Enovis CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of Enovis Corporation (“Enovis,” “the Company,” “we,” “our,” and “us”) should be read in conjunction with the Condensed Consolidated Financial Statements and related footnotes included in Part I. Item 1. “Financial Statements” of this Quarterly Report on Form 10-Q for the quarterly period ended March 29, 2024 (this “Form 10-Q”) and the Consolidated Financial Statements and related footnotes included in Part II. Item 8. “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended December 31, 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 Some of the statements contained in this Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Form 10-Q is filed with the SEC. Statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements regarding: the Company’s recently completed acquisition (the “Lima Acquisition”) of LimaCorporate S.p.A. (“Lima”); 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 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; plans, strategies and objectives of management for future operations including statements relating to potential acquisitions, compensation plans or purchase commitments; developments, performance, industry or market rankings relating to products or services; future economic conditions or performance, including the impact of increasing inflationary pressures; the outcome of outstanding claims or legal proceedings; potential gains and recoveries of costs; assumptions underlying any of the foregoing; and any other statements that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future. Forward-looking statements may be characterized by terminology such as “believe,” “anticipate,” “should,” “would,” “could,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy,” “targets,” “aims,” “seeks,” “sees,” and similar expressions. These statements are based on assumptions and assessments made by our management as of the filing of this Form 10-Q in light of their experience and perception of historical trends, current conditions, expected future developments and other factors we believe to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties and actual results could differ materially due to numerous factors, including but not limited to the following: • 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; • the availability of additional capital and our inability to pursue our growth strategy without it; • our indebtedness and our debt agreements, which contain restrictions that may limit our flexibility in operating our business; • our restructuring activities, which may subject us to additional uncertainty in our operating results; • any impairment in the value of our intangible assets, including goodwill; • a material disruption at any of our manufacturing facilities; • any failure to maintain, protect and defend our intellectual property rights; 21 • 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; • the availability of raw materials, as well as parts and components used in our products, as well as the impact of raw material, energy and labor price fluctuations and supply shortages; • the competitive environment in which we operate; • our reliance on a variety of distribution methods to market and sell our medical device products; • extensive government regulation and oversight of our products, including the requirement to obtain and maintain regulatory approvals and clearances; • safety issues or recalls of our products; • failure to comply with federal and state regulations related to the manufacture of our products; • improper marketing or promotion of our products; • impacts of potential legislative or regulatory reforms on our business • risks associated with the clinical trial process; • failure to comply with governmental regulations for products for which we obtain clearance or approval; • our exposure to product liability claims; • our inability to obtain coverage and adequate levels of reimbursement from third party payors for our medical device products; • audits or denials of claims by government officials; • federal and state health reform and cost control efforts; • our failure or the failure of our employees or third parties with which we have relationships to comply with healthcare laws and regulations; • our relationships with leading surgeons and our ability to comply with enhanced disclosure requirements regarding payments to physicians; • actual or perceived failures to comply with applicable data protection, privacy and security laws, regulations, standards and other requirements; • service interruptions, data corruption, cyber-based attacks or network security breaches affecting our information technology infrastructure; • 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; • if the Separation and/or certain related transactions do not qualify as transactions that are generally tax-free for U.S. federal income tax purposes, we and our stockholders could be subject to significant tax liabilities; 22 • potential indemnification liabilities to ESAB pursuant to the Separation and distribution agreement and other related agreements; • changes in the general economy; • disruptions in the global economy caused by the ongoing conflict between Russia and Ukraine; • the loss of key members of our leadership team, or the inability to attract, develop, engage, and retain qualified employees; and • 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 2023 Form 10-K. Any such forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ materially from those envisaged by such forward-looking statements. We do not assume any obligation and do not intend to update any forward-looking statement, except as required by law. See “Risk Factors” in this Form 10-Q and our 2023 Form 10-K for a further discussion regarding some of the reasons that actual results may be materially different from those that we anticipate. 23 Overview Please see Part I, Item 1. “Business” in our 2023 Form 10-K for a discussion of the Company’s objectives and methodologies for delivering shareholder value. Enovis conducts its operations through two operating segments: 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. We serve a global customer base across multiple markets through a combination of direct sales and third-party distribution channels. Our customer base is highly diversified in the medical market. Integral to our operations is our business management system, Enovis Growth Excellence (“EGX”). EGX includes our values and behaviors, a comprehensive set of tools, and repeatable, teachable processes that we use to drive continuous improvement and create superior value for our customers, shareholders, and associates. We believe that our management team’s access to, and experience in, the application of the EGX methodology is one of our primary competitive strengths. Results of Operations The following discussion of Results of Operations addresses the comparison of the periods presented. Our management evaluates the operating results of each of its reportable segments based upon Net sales and Adjusted EBITDA, as defined in the “Non-GAAP Measures” section below. Items Affecting Comparability of Reported Results and Other Recent Developments 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. 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 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 24 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 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 United States are denominated in currencies other than the U.S. dollar. Similar portions of our manufacturing and employee costs are also outside the United States and denominated in currencies other than the U.S. dollar. Changes in foreign exchange rates can impact our results of operations and are quantified when significant. For the three months ended 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%. Seasonality 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. 25 Non-GAAP Measures Adjusted EBITDA; 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. Operating income (loss), adjusted EBITDA and adjusted EBITDA margins at the operating segment level also include allocations of certain central function expenses not directly attributable to either operating segment. Adjusted EBITDA assists our management in comparing operating performance over time because certain items may obscure underlying business trends and make comparisons of long-term performance difficult, as they are of a nature and/or size that occur with inconsistent frequency or relate to discrete restructuring plans and other initiatives that are fundamentally different from our ongoing productivity improvements. 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. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information calculated in accordance with GAAP. Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures. The following tables set forth a reconciliation of net income (loss) from continuing operations, the most directly comparable financial statement measure, to Adjusted EBITDA, for the three months ended March 29, 2024 and March 31, 2023. 26 Three Months Ended March 29, 2024 March 31, 2023 P&R Recon Total P&R Recon Total (Dollars in millions) Net income (loss) from continuing operations (GAAP) (1) $ (71.8) $ (22.8) Income tax expense (benefit) (7.4) (7.1) Other (income) expense, net 24.2 (0.7) Interest expense, net 20.0 5.7 Operating income (loss) (GAAP) $ (13.9) $ (21.1) (35.0) $ (18.1) $ (6.8) (25.0) Operating income (loss) margin (5.4) % (8.2) % (6.8) % (7.2) % (4.4) % (6.1) % Adjusted to add (deduct): Restructuring and other charges (2) 7.8 5.1 12.9 1.3 1.6 2.9 MDR and other costs (3) 3.0 1.9 4.9 3.2 4.6 7.8 Strategic transaction costs (3) 0.1 20.8 20.8 6.2 5.4 11.6 Stock-based compensation (3) 3.2 3.2 6.4 4.1 2.8 6.9 Depreciation and other amortization 4.6 22.6 27.2 5.7 14.2 20.0 Amortization of acquired intangibles 23.2 17.7 40.9 23.3 8.8 32.0 Inventory step-up — 5.1 5.1 — 0.1 0.1 Adjusted EBITDA (non-GAAP) $ 27.9 $ 55.3 $ 83.2 $ 25.7 $ 30.7 $ 56.4 Adjusted EBITDA margin (non-GAAP) 10.8 % 21.5 % 16.1 % 10.3 % 19.8 % 13.9 % (1) Non-operating components of Net income (loss) from continuing operations are not allocated to the segments. (2) Restructuring and other charges includes $0.3 million of expense classified as Cost of sales on 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. 27 Total Company Sales 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: U.S. Bracing & Support $ 104.6 $ 104.4 0.2 % $ 104.4 0.2 % U.S. 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: U.S. 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 % 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 $1.7 million, or 0.4%, favorable foreign currency translation impacts on total net sales during the three months ended March 29, 2024. 28 Operating Results The following table summarizes our results of continuing operations for the comparable periods. Three Months Ended March 29, 2024 March 31, 2023 (Dollars in millions) Gross profit $ 297.9 $ 235.1 Gross profit margin 57.7 % 57.9 % Selling, general and administrative expense $ 255.7 $ 207.2 Research and development expense $ 23.4 $ 18.2 Operating loss $ (35.0) $ (25.0) Operating loss margin (6.8) % (6.1) % Net loss from continuing operations $ (71.8) $ (22.8) Net loss from continuing operations margin (GAAP) (13.9) % (5.6) % Adjusted EBITDA (non-GAAP) $ 83.2 $ 56.4 Adjusted EBITDA margin (non-GAAP) 16.1 % 13.9 % Items excluded from Adjusted EBITDA: Restructuring and other charges (1) $ 12.9 $ 2.9 MDR and other costs $ 4.9 $ 7.8 Strategic transaction costs $ 20.8 $ 11.6 Stock-based compensation $ 6.4 $ 6.9 Depreciation and other amortization $ 27.2 $ 20.0 Amortization of acquired intangibles $ 40.9 $ 32.0 Inventory step-up $ 5.1 $ 0.1 Interest expense, net $ 20.0 $ 5.7 Other expense (income), net $ 24.2 $ (0.7) Income tax benefit $ (7.4) $ (7.1) (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. 29 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. 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. 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. 30 Business Segments As discussed further above, we report results in two reportable segments: 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. See Item 2. “Non-GAAP Measures” for a further discussion and reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures. Prevention & Recovery We develop, manufacture, and distribute rigid bracing products, orthopedic soft goods, vascular systems, and compression garments, and hot and cold therapy products and offer robust recovery sciences products in the clinical rehabilitation and sports medicine markets such as bone growth stimulators and electrical stimulators used for pain management. Our Prevention & Recovery products are marketed under several brand names, most notably DJO, to orthopedic specialists, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers, and other healthcare professionals who treat patients with a variety of treatment needs including musculoskeletal conditions resulting from degenerative diseases, deformities, traumatic events and sports-related injuries. Many of our medical devices and related accessories are used by athletes and other patients for injury prevention and at-home physical therapy treatments. We reach a diverse customer base through multiple distribution channels, including independent distributors, direct salespeople, and directly to patients. The following table summarizes selected financial results for our Prevention & Recovery segment: Three Months Ended March 29, 2024 March 31, 2023 (Dollars in millions) Net sales $ 259.0 $ 250.7 Gross profit $ 131.3 $ 126.9 Gross profit margin 50.7 % 50.6 % Selling, general and administrative expenses $ 128.6 $ 112.2 Research and development expense $ 8.8 $ 8.5 Operating income (loss) (GAAP) $ (13.9) $ (18.1) Operating income (loss) margin (GAAP) (5.4) % (7.2) % Adjusted EBITDA (non-GAAP) $ 27.9 $ 25.7 Adjusted EBITDA margin (non-GAAP) 10.8 % 10.3 % 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. 31 Reconstructive We develop, manufacture, and market a wide variety of knee, hip, shoulder, elbow, foot, ankle, and finger implant products and surgical productivity solutions that serve the orthopedic reconstructive joint implant market. Our products are primarily used by surgeons for surgical procedures. The following table summarizes the selected financial results for our Reconstructive segment: Three Months Ended March 29, 2024 March 31, 2023 (Dollars in millions) Net sales $ 257.3 $ 155.4 Gross profit $ 166.6 $ 108.1 Gross profit margin 64.7 % 69.6 % Selling, general and administrative expenses $ 147.1 $ 95.0 Research and development expense $ 14.6 $ 9.7 Operating loss (GAAP) $ (21.1) $ (6.8) Operating loss margin (GAAP) (8.2) % (4.4) % Adjusted EBITDA (non-GAAP) $ 55.3 $ 30.7 Adjusted EBITDA margin (non-GAAP) 21.5 % 19.8 % 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. 32 Liquidity and Capital Resources Overview We finance our long-term capital and working capital requirements through a combination of cash flows from operating activities, various borrowings, and the issuances of equity. We expect that our primary ongoing requirements for cash will be for working capital, funding of acquisitions, capital expenditures, restructuring and other non-routine costs, and interest and principal repayments on our term loan and on amounts drawn on our revolving credit facility. We believe we could raise additional funds in the form of debt or equity if it were determined to be appropriate for strategic acquisitions or other corporate purposes. We believe that our sources of liquidity are adequate to fund our operations for the next twelve months. Equity Capital In 2018, our Board of Directors authorized the repurchase of our common stock from time-to-time on the open market or in privately negotiated transactions. No stock repurchases have been made under this plan since the third quarter of 2018. As of 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. There is no term associated with the remaining repurchase authorization. Term Loan and Revolving Credit Facility 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. Certain U.S. subsidiaries of the Company guarantee the obligations under the Enovis Credit Agreement. 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 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. 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 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); 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 33 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 $32.8 million were outstanding as of March 29, 2024. Cash Flows 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) Net cash provided by (used in) operating activities $ (36.2) $ 7.5 Purchases of property, plant and equipment and intangibles (36.9) (30.4) 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 of debt 873.0 24.9 Proceeds from issuance of common stock, net 0.9 0.4 Other financing (9.4) (0.8) 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, 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. 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 The methods, estimates and judgments that we use in applying our critical accounting policies have a significant impact on our results of operations and financial position. We evaluate our estimates and judgments on an ongoing basis. Our estimates are based upon our historical experience, our evaluation of business and macroeconomic trends and information from other outside sources, as appropriate. Our experience and assumptions form the basis for our judgments about the carrying value of 34 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 7A. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies” in our 2023 Form 10-K.