock began trading under the new ticker symbol “ENOV.” See the Results of Operations section below for further information on the Separation.

Following the Separation, the Company holds only the medical technology business reported through our Prevention & Recovery and Reconstructive segments.

See the Results of Operations section below for further information on the Separation.

As mentioned above, beginning in the second quarter of 2022, Enovis conducts its operations through two operating segments:

Prevention and Recovery and Reconstructive.

Prevention & Recovery and Reconstructive.

We have reflected this change in all historical periods presented.

• Prevention and Recovery - a leader in orthopedic solutions, 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.

• Prevention & Recovery - a leader in orthopedic solutions, 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 market-leader positioned in the fast-growing surgical implant business, offering a comprehensive suite of reconstructive joint products for the hip, knee, shoulder, elbow, foot, ankle, and finger and surgical productivity tools.

We have a global footprint, with production facilities in North America, Europe, North Africa, and Asia.

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Our management evaluates the operating results of each of its reportable segments based upon Net sales and Adjusted EBITDA, as defined in the “Non-GAAP Measures” section.

Items Affecting Comparability of Reported Results

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:

Items Affecting Comparability of Reported Results and Other Recent Developments

The comparability of our operating results for the three months ended March 31, 2023 to the comparable period in 2022 is affected by the following significant items:

The Separation

On April 4, 2022 (the “Distribution Date”), we completed the Separation through a tax-free, pro-rata distribution of 90% of the outstanding common stock of ESAB to our stockholders.

We retained 10% of the shares of ESAB common stock immediately following the Separation.

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 nine months ended September 30, 2022 and October 1, 2021.

We expect that the Separation will allow each company to:

(1) optimize capital allocation for internal investment, mergers and acquisitions, and return of capital to shareholders;

(2) tailor investment to its specific business profile and strategic priorities in the most efficient manner possible;

(3) increase operating flexibility and resources to capitalize on growth opportunities in its respective markets;

and (4) improve both investor alignment with its clear value proposition and the ability for investors to value it based on its distinct strategic, operational and financial characteristics.

The Separation also provides each company with an appropriately valued acquisition currency that could be used for larger, transformational transactions.

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

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 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.

Given the potential dynamic nature of this situation, including the rise, prevalence and severity of variants of the virus, we cannot reasonably estimate the full impacts of COVID-19 on our financial condition, results of operations or cash flows in the future.

COVID-19 and other market dynamics have caused widespread supply chain challenges due to labor, raw material, and component shortages.

As a result, we continue to experience supply constraints in our businesses, which have led to cost inflation and logistics delays.

We are taking actions in an effort to mitigate impacts to our supply chain, including purchasing and producing additional inventory to protect our ability to meet customer demand;

however, we expect these pressures to continue.

Please see Part I.

“Risk Factors” in our 2021 Form 10-K for a further discussion of some of the risks related to the COVID-19 pandemic.

On April 4, 2022, we completed the Separation of our fabrication technology business through a tax-free, pro-rata distribution of 90% of the outstanding common stock of ESAB to our stockholders.

On November 18, 2022, we subsequently disposed of the retained 10% stake in the shares of ESAB common stock through a debt-for-equity exchange with a lender under our Enovis Credit Agreement.

Once the Separation was completed in the second quarter of 2022, we began classifying the results from the fabrication technology business for the comparable periods presented as a discontinued operation in our financial statements.

Accordingly, the results of our fabrication technology businesses have been recast as a discontinued operation in the accompanying financial statements for the three months ended April 1, 2022.

Strategic Acquisitions

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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 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;

MedShape, Inc., a provider of innovative surgical solutions for foot and ankle surgeons;

and Mathys AG Bettlach, a Switzerland-based company that develops and distributes innovative products for artificial joint replacement, synthetic bone graft solutions and sports medicine.

The change in Net sales due to acquisitions for the three months ended March 31, 2023 presented in this filing represents the incremental sales subsequent to the beginning of the prior year period.

During the year ended December 31, 2022, the Company completed two business acquisitions for aggregate net cash consideration of $50.5 million.

In the second quarter of 2022, the Company acquired KICo Knee Innovation Company Pty Limited and subsidiaries, an Australian private company doing business as 360 Med Care, which is a 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.

In the third quarter of 2022, the Company acquired a controlling interest in Insight Medical Systems, the flagship product of which is the ARVIS surgical navigation system.

Additionally, during the three months ended April 1, 2022, we completed two asset acquisitions in our Prevention & Recovery segment for net cash consideration of $3.7 million.

On March 31, 2023, the Company also entered into a definitive agreement with Amplitude Surgical SA to acquire Novastep®, a leading player in Minimally Invasive Surgery (MIS) foot and ankle solutions for cash considerations of 90 million Euros.

The transaction is subject to customary closing conditions and regulatory approvals and is expected to close in the second quarter of 2023.

Foreign Currency Fluctuations

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.

During the three months ended March 31, 2023, approximately 33% of our sales are derived from operations outside the U.S., the majority of which is in Europe, with the remaining portion mostly in the Asia-Pacific region.

Accordingly, we can be affected by market demand, economic and political factors in countries in Europe and the Asia-Pacific region, and significant movements in foreign exchange rates.

Our ability to grow and our financial performance will be affected by our ability to address challenges and opportunities that are a consequence of expanding our global operations through our recent acquisitions, including efficiently utilizing our international sales channels, manufacturing and distribution capabilities, participating in the expansion of market opportunities, successfully completing global acquisitions and engineering innovative new product applications to create better patient outcomes.

The majority of our Net sales derived from operations outside the U.S.

are denominated in currencies other than the U.S.

Similar portions of our manufacturing and employee costs are also outside the U.S.

and denominated in currencies other than the U.S.

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

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.

For the three months ended March 31, 2023 compared to the three months ended April 1, 2022, fluctuations in foreign currencies decreased Net sales by 1.5%, decreased Gross profit by approximately 1.9% and decreased operating expenses by approximately 1%.

Sales in our Prevention & Recovery and Reconstructive segments typically peak in the fourth quarter.

General economic conditions and other factors may, however, impact future seasonal variations.

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 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 excludes from Net income (loss) from continuing operations the effect of income tax expense (benefit), Other income, non-operating (gain) loss on investments, debt extinguishment charges, interest expense, net, restructuring and other charges, Medical Device Regulation (MDR) fees and other costs, strategic transaction costs, stock-based compensation, depreciation and other amortization, acquisition-related intangible asset amortization, and fair value charges on acquired inventory.

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

Operating income (loss), adjusted EBITDA and adjusted EBITDA margins at the operating segment level also include allocations of certain central function expenses not directly attributable to either operating segment.

Adjusted EBITDA assists Enovis management in comparing its operating performance over time because certain items may obscure underlying business trends and make comparisons of long-term performance difficult, as they are of a nature and/or size that occur with inconsistent frequency or relate to discrete restructuring plans and other initiatives that are fundamentally different from our ongoing productivity improvements.

Enovis management also believes that presenting these measures allows investors to view its performance using the same measures that we use in evaluating our financial and business performance and trends.

Adjusted EBITDA assists our management in comparing operating performance over time because certain items may obscure underlying business trends and make comparisons of long-term performance difficult, as they are of a nature and/or size that occur with inconsistent frequency or relate to discrete restructuring plans and other initiatives that are fundamentally different from our ongoing productivity improvements.

Our management also believes that presenting these measures allows investors to view our performance using the same measures that we use in evaluating our financial and business performance and trends.

Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information calculated in accordance with GAAP.

Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures.

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

Three Months Ended Nine Months Ended

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

The following tables set forth a reconciliation of net loss from continuing operations, the most directly comparable financial statement measure, to Adjusted EBITDA, for the three months ended March 31, 2023 and April 1, 2022.

Three Months Ended March 31, 2023

Prevention & Recovery Reconstructive Total

(Dollars in millions)

Net loss from continuing operations (GAAP) (1)

Income tax benefit (7.1)

Other income (0.7)

Interest expense, net 5.7

Operating loss (GAAP) $ (18.1) $ (6.8) (25.0)

Operating loss margin (7.2) % (4.4) % (6.1) %

Adjusted to add (deduct):

Restructuring and other charges (2)

3.0 2.2 8.5 5.2

MDR and other costs (3)

3.6 1.9 10.6 5.6

Strategic transaction costs (3)

8.1 11.4 32.5 15.8

Stock-based compensation (3)

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Amortization of acquired intangibles 23.3 8.8 32.0

Insurance settlement (gain) loss (4)

1.0 — (32.1) —

Inventory step-up — 0.1 0.1

Adjusted EBITDA (non-GAAP) $ 25.7 $ 30.7 $ 56.4

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

Adjusted EBITDA margin (non-GAAP) 10.3 % 19.8 % 13.9 %

(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.

These costs are classified as Selling, general and administrative expense on our Condensed Consolidated Statements of Operations.

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

(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

(1) Non-operating components of Net loss from continuing operations are not allocated to the segments.

(2) Restructuring and other charges includes $0.3 million of expense classified as Cost of sales on our Condensed Consolidated Statements of Operations.

(3) Certain amounts are allocated to the segments as a percentage of revenue as the costs are not discrete to either segment.

Three Months Ended April 1, 2022

Prevention & Recovery Reconstructive Total

(Dollars in millions)

Net loss from continuing operations (GAAP) (1)

Income tax expense 0.4

Interest expense, net 7.1

Operating loss (GAAP) $ (14.4) $ (16.2) (30.6)

Adjusted to add (deduct):

Restructuring and other charges (1)

1.3 1.7 3.0 4.7 3.8 8.5

MDR and other costs (2)

2.4 1.2 3.6 7.1 3.6 10.6

Strategic transaction costs (2)

5.4 2.7 8.1 21.6 11.0 32.5

Stock-based compensation (2)

4.8 2.4 7.2 14.4 7.3 21.7

Depreciation and other amortization 5.5 12.6 18.2 17.7 38.4 56.1

Amortization of acquired intangibles 19.8 12.2 32.0 58.4 36.3 94.6

Insurance settlement (gain) loss (2)

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

Inventory step-up — 2.1 2.1 — 12.0 12.0

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

Operating loss margin (5.9) % (12.4) % (8.2) %

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 October 1, 2021 Nine Months Ended October 1, 2021

Prevention and Recovery Reconstructive Total Prevention and Recovery Reconstructive Total

(Dollars in millions)

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

Adjusted to add (deduct):

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MDR and other costs (3)

1.4 0.5 1.9 4.1 1.4 5.6

Strategic transaction costs (3)

7.3 4.0 11.4 10.7 5.1 15.8

Stock-based compensation (3)

3.9 2.3 6.3 13.5 5.5 19.0

Depreciation and other amortization 5.8 12.7 18.5

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Adjusted EBITDA (non-GAAP) $ 26.4 $ 21.4 $ 47.7

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

Adjusted EBITDA margin (non-GAAP) 10.8 % 16.4 % 12.7 %

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

(1) Non-operating components of Net loss from continuing operations are not allocated to the segments.

(2) Restructuring and other charges includes $0.5 million of expense classified as Cost of sales on our Condensed Consolidated Statements of Operations.

(3) Certain amounts are allocated to the segments as a percentage of revenue as the costs are not discrete to either segment.

Total Company

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

Net sales for the three months ended March 31, 2023 increased from the three months ended April 1, 2022.

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

Three Months Ended Nine Months Ended

Net Sales Change % Net Sales Change %

Three Months Ended

Net Sales Change %

(Dollars in millions)

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

For the three months ended April 1, 2022 $ 375.5

Components of Change:

Existing Businesses (1)

25.1 7.0 % 58.8 5.7 %

Acquisitions (2)

9.0 2.5 % 92.0 9.0 %

Foreign Currency Translation (3)

(5.6) (1.5) %

23.8 6.6 % 127.2 12.4 %

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

For the three months ended March 31, 2023 $ 406.2

(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 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 increase in Net sales during the three months ended March 31, 2023 compared to the prior year period was primarily attributable to an increase in sales from existing businesses across both of our segments, partially offset by foreign currency headwinds.

Existing business sales in our Reconstructive segment increased $25.1 million during the three months ended March 31, 2023 due to higher sales volumes compared to the prior year period, driven by broad market strength and market outperformance.

Existing business sales in our Prevention & Recovery segment increased $10.1 million during the three months ended March 31, 2023 due to volume and inflation-related pricing increases.

Net sales from acquisitions increased in the three months ended March 31, 2023 due to the 360 Med Care acquisition in our Reconstructive segment in May 2022.

The strengthening of the U.S.

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.

dollar relative to other currencies resulted in $5.6 million unfavorable foreign currency translation impacts during the three months ended March 31, 2023.

Operating Results

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

Three Months Ended Nine Months Ended

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

Three Months Ended

March 31, 2023 April 1, 2022

(Dollars in millions)

5 unchanged sentences

Operating loss margin (6.1) % (8.2) %

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

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

Net loss from continuing operations $ (22.8) $ (38.1)

Net loss from continuing operations margin (GAAP) (5.6) % (10.1) %

Adjusted EBITDA (non-GAAP) $ 56.4 $ 47.7

2 unchanged sentences

Restructuring and other related charges (1)

$ 3.0 $ 2.2 $ 8.5 $ 5.2

MDR and other costs $ 7.8 $ 2.6

3 unchanged sentences

Amortization of acquired intangibles $ 32.0 $ 30.8

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

Inventory step-up $ 0.1 $ 5.1

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 $ 5.7 $ 7.1

Debt extinguishment charges $ — $ — $ 20.1 $ 29.9

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

Other income $ (0.7) $ —

(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 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.

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.

Income tax expense (benefit) $ (7.1) $ 0.4

(1) Restructuring and other charges includes $0.3 million and $0.5 million of expense classified as Cost of sales on our Condensed Consolidated Statements of Operations for the three months ended March 31, 2023 and April 1, 2022, respectively.

Three Months Ended March 31, 2023 Compared to Three Months Ended April 1, 2022

Gross profit increased in the three months ended March 31, 2023 compared with the prior year period due to a $24.7 million increase in our Reconstructive segment and a $4.4 million increase in our Prevention & Recovery segment.

The Gross profit increase was attributable to increased sales in our existing businesses from volume and inflation-related pricing increases, improved operating cost leverage, and the benefit of a decrease of $5.0 million in inventory fair value step-up amortization charges, partially offset by unfavorable foreign currency translation and inflation in supply chain, logistics, and other costs.

Gross profit margin increased due to the aforementioned factors.

Selling, general and administrative expense increased $18.7 million in the three months ended March 31, 2023 compared to the prior year period, primarily due to increased commissions driven by higher sales, investments to support growth, spending on MDR and other costs, and cost inflation, partially offset by cost reduction initiatives.

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, which are investing in surgical productivity solutions and computer-assisted surgery technologies.

Amortization of acquired intangibles and Depreciation and other amortization also increased compared to the prior year period due to business acquisitions.

Interest expense, net decreased in the three months ended March 31, 2023 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 and the partial extinguishment of the outstanding balance of the Enovis Term Loan (as defined below) in November 2022.

The effective tax rate for Net loss from continuing operations during the three months ended March 31, 2023 was 23.7%, which differed from the 2023 U.S.

federal statutory tax rate of 21%, primarily due to non-U.S.

income taxed at lower rates, release of valuation allowance on non-U.S attributes, and tax credits for research and development offset by other non-deductible expenses and U.S.

taxation on international operations.

The effective tax rate for the three months ended April 1, 2022 was (1.0)%, which was lower than the 2022 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 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.

Net loss from continuing operations decreased in the three months ended March 31, 2023 compared with the prior year period, primarily due to the aforementioned Gross profit increase and an income tax benefit, offset by the aforementioned Selling, general and administrative expense increase.

Net loss margin from continuing operations decreased by 450 basis points due to the aforementioned factors.

Adjusted EBITDA increased due to organic growth.

Adjusted EBITDA margin excluding the effects of recent acquisitions and foreign currency pressures increased by approximately 200 basis points.

Our recent acquisitions in our Reconstructive segment, which were dilutive to the net loss margin from continuing operations and to Adjusted EBITDA margin by approximately 40 basis points, are expected to be accretive to margins in future years.

Business Segments

Following the completion of the Separation, we revised our reporting structure and conduct our business through two operating segments, “Prevention and Recovery”, which consists of our orthopedic and rehabilitation business, and “Reconstructive”, which includes our surgical business.

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, as well as digital and workflow solution offerings that enhance our products and the continuum of care path.

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.

As discussed further above, we report results in two reportable segments:

Prevention & Recovery and Reconstructive.

Operating loss, adjusted EBITDA, and adjusted EBITDA margins at the operating segment level also include allocations of certain central function expenses not directly attributable to either operating segment.

“Non-GAAP Measures” for a further discussion and reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures.

Prevention & 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 & Recovery products are marketed under several brand names, most notably DJO, 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.

Many of our medical devices and related accessories are used by athletes and other patients for injury prevention and at-home physical therapy treatments.

We reach a diverse customer base through multiple distribution channels, including independent distributors, direct salespeople, and directly to patients.

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

Three Months Ended Nine Months Ended

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

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

Three Months Ended

March 31, 2023 April 1, 2022

(Dollars in millions)

4 unchanged sentences

Research and development expense $ 8.5 $ 8.3

Operating income (loss) (GAAP) $ (0.4) $ 1.5 $ (1.4) $ (12.1)

Operating loss (GAAP) $ (18.1) $ (14.4)

Operating loss margin (GAAP) (7.2) % (5.9) %

Adjusted EBITDA (non-GAAP) $ 25.7 $ 26.4

Adjusted EBITDA margin (non-GAAP) 10.3 % 10.8 %

Items excluded from Adjusted EBITDA:

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

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

Strategic transaction costs $ 5.4 $ 7.3 $ 21.6 $ 10.7

Stock-based compensation $ 4.8 $ 3.9 $ 14.4 $ 13.5

Depreciation and other amortization $ 5.5 $ 6.6 $ 17.7 $ 18.8

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

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

Inventory step up $ — $ — $ — $ 0.7

(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.

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 inflation of supply chain, logistics, and other costs.

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.

Three Months Ended March 31, 2023 Compared to Three Months Ended April 1, 2022

Net sales in our Prevention & Recovery se gment increased $5.9 million, or 2.4%, in the first quarter ended March 31, 2023 compared with the prior year period, driven by a 4.1% or $10.1 million increase from volume and inflation-related pricing increases, offset by foreign currency headwinds.

Gross profit increa sed $4.4 million due to inflation-related pricing increases and improved sales mix in our existing businesses, partially offset by the effect of unfavorable foreign currency impacts in a primary production facility.

Gross profit margin increased 60 basis points due to the aforementioned factors.

Selling, general and administrative expense increased over the same period primarily due to investments to support growth, spending on MDR and other costs, and cost inflation, partially offset by cost reduction initiatives.

Research and development expense increased slightly due to timing of certain initiatives.

Operating loss increased due to higher acquisition amortization, higher selling, general and administrative expenses and inflation of supply chain, logistics, and other costs, offset by improved sales mix in our existing businesses .

Adjusted EBITDA and Adjusted EBITDA margin decreased due to higher costs caused by unfavorable foreign currency impacts and inflation-related pricing increases which partially offset by improved Gross profit margin due to improved sales mix.

Reconstructive

We develop, manufacture, and market a wide variety of knee, hip, shoulder, elbow, foot, ankle, and finger implant products that serve the orthopedic reconstructive joint implant market.

Our products are primarily used by surgeons for surgical procedures, including in hospitals and ambulatory surgery centers.

We develop, manufacture, and market a wide variety of knee, hip, shoulder, elbow, foot, ankle, and finger implant products and surgical productivity solutions that serve the orthopedic reconstructive joint implant market.

Our products are primarily used by surgeons for surgical procedures.

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

Three Months Ended Nine Months Ended

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

Three Months Ended

March 31, 2023 April 1, 2022

(Dollars in millions)

5 unchanged sentences

Operating loss (GAAP) $ (6.8) $ (16.2)

Operating loss margin (GAAP) (4.4) % (12.4) %

Adjusted EBITDA (non-GAAP) $ 30.7 $ 21.4

Adjusted EBITDA margin (non-GAAP) 19.8 % 16.4 %

Items excluded from Adjusted EBITDA:

Restructuring and other related charges $ 1.7 $ 0.5 $ 3.8 $ 1.5

MDR and other costs $ 1.2 $ 0.5 $ 3.6 $ 1.4

Strategic transaction costs $ 2.7 $ 4.0 $ 11.0 $ 5.1

Stock-based compensation $ 2.4 $ 2.3 $ 7.3 $ 5.5

Depreciation and other amortization $ 12.6 $ 11.8 $ 38.4 $ 32.8

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

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

Inventory step up $ 2.1 $ 1.4 $ 12.0 $ 3.0

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.

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 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.

Three Months Ended March 31, 2023 Compared to Three Months Ended April 1, 2022

Net sal es increased in our Reconstructive segment by $24.8 million, or 19.0%, in the first quarter ended March 31, 2023 compared with the prior year period, primarily due to higher sales volumes driven by broad market strength and market outperformance.

Gro ss profit increased in the first quarter ended March 31, 2023 compared to the first quarter ended April 1, 2022, primarily due to increased sales in our existing businesses and improved operating cost leverage, which also led to an increase in Gross profit margin.

Selling, general and administrative expense increased over the same period primarily due to increased commissions driven by higher sales, investments to support growth, spending on MDR and other costs, and cost inflation, partially offset by cost reduction initiatives.

Research and development expense increased compared to the prior year period, primarily due to increased spend within recently acquired businesses in our Reconstructive segment, which are investing in surgical productivity solutions and computer-assisted surgery technologies.

Operating loss decreased in the first quarter ended March 31, 2023 compared to the first quarter ended April 1, 2022, primarily due to the aforementioned Gross profit increase and a reduction of acquisition amortization, offset by the aforementioned Selling, general and administrative expense increase.

Adjusted EBITDA increased primarily due to growth in existing businesses and improved operating cost leverage.

Without the impact of recent acquisitions, Adjusted EBITDA margins increased 450 basis points compared to prior year.

Recent acquisitions were dilutive to the margin by approximately 100 basis points, but are expected to be accretive to margins in future years.

1 unchanged sentence

We finance our long-term capital and working capital requirements through a combination of cash flows from operating activities, various borrowings, and the issuances of equity.

We expect that our primary ongoing requirements for cash after the Separation will be for working capital, funding of acquisitions, near-term Separation costs, capital expenditures, restructuring, and debt service and principal repayments.

We expect that our primary ongoing requirements for cash will be for working capital, funding of acquisitions, capital expenditures, restructuring and other non-routine cots, and interest and principal repayments on amounts drawn on our revolving credit facility.

We believe we could raise additional funds in the form of debt or equity if it were determined to be appropriate for strategic acquisitions or other corporate purposes.

ESAB Separation

As discussed in Note 1, “General”, the Company completed the separation of its fabrication technology business on April 4, 2022 through a tax-free, pro-rata distribution of 90% of the outstanding common stock of ESAB to the Company’s stockholders.

We retained 10% of the shares of ESAB common stock immediately following the Separation.

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

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 us upon Separation.

We used the distribution proceeds in conjunction with $450 million of borrowings on a term loan under the new credit facility, and $52.3 million of cash on hand to repay $1.4 billion of outstanding debt and accrued interest on our existing credit facility, $302.8 million of outstanding debt and accrued interest on our senior notes due February 15, 2026 (“2026 Notes”), as well as a redemption premium at 103.188% of the principal amount of our 2026 Notes, and other fees and expenses due at closing.

Additionally, on April 7, 2022, we completed the redemption of our senior unsecured notes due April 2025 (“Euro Senior Notes”) representing all of our outstanding €350 million principal 3.250% Senior Notes due 2025 at a redemption price of 100.813% of the principal amount and accrued interest for $391.2 million.

See section Enovis Term Loan and Revolving Credit Facility for more detail on the new Enovis Credit Agreement.

In the second quarter of 2022, the Company recorded Debt extinguishment charges of $20.1 million, including $12.7 million of redemption premiums on the retired debt instruments and $7.4 million in noncash write-offs of original issue discount and deferred financing fees.

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

Equity Capital

On March 19, 2021, we completed an underwritten public offering of 5.4 million shares of our Common stock, as adjusted for the reverse split, resulting in net proceeds of $711.3 million , after deducting offering expenses and underwriters’ discount and commissions.

We used the proceeds to pay down certain of our senior notes.

On July 28, 2021, the Company issued 2.2 million shares of Common stock, as adjusted for the reverse split, to the former shareholders of Mathys for acquisition consideration of $285.7 million.

In 2018, our Board of Directors authorized the repurchase of our common stock from time-to-time on the open market or in privately negotiated transactions.

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

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

As of March 31, 2023, 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.

1 unchanged sentence

Term Loan and Revolving Credit Facility

Our previous credit agreement dated December 17, 2018, as amended (the “Colfax Credit Facility”) consisted of a $975 million revolving credit facility (the “Revolver”) and a Term A-1 loan in an initial aggregate principal amount of $825 million, each with a maturity date of December 6, 2024.

The Revolver contained a $50 million swing line loan sub-facility.

On April 4, 2022, the Company entered into a new credit agreement (the “Enovis Credit Agreement”) which replaces the Colfax Credit Facility and concurrently terminated all indebtedness of the Company outstanding thereunder being repaid on such date with proceeds of the Enovis Credit Agreement and other funds of the Company.

The Enovis Credit Agreement consists of a revolving credit facility that totals $900 million in commitments (the “Revolver”) and a term loan in an aggregate amount of $450 million (the “Enovis Term Loan”, and together with the Revolver, the “Enovis Credit Facility”).

The Revolver includes a $50 million swing line loan sub-facility.

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

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.

The Revolver bears interest, at the election of the Company, at either the base rate or, in the case of loans denominated in dollars, the term SOFR rate plus an adjustment or the daily simple SOFR plus an adjustment, in the case of loans denominated in euros, the adjusted EURIBOR rate and, in the case of loans denominated in sterling, SONIA plus an adjustment (as all such rates are defined in the Enovis Credit Agreement), in each case, plus the applicable interest rate margin.

Initially, the applicable interest rate margin will be 1.5% or, in the case of base rate loans, 0.5%, and in future quarters it may change based upon the Company’s total leverage ratio (ranging from 1.125% to 1.750% or in the case of the base rate margin, 0.125% to 0.750%).

Each swing line loan denominated in dollars bears interest at the base rate plus the

applicable interest rate margin.

subsidiaries of the Company have agreed to guarantee the obligations of the Company under the Enovis Credit

On April 4, 2022, we entered into a new credit agreement (the “Enovis Credit Agreement”), consisting 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.

subsidiaries of the Company guarantee the obligations under the Enovis Credit Agreement.

On November 18, 2022, the Company completed an exchange with a lender under the Enovis Credit Agreement of 6,003,431 shares of common stock of ESAB, representing all of the retained shares in ESAB following the Separation, for $230.5 million of the $450.0 million in Enovis Term Loan outstanding under the Enovis Credit Agreement, net of cost to sell.

The remaining balance on the Enovis Term Loan was extinguished on March 1, 2023, with proceeds from the Revolver.

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.

Euro Senior Notes

Our senior unsecured notes with an aggregate principal amount of €350 million were due in May 2025 and had an interest rate of 3.25%.

Upon the completion of the Separation, the Euro Senior Notes were redeemed on April 7, 2022 at a redemption premium of 100.813% of the principal amount.

TEU Amortizing Notes

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 $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%.

Upon the completion of the Separation, the 2026 Notes were redeemed on April 7, 2022 at a redemption premium at 103.188% of the principal amount.

In addition, the Enovis Credit Agreement contains financial covenants requiring the Company to maintain (i) a current maximum total leverage ratio of not more than 4.00:1.00, stepping down to 3.75:1.00 for the fiscal quarter ending June 30, 2023 and to 3.50:1.00 for the fiscal quarter ending June 30, 2024, and (ii) a minimum interest coverage ratio of 3.00:1:00.

Other Indebtedness

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 $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 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.

Total letters of credit and surety bonds of $7.1 million are outstanding as of March 31, 2023.

As of March 31, 2023, we had $21.9 million of Cash and cash equivalents, a decrease of $2.4 million from the balance as of December 31, 2022 of $24.3 million.

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

Nine Months Ended

September 30, 2022 October 1, 2021

Three Months Ended

March 31, 2023 April 1, 2022

(Dollars in millions)

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Net cash used in investing activities (34.4) (35.2)

Repayments of borrowings, net (1,630.2) (594.3)

Distribution from ESAB Corporation, net 1,143.4 —

Net borrowings (repayments) of debt 24.9 (7.4)

Proceeds from issuance of common stock, net 0.4 1.2

Payment of debt extinguishment costs (12.7) (24.4)

Deferred consideration payments and other (0.8) (4.6)

2 unchanged sentences

Increase (decrease) in Cash and cash equivalents $ (2.4) $ (57.9)

Cash flows from operating activities can fluctuate significantly from period-to-period due to changes in working capital and the timing of payments for items such as restructuring and strategic transaction costs such as Separation costs.

Changes in significant operating cash flow items are discussed below.

• Year-to-date 2022 cash used in operating activities of $19.9 million includes $136.0 million of outflows from working capital, primarily due to business growth and increases in inventory to insulate for supply chain volatility.

Results in the comparable prior year period include $69.0 million of outflows for working capital increases.

• 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 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 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 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

Cash provided by operating activities related to discontinued operations for the three months ended April 1, 2022 was $9.2 million.

Excluding the $9.2 million impact of discontinued operations, cash flows from operating activities increased $31.1 million year-over-year.

This increase is primarily due to a lower net loss from continuing operations of $15.2 million, a decrease in cash paid for interest of $8.6 million, and a lower decrease in accrued compensation and benefits.

Cash flows used in investing activities during the three months ended March 31, 2023 were $34.4 million compared to $35.2 million in the prior year period.

The amounts included in Purchases of property, plant and equipment and intangibles related to discontinued operations for the three months ended April 1, 2022 were $5.9 million.

The amounts included in Proceeds from sale of property, plant and equipment related to discontinued operations for the three months ended April 1, 2022 were $2.7 million.

Cash flows provided by financing activities during the three months ended March 31, 2023 include $24.9 million of net debt borrowings.

Cash flows used in financing activities for the three months ended April 1, 2022 include net debt repayments of $7.4 million and deferred consideration payments of $3.0 million.

Critical Accounting Policies and Estimates

The methods, estimates and judgments that we use in applying our critical accounting policies have a significant impact on our results of operations and financial position.

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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