What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-02 compared with 2023-11-07 · 148 added, 220 removed, 219 unchanged (63% of the section changed)

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

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

“Financial Statements” of this Quarterly Report on Form 10-Q for the quarterly period ended March 29, 2024 (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, 2023 (the “2023 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 22, 2024.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

the Company’s recently completed 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”);

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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:

• 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;

• the effects of the Lima Acquisition on the Company’s and Lima’s combined operations, including any effects on relationships with customers, suppliers and other third parties;

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

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

• the effects of the COVID-19 global pandemic;

• the effects of contagious diseases, such as the COVID-19 pandemic, terrorist activity, man-made or natural disasters and war;

• significant movements in foreign currency exchange rates;

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

• extensive government regulation and oversight of our products;

• extensive government regulation and oversight of our products, including the requirement to obtain and maintain regulatory approvals and clearances;

• safety issues or recalls of our products;

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• improper marketing or promotion of our products;

• impacts of potential legislative or regulatory reforms on our business

• risks associated with the clinical trial process;

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• 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;

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

• non-compliance with non-U.S.

laws, regulations and policies;

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

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“Business” in our 2023 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.

• 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.

Prevention & Recovery (“P&R”) and Reconstructive (“Recon”).

• P&R - 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.

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

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

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Items Affecting Comparability of Reported Results and Other Recent Developments

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:

The comparability of our operating results for the three months ended March 29, 2024 to the comparable period in 2023 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 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.

Acquisitions can significantly affect our reported results.

On January 3, 2024, the Company acquired LimaCorporate S.p.A.

(“Lima”), a privately held global orthopedic company focused on restoring motion through digital innovation and customized hardware for total fair value consideration of $868.5 million, net of acquired cash.

The fair value total consideration includes the fair value of contingently issuable shares of Enovis stock of $107.9 million which is dependent on the non-occurrence of certain future events and is expected to be settled within one year of the acquisition closing.

This acquisition expands and complements our current product offerings internationally within our Recon segment.

During the year ended December 31, 2023, we completed one acquisition accounted for as a business combination and two asset acquisitions in our Recon 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 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.

On July 20, 2023, we completed an asset acquisition of a broad line of external fixation products from D.N.E., LLC for total consideration of $28.2 million.

These two acquisitions are valuable additions serving to enhance the offerings under our foot & ankle product lines.

On October 5, 2023, we acquired a 100% interest in Precision AI, a developer of surgical planning software.

The acquisition of Precision AI complements our current

product offerings with advanced surgical planning software.

The software has capabilities to be used for shoulder reconstruction and there is an opportunity to expand this to additional anatomies.

Foreign Currency Fluctuations

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.

During the three months ended March 29, 2024, approximately 43% of our sales were derived from operations outside the United States., the majority of which are in Europe, with the remaining portion primarily in the Asia-Pacific region.

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

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

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

are denominated in currencies other than the U.S.

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

and denominated in currencies other than the U.S.

The majority of our Net sales derived from operations outside the United States are denominated in currencies other than the U.S.

Similar portions of our manufacturing and employee costs are also outside the United States and denominated in currencies other than the U.S.

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

For the 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.

For the three months ended March 29, 2024 compared to the three months ended March 31, 2023, fluctuations in foreign currencies increased Net sales by 0.4%, decreased Gross profit by approximately 0.3%, and increased operating expenses by approximately 0.6%.

Sales in our P&R and Recon segments typically peak in the fourth quarter.

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

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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.

Proforma sales

Adjusted EBITDA, Adjusted EBITDA margin, proforma sales, and proforma sales growth, which are 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.

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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.

Proforma sales adjusts net sales for prior periods to include the sales of acquired businesses (including Lima and Novastep) prior to our ownership from acquisitions that closed after March 31, 2023.

Proforma sales growth represents the change in net sales for the current period compared to proforma sales for the comparable prior year period.

Proforma sales and proforma sales growth assist our management in comparing operating performance over time because the impact of significant acquisitions subsequent to prior comparison periods may obscure underlying business trends and make comparisons of period-over-period performance difficult.

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.

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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 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

September 29, 2023 September 30, 2022

Prevention & Recovery Reconstructive Total Prevention & Recovery Reconstructive Total

March 29, 2024 March 31, 2023

P&R Recon Total P&R Recon Total

(Dollars in millions)

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$ (71.8) $ (22.8)

Income tax benefit (6.1) (12.3)

Income tax expense (benefit)

Other (income) expense, net

Unrealized (gain) loss on investment in ESAB Corporation

Gain on cost basis investment — (8.8)

Debt extinguishment charges — —

Interest expense, net 20.0 5.7

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Amortization of acquired intangibles 23.2 17.7 40.9 23.3 8.8 32.0

Insurance settlement (gain) loss (2)

— — — 0.7 0.3 1.0

Inventory step-up — 5.1 5.1 — 0.1 0.1

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(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.

Nine Months Ended

September 29, 2023 September 30, 2022

Prevention & Recovery Reconstructive Total Prevention & Recovery Reconstructive Total

(Dollars in millions)

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

$ (56.9) $ 16.6

Income tax benefit (17.9) (16.2)

Other (income) expense, net

Unrealized (gain) loss on investment in ESAB Corporation

Gain on cost basis investment — (8.8)

Debt extinguishment charges — 20.1

Interest expense, net 15.5 17.9

Operating loss (GAAP) $ (21.8) $ (38.1) (60.0) $ (1.4) $ (41.6) (43.0)

Operating loss margin (2.7) % (8.3) % (4.8) % (0.2) % (10.7) % (3.7) %

Adjusted to add (deduct):

Restructuring and other charges (2)

6.2 5.9 12.1 4.7 3.8 8.5

MDR and other costs (3)

11.6 11.4 23.0 7.1 3.6 10.6

Strategic transaction costs (3)

10.6 16.9 27.5 21.6 11.0 32.5

Stock-based compensation (3)

15.3 8.8 24.1 14.4 7.3 21.7

Depreciation and other amortization 17.0 45.2 62.2 17.7 38.4 56.1

Amortization of acquired intangibles 70.2 28.1 98.3 58.4 36.3 94.6

Insurance settlement (gain) loss (3)

— — — (21.4) (10.6) (32.1)

Inventory step-up — 0.1 0.1 — 12.0 12.0

Adjusted EBITDA (non-GAAP) $ 109.1 $ 78.4 $ 187.5 $ 101.1 $ 60.1 $ 161.1

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

(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.

(2) Restructuring and other charges includes $0.3 million of expense classified as Cost of sales on the Company’s Condensed Consolidated Statements of Operations for the three months ended March 31, 2023.

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

Total Company

Net sales for the three and nine months ended September 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 Nine Months Ended

Net Sales Change % Net Sales Change %

(Dollars in millions)

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

Components of Change:

Existing Businesses (1)

23.6 6.1 % 90.2 7.8 %

Acquisitions (2)

4.6 1.2 % 6.6 0.6 %

Foreign Currency Translation (3)

The following table summarizes our results for comparable periods including proforma financial information.

Three Months Ended

March 29, 2024 March 31, 2023 Growth rate

March 31, 2023 Growth rate

GAAP Proforma (1)

(In millions)

Prevention & Recovery:

Bracing & Support $ 104.6 $ 104.4 0.2 % $ 104.4 0.2 %

Other P&R 66.4 62.3 6.4 % 62.3 6.4 %

International P&R 88.1 84.0 4.8 % 84.0 4.8 %

Total Prevention & Recovery

259.0 250.7 3 % 250.7 3.3 %

Reconstructive:

Reconstructive 123.7 103.5 19.6 % 118.9 4.1 %

International Reconstructive 133.5 51.9 157.2 % 121.4 10.0 %

Total Reconstructive

257.3 155.4 65.5 % 240.3 7.0 %

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.

(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 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.

Total $ 516.3 $ 406.2 27.1 % $ 491.1 5.1 %

(1) Proforma amounts for Recon include the sales of acquired businesses prior to our ownership from our acquisitions that settled after March 31, 2023.

Net sales for the three months ended March 29, 2024 increased from the three months ended March 31, 2023 by $110.1 million, or 27.1% primarily attributable to an increase in sales from the Lima Acquisition and to a lesser extent from growth in existing businesses.

Recon sales increased by $101.8 million, or 65.5%, primarily due to the Lima Acquisition and the Novastep acquisition to a lesser extent, while P&R increased by $8.3 million, or 3.3%, from organic growth in volumes.

The Recon proforma sales growth was approximately 7.0% driven by increased volume and market share gains, partly offset by integration-related impacts.

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.

dollar relative to other currencies resulted in $1.7 million, or 0.4%, favorable foreign currency translation impacts on total net sales during the three months ended March 29, 2024.

Operating Results

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

Three Months Ended Nine Months Ended

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

Three Months Ended

March 29, 2024 March 31, 2023

(Dollars in millions)

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Operating loss margin (6.8) % (6.1) %

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

Net loss from continuing operations $ (71.8) $ (22.8)

Net loss from continuing operations margin (GAAP) (13.9) % (5.6) %

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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 $ 20.8 $ 11.6

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Amortization of acquired intangibles $ 40.9 $ 32.0

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

Inventory step-up $ 5.1 $ 0.1

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

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

Interest expense, net $ 20.0 $ 5.7

Debt extinguishment charges $ — $ — $ — $ 20.1

Other income $ (0.8) $ (0.3) $ (0.7) $ (0.3)

Other expense (income), net

$ 24.2 $ (0.7)

Income tax benefit $ (7.4) $ (7.1)

(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 nine months ended September 29, 2023, respectively.

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 $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 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.

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.

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

Three Months Ended March 29, 2024 Compared to Three Months Ended March 31, 2023

Gross profit increased in the three months ended March 29, 2024 compared with the prior year period due to a $58.5 million increase in our Reconstructive segment and a $4.4 million increase in our Prevention & Recovery segment.

The Gross profit increase was attributable to increased sales from the Lima Acquisition, offset by an increase of $5.0 million in inventory fair value step-up amortization charges.

Gross profit margin decreased by 0.2% due to the aforementioned increase in inventory fair value step-up amortization charge from the Lima Acquisition.

Selling, general and administrative expense increased $49 million in the three months ended March 29, 2024 compared to the prior year period, primarily due to increased commissions aligning with the increase in sales and increased selling, general and administrative costs from the Lima Acquisition.

Research and development costs also increased compared to the prior year period, primarily due to the Lima Acquisition and 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 the Lima Acquisition.

Interest expense, net increased in the three months ended March 29, 2024 compared to the prior year period due to an increase in debt balances as a result of the financing for the Lima acquisition.

The effective tax rate for Net loss from continuing operations during the three months ended March 29, 2024 was 9.3%, which was lower than the 2024 U.S.

federal statutory tax rate of 21%, primarily due to a build in valuation allowance on interest limitation carryforwards, non-deductible expenses and U.S.

taxation on international operations.

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.

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.

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 $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 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.

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.

This was partially offset by tax credits for research and development and non-U.S.

income taxed at lower rates.

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

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

income being taxed at lower rates, the release of a valuation allowance on non-U.S.

attributes, and tax credits for research and development.

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

taxation on international operations.

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.

Adjusted EBITDA margin excluding the effects of recent acquisitions and foreign currency pressures increased by approximately 180 basis points.

Net loss from continuing operations increased in the three months ended March 29, 2024 compared with the prior year period, primarily due to a $14.3 million increase in interest expense, net, a $13.4 million mark-to-market loss on the Contingent Acquisition Shares liability and an $11.1 million loss in 2024 on the non-designated forward currency contracts for the Lima Acquisition.

Adjusted EBITDA increased due to the acquisition of Lima.

Business Segments

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

Prevention & Recovery and Reconstructive.

P&R and Recon.

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.

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

Three Months Ended Nine Months Ended

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

Three Months Ended

March 29, 2024 March 31, 2023

(Dollars in millions)

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

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 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.

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

Three Months Ended March 29, 2024 Compared to Three Months Ended March 31, 2023

Net sales in our Prevention & Recovery segment increased $8.3 million, or 3.3%, in the three months ended March 29, 2024 compared with the prior year period, driven by increases in volume.

Gross profit increased $4.4 million consistent with the increase in net sales.

Gross profit margin increased by 10 basis points over the prior period.

Selling, general and administrative expense increased slightly, but decreased as a percentage of net sales, due to operational efficiencies.

Operating loss decreased due to a $6.2 million reduction in strategic transaction costs and to a lesser extent lower depreciation and amortization as well as a reduced stock compensation cost allocation, largely offset by increased Restructuring and other charges.

Adjusted EBITDA and Adjusted EBITDA margin increased due to the aforementioned gross profit increase and operational efficiencies.

Reconstructive

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

Three Months Ended Nine Months Ended

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

Three Months Ended

March 29, 2024 March 31, 2023

(Dollars in millions)

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Adjusted EBITDA margin (non-GAAP) 21.5 % 19.8 %

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.

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 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.

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 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.

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 230 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.

Three Months Ended March 29, 2024 Compared to Three Months Ended March 31, 2023

Net sal es in our Reconstructive segment increased by $101.9 million, or 65.6%, in the three months ended March 29, 2024 primarily due to higher sales volumes driven by our acquisition of Lima.

The Recon proforma sales growth was approximately 7.0% driven by increased volume and market share gains and offset by integrated related impacts.

Gro ss profit increased over the same period , primarily due to higher net sales due to our acquisition of Lima, improved operating cost leverage, offset by an increase of $5.0 million in inventory fair value step-up amortization charges.

Gross profit margin decreased primarily due to increased inventory fair value step-up amortization charges and product mix.

Selling, general and administrative expense increased over the same period primarily due to increased commissions driven by higher sales, a general and administrative expense increase due to the Lima Acquisition, and increases in existing business investments to support growth.

Research and development expense increased compared to the prior year period due to the Lima Acquisition and increased spending within other 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 a $15.4 million increase in strategic transaction costs including the deal costs for the Lima Acquisition and integration costs, and an increase in amortization of acquired intangibles and inventory fair value step-up amortization charges, offset by the aforementioned factors driving growth.

Adjusted EBITDA increased primarily due to increased gross profit from the Lima Acquisition and improved operating cost leverage.

Liquidity and Capital Resources

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.

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

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

As of March 29, 2024, the remaining stock repurchase authorization provided by our Board of Directors was $100 million.

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

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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 (the “Enovis Term Loan”) which was fully extinguished during the first quarter of 2023.

Our credit agreement (the “Enovis Credit Agreement”) initially consisted 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 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, 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.

As of March 29, 2024, there was $400 million available on the Revolver.

The Enovis Credit Agreement contains customary covenants limiting the ability of the Company and its subsidiaries to, among other things, incur debt or liens, merge or consolidate with others, dispose of assets, make investments, or pay dividends.

In addition, the Enovis Credit Agreement contains financial covenants requiring the Company to maintain (i) a 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.

In addition, the Enovis Credit Agreement contains financial covenants requiring the Company to maintain (i) a maximum senior secured 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.

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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;

The term loan facility extended to the Company under the Amendment was funded on January 3, 2024, the date the Lima Acquisition was consummated.

The term loan requires quarterly principal repayments at 1.25% of the initial aggregate principal amount, which is $5 million each quarter, and matures on April 4, 2027 (the “2024 Term Loan”).

Pursuant to the Amendment, effective as of the date of consummation of the Lima Acquisition, (i) all facilities under the Enovis Credit Agreement (including the 2024 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 Enovis Credit Agreement were adjusted to a new senior secured leverage ratio;

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

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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 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.

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

Total letters of credit and surety bonds of $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:

Nine Months Ended

September 29, 2023 September 30, 2022

Total letters of credit and surety bonds of $32.8 million were outstanding as of March 29, 2024.

As of March 29, 2024, we had $74.5 million of Cash, cash equivalents and restricted cash, an increase of $29.7 million from the balance as of December 31, 2023 of $44.8 million.

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

Three Months Ended

March 29, 2024 March 31, 2023

(Dollars in millions)

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Purchases of property, plant and equipment and intangibles (36.9) (30.4)

Proceeds from sale of property, plant and equipment 42.6 2.7

Payments for acquisitions, net of cash received, and investments (760.9) (3.9)

Net cash used in investing activities (797.8) (34.4)

Net borrowings (repayments) of debt 133.2 (1,630.2)

Distribution from ESAB Corporation, net — 1,143.4

Net borrowings of debt 873.0 24.9

Proceeds from issuance of common stock, net 0.9 0.4

Payment of debt extinguishment costs — (12.7)

Other financing

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

Net cash provided by financing activities 864.5 24.5

Effect of foreign exchange rates on Cash and cash equivalents (0.8) —

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

(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.

Increase (decrease) in Cash, cash equivalents and restricted cash $ 29.7 $ (2.4)

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 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.

Cash flows from operating activities decreased $43.6 million year-over-year.

This decrease includes a higher investment in working capital of $29 million, higher strategic transaction costs of $9 million and an increased cash paid for interest of $7 million.

Cash flows used in investing activities during the three months ended March 29, 2024 were $797.8 million compared to $34.4 million in the prior year period due to higher investments in the current year driven by the acquisition of Lima for $760.7 million, net of cash received.

Cash flows provided by financing activities during the three months ended March 29, 2024 include $873.0 million of net debt borrowings primarily used for the acquisition of Lima, capital expenditures and operations.

Cash flows provided by financing activities for the three months ended March 31, 2023 include net debt borrowings of $24.9 million primarily used for capital expenditures.

Critical Accounting Policies and Estimates

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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.

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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis