Enovis CORP 10-Q

Item 1. Financial Statements ENOVIS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Dollars in thousands, except per share amounts (Unaudited) Three Months Ended Six Months Ended June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 Net sales $ 428,502 $ 395,117 $ 834,653 $ 770,574 Cost of sales 180,143 179,211 351,229 348,768 Gross profit 248,359 215,906 483,424 421,806 Selling, general and administrative expense 207,881 193,657 415,046 382,137 Research and development expense 18,918 15,661 37,111 30,503 Amortization of acquired intangibles 32,249 31,824 64,289 62,610 Insurance settlement gain — ( 33,034 ) — ( 33,034 ) Restructuring and other charges 3,805 2,245 6,440 4,664 Operating income (loss) ( 14,494 ) 5,553 ( 39,462 ) ( 25,074 ) Interest expense, net 4,076 4,546 9,728 11,610 Debt extinguishment charges — 20,104 — 20,104 Unrealized gain on investment in ESAB Corporation — ( 135,537 ) — ( 135,537 ) Other expense, net 753 — 92 — Income (loss) from continuing operations before income taxes ( 19,323 ) 116,440 ( 49,282 ) 78,749 Income tax benefit ( 4,713 ) ( 4,211 ) ( 11,826 ) ( 3,847 ) Net income (loss) from continuing operations ( 14,610 ) 120,651 ( 37,456 ) 82,596 Income (loss) from discontinued operations, net of taxes 4,797 ( 43,666 ) 4,485 10,690 Net income (loss) ( 9,813 ) 76,985 ( 32,971 ) 93,286 Less: net income attributable to noncontrolling interest from continuing operations - net of taxes 182 130 374 397 Less: net income attributable to noncontrolling interest from discontinued operations - net of taxes — — — 966 Net income (loss) attributable to Enovis Corporation $ ( 9,995 ) $ 76,855 $ ( 33,345 ) $ 91,923 Net income (loss) per share - basic Continuing operations $ ( 0.27 ) $ 2.23 $ ( 0.70 ) $ 1.52 Discontinued operations $ 0.09 $ ( 0.81 ) $ 0.08 $ 0.18 Consolidated operations $ ( 0.18 ) $ 1.42 $ ( 0.61 ) $ 1.70 Net income (loss) per share - diluted Continuing operations $ ( 0.27 ) $ 2.21 $ ( 0.70 ) $ 1.51 Discontinued operations $ 0.09 $ ( 0.80 ) $ 0.08 $ 0.18 Consolidated operations $ ( 0.18 ) $ 1.41 $ ( 0.61 ) $ 1.69 See Notes to Condensed Consolidated Financial Statements. 2 ENOVIS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Dollars in thousands (Unaudited) Three Months Ended Six Months Ended June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 Net income (loss) $ ( 9,813 ) $ 76,985 $ ( 32,971 ) $ 93,286 Other comprehensive income (loss): Foreign currency translation, net of tax expense of $ — , $ — , $ — and $ 338 11,311 ( 30,876 ) 21,895 ( 84,337 ) Unrealized gain (loss) on hedging activities, net of tax expense (benefit) of $( 1,740 ), $ — , $( 1,740 ) and $ 2,711 ( 5,449 ) — ( 5,449 ) 9,028 Amounts reclassified from Accumulated other comprehensive loss: Amortization of pension and other post-retirement net actuarial gain (loss), net of tax expense (benefit) of $( 41 ), $ — , $( 41 ) and $ 199 ( 882 ) — ( 882 ) 629 Other comprehensive income (loss) 4,980 ( 30,876 ) 15,564 ( 74,680 ) Comprehensive income (loss) ( 4,833 ) 46,109 ( 17,407 ) 18,606 Less: comprehensive income (loss) attributable to noncontrolling interest 190 ( 1,303 ) 406 ( 408 ) Comprehensive income (loss) attributable to Enovis Corporation $ ( 5,023 ) $ 47,412 $ ( 17,813 ) $ 19,014 See Notes to Condensed Consolidated Financial Statements. 3 ENOVIS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS Dollars in thousands, except share amounts (Unaudited) June 30, 2023 December 31, 2022 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 32,491 $ 24,295 Trade receivables, less allowance for credit losses of $ 8,158 and $ 7,965 298,976 267,380 Inventories, net 453,897 426,643 Prepaid expenses 26,758 28,550 Other current assets 75,117 48,155 Total current assets 887,239 795,023 Property, plant and equipment, net 260,754 236,741 Goodwill 2,034,087 1,983,588 Intangible assets, net 1,110,950 1,110,727 Lease asset - right of use 61,739 66,881 Other assets 88,784 80,288 Total assets $ 4,443,553 $ 4,273,248 LIABILITIES AND EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ — $ 219,279 Accounts payable 147,180 135,628 Accrued liabilities 206,493 210,292 Total current liabilities 353,673 565,199 Long-term debt, less current portion 400,000 40,000 Non-current lease liability 47,567 51,259 Other liabilities 191,553 166,989 Total liabilities 992,793 823,447 Equity: Common stock, $ 0.001 par value; 133,333,333 shares authorized; 54,534,111 and 54,228,619 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively 55 54 Additional paid-in capital 2,944,094 2,925,729 Retained earnings 542,387 575,732 Accumulated other comprehensive loss ( 37,898 ) ( 53,430 ) Total Enovis Corporation equity 3,448,638 3,448,085 Noncontrolling interest 2,122 1,716 Total equity 3,450,760 3,449,801 Total liabilities and equity $ 4,443,553 $ 4,273,248 See Notes to Condensed Consolidated Financial Statements. 4 ENOVIS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF EQUITY Dollars in thousands, except share amounts (Unaudited) Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Noncontrolling Interest Total Shares Amount Balance at December 31, 2022 54,228,619 $ 54 $ 2,925,729 $ 575,732 $ ( 53,430 ) $ 1,716 $ 3,449,801 Net loss — — — ( 23,350 ) — 192 ( 23,158 ) Other comprehensive income, net of tax of $ — — — — — 10,560 24 10,584 Common stock-based award activity 264,535 — 8,044 — — — 8,044 Balance at March 31, 2023 54,493,154 54 2,933,773 552,382 ( 42,870 ) 1,932 3,445,271 Net loss — — — ( 9,995 ) — 182 ( 9,813 ) Other comprehensive income, net of tax of $( 1,781 ) — — — — 4,972 8 4,980 Common stock-based award activity 40,957 1 10,321 — — — 10,322 Balance at June 30, 2023 54,534,111 $ 55 $ 2,944,094 $ 542,387 $ ( 37,898 ) $ 2,122 $ 3,450,760 Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Noncontrolling Interest Total Shares Amount Balance at December 31, 2021 52,083,078 $ 52 $ 4,544,315 $ 589,024 $ ( 516,013 ) $ 44,055 $ 4,661,433 Net income — — — 15,068 — 1,233 16,301 Distributions to noncontrolling owners — — — — — ( 941 ) ( 941 ) Other comprehensive loss, net of tax of $ 3,248 — — — — ( 43,466 ) ( 338 ) ( 43,804 ) Conversion of tangible equity units into common stock 1,691,845 2 ( 2 ) — — — — Common stock-based award activity 255,957 — 11,056 — — — 11,056 Balance at April 1, 2022 54,030,880 54 4,555,369 604,092 ( 559,479 ) 44,009 4,644,045 Net income — — — 76,855 — 130 76,985 Other comprehensive income, net of tax of $ — — — — — ( 29,443 ) ( 1,433 ) ( 30,876 ) Distribution of ESAB Corporation — — ( 1,666,732 ) — 499,981 ( 40,510 ) ( 1,207,261 ) Common stock-based award activity 80,238 — 8,570 — — — 8,570 Balance at July 1, 2022 54,111,118 $ 54 $ 2,897,207 $ 680,947 $ ( 88,941 ) $ 2,196 $ 3,491,463 See Notes to Condensed Consolidated Financial Statements. 5 ENOVIS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Dollars in thousands (Unaudited) Six Months Ended June 30, 2023 July 1, 2022 Cash flows from operating activities: Net income (loss) $ ( 32,971 ) $ 93,286 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation, amortization and other impairment charges 105,033 117,300 Stock-based compensation expense 16,981 19,793 Non-cash interest expense 1,481 1,658 Unrealized gain on investment in ESAB Corporation — ( 135,537 ) Debt extinguishment charges — 20,104 Deferred income tax expense (benefit) ( 107 ) 2,174 Loss on sale of property, plant and equipment 533 352 Changes in operating assets and liabilities: Trade receivables, net ( 25,912 ) ( 33,123 ) Inventories, net ( 10,476 ) ( 92,910 ) Accounts payable 8,324 15,919 Other operating assets and liabilities ( 27,326 ) ( 48,329 ) Net cash provided by (used in) operating activities 35,560 ( 39,313 ) Cash flows from investing activities: Purchases of property, plant and equipment and intangibles ( 67,248 ) ( 47,796 ) Proceeds from sale of property, plant and equipment — 2,746 Acquisitions, net of cash received, and investments ( 98,740 ) ( 35,123 ) Net cash used in investing activities ( 165,988 ) ( 80,173 ) Cash flows from financing activities: Payments under term credit facility ( 219,468 ) ( 785,000 ) Proceeds from borrowings on revolving credit facilities and other 370,000 450,000 Repayments of borrowings on revolving credit facilities and other ( 11,538 ) ( 607,618 ) Repayments of borrowings on Euro senior notes — ( 386,278 ) Repayments of borrowings on Senior notes — ( 300,000 ) Distribution from ESAB Corporation, net — 1,143,369 Proceeds from issuance of common stock, net 1,385 1,727 Payment of debt extinguishment costs — ( 12,704 ) Deferred consideration payments and other ( 1,668 ) ( 9,795 ) Net cash provided by (used in) financing activities 138,711 ( 506,299 ) Effect of foreign exchange rates on Cash and cash equivalents ( 87 ) 2,020 Increase (decrease) in Cash and cash equivalents 8,196 ( 623,765 ) Cash and cash equivalents, beginning of period 24,295 719,370 Cash and cash equivalents, end of period $ 32,491 $ 95,605 See Notes to Condensed Consolidated Financial Statements. 6 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. General Enovis Corporation (the “Company” or “Enovis”) was previously Colfax Corporation (“Colfax”) until its separation into two differentiated, independent, and publicly traded companies on April 4, 2022 (the “Separation”). Upon completion of the Separation, the Company retained its specialty medical technology business, changed its name to Enovis Corporation, and began trading under the stock symbol “ENOV” on the New York Stock Exchange on April 5, 2022. Enovis is an innovation-driven medical technology growth company dedicated to developing clinically differentiated solutions that generate measurably better patient outcomes and transform workflows. The Company conducts its business through two operating segments, “Prevention & Recovery” and “Reconstructive”. The Prevention & Recovery segment provides orthopedic and recovery science solutions, including devices, software, and services across the patient care continuum from injury prevention to rehabilitation after surgery, injury, or from degenerative disease. The Reconstructive segment provides surgical implant solutions, offering a comprehensive suite of reconstructive joint products for the hip, knee, shoulder, elbow, foot, ankle, and finger and surgical productivity tools. The Condensed Consolidated Financial Statements included in this quarterly report have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and reflect, in the opinion of management, all adjustments, which consist solely of normal recurring adjustments, necessary to present fairly the Company’s financial position and results of operations as of and for the periods indicated. Certain prior period amounts have been reclassified to conform to the current period presentation. The Condensed Consolidated Balance Sheet as of December 31, 2022 is derived from the Company’s audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the SEC’s rules and regulations for interim financial statements. The Condensed Consolidated Financial Statements included herein should be read in conjunction with the audited financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”), filed with the SEC on March 1, 2023. The Company makes certain estimates and assumptions in preparing its Condensed Consolidated Financial Statements in accordance with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the Condensed Consolidated Financial Statements, and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from those estimates. 7 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) 2. Recently Issued Accounting Pronouncements The Company has not adopted any new accounting standards during the six months ended June 30, 2023. There are no recently issued accounting pronouncements that are expected to have a material effect on the Company’s financial position, results of operations or cash flows. 3. Discontinued Operations The Company’s discontinued operations include the following: (1) operating results of ESAB Corporation (“ESAB”) prior to Separation, (2) charges related to previously retained asbestos contingencies from certain divested businesses for which we did not retain an interest in the ongoing operations that were fully transferred to ESAB in conjunction with the Separation, and (3) certain expenses related to the Separation and prior divestitures. The following table presents the financial results of the Company’s discontinued operations: Three Months Ended Six Months Ended June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 (in thousands) Net sales $ — $ — $ — $ 647,911 Cost of sales — — — 423,580 Selling, general and administrative expense — — — 125,529 Restructuring and other charges — — — 5,304 Asbestos charges — — — 3,194 Divestiture-related expenses (1) 5,600 35,463 6,011 45,941 Operating (loss) income ( 5,600 ) ( 35,463 ) ( 6,011 ) 44,363 Interest expense (2) — — — 8,035 (Loss) income from discontinued operations before income taxes ( 5,600 ) ( 35,463 ) ( 6,011 ) 36,328 Income tax (benefit) expense (3) ( 10,397 ) 8,203 ( 10,496 ) 25,638 (Loss) income from discontinued operations, net of taxes $ 4,797 $ ( 43,666 ) $ 4,485 $ 10,690 (1) Divestiture-related expenses include a charge for the release of a tax indemnification with ESAB for the three and six months ended June 30, 2023, and charges of $ 35.3 million and $ 45.0 million associated with the Separation for the three and six months ended July 1, 2022, respectively. (2) Interest expense was allocated to discontinued operations based on allocating $ 1.2 billion of corporate level debt to discontinued operations consistent with the dividend received from ESAB and the debt repaid at the time of the Separation. (3) Includes benefit of release of uncertain tax positions for the three and six months ended June 30, 2023. Cash used in operating activities related to discontinued operations for the six months ended July 1, 2022 was $ 26.2 million. Cash used in investing activities related to discontinued operations for the six months ended July 1, 2022 was $ 3.2 million. 8 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) 4. Acquisitions and Investments 2023 Acquisitions On June 28, 2023, the Company completed the Novastep acquisition in its Reconstructive segment, a leading player in Minimally Invasive Surgery (MIS) foot and ankle solutions with a best-in-class MIS bunion system serving a rapidly growing portion of the global bunion segment. The acquisition is accounted for under the acquisition method of accounting, and accordingly, the Condensed Consolidated Financial Statements include the financial position and results of operations from the acquisition date. The Company paid $ 96.9 million for the acquisition, net of cash received. The Company has allocated $ 39.8 million to goodwill and $ 52 million to intangible assets acquired. The acquisition accounting reflects our preliminary estimates and are subject to adjustment. The acquired goodwill value is primarily driven by the expected synergies from cross-selling Novastep products to existing Enovis foot & ankle customers. The acquisition broadens our reconstructive product offerings for the foot and ankle market and expands our customer base in Europe. Purchase accounting procedures are ongoing and revisions may be recorded in future periods during the measurement period. In April 2023, the Company entered into a definitive agreement to acquire the SEAL external fixation product line from D.N.E., LLC. The transaction closed on July 20, 2023 for a purchase price of $ 28 million, subject to working capital adjustments. 2022 Acquisitions On May 6, 2022, the Company completed a business acquisition in its Reconstructive segment of KICo Knee Innovation Company Pty Limited and subsidiaries, an Australian private company doing business as 360 Med Care, by acquiring 100 % of its equity interests. 360 Med Care is a medical device distributor that bundles certain computer-assisted surgery and patient experience enhancement programs to add value to its device supply arrangements with surgeons, hospitals, and insurers. The acquisition is accounted for under the acquisition method of accounting, and accordingly, the Condensed Consolidated Financial Statements include the financial position and results of operations from the acquisition date. The Company paid $ 14.3 million for the acquisition, net of cash received, and recorded estimated contingent consideration at fair value of $ 12.8 million related to expected results over future revenue targets. The Company has allocated $ 16.3 million to goodwill and $ 18.2 million to intangible assets acquired. The purchase price accounting for this acquisition was finalized. The 360 Med Care acquisition broadens our customer base in Australia and adds to our overall product offerings. On July 5, 2022, the Reconstructive segment of the Company acquired a controlling interest of Insight Medical Systems (“Insight”). Insight’s flagship solution, ARVIS, is an FDA-cleared augmented reality solution precisely engineered for the specific needs of hip and knee replacement surgery. The ARVIS navigation unit consists of a hands-free heads-up display worn by the surgeon which provides surgical guidance at the point of care in a streamlined, space-conserving and cost-effective manner compared to traditional robotic offerings. The acquisition is accounted for under the acquisition method of accounting as a step-acquisition, and accordingly, the Condensed Consolidated Financial Statements include the financial position and results of operations from the acquisition date. The Company made initial investments in Insight in 2020 and 2021, which were initially carried at cost. During the third quarter of 2022, the Company acquired an additional 53.7 % interest in Insight for $ 34.2 million net of cash received, and recorded contingent consideration of $ 5.0 million, which is the maximum amount payable under the agreement based on Insight’s achievement of certain milestones related to ARVIS. The Company holds a 99.5 % interest in Insight and recognized an initial $ 0.3 million noncontrolling equity interest in its financial statements attributed to Insight. The Company allocated $ 36.3 million to goodwill and $ 38.4 million to intangible assets acquired. The purchase price accounting for this acquisition was finalized. Goodwill is primarily driven by expected synergies between ARVIS’ augmented reality surgical guidance system and our existing customer base and existing products. The Company does not expect any of the goodwill to be deductible for tax purposes. As a result of obtaining control of Insight, the Company remeasured its initial investments to fair value, resulting in a $ 8.8 million gain in the fourth quarter of 202 2. 9 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) During the six months ended July 1, 2022, the Company also completed two asset acquisitions and one investment in its Prevention & Recovery segment. The asset acquisitions broaden the Company’s product offering and distribution network. Aggregate purchase consideration for the two asset acquisitions and one investment was $ 18.2 million, of which $ 13.6 million was paid in cash and $ 4.6 million of deferred and contingent consideration. For further information on prior year acquisitions and investments, refer to Note 5. “Acquisitions and Investments” in the in the Company’s 2022 Form 10-K. Investments As of June 30, 2023, the balance of investments held by the Company without readily determinable fair values w as $ 20.7 million . The investments are carried at cost minus impairments, if any, plus adjustments for fair value indicators from observable price changes in orderly transactions for the identical or similar investment of the same issuer. There have been no impairments or upward adjustments in the current year or since acquisition of these investments. 5. Revenue The Company provides orthopedic solutions, including products and services spanning the full continuum of patient care, from injury prevention to rehabilitation. While the Company’s sales are primarily derived from three sales channels including dealers and distributors, insurance, and direct to consumers and hospitals, substantially all of the Company’s revenue is recognized at a point in time. The Company disaggregates its revenue into the following segments: Three Months Ended Six Months Ended June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 (In thousands) Prevention & Recovery: U.S. Bracing & Support $ 114,963 $ 111,185 $ 219,338 $ 214,220 U.S. Other P&R 67,729 65,296 130,076 123,010 International P&R (1) 90,783 87,302 174,801 171,388 Total Prevention & Recovery 273,475 263,783 524,215 508,618 Reconstructive: U.S. Reconstructive 106,146 90,643 209,638 179,122 International Reconstructive 48,881 40,691 100,800 82,834 Total Reconstructive 155,027 131,334 310,438 261,956 Total $ 428,502 $ 395,117 $ 834,653 $ 770,574 (1) Includes favorable currency impact of $ 0.1 million and unfavorable currency impacts of $ 4.1 million for the three and six months ended June 30, 2023, respectively. Given the nature of the businesses, the Company does not generally have unsatisfied performance obligations with an original contract duration of greater than one year. The nature of the Company’s contracts gives rise to certain types of variable consideration, including rebates, implicit price concessions, and other discounts. The Company includes estimated amounts of variable consideration in the transaction price to the extent that it is probable there will not be a significant reversal of revenue. Allowance for Credit Losses The Company’s estimate of current expected credit losses on trade receivables considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. In calculating and applying its current expected 10 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) credit losses, the Company disaggregates trade receivables into business segments due to risk characteristics unique to each segment given the individual lines of business and market. The business segments are further disaggregated based on either geography or product type. The Company uses a loss rate methodology in calculating its current expected credit losses, considering historical write-offs over a defined lookback period in deriving a historical loss rate. The expected credit loss model considers current conditions and reasonable and supportable forecasts for current and projected macroeconomic factors. A summary of the activity in the Company’s allowance for credit losses included within Trade receivables in the Condensed Consolidated Balance Sheets is as follows: Six Months Ended June 30, 2023 Balance at Beginning of Period Charged to Expense, net Write-Offs, Deductions and Other, net Foreign Currency Translation Balance at End of Period (In thousands) Allowance for credit losses $ 7,965 $ 1,844 $ ( 1,709 ) $ 58 $ 8,158 6. Net Loss Per Share from Continuing Operations Net loss per share from continuing operations was computed as follows: Three Months Ended Six Months Ended June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 (In thousands, except share and per share data) Computation of Net income (loss) per share from continuing operations - basic: Net income (loss) from continuing operations attributable to Enovis Corporation (1) $ ( 14,792 ) $ 120,521 $ ( 37,830 ) $ 82,199 Weighted-average shares of Common stock outstanding – basic 54,510,688 54,080,549 54,418,554 53,969,738 Net income (loss) per share from continuing operations – basic $ ( 0.27 ) $ 2.23 $ ( 0.70 ) $ 1.52 Computation of Net income (loss) per share from continuing operations - diluted: Net income (loss) from continuing operations attributable to Enovis Corporation (1) $ ( 14,792 ) $ 120,521 $ ( 37,830 ) $ 82,199 Weighted-average shares of Common stock outstanding – basic 54,510,688 54,080,549 54,418,554 53,969,738 Net effect of potentially dilutive securities - stock options and restricted stock units — 441,300 — 489,134 Weighted-average shares of Common stock outstanding – diluted 54,510,688 54,521,849 54,418,554 54,458,872 Net income (loss) per share from continuing operations – diluted $ ( 0.27 ) $ 2.21 $ ( 0.70 ) $ 1.51 (1) Net income (loss) from continuing operations attributable to Enovis Corporation for the respective periods is calculated using Net income (loss) from continuing operations less the continuing operations component of the income attributable to noncontrolling interest, net of taxes, of $ 0.2 million and $ 0.4 million for the three and six months ended June 30, 2023 and $ 0.1 million and $ 0.4 million for the three and six months ended July 1, 2022. The weighted-average computation of the dilutive effect of potentially issuable shares of Common stock under the treasury stock method for both the three and six months ended June 30, 2023 excludes 1.2 million shares underlying outstanding stock-based compensation awards, as their inclusion would be anti-dilutive. The weighted-average computation of the dilutive effect of potentially issuable shares of Common stock under the treasury stock method for both the three and six months ended July 1, 2022 excludes 0.4 million shares underlying outstanding stock-based compensation awards, as their inclusion would be anti-dilutive. 11 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) 7. Income Taxes During the three and six months ended June 30, 2023, Loss from continuing operations before income taxes was $ 19.3 million and $ 49.3 million, while Income tax benefit was $ 4.7 million and $ 11.8 million, respectively. The effective tax rate was 24.4 % and 24.0 % for the three and six months ended June 30, 2023, both of which differed from the 2023 federal statutory rate of 21% mainly 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. During the three and six months ended July 1, 2022, Income from continuing operations before income taxes was $ 116.4 million and $ 78.7 million, while Income tax benefit was $ 4.2 million and $ 3.8 million, respectively. The effective tax rate was ( 3.6 )% and ( 4.9 )% for the three and six months ended July 1, 2022, both of which differed from the 2022 U.S. federal statutory rate of 21% mainly due to non-deductible unrealized gains on the investment in ESAB offset by non-deductible costs related to the tax-free separation transaction. 8. Equity Share Repurchase Program In 2018, the Company’s Board of Directors authorized the repurchase of shares of the Company’s Common stock from time-to-time on the open market or in privately negotiated transactions. No repurchases of the Company’s Common stock have been made under this plan since the third quarter of 2018. As of June 30, 2023, the remaining stock repurchase authorization provided by the Board of Directors was $ 100 million. The timing, amount and method of shares repurchased is determined by management based on its evaluation of market conditions and other factors. There is no term associated with the remaining repurchase authorization. Accumulated Other Comprehensive Loss The following tables present the changes in the balances of each component of Accumulated other comprehensive loss including reclassifications out of Accumulated other comprehensive loss for the six months ended June 30, 2023 and July 1, 2022. All amounts are net of tax and noncontrolling interest, if any. Accumulated Other Comprehensive Loss Components Net Unrecognized Pension Benefit Cost Foreign Currency Translation Adjustment Unrealized Loss on Hedging Activities Total (In thousands) Balance at January 1, 2023 $ 12,207 $ ( 65,637 ) $ — $ ( 53,430 ) Other comprehensive income (loss) before reclassifications: Foreign currency translation adjustment 383 21,480 — 21,863 Loss on net investment hedges — — ( 5,449 ) ( 5,449 ) Other comprehensive income (loss) before reclassifications 383 21,480 ( 5,449 ) 16,414 Amounts reclassified from Accumulated other comprehensive income (loss) ( 882 ) — — ( 882 ) Net Other comprehensive income (loss) ( 499 ) 21,480 ( 5,449 ) 15,532 Balance at June 30, 2023 $ 11,708 $ ( 44,157 ) $ ( 5,449 ) $ ( 37,898 ) 12 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) Accumulated Other Comprehensive Loss Components Net Unrecognized Pension and Other Post-Retirement Benefit Cost Foreign Currency Translation Adjustment Unrealized Gain on Hedging Activities Total (In thousands) Balance at January 1, 2022 $ ( 85,559 ) $ ( 475,125 ) $ 44,671 $ ( 516,013 ) Other comprehensive income (loss) before reclassifications: Foreign currency translation adjustment 470 ( 61,257 ) — ( 60,787 ) Loss on long-term intra-entity foreign currency transactions — ( 21,779 ) — ( 21,779 ) Gain on net investment hedges — — 9,028 9,028 Other comprehensive income (loss) before reclassifications 470 ( 83,036 ) 9,028 ( 73,538 ) Amounts reclassified from Accumulated other comprehensive loss 629 — — 629 Net Other comprehensive income (loss) 1,099 ( 83,036 ) 9,028 ( 72,909 ) Distribution of ESAB Corporation 84,460 469,220 ( 53,699 ) 499,981 Balance at July 1, 2022 $ — $ ( 88,941 ) $ — $ ( 88,941 ) 9. Inventories, Net Inventories, net consisted of the following: June 30, 2023 December 31, 2022 (In thousands) Raw materials $ 98,223 $ 100,038 Work in process 32,838 28,164 Finished goods 383,815 357,143 514,876 485,345 Less: allowance for excess, slow-moving and obsolete inventory ( 60,979 ) ( 58,702 ) $ 453,897 $ 426,643 10. Debt Long-term debt consisted of the following: June 30, 2023 December 31, 2022 (In thousands) Term loan $ — $ 219,279 Revolving credit facilities and other 400,000 40,000 Total debt 400,000 259,279 Less: current portion — ( 219,279 ) Long-term debt $ 400,000 $ 40,000 Debt Redemptions In conjunction with the Separation, which occurred on April 4, 2022, the Company repaid all obligations under its previous credit agreement and entered into a new credit agreement (the “Enovis Credit Agreement”) with certain of its existing bank lenders. Additionally, on April 7, 2022, after the completion of the Separation, the Company completed the redemptions of its 3.25 % Euro Senior Notes due 2025 (the “Euro Senior Notes”) and its 6.375 % Senior Notes due 2026 (the “2026 Notes”). As a result of these changes, the Company recorded Debt extinguishment charges of $ 20.1 million in the second quarter of 2022, 13 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) comprised of $ 12.7 million in redemption premiums and $ 7.4 million in noncash write-offs of original issue discount and deferred financing fees. Enovis Term Loan and Revolving Credit Facility The Enovis Credit Agreement became effective on April 4, 2022 and consists of a $ 900 million revolving credit facility (the “Revolver”) with an April 4, 2027 maturity date. The Enovis Credit Agreement also had 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. Certain U.S. 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. On March 1, 2023, the Company extinguished the remaining outstanding balance on the Enovis Term Loan with borrowings on 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 3.75 :1.00 for the fiscal quarter ending June 30, 2023, 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 Enovis Credit Agreement. As of June 30, 2023, the Company was in compliance with the covenants under the Enovis Credit Agreement. As of June 30, 2023, the weighted-average interest rate of borrowings under the Enovis Credit Agreement was 6.32 %, excluding accretion of original issue discount and deferred financing fees, and there was $ 500 million available on the Revolver. The Compan y has $ 4.0 million in deferred f inancing fees recorded in conjunction with the Enovis Credit Agreement as of June 30, 2023, which are being accreted to Interest expense, net primarily using a straight-line method over the life of the facility. Euro Senior Notes The Company had senior unsecured notes with an aggregate principal amount of € 350 million due in May 2025, with an interest rate of 3.25 %. The Euro Senior Notes were redeemed on April 7, 2022 at a 100.813 % redemption premium after the completion of the Separation. Tangible Equity Unit (“TEU”) Amortizing Notes The Company previously had 6.50 % TEU amortizing notes at an initial principal amount of $ 15.6099 per note with equal quarterly cash installments of $ 1.4375 per note representing a payment of interest and partial payment of principal. The Company paid $ 6.5 million of principal on the TEU amortizing notes in 2022. The final installment payment was made on January 15, 2022. 2026 Notes The Company had senior notes with a remaining principal amount of $ 300 million, which were due on February 15, 2026 and had an interest rate of 6.375 %. The 2026 Notes were redeemed on April 7, 2022 at a 103.188 % redemption premium after the completion of the Separation. 14 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) Other Indebtedness In addition to the debt agreements discussed above, the Company is party to overdraft facilities with a borrowing capacity of $ 30.0 million. Total letters of credit and surety bonds of $ 6.9 million were outstanding as of June 30, 2023. 11. Accrued Liabilities Accrued liabilities in the Condensed Consolidated Balance Sheets consisted of the following: June 30, 2023 December 31, 2022 (In thousands) Accrued compensation and related benefits $ 52,814 $ 51,384 Accrued taxes 16,288 13,676 Accrued freight 4,533 3,955 Contingent consideration - current portion 7,832 8,812 Warranty liability- current portion 2,826 2,804 Accrued restructuring liability 1,057 1,090 Accrued third-party commissions 25,643 24,958 Customer advances and billings in excess of costs incurred 3,423 3,560 Lease liability - current portion 22,278 24,281 Accrued interest 545 2,921 Accrued rebates 9,277 13,715 Accrued professional fees 8,774 15,670 Accrued royalties 5,892 5,777 Other 45,311 37,689 $ 206,493 $ 210,292 Accrued Restructuring Liability The Company’s restructuring programs include a series of actions to reduce the structural costs of the Company. A summary of the activity in the Company’s restructuring liability included in Accrued liabilities in the Condensed Consolidated Balance Sheets is as follows: Six Months Ended June 30, 2023 Balance at Beginning of Period Provisions Payments Balance at End of Period (In thousands) Restructuring and other charges: Termination benefits (1) $ 972 $ 3,122 $ ( 3,096 ) $ 998 Facility closure costs and other (2) 118 3,318 ( 3,377 ) 59 Total $ 1,090 6,440 $ ( 6,473 ) $ 1,057 Non-cash charges (2) 301 Total Provisions (3) $ 6,741 (1) Includes severance and other termination benefits, including outplacement services. (2) Includes the cost of relocating associates, relocating equipment, lease termination expense and other costs in connection with the closure and optimization of facilities, site cost structures, and product lines. (3) For the six months ended June 30, 2023, $ 3.3 million and $ 3.4 million of th e Company’s total provisions were related to the Prevention & Recovery and Reconstructive segments, respectively. Restructuring and other charges includes $ 0.3 million of expense classified as Cost of sales on the Company’s Condensed Consolidated Statements of Operations for the six months ended June 30, 2023. 15 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) 12. Financial Instruments and Fair Value Measurements The carrying values of financial instruments, including trade receivables, other receivables and accounts payable, approximate their fair values due to their short-term maturities. The estimated fair value of the Company’s debt, which was $ 400.0 million as of June 30, 2023, was based on current interest rates for similar types of borrowings and is in Level Two of the fair value hierarchy. The estimated fair values may not represent actual values of the financial instruments that could be realized as of the balance sheet date or that will be realized in the future. As of June 30, 2023, the Company held $ 21.6 million in Level Three liabilities arising from contingent consideration related to acquisitions. The fair value of the contingent consideration liabilities is determined using unobservable inputs and the inputs vary based on the nature of the purchase agreements. These inputs can include the estimated amount and timing of projected cash flows, the risk-adjusted discount rate used to present value the projected cash flows, and the probability of the acquired company attaining certain targets stated within the purchase agreements. A change in these unobservable inputs to a different amount might result in a significantly higher or lower fair value measurement at the reporting date due to the nature of uncertainty inherent to the estimates. During the six months ended June 30, 2023 the Company recorded a reduction in contingent consideration of $ 0.8 million due to a final agreement on the payout from an acquisition in 2020 and payments of $ 0.9 million, offset by increases for interest accretion and effect of foreign currency. The gross range of outcomes for contingent consideration arrangements that have a fixed limit on the maximum payout is zero to $ 10.0 million. There are two contingent consideration arrangements that have no limits and are based on a percentage of sales in excess of a benchmark over a three -year period and five -year period, respectively. There were no transfers in or out of Level One, Two or Three during the six months ended June 30, 2023. Deferred Compensation Plans The Company maintains deferred compensation plans for the benefit of certain employees and non-executive officers. As of June 30, 2023 and December 31, 2022 the fair value of these plans were $ 13.5 million and $ 10.3 million, respectively. These plans are deemed to be Level Two within the fair value hierarchy. Foreign Currency Contracts As of June 30, 2023 and December 31, 2022, the Company had foreign currency contracts related to purchases and sales with notional values of $ 0.0 million and $ 0.8 million, respectively. During the six months ended June 30, 2023, the Company recognized an unrealized gain of $ 0.0 million and realized loss of $ 1.4 million on its Condensed Consolidated Statements of Operations related to its derivative instruments. The realized loss is recorded in Other expense, net on Condensed Consolidated Statements of Operations. Net investment hedges On April 18, 2023, the Company entered into cross-currency swap agreements to hedge its net investment in its Swiss Franc-denominated subsidiaries against adverse movements in exchange rates between the U.S. Dollar and the Swiss Franc. These swap agreements are designated and qualify as net investment hedges. These contracts have a Swiss Franc notional amount of approximately ₣ 403 million and a U.S. Dollar aggregate notional amount of $ 450 million at June 30, 2023. Cross-currency swaps involve the receipt of functional-currency fixed-rate amounts from a counterparty in exchange for the Company making foreign-currency fixed-rate payments over the life of the agreement. For derivatives designated as net investment hedges, the gain or loss on the derivative is reported in Accumulated other comprehensive income (loss) in the Company’s Condensed Consolidated Statements of Comprehensive Income (Loss) as part of the cumulative translation adjustment. Amounts are reclassified out of Accumulated other comprehensive loss into earnings when the hedged net investment is either sold or substantially liquidated. 16 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) During the three and six months ended June 30, 2023, the Company received interest income on its Cross-currency swap derivatives of $ 2.1 million, which is included within Interest expense, net in the Condensed Consolidated Statements of Operations. The following table presents the amount of loss recognized in Other comprehensive loss for the three and six months ended June 30, 2023 and 2022: Three Months Ended Six Months Ended June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 (In thousands) Loss on cross-currency swaps $ ( 7,189 ) $ — $ ( 7,189 ) $ — $ ( 7,189 ) $ — $ ( 7,189 ) $ — The following table presents the fair value of the Company’s derivative financial instruments as well as their classification on the Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022: June 30, 2023 December 31, 2022 Other current assets Other liabilities Other current assets Other liabilities (In thousands) Derivatives designated as hedging instruments: Cross-currency swaps $ 9,977 $ 17,166 $ — $ — $ 9,977 $ 17,166 $ — $ — 13. Commitments and Contingencies The Company is involved in various pending legal, regulatory, and other proceedings arising out of the ordinary course of the Company’s business. None of these proceedings are expected to have a material adverse effect on the financial condition, results of operations or cash flow of the Company. With respect to these proceedings, management of the Company believes that either it will prevail, has adequate insurance coverage or has established appropriate accruals to cover potential liabilities. Legal costs related to proceedings or claims are recorded as incurred. Other costs that management estimates may be paid related to the claims are accrued when the liability is considered probable and the amount can be reasonably estimated. There can be no assurance, however, as to the ultimate outcome of any of these matters, and if all or substantially all of these proceedings were to be determined adverse to the Company, there could be a material adverse effect on the financial condition, results of operations or cash flow of the Company. For further description of the Company’s litigation and contingencies, reference is made to Note 18, “Commitments and Contingencies” in the Notes to Consolidated Financial Statements in the Company’s 2022 Form 10-K. 14. Segment Information The Company conducts its continuing operations through the Prevention & Recovery and Reconstructive operating segments, which also represent the Company’s reportable segments. ▪ Prevention & Recovery - a leader in orthopedic solutions and recovery sciences, providing devices, software, and services across the patient care continuum from injury prevention to rehabilitation after surgery, injury, or from degenerative disease. • Reconstructive - an innovation 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. 17 ENOVIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (Unaudited) The Company’s management, including the chief operating decision maker, evaluates the operating results of each of its reportable segments based upon Net sales and Adjusted EBITDA, which excludes the effect of restructuring and certain other charges, MDR and other costs, strategic transaction costs, stock-based compensation, depreciation and other amortization, acquisition-related intangible asset amortization, and inventory step-up charges from the results of the Company’s operating segments. The Company’s segment results were as follows: Three Months Ended Six Months Ended June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 (In thousands) Net sales: Prevention & Recovery $ 273,475 $ 263,783 $ 524,215 $ 508,618 Reconstructive 155,027 131,334 310,438 261,956 $ 428,502 $ 395,117 $ 834,653 $ 770,574 Segment Adjusted EBITDA (1) : Prevention & Recovery $ 39,323 $ 35,148 $ 65,018 $ 61,518 Reconstructive 26,359 21,042 57,075 42,399 $ 65,682 $ 56,190 $ 122,093 $ 103,917 (1) The following is a reconciliation of Loss from continuing operations before income taxes to Adjusted EBITDA: Three Months Ended Six Months Ended June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 (In thousands) Income (loss) from continuing operations before income taxes (GAAP) $ ( 19,323 ) $ 116,440 $ ( 49,282 ) $ 78,749 Restructuring and other charges (1) 3,806 2,555 6,742 5,508 MDR and other costs (2) 8,997 4,421 16,793 7,048 Strategic transaction costs 5,435 12,707 17,065 24,403 Stock-based compensation 8,868 7,821 15,776 14,529 Depreciation and other amortization 20,794 19,450 40,745 37,950 Amortization of acquired intangibles 32,249 31,824 64,289 62,610 Inventory step-up 27 4,893 146 9,977 Interest expense, net 4,076 4,546 9,728 11,610 Other expense, net 753 — 92 — Debt extinguishment charges — 20,104 — 20,104 Insurance settlement gain (3) — ( 33,034 ) — ( 33,034 ) Unrealized gain on investment in ESAB Corporation — ( 135,537 ) — ( 135,537 ) Adjusted EBITDA (non-GAAP) $ 65,682 $ 56,190 $ 122,093 $ 103,917 (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. (2) Primarily related to costs specific to compliance with medical device reporting reg ulations and other requirements of the European Union Medical Devices Regulation. These costs are classified as Selling, general and administrative expense on our Condensed Consolidated Statements of Operations. (3) Insurance settlement gain is related to the 2019 acquisition of DJO. 18