What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-04 · 162 added, 94 removed, 255 unchanged (50% 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 March 31, 2023 (this “Form 10-Q”) and the Consolidated Financial Statements and related footnotes included in Part II.

“Financial Statements” of this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 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.

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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 impacts of the 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;

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“Business” in our 2022 Form 10-K for a discussion of the Company’s objectives and methodologies for delivering shareholder value.

We previously reported our operations through our Fabrication Technology and Medical Technology segments.

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

Following the Separation, the Company holds only the medical technology business reported through our Prevention & 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”.

Following the Separation, 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.

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

Enovis conducts its operations through two operating segments:

Prevention & Recovery and Reconstructive.

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Integral to our operations is our business management system, Enovis Growth Excellence (EGX).

EGX is our culture and includes our values and behaviors, a comprehensive set of tools, and repeatable, teachable processes that we use to drive continuous improvement and create superior value for our customers, shareholders, and associates.

EGX includes our values and behaviors, a comprehensive set of tools, and repeatable, teachable processes that we use to drive continuous improvement and create superior value for our customers, shareholders, and associates.

We believe that our management team’s access to, and experience in, the application of the EGX methodology is one of our primary competitive strengths.

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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, 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.

The comparability of our operating results for the three and six months ended June 30, 2023 to the comparable period in 2022 is affected by the following significant items:

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 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.

The change in Net sales due to acquisitions for the three and six months ended June 30, 2023 presented in this filing represents the incremental sales subsequent to the beginning of the prior year period.

During the second quarter of 2023, we completed one business acquisition in our Reconstructive segment.

On June 28, 2023, we acquired Novastep, a leading player in Minimally Invasive Surgery (MIS) foot and ankle solutions for total consideration of $97.9 million.

The company’s best-in-class MIS bunion system serves a rapidly growing portion of the global bunion segment.

In April 2023, the Company also entered into a definitive agreement to acquire the SEAL external fixation product line from D.N.E., LLC.

The transaction was closed on July 20, 2023 for a purchase price of $28 million.

During the first quarter of 2023, we also completed two asset acquisitions in our Prevention & Recovery segment for net cash consideration of $3.7 million.

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

In the second quarter of 2022, we 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, we acquired a controlling interest in Insight Medical Systems, whose flagship product is the ARVIS surgical navigation system.

Foreign Currency Fluctuations

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.

During the three and six months ended June 30, 2023, approximately 33% and 33% of our sales, respectively, 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.

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

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%.

For the three months ended June 30, 2023 compared to the three months ended July 1, 2022, fluctuations in foreign currencies increased Net sales by 0.3%, decreased Gross profit by approximately 0.3%, and increased operating expenses by approximately 0.4%.

Impact on gross profits is due to the Mexican peso currency impact on costs at one of our primary manufacturing facilities.

For the six months ended June 30, 2023 compared to the six months ended July 1, 2022, fluctuations in foreign currencies decreased Net sales by 0.6%, decreased Gross profit by approximately 1.1%, and decreased operating expenses by approximately 0.3%.

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

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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 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.

Adjusted EBITDA excludes from Net income (loss) from continuing operations the effect of income tax expense (benefit), Other (income) expense, net, 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, insurance settlement gain, 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.

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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 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

Three Months Ended

June 30, 2023 July 1, 2022

Prevention & Recovery Reconstructive Total Prevention & Recovery Reconstructive Total

(Dollars in millions)

Net loss from continuing operations (GAAP) (1)

Net income (loss) from continuing operations (GAAP) (1)

$ (14.6) $ 120.7

Income tax benefit (4.7) (4.2)

Other income (0.7)

Other expense, net 0.8 —

Unrealized gain on investment in ESAB Corporation — (135.5)

Debt extinguishment charges — 20.1

Interest expense, net 4.1 4.5

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

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

Operating income (loss) (GAAP) $ (4.4) $ (10.1) (14.5) $ 13.4 $ (7.9) 5.6

Operating income (loss) margin (1.6) % (6.5) % (3.4) % 5.1 % (6.0) % 1.4 %

Adjusted to add (deduct):

Restructuring and other charges (2)

2.0 1.8 3.8 1.3 1.3 2.6

MDR and other costs (3)

5.0 4.0 9.0 3.0 1.5 4.4

Strategic transaction costs (3)

1.8 3.7 5.4 8.5 4.2 12.7

Stock-based compensation (3)

5.8 3.0 8.9 5.2 2.6 7.8

Depreciation and other amortization 5.8 15.0 20.8 6.3 13.1 19.5

Amortization of acquired intangibles 23.4 8.9 32.2 19.5 12.3 31.8

Insurance settlement gain (3)

— — — (22.1) (11.0) (33.0)

Inventory step-up — — — — 4.9 4.9

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(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.

(2) Restructuring and other charges includes $— million and $0.3 million of expense classified as Cost of sales on our Condensed Consolidated Statements of Operations for the three months ended June 30, 2023 and July 1, 2022, respectively.

(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

Six Months Ended

June 30, 2023 July 1, 2022

Prevention & Recovery Reconstructive Total Prevention & Recovery Reconstructive Total

(Dollars in millions)

Net loss from continuing operations (GAAP) (1)

Income tax expense 0.4

Net income (loss) from continuing operations (GAAP) (1)

$ (37.5) $ 82.6

Income tax benefit (11.8) (3.8)

Other expense, net 0.1 —

Unrealized gain on investment in ESAB Corporation — (135.5)

Debt extinguishment charges — 20.1

Interest expense, net 9.7 11.6

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Restructuring and other charges (2)

3.3 3.4 6.7 3.4 2.1 5.5

MDR and other costs (3)

8.2 8.6 16.8 4.7 2.4 7.0

Strategic transaction costs (3)

8.0 9.1 17.1 16.1 8.3 24.4

Stock-based compensation (3)

9.9 5.9 15.8 9.6 4.9 14.5

Depreciation and other amortization 11.5 29.3 40.7 12.2 25.8 38.0

Amortization of acquired intangibles 46.7 17.6 64.3 38.6 24.1 62.6

Insurance settlement gain — — — (22.1) (11.0) (33.0)

Inventory step-up — 0.1 0.1 — 10.0 10.0

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(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.

(2) Restructuring and other charges includ es $0.3 million and $0.8 million of expense classified as Cost of sales on our Condensed Consolidated Statements of Operations for the six months ended June 30, 2023 and July 1, 2022, respectively.

(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 months ended March 31, 2023 increased from the three months ended April 1, 2022.

Net sales for the three and six months ended June 30, 2023 increased from the three and six months ended July 1, 2022.

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

Three Months Ended

Net Sales Change %

Three Months Ended Six Months Ended

Net Sales Change % Net Sales Change %

(Dollars in millions)

For the three months ended April 1, 2022 $ 375.5

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

Components of Change:

Existing Businesses (1)

31.4 7.9 % 66.6 8.6 %

Acquisitions (2)

0.9 0.2 % 2.1 0.3 %

Foreign Currency Translation (3)

1.1 0.3 % (4.5) (0.6) %

For the three months ended March 31, 2023 $ 406.2

33.4 8.4 % 64.1 8.3 %

For the three and six months ended June 30, 2023 $ 428.5 $ 834.7

(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 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 increase in Net sales during the three and six months ended June 30, 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 for the six months ended June 30, 2023.

Existing business sales in our Reconstructive segment increased $21.8 million and $46.9 million during the three and six months ended June 30, 2023, respectively, 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 $9.6 million and $19.7 million during the three and six months ended June 30, 2023, respectively, due to volume and inflation-related pricing increases.

Net sales from acquisitions increased in the three and six months ended June 30, 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 $5.6 million unfavorable foreign currency translation impacts during the three months ended March 31, 2023.

dollar relative to other currencies resulted in $4.5 million unfavorable foreign currency translation impacts during the six months ended June 30, 2023.

Operating Results

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

Three Months Ended

March 31, 2023 April 1, 2022

Three Months Ended Six Months Ended

June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022

(Dollars in millions)

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Research and development expense $ 18.9 $ 15.7 $ 37.1 $ 30.5

Operating loss $ (25.0) $ (30.6)

Operating loss margin (6.1) % (8.2) %

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

Operating income (loss) $ (14.5) $ 5.6 $ (39.5) $ (25.1)

Operating income (loss) margin (3.4) % 1.4 % (4.7) % (3.3) %

Net income (loss) from continuing operations $ (14.6) $ 120.7 $ (37.5) $ 82.6

Net loss from continuing operations margin (GAAP) (3.4) % 30.5 % (4.5) % 10.7 %

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Restructuring and other related charges (1)

$ 3.8 $ 2.6 $ 6.7 $ 5.5

MDR and other costs $ 9.0 $ 4.4 $ 16.8 $ 7.0

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Amortization of acquired intangibles $ 32.2 $ 31.8 $ 64.3 $ 62.6

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

Inventory step-up $ — $ 4.9 $ 0.1 $ 10.0

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

Interest expense, net $ 4.1 $ 4.5 $ 9.7 $ 11.6

Debt extinguishment charges $ — $ 20.1 $ — $ 20.1

Other income $ 0.8 $ — $ 0.1 $ —

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.

Income tax benefit $ (4.7) $ (4.2) $ (11.8) $ (3.8)

(1) Restructuring and other charges in cludes $— million and $0.3 million of expense classified as Cost of sales on the Company’s Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2023, respectively.

Restructuring and other charges in cludes $0.3 million and $0.8 million of expense classified as Cost of sales on the Company’s Condensed Consolidated Statements of Operations for the three and six months ended July 1, 2022, respectively.

Three Months Ended June 30, 2023 Compared to Three Months Ended July 1, 2022

Gross profit increased in the three months ended June 30, 2023 compared with the prior year period due to a $24.0 million increase in our Reconstructive segment and a $8.5 million increase in our Prevention & Recovery segment.

Gross profit margin increased due to the aforementioned factors.

Selling, general and administrative expense increased $14.2 million in the three months ended June 30, 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 is 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 June 30, 2023 compared to the prior year period due to a reduction in debt balances as a result of the extinguishment of the outstanding balance of the Enovis Term Loan and interest savings from the lower interest rates on the Swiss Franc cross-currency swap agreements.

The effective tax rate for Net loss from continuing operations during the three months ended June 30, 2023 was 24.4%, 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, tax credits for research and development, and release of uncertain tax positions.

This was offset by other non-deductible expenses and U.S.

taxation on international operations.

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

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

Net loss from continuing operations increased in the three months ended June 30, 2023 compared with the prior year period, primarily due to the one-time income items in the prior year period, including the Unrealized gain on investment in ESAB Corporation and Insurance settlement gain, partially offset by the reduction of debt extinguishment and the aforementioned Gross profit and Selling, general, and administrative increases.

Net loss margin from continuing operations increased by 3390 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 160 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 10 basis points, are expected to be accretive to margins in future years.

Six Months Ended June 30, 2023 Compared to Six Months Ended July 1, 2022

Gross profit increased in the six months ended June 30, 2023 compared with the prior year period due to a $48.7 million increase in our Reconstructive segment and a $13.0 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 $9.8 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.

Selling, general and administrative expense increased $32.9 million in the six months ended June 30, 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 a reduction of strategic transaction costs and 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.

Interest expense, net decreased in the six months ended June 30, 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, the extinguishment of the outstanding balance of the Enovis Term Loan, and interest savings from the lower interest rates on the Swiss Franc cross-currency swap agreements.

The effective tax rate for Net loss from continuing operations during the six months ended June 30, 2023 was 24.0%, 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.

income taxed at lower rates, release of valuation allowance on non-U.S attributes, tax credits for research and development, and release of uncertain tax positions.

This was 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.

The effective tax rate for the six months ended July 1, 2022 was (3.6)%, 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 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.

Net loss from continuing operations increased in the six months ended June 30, 2023 compared with the prior year period, primarily due to one-time income items in the prior year period, including the Unrealized gain on investment in ESAB Corporation and Insurance settlement gain, partially offset by the reduction of debt extinguishment and the aforementioned Gross profit and Selling, general, and administrative increases.

Net loss margin from continuing operations increased by 1520 basis points due to the aforementioned factors.

Adjusted EBITDA increased due to organic growth.

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

Three Months Ended

March 31, 2023 April 1, 2022

Three Months Ended Six Months Ended

June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022

(Dollars in millions)

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Adjusted EBITDA margin (non-GAAP) 14.4 % 13.3 % 12.4 % 12.1 %

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.

Three Months Ended June 30, 2023 Compared to Three Months Ended July 1, 2022

Net sales in our Prevention & Recovery se gment increased $9.7 million, or 3.7%, in the second quarter ended June 30, 2023 compared with the prior year period, driven by increases in volume and inflation-related pricing increases.

Gross profit increa sed $8.5 million due to inflation-related pricing increases, improved sales mix in our existing businesses, and reductions in freight costs, partially offset by the effect of unfavorable foreign currency impacts in a primary production facility.

Gross profit margin increased 130 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.

Selling, general and administrative expense was flat due to reduced central cost allocations, offset by investment to support growth and spending on MDR and other costs.

Research and development expense was flat.

Operating loss increased due to a one-time Insurance settlement gain in 2022, as well as higher acquisition amortization, offset by improved sales mix in our existing businesses .

Adjusted EBITDA and Adjusted

EBITDA margin increased due to improved sales mix, partially offset by unfavorable foreign currency impacts in a primary manufacturing facility.

Six Months Ended June 30, 2023 Compared to Six Months Ended July 1, 2022

Net sales in our Prevention and Recovery segment increased $15.6 million, or 3.1%, despite currency translation pressure of $4.1 million in the six months ended June 30, 2023 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 $13.0 million due to the improved sales, offset by the effect of unfavorable foreign currency and inflation of supply chain, logistics, and other costs.

Gross profit margin increased 90 basis points due to improved sales mix and inflation-related customer pricing, partially offset by the effect of unfavorable foreign currency in a primary manufacturing facility.

Selling, general and administrative expense increased primarily due to investment to support growth, spending on MDR and other costs, offset by lower allocated central costs.

Operating loss increased due to an insurance settlement gain recorded in the second quarter of 2022 and higher Selling, general and administrative expenses, partially offset by the higher gross profit.

Adjusted EBITDA and Adjusted EBITDA margin increased due to improved sales mix, partially offset by unfavorable foreign currency impacts in a primary manufacturing facility during the six months ended June 30, 2023 compared to the prior year period.

Reconstructive

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

Three Months Ended

March 31, 2023 April 1, 2022

Three Months Ended Six Months Ended

June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022

(Dollars in millions)

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Adjusted EBITDA margin (non-GAAP) 17.0 % 16.0 % 18.4 % 16.2 %

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.

Three Months Ended June 30, 2023 Compared to Three Months Ended July 1, 2022

Net sal es increased in our Reconstructive segment by $23.7 million, or 18.1%, primarily due to higher sales volumes driven by broad market strength and market outperformance.

Gro ss profit and profit margin increased in the second quarter ended June 30, 2023 compared to the prior year period, primarily due to increased sales in our existing businesses, improved operating cost leverage, and the benefit of a decrease of $4.9 million in inventory fair value step-up amortization charges.

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.

Operating loss increased, primarily due to an insurance settlement gain recorded in the second quarter of 2022, partially offset by the aforementioned factors driving organic growth.

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 120 basis points compared to prior year.

Recent acquisitions were dilutive to the margin by approximately 20 basis points, but are expected to be accretive to margins in future years.

Six Months Ended June 30, 2023 Compared to Six Months Ended July 1, 2022

Net sal es increased in our Reconstructive segment by $48.4 million, or 18.5%, primarily due to higher sales volumes driven by broad market strength and market outperformance.

Gro ss profit increased in the six months ended June 30, 2023 compared to the prior year period , primarily due to increased sales in our existing businesses, improved operating cost leverage, and the benefit of a decrease of $9.8 million in inventory fair value step-up amortization charges, which also led to an increase in Gross profit margin.

Operating loss decreased primarily due to the aforementioned factors driving organic growth, offset by an insurance settlement gain recorded in the second quarter of 2022.

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

Without the impact of recent acquisitions, Adjusted EBITDA margins increased 280 basis points compared to prior year.

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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 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 expect that our primary ongoing requirements for cash will be for working capital, funding of acquisitions, capital expenditures, restructuring and other non-routine costs, 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.

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

As of March 31, 2023, the remaining stock repurchase authorization provided by our Board of Directors was $100.0 million.

As of June 30, 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.

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Term Loan and Revolving Credit Facility

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”).

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 which has been fully extinguished (the “Enovis Term Loan”).

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

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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 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.

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 3.75:1.00, stepping down 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.

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 Revolver.

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

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.

Total letters of credit and surety bonds of $6.9 million are outstanding as of June 30, 2023.

As of June 30, 2023, we had $32.5 million of Cash and cash equivalents, an increase of $8.2 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:

Three Months Ended

March 31, 2023 April 1, 2022

Six Months Ended

June 30, 2023 July 1, 2022

(Dollars in millions)

5 unchanged sentences

Net borrowings (repayments) of debt 139.0 (1,628.9)

Distribution from ESAB Corporation, net — 1,143.4

Proceeds from issuance of common stock, net 1.4 1.7

Payment of debt extinguishment costs — (12.7)

Deferred consideration payments and other (1.7) (9.8)

2 unchanged sentences

Increase (decrease) in Cash and cash equivalents $ 8.2 $ (623.8)

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

Cash used in operating activities related to discontinued operations for the six months ended July 1, 2022 was $26.2 million.

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.

Excluding the $26.2 million impact of discontinued operations, cash flows from operating activities increased $48.7 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.

This increase is primarily due to a lower investment in working capital of $22 million, a decrease in cash paid for interest of $18 million and favorable changes in accrued compensation and benefits of approximately $9 million.

Cash flows used in investing activities during the six months ended June 30, 2023 were $166.0 million compared to $80.2 million in the prior year period due to higher investments in the current year driven by the June 28, 2023 acquisition of Novastep for $96.9 million, net of cash received .

The amounts included in Purchases of property, plant and equipment and intangibles related to discontinued operations for the six months ended July 1 2022 were $3.2 million.

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

Cash flows provided by financing activities during the six months ended June 30, 2023 include $139.0 million of net debt borrowings primarily used for the acquisition of Novastep.

Cash flows used in financing activities for the six months ended July 1, 2022 include net debt repayments of $1,628.9 million, partially offset by the Distribution from ESAB Corporation, net of $1,143.4 million.

Critical Accounting Policies and Estimates

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Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Actual results may vary from what our management anticipates, and different assumptions or estimates about the future could have a material impact on our results of operations and financial position.

Actual results may vary from what our management

anticipates, and different assumptions or estimates about the future could have a material impact on our results of operations and financial position.

There have been no significant additions or changes to the methods, estimates and judgments included in “Item 7.

1 unchanged sentence

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