What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-07 compared with 2023-08-03 · 142 added, 120 removed, 297 unchanged (47% of the section changed)

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The following discussion of the financial condition and results of operations of Enovis Corporation (“Enovis,” “the Company,” “we,” “our,” and “us”) should be read in conjunction with the Condensed Consolidated Financial Statements and related footnotes included in Part I.

“Financial Statements” of this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2023 (this “Form 10-Q”) and the Consolidated Financial Statements and related footnotes included in Part II.

“Financial Statements” of this Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2023 (this “Form 10-Q”) and the Consolidated Financial Statements and related footnotes included in Part II.

“Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2023.

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

the Company’s pending acquisition (the “Lima Acquisition”) of LimaCorporate S.p.A.

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;

the impact of public health emergencies and global pandemics (including COVID-19);

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

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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 ability of the Company to successfully complete the proposed acquisition of Lima on the anticipated terms and timing, including obtaining required regulatory approvals and other conditions to the completion of the acquisition;

• the financing arrangements relating to the Lima Acquisition;

• the effects of the Lima Acquisition on the Company’s and Lima’s operations;

• the potential impact of the announcement or the consummation of the acquisition of Lima on relationships with customers, suppliers and other third parties;

• an inability to identify, finance, acquire and successfully integrate suitable acquisition candidates;

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

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

• other risks and factors listed in Item 1A.

• other risks and factors listed in Part II, Item 1A.

“Risk Factors” in this Form 10-Q and Part 1, Item 1A.

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

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

“Risk Factors” in our 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.

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

Please see Part I, Item 1.

“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.

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.

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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.

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 below.

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:

The comparability of our operating results for the three and nine months ended September 29, 2023 to the comparable period in 2022 is affected by the following significant items:

Strategic Acquisitions

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Acquisitions can significantly affect our reported results, and we report the change in our Net sales between periods both from existing and acquired businesses.

The change in Net sales due to acquisitions for the three 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.

The change in Net sales due to acquisitions for the three and nine months ended September 29, 2023 presented in this filing represents the incremental sales as a result of acquisitions that closed subsequent to the beginning of the comparable prior period.

During the nine months ended September 29, 2023, we completed one business combination and one asset 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 $96.9 million.

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

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

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

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

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

In the second quarter of 2022, we acquired KICo Knee Innovation Company Pty Limited and subsidiaries, an Australian private company doing business as 360 Med Care, which is a medical device distributor that bundles certain computer-assisted surgery and patient experience enhancement programs to add value to the device supply arrangements with surgeons, hospitals, and insurers.

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

On July 20, 2023, we completed the asset acquisition of SEAL, developers of a broad line of external fixation products for total consideration of $28.2 million.

During the year ended December 31, 2022, we completed two business combinations in our Reconstructive segment for aggregate net cash consideration of $50.5 million and four asset acquisitions in our Prevention & Recovery segment for total consideration of $22.3 million, of which $12.6 million was paid in cash and $9.6 million consists of deferred and contingent consideration.

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.

On September 22, 2023, as discussed more fully in Note 4, “Acquisitions and Investments,” in our Notes to Condensed Consolidated Financial Statements included in this Form 10-Q, we entered into a definitive agreement to acquire Lima, a privately held global orthopedic company focused on restoring motion through digital innovation and customized hardware.

We have incurred and expect to continue to incur non-recurring costs associated with the Lima Acquisition.

The closing of the Lima Acquisition is subject to the receipt of applicable regulatory approvals and other customary closing conditions and is expected to be completed in the first quarter of 2024.

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.

During the three and nine months ended September 29, 2023, approximately 31% and 32% of our sales, respectively, were derived from operations outside the U.S., the majority of which is in Europe, with the remaining portion mostly in the Asia-Pacific region.

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

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

For the three months ended 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%.

For the three months ended September 29, 2023 compared to the three months ended September 30, 2022, fluctuations in foreign currencies increased Net sales by 1.4%, increased Gross profit by approximately 0.3%, and increased operating expenses by approximately 1.7%.

For the nine months ended September 29, 2023 compared to the nine months ended September 30, 2022, fluctuations in foreign currencies increased Net sales by 0.1%, decreased Gross profit by approximately 0.6%, and increased operating expenses by approximately 0.3%.

The unfavorable impact on gross profits is due to the Mexican peso strengthening and its effect on costs at one of our primary manufacturing facilities.

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

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

The following tables set forth a reconciliation of net loss from continuing operations, the most directly comparable financial statement measure, to Adjusted EBITDA, for the three and six months ended June 30, 2023 and July 1, 2022.

The following tables set forth a reconciliation of net income (loss) from continuing operations, the most directly comparable financial statement measure, to Adjusted EBITDA, for the three and nine months ended September 29, 2023 and September 30, 2022.

Three Months Ended

June 30, 2023 July 1, 2022

September 29, 2023 September 30, 2022

Prevention & Recovery Reconstructive Total Prevention & Recovery Reconstructive Total

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Income tax benefit (6.1) (12.3)

Other expense, net 0.8 —

Unrealized gain on investment in ESAB Corporation — (135.5)

Other (income) expense, net

Unrealized (gain) loss on investment in ESAB Corporation

Gain on cost basis investment — (8.8)

Debt extinguishment charges — —

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Amortization of acquired intangibles 23.5 10.5 34.0 19.8 12.2 32.0

Insurance settlement gain (3)

Insurance settlement (gain) loss (2)

— — — 0.7 0.3 1.0

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Adjusted EBITDA margin (non-GAAP) 16.3 % 14.5 % 15.7 % 15.4 % 13.9 % 14.9 %

(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.

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

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

Six Months Ended

June 30, 2023 July 1, 2022

Nine Months Ended

September 29, 2023 September 30, 2022

Prevention & Recovery Reconstructive Total Prevention & Recovery Reconstructive Total

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Income tax benefit (17.9) (16.2)

Other expense, net 0.1 —

Unrealized gain on investment in ESAB Corporation — (135.5)

Other (income) expense, net

Unrealized (gain) loss on investment in ESAB Corporation

Gain on cost basis investment — (8.8)

Debt extinguishment charges — 20.1

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Amortization of acquired intangibles 70.2 28.1 98.3 58.4 36.3 94.6

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

Insurance settlement (gain) loss (3)

— — — (21.4) (10.6) (32.1)

Inventory step-up — 0.1 0.1 — 12.0 12.0

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Adjusted EBITDA margin (non-GAAP) 13.7 % 17.1 % 15.0 % 13.2 % 15.4 % 14.0 %

(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.

(1) Non-operating components of Net income (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 nine months ended September 29, 2023 and September 30, 2022, respectively.

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

Total Company

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

Net sales for the three and nine months ended September 29, 2023 increased from the three and nine months ended September 30, 2022.

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

Three Months Ended Six Months Ended

Three Months Ended Nine 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

For the three and nine months ended September 30, 2022 $ 383.8 $ 1,154.4

Components of Change:

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33.7 8.8 % 97.8 8.5 %

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

For the three and nine months ended September 29, 2023 $ 417.5 $ 1,252.2

(1) Excludes the impact of foreign exchange rate fluctuations and acquisitions, thus providing a measure of change due to factors such as price, product mix and volume.

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(3) Represents the difference between prior year sales valued at the actual prior year foreign exchange rates and prior year sales valued at current year foreign exchange rates.

The increase in Net sales during the three and 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.

The increase in Net sales during the three and nine months ended September 29, 2023 compared to the prior year period was primarily attributable to an increase in sales from existing businesses across both of our segments, while acquisition and favorable foreign currency translation also added to the growth to a lesser extent.

Existing business sales in our Reconstructive segment increased $13.1 million and $60.0 million during the three and nine months ended September 29, 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 $10.5 million and $30.1 million during the three and nine months ended September 29, 2023, respectively, due to volume and inflation-related pricing increases.

Net sales from acquisitions increased in the three and nine months ended September 29, 2023 primarily due to the Novastep acquisition in June 2023.

The weakening of the U.S.

dollar relative to other currencies resulted in $5.5 million and $1.0 million favorable foreign currency translation impacts during the three and nine months ended September 29, 2023.

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

Three Months Ended Nine Months Ended

September 29, 2023 September 30, 2022 September 29, 2023 September 30, 2022

(Dollars in millions)

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Research and development expense $ 19.9 $ 15.6 $ 57.0 $ 46.1

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

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

Operating loss $ (20.5) $ (17.9) $ (60.0) $ (43.0)

Operating loss margin (4.9) % (4.7) % (4.8) % (3.7) %

Net income (loss) from continuing operations $ (19.5) $ (65.9) $ (56.9) $ 16.6

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Items excluded from Adjusted EBITDA:

Restructuring and other related charges (1)

Restructuring and other charges (1)

$ 5.3 $ 3.0 $ 12.1 $ 8.5

MDR and other costs

$ 6.2 $ 3.6 $ 23.0 $ 10.6

Strategic transaction costs $ 10.5 $ 8.1 $ 27.5 $ 32.5

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Amortization of acquired intangibles $ 34.0 $ 32.0 $ 98.3 $ 94.6

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

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

Inventory step-up $ — $ 2.1 $ 0.1 $ 12.0

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

Unrealized (gain) loss on investment in ESAB Corporation $ — $ 63.1 $ — $ (72.4)

Gain on cost basis investment $ — $ (8.8) $ — $ (8.8)

Interest expense, net $ 5.8 $ 6.3 $ 15.5 $ 17.9

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Income tax benefit $ (6.1) $ (12.3) $ (17.9) $ (16.2)

(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.

Restructuring and other charges in cludes $— 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 nine months ended September 30, 2022, respectively.

Three Months Ended September 29, 2023 Compared to Three Months Ended September 30, 2022

Gross profit increased in the three months ended September 29, 2023 compared with the prior year period due to a $15.9 million increase in our Reconstructive segment and a $11.2 million increase in our Prevention & Recovery segment.

Gross profit margin increased due to the aforementioned factors.

Selling, general and administrative expense increased $14.2 million in the three months ended June 30, 2023 compared to the prior year period, primarily due to increased commissions driven by higher sales, investments to support growth, spending on MDR and other costs, and cost inflation, partially offset by cost reduction initiatives.

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

Selling, general and administrative expense increased $22.0 million in the three months ended September 29, 2023 compared to the prior year period, primarily due to increased commissions driven by higher sales, investments to support growth, spending on MDR and other costs, and cost inflation, partially offset by cost reduction initiatives.

Research and development costs also increased compared to the prior year period, primarily due to increased spend within recently acquired

businesses in our Reconstructive segment, which is investing in surgical productivity solutions and computer-assisted surgery technologies.

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

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

The effective tax rate for Net loss from continuing operations during the three months ended June 30, 2023 was 24.4%, which differed from the 2023 U.S.

Interest expense, net decreased in the three months ended September 29, 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 $2.6 million interest received on the Swiss Franc cross-currency swap agreements.

The effective tax rate for Net loss from continuing operations during the three months ended September 29, 2023 was 23.7%, which differed from the 2023 U.S.

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

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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.

The effective tax rate for Net loss from continuing operations during the three months ended September 30, 2022 was 15.8%, which was lower than the 2022 U.S.

federal statutory tax rate of 21% mainly due to non-taxable unrealized loss on the investment in ESAB and gain on cost basis investment, offset by non-deductible costs related to the tax-free Separation.

Net loss from continuing operations decreased in the three months ended September 29, 2023 compared with the prior year period, primarily due to the one-time items in the prior year period, including the Unrealized loss on investment in ESAB Corporation and Gain on cost basis investment and the aforementioned Gross profit and Selling, general, and administrative increases.

Adjusted EBITDA increased due to organic growth.

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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.

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.

Nine Months Ended September 29, 2023 Compared to Nine Months Ended September 30, 2022

Gross profit increased in the nine months ended September 29, 2023 compared with the prior year period due to a $64.6 million increase in our Reconstructive segment and a $24.2 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 $11.9 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.

Selling, general and administrative expense increased $55.0 million in the nine months ended September 29, 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 and a reduction of strategic transaction costs.

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.

Interest expense, net decreased in the nine months ended September 29, 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 $4.7 million interest received on the Swiss Franc cross-currency swap agreements.

The effective tax rate for Net loss from continuing operations during the nine months ended September 29, 2023 was 23.9%, which differed from the 2023 U.S.

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

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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.

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.

The effective tax rate for Net income from continuing operations during the nine months ended September 30, 2022 was (3,434.4)%, which differed from the 2022 U.S.

federal statutory tax rate of 21% mainly due to non-taxable unrealized gain on the investment in ESAB and gain on cost basis investment, offset by non-deductible costs related to the tax-free Separation.

Net loss from continuing operations increased in the nine months ended September 29, 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, Gain on cost basis investment, and Insurance settlement gain, partially offset by the reduction of debt extinguishment charges and the aforementioned Gross profit and Selling, general, and administrative increases.

Adjusted EBITDA increased due to organic growth.

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

Three Months Ended Six Months Ended

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

Three Months Ended Nine Months Ended

September 29, 2023 September 30, 2022 September 29, 2023 September 30, 2022

(Dollars in millions)

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Research and development expense $ 9.2 $ 8.5 $ 26.6 $ 25.5

Operating loss (GAAP) $ (4.4) $ 13.4 $ (22.6) $ (1.0)

Operating loss margin (GAAP) (1.6) % 5.1 % (4.3) % (0.2) %

Operating income (loss) (GAAP)

$ 0.8 $ (0.4) $ (21.8) $ (1.4)

Operating income (loss) margin (GAAP)

0.3 % (0.2) % (2.7) % (0.2) %

Adjusted EBITDA (non-GAAP) $ 44.1 $ 39.5 $ 109.1 $ 101.1

Adjusted EBITDA margin (non-GAAP) 16.3 % 15.4 % 13.7 % 13.2 %

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.

Three Months Ended September 29, 2023 Compared to Three Months Ended September 30, 2022

Net sales in our Prevention & Recovery se gment increased $13.8 million, or 5.4%, in the three months ended September 29, 2023 compared with the prior year period, driven by increases in volume and inflation-related pricing increases.

Gross profit increa sed $11.2 million due to inflation-related pricing increases, improved sales mix in our existing businesses, and reductions in freight costs .

Gross profit margin increased 150 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.

Selling, general and administrative expense increased slightly due to investment to support growth and spending on MDR and other costs, partially offset by a reduction of allocated corporate costs due to the growth in the Reconstructive segment.

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

Adjusted EBITDA and Adjusted

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

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

Net sales in our Prevention and Recovery segment increased $15.6 million, or 3.1%, despite currency translation pressure of $4.1 million in the six months ended June 30, 2023 compared with the prior year period, driven by organic growth in existing businesses which was aided by pricing increases to mitigate inflation.

Adjusted EBITDA and Adjusted EBITDA margin increased due to improved sales mix.

Nine Months Ended September 29, 2023 Compared to Nine Months Ended September 30, 2022

Net sales in our Prevention and Recovery segment increased $29.4 million, or 3.8%, despite currency translation pressure of $0.7 million in the nine months ended September 29, 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 $24.2 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 110 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.

Selling, general and administrative expense increased primarily due to investment to support growth, spending on MDR and other costs, offset by a reduction of allocated corporate costs due to the growth in the Reconstructive segment.

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.

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 nine months ended September 29, 2023 compared to the prior year period.

Reconstructive

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

Three Months Ended Six Months Ended

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

Three Months Ended Nine Months Ended

September 29, 2023 September 30, 2022 September 29, 2023 September 30, 2022

(Dollars in millions)

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Adjusted EBITDA margin (non-GAAP) 14.5 % 13.9 % 17.1 % 15.4 %

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.

Three Months Ended September 29, 2023 Compared to Three Months Ended September 30, 2022

Net sal es in our Reconstructive segment increased in the three months ended September 29, 2023 compared to the prior year period, by $19.9 million, or 15.6%, primarily due to higher sales volumes driven by broad market strength and market outperformance.

Gro ss profit and profit margin increased over the same period , primarily due to increased sales in our existing businesses, improved operating cost leverage, and the benefit of a decrease of $2.1 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.

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

Without the impact of

recent acquisitions, Adjusted EBITDA margins increased 120 basis points compared to prior year.

Without the impact of recent acquisitions, Adjusted EBITDA margins increased 120 basis points compared to prior year.

Recent acquisitions were dilutive to the margin by approximately 60 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

Nine Months Ended September 29, 2023 Compared to Nine Months Ended September 30, 2022

Net sal es increased in our Reconstructive segment by $68.4 million, or 17.6%, 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.

Gro ss profit increased in the nine months ended September 29, 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 $11.9 million in inventory fair value step-up amortization charges, which also led to an increase in Gross profit margin.

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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.

As of September 29, 2023, the remaining stock repurchase authorization provided by our Board of Directors was $100.0 million.

The timing, amount, and method of shares repurchased is determined by management based on its evaluation of market conditions and other factors.

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Term Loan and Revolving Credit Facility

On April 4, 2022, we entered into a new credit agreement (the “Enovis Credit Agreement”), consisting of a $900 million revolving credit facility (the “Revolver”) with an April 4, 2027 maturity date and a term loan with an initial aggregate principal amount of $450 million which has been fully extinguished (the “Enovis Term Loan”).

On April 4, 2022, we entered into a new credit agreement (the “Enovis Credit Agreement”), consisting of a $900 million revolving credit facility (the “Revolver”) with an April 4, 2027 maturity date and a term loan with an initial aggregate principal amount of $450 million (the “Enovis Term Loan”) which was fully extinguished during the first quarter of 2023.

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

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

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

On November 18, 2022, we 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 Enovis Term Loan that was outstanding at that time 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.

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 and thereafter, stepping down to 3.50:1.00 for the fiscal quarter ending June 30, 2024 and thereafter, 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.

In connection with the Lima Acquisition, on October 23, 2023 we entered into an amendment to the Enovis Credit Agreement (the “Amendment”).

The Amendment provides for a new term loan commitment in the aggregate amount of $400 million.

The term loan facility extended to us under the Amendment will be available on the date the Lima Acquisition is consummated, will amortize at 1.25%, and mature on April 4, 2027.

Pursuant to the Amendment, effective as of the date of consummation of the Lima Acquisition, (i) all facilities under the Credit Agreement (including the Term Loan Facility) will become secured by certain personal property of the Company and certain of its subsidiaries, subject to limitations and exclusions;

(ii) the financial covenant under the Credit Agreement will be adjusted from total leverage ratio to senior secured leverage ratio and will require the senior secured leverage ratio to be no more than 3.75:1.00 with a step down to 3.50:1.00 commencing with the fiscal quarter ending June 30, 2024;

(iii) certain changes to the negative covenants will become effective (including restrictions on repayments of junior financing and amendments to junior financing documents);

and (iv) certain additional changes will be implemented (including the removal of the guaranty fallaway provision).

Convertible Notes and Capped Calls

In connection with the signing of the definitive stock purchase agreement for the Lima Acquisition, we entered into several financing agreements in October 2023.

On October 24, 2023, we issued $460 million aggregate principal amount of senior unsecured convertible notes in a private placement pursuant to Rule 144A (the “2028 Notes”).

The 2028 Notes have an interest rate of 3.875%, payable semiannually in arrears on April 15 and October 15 of each year, beginning April 15, 2024.

The 2028 Notes will mature on October 15, 2028 unless earlier repurchased, redeemed, or converted.

We also entered into privately negotiated capped call transactions with certain of the initial purchasers of the 2028 Notes.

The capped call transactions are intended generally to mitigate potential dilution to our common stock upon conversion of any 2028 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2028 Notes, as the case may be, with such reduction and/or offset subject to a cap.

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.

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.

Total letters of credit and surety bonds of $11.2 million were outstanding as of September 29, 2023.

As of September 29, 2023, we had $32.1 million of Cash and cash equivalents, an increase of $7.8 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

Nine Months Ended

September 29, 2023 September 30, 2022

(Dollars in millions)

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Proceeds from sale of property, plant and equipment 42.6 2.7

Acquisitions, net of cash received, and investments (98.7) (35.1)

Payments for acquisitions, net of cash received, and investments (131.4) (73.4)

Net cash used in investing activities (183.1) (139.3)

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Payment of debt extinguishment costs — (12.7)

Deferred consideration payments and other (1.7) (9.8)

Other financing (1)

Net cash provided by (used in) financing activities 125.0 (506.8)

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Increase (decrease) in Cash and cash equivalents $ 7.8 $ (664.4)

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

(1) Primarily includes payments of debt issuance costs and deferred consideration payments, which are fixed payments for acquisitions which are contractually paid in years after the acquisition date.

Cash used in operating activities related to discontinued operations for the nine months ended September 29, 2023 and nine months ended September 30, 2022 was $1.2 million and $26.8 million, respectively.

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.

Excluding the impact of cash used in discontinued operations, cash flows from operating activities increased $60.9 million year-over-year.

This increase includes a lower investment in working capital of $20 million, a decrease in cash paid for interest of $18 million, and favorable changes in accrued compensation and benefits of approximately $13 million.

Cash flows used in investing activities during the nine months ended September 29, 2023 were $183.1 million compared to $139.3 million in the prior year period due to higher investments in the current year driven by acquisition of Novastep for $96.9 million, net of cash received;

partially offset by proceeds from sale of an asset previously classified as held for sale for $42.6 million .

The amounts included in Purchases of property, plant and equipment and intangibles related to discontinued operations for the nine months ended September 30, 2022 were $5.9 million.

The amounts included in Proceeds from sale of property, plant and equipment related to discontinued operations for the nine months ended September 30, 2022 were $2.7 million.

Cash flows provided by financing activities during the nine months ended September 29, 2023 include $133.2 million of net debt borrowings primarily used for the acquisitions of Novastep and SEAL.

Cash flows used in financing activities for the nine months ended September 30, 2022 include net debt repayments of $1,630.2 million, partially offset by the Distribution from ESAB Corporation, net of $1,143.4 million.

Critical Accounting Policies and Estimates

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

Actual results may vary from what our management

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

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

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

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies” in our 2022 Form 10-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis