Enovis CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. Item 1. “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. Item 8. “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2023. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements contained in this Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Form 10-Q is filed with the SEC. Statements other than statements of historical fact are statements could be deemed forward-looking statements, including statements regarding: 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; the impact of the COVID-19 global pandemic; projections of revenue, profit margins, expenses, tax provisions and tax rates, earnings or losses from operations, impact of foreign exchange rates, cash flows, synergies or other financial items; plans, strategies and objectives of management for future operations including statements relating to potential acquisitions, compensation plans or purchase commitments; developments, performance, industry or market rankings relating to products or services; future economic conditions or performance, including the impact of increasing inflationary pressures; the outcome of outstanding claims or legal proceedings; potential gains and recoveries of costs; assumptions underlying any of the foregoing; and any other statements that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future. Forward-looking statements may be characterized by terminology such as “believe,” “anticipate,” “should,” “would,” “could,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy,” “targets,” “aims,” “seeks,” “sees,” and similar expressions. These statements are based on assumptions and assessments made by our management as of the filing of this Form 10-Q in light of their experience and perception of historical trends, current conditions, expected future developments and other factors we believe to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties and actual results could differ materially due to numerous factors, including but not limited to the following: • an inability to identify, finance, acquire and successfully integrate attractive acquisition targets; • the availability of additional capital and our inability to pursue our growth strategy without it; • our indebtedness and our debt agreements, which contain restrictions that may limit our flexibility in operating our business; • our restructuring activities, which may subject us to additional uncertainty in our operating results; • any impairment in the value of our intangible assets, including goodwill; • a material disruption at any of our manufacturing facilities; • any failure to maintain, protect and defend our intellectual property rights; • the effects of the COVID-19 global pandemic; • significant movements in foreign currency exchange rates; 19 • the availability of raw materials, as well as parts and components used in our products, as well as the impact of raw material, energy and labor price fluctuations and supply shortages; • the competitive environment in which we operate; • our reliance on a variety of distribution methods to market and sell our medical device products; • extensive government regulation and oversight of our products; • safety issues or recalls of our products; • failure to comply with federal and state regulations related to the manufacture of our products; • improper marketing or promotion of our products; • risks associated with the clinical trial process; • failure to comply with governmental regulations for products for which we obtain clearance or approval; • our exposure to product liability claims; • our inability to obtain coverage and adequate levels of reimbursement from third party payors for our medical device products; • audits or denials of claims by government officials; • federal and state health reform and cost control efforts; • our failure or the failure of our employees or third parties with which we have relationships to comply with healthcare laws and regulations; • our relationships with leading surgeons and our ability to comply with enhanced disclosure requirements regarding payments to physicians; • actual or perceived failures to comply with applicable data protection, privacy and security laws, regulations, standards and other requirements; • service interruptions, data corruption, cyber-based attacks or network security breaches affecting our information technology infrastructure; • noncompliance with anti-bribery laws, export control regulations, economic sanctions or other trade laws; • our inability to achieve some or all of the expected benefits of the Separation; • if the Separation and/or certain related transactions do not qualify as transactions that are generally tax-free for U.S. federal income tax purposes, we and our stockholders could be subject to significant tax liabilities; • potential indemnification liabilities to ESAB pursuant to the Separation and distribution agreement and other related agreements • changes in the general economy; • disruptions in the global economy caused by the ongoing conflict between Russia and Ukraine; • the loss of key members of our leadership team, or the inability to attract, develop, engage, and retain qualified employees; and 20 • other risks and factors listed in Item 1A. “Risk Factors” in Part I of our 2022 Form 10-K. Any such forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ materially from those envisaged by such forward-looking statements. We do not assume any obligation and do not intend to update any forward-looking statement, except as required by law. See Part I. Item 1A. “Risk Factors” in our 2022 Form 10-K for a further discussion regarding some of the reasons that actual results may be materially different from those that we anticipate. 21 Overview Please see Part I, Item 1. “Business” in our 2022 Form 10-K for a discussion of the Company’s objectives and methodologies for delivering shareholder value. 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. Enovis conducts its operations through two operating segments: Prevention & Recovery and Reconstructive. We have reflected this change in all historical periods presented. • Prevention & Recovery - a leader in orthopedic solutions, providing devices, software, and services across the patient care continuum from injury prevention to rehabilitation after surgery, injury, or from degenerative disease. • Reconstructive - an innovation market-leader positioned in the fast-growing surgical implant business, offering a comprehensive suite of reconstructive joint products for the hip, knee, shoulder, elbow, foot, ankle, and finger and surgical productivity tools. We have a global footprint, with production facilities in North America, Europe, North Africa, and Asia. We serve a global customer base across multiple markets through a combination of direct sales and third-party distribution channels. Our customer base is highly diversified in the medical market. Integral to our operations is our business management system, Enovis Growth Excellence (EGX). 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. Results of Operations The following discussion of Results of Operations addresses the comparison of the periods presented. Our management evaluates the operating results of each of its reportable segments based upon Net sales and Adjusted EBITDA, as defined in the “Non-GAAP Measures” section. Items Affecting Comparability of Reported Results and Other Recent Developments 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 We complement our organic growth plans with strategic acquisitions. 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 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. 22 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 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. Our ability to grow and our financial performance will be affected by our ability to address challenges and opportunities that are a consequence of expanding our global operations through our recent acquisitions, including efficiently utilizing our international sales channels, manufacturing and distribution capabilities, participating in the expansion of market opportunities, successfully completing global acquisitions and engineering innovative new product applications to create better patient outcomes. The majority of our Net sales derived from operations outside the U.S. are denominated in currencies other than the U.S. dollar. Similar portions of our manufacturing and employee costs are also outside the U.S. and denominated in currencies other than the U.S. dollar. Changes in foreign exchange rates can impact our results of operations and are quantified when significant. 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%. Seasonality Sales in our Prevention & Recovery and Reconstructive segments typically peak in the fourth quarter. General economic conditions and other factors may, however, impact future seasonal variations. 23 Non-GAAP Measures Adjusted EBITDA 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) 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. Operating income (loss), adjusted EBITDA and adjusted EBITDA margins at the operating segment level also include allocations of certain central function expenses not directly attributable to either operating segment. Adjusted EBITDA assists our management in comparing operating performance over time because certain items may obscure underlying business trends and make comparisons of long-term performance difficult, as they are of a nature and/or size that occur with inconsistent frequency or relate to discrete restructuring plans and other initiatives that are fundamentally different from our ongoing productivity improvements. Our management also believes that presenting these measures allows investors to view our performance using the same measures that we use in evaluating our financial and business performance and trends. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information calculated in accordance with GAAP. Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures. The following tables set forth a reconciliation of net loss from continuing operations, the most directly comparable financial statement measure, to Adjusted EBITDA, for the three and six months ended June 30, 2023 and July 1, 2022. 24 Three Months Ended June 30, 2023 July 1, 2022 Prevention & Recovery Reconstructive Total Prevention & Recovery Reconstructive Total (Dollars in millions) Net income (loss) from continuing operations (GAAP) (1) $ (14.6) $ 120.7 Income tax benefit (4.7) (4.2) 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 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 Adjusted EBITDA (non-GAAP) $ 39.3 $ 26.4 $ 65.7 $ 35.1 $ 21.0 $ 56.2 Adjusted EBITDA margin (non-GAAP) 14.4 % 17.0 % 15.3 % 13.3 % 16.0 % 14.2 % (1) Non-operating components of Net loss from continuing operations are not allocated to the segments. (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. 25 Six Months Ended June 30, 2023 July 1, 2022 Prevention & Recovery Reconstructive Total Prevention & Recovery Reconstructive Total (Dollars in millions) 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 Operating loss (GAAP) $ (22.6) $ (16.9) (39.5) $ (1.0) $ (24.1) (25.1) Operating loss margin (4.3) % (5.4) % (4.7) % (0.2) % (9.2) % (3.3) % Adjusted to add (deduct): 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 Adjusted EBITDA (non-GAAP) $ 65.0 $ 57.1 $ 122.1 $ 61.5 $ 42.4 $ 103.9 Adjusted EBITDA margin (non-GAAP) 12.4 % 18.4 % 14.6 % 12.1 % 16.2 % 13.5 % (1) Non-operating components of Net loss from continuing operations are not allocated to the segments. (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. 26 Total Company Sales 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 Six Months Ended Net Sales Change % Net Sales Change % (Dollars in millions) 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) % 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. (2) Represents the incremental sales as a result of acquisitions closed subsequent to the beginning of the prior year period. (3) Represents the difference between prior year sales valued at the actual prior year foreign exchange rates and prior year sales valued at current year foreign exchange rates. The increase in Net sales during the three and six months ended 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 $4.5 million unfavorable foreign currency translation impacts during the six months ended June 30, 2023. 27 Operating Results The following table summarizes our results of continuing operations for the comparable periods. Three Months Ended Six Months Ended June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 (Dollars in millions) Gross profit $ 248.4 $ 215.9 $ 483.4 $ 421.8 Gross profit margin 58.0 % 54.6 % 57.9 % 54.7 % Selling, general and administrative expense $ 207.9 $ 193.7 $ 415.0 $ 382.1 Research and development expense $ 18.9 $ 15.7 $ 37.1 $ 30.5 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 % Adjusted EBITDA (non-GAAP) $ 65.7 $ 56.2 $ 122.1 $ 103.9 Adjusted EBITDA margin (non-GAAP) 15.3 % 14.2 % 14.6 % 13.5 % Items excluded from Adjusted EBITDA: 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 Strategic transaction costs $ 5.4 $ 12.7 $ 17.1 $ 24.4 Stock-based compensation $ 8.9 $ 7.8 $ 15.8 $ 14.5 Depreciation and other amortization $ 20.8 $ 19.5 $ 40.7 $ 38.0 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 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. 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 $4.9 million in inventory fair value step-up amortization charges. 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. 28 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 $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 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, 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 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. 29 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. Adjusted EBITDA margin excluding the effects of recent acquisitions and foreign currency pressures increased by approximately 180 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 20 basis points, are expected to be accretive to margins in future years. Business Segments As discussed further above, we report results in two reportable segments: Prevention & Recovery and Reconstructive. Operating loss, adjusted EBITDA, and adjusted EBITDA margins at the operating segment level also include allocations of certain central function expenses not directly attributable to either operating segment. See Item 2. “Non-GAAP Measures” for a further discussion and reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures. Prevention & Recovery We develop, manufacture, and distribute rigid bracing products, orthopedic soft goods, vascular systems, and compression garments, and hot and cold therapy products and offer robust recovery sciences products in the clinical rehabilitation and sports medicine markets such as bone growth stimulators and electrical stimulators used for pain management. Our Prevention & Recovery products are marketed under several brand names, most notably DJO, to orthopedic specialists, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers, and other healthcare professionals who treat patients with a variety of treatment needs including musculoskeletal conditions resulting from degenerative diseases, deformities, traumatic events and sports-related injuries. Many of our medical devices and related accessories are used by athletes and other patients for injury prevention and at-home physical therapy treatments. We reach a diverse customer base through multiple distribution channels, including independent distributors, direct salespeople, and directly to patients. The following table summarizes selected financial results for our Prevention & Recovery segment: Three Months Ended Six Months Ended June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 (Dollars in millions) Net sales $ 273.5 $ 263.8 $ 524.2 $ 508.6 Gross profit $ 142.2 $ 133.7 $ 269.2 $ 256.2 Gross profit margin 52.0 % 50.7 % 51.4 % 50.5 % Selling, general and administrative expenses $ 112.4 $ 112.9 $ 224.6 $ 221.0 Research and development expense $ 8.9 $ 8.8 $ 17.4 $ 17.1 Operating loss (GAAP) $ (4.4) $ 13.4 $ (22.6) $ (1.0) Operating loss margin (GAAP) (1.6) % 5.1 % (4.3) % (0.2) % Adjusted EBITDA (non-GAAP) $ 39.3 $ 35.1 $ 65.0 $ 61.5 Adjusted EBITDA margin (non-GAAP) 14.4 % 13.3 % 12.4 % 12.1 % 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 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 30 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 We develop, manufacture, and market a wide variety of knee, hip, shoulder, elbow, foot, ankle, and finger implant products and surgical productivity solutions that serve the orthopedic reconstructive joint implant market. Our products are primarily used by surgeons for surgical procedures. The following table summarizes the selected financial results for our Reconstructive segment: Three Months Ended Six Months Ended June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 (Dollars in millions) Net sales $ 155.0 $ 131.3 $ 310.4 $ 262.0 Gross profit $ 106.1 $ 82.1 $ 214.2 $ 165.5 Gross profit margin 68.5 % 62.5 % 69.0 % 63.2 % Selling, general and administrative expenses $ 95.5 $ 80.7 $ 190.5 $ 161.1 Research and development expense $ 10.0 $ 6.9 $ 19.7 $ 13.5 Operating loss (GAAP) $ (10.1) $ (7.9) $ (16.9) $ (24.1) Operating loss margin (GAAP) (6.5) % (6.0) % (5.4) % (9.2) % Adjusted EBITDA (non-GAAP) $ 26.4 $ 21.0 $ 57.1 $ 42.4 Adjusted EBITDA margin (non-GAAP) 17.0 % 16.0 % 18.4 % 16.2 % 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 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 31 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. 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 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. Recent acquisitions were dilutive to the margin by approximately 60 basis points, but are expected to be accretive to margins in future years. 32 Liquidity and Capital Resources Overview 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 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. We believe that our sources of liquidity are adequate to fund our operations for the next twelve months. Equity Capital In 2018, our Board of Directors authorized the repurchase of our common stock from time-to-time on the open market or in privately negotiated transactions. No stock repurchases have been made under this plan since the third quarter of 2018. As of 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. There is no term associated with the remaining repurchase authorization. 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 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. The remaining balance on the Enovis Term Loan was extinguished on March 1, 2023, with proceeds from the Revolver. The Enovis Credit Agreement contains customary covenants limiting the ability of the Company and its subsidiaries to, among other things, incur debt or liens, merge or consolidate with others, dispose of assets, make investments, or pay dividends. In addition, the Enovis Credit Agreement contains financial covenants requiring the Company to maintain (i) a 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. Other Indebtedness In addition, we are party to overdraft facilities with a borrowing capacity of $30.0 million. Total letters of credit and surety bonds of $6.9 million are outstanding as of June 30, 2023. 33 Cash Flows 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: Six Months Ended June 30, 2023 July 1, 2022 (Dollars in millions) Net cash provided by (used in) operating activities $ 35.6 $ (39.3) Purchases of property, plant and equipment and intangibles (67.2) (47.8) Proceeds from sale of property, plant and equipment — 2.7 Acquisitions, net of cash received, and investments (98.7) (35.1) Net cash used in investing activities (166.0) (80.2) 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) Net cash provided by (used in) financing activities 138.7 (506.3) Effect of foreign exchange rates on Cash and cash equivalents (0.1) 2.0 Increase (decrease) in Cash and cash equivalents $ 8.2 $ (623.8) 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 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 The methods, estimates and judgments that we use in applying our critical accounting policies have a significant impact on our results of operations and financial position. We evaluate our estimates and judgments on an ongoing basis. Our estimates are based upon our historical experience, our evaluation of business and macroeconomic trends and information from other outside sources, as appropriate. 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 34 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. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies” in our 2022 Form 10-K.