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Item 2. Management’s Discussion and Analysis

2024-08-07 compared with 2024-05-02 · 201 added, 91 removed, 276 unchanged (51% of the section changed)

3 unchanged sentences

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 March 29, 2024 (this “Form 10-Q”) and the Consolidated Financial Statements and related footnotes included in Part II.

“Financial Statements” of this Quarterly Report on Form 10-Q for the quarterly period ended June 28, 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.

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developments, performance, industry or market rankings relating to products or services;

future economic conditions or performance, including the impact of increasing inflationary pressures;

future economic conditions or performance, including the impact of inflationary pressures;

the outcome of outstanding claims or legal proceedings;

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• 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;

• any impairment in the value of our intangible assets or goodwill, because of a sustained decline, including but not limited to, operating performance at one or more our business units or the market price of our common stock;

• a material disruption at any of our manufacturing facilities;

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• changes in the general economy;

• disruptions in the global economy caused by the ongoing conflict between Russia and Ukraine;

• disruptions in the global economy caused by escalating geopolitical tensions, including in connection with Russia’s invasion of Ukraine;

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

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Our customer base is highly diversified in the medical market.

Integral to our operations is our business management system, Enovis Growth Excellence (“EGX”).

Our business management system, Enovis Growth Excellence (“EGX”), is integral to our operations.

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.

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The following discussion of Results of Operations addresses the comparison of the periods presented.

Our management evaluates the operating results of each of its reportable segments based upon Net sales and Adjusted EBITDA, as defined in the “Non-GAAP Measures” section below.

Our management evaluates the operating results of each of its reportable segments based upon Net sales, Adjusted EBITDA, Comparable sales, and Comparable sales growth rate 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:

The comparability of our operating results for the three and six months ended June 28, 2024 to the prior periods in 2023 is affected by the following significant items:

Strategic Acquisitions

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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.

On January 3, 2024, the Company acquired Lima, a privately held global orthopedic company focused on restoring motion through digital innovation and customized hardware for total fair value consideration of $866.5 million, net of acquired cash.

The fair value total consideration includes a fixed number contingently issuable shares of Enovis stock valued at $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.

Subsequent to the end of the second quarter of 2024, the first tranche of the Contingent Acquisition Shares of 971,343 shares were issued to the sellers on July 16, 2024.

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

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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.

During the three and six months ended June 28, 2024, approximately 41% and 42% of our sales, respectively, 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.

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

For the three months ended 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%.

For the three months ended June 28, 2024 compared to the three months ended June 30, 2023, fluctuations in foreign currencies decreased Net sales by 0.3%, decreased Gross profit by approximately 0.6%, and decreased operating expense by approximately 0.3%.

For the six months ended June 28, 2024 compared to the six months ended June 30, 2023, fluctuations in foreign currencies had immaterial impact on Net sales, decreased Gross profit by approximately 0.4%, and increased operating expenses by approximately 0.1%.

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

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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.

Comparable sales

Adjusted EBITDA, Adjusted EBITDA margin, Comparable sales, and Comparable sales growth rate, 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);

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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.

Comparable sales adjusts nets sales for prior periods to include the sales of acquired businesses prior to our ownership from acquisitions that closed in the periods presented and to exclude the sales of certain non-core product lines that were divested or discontinued, as applicable, during the periods presented.

The acquired businesses include Lima and Novastep, which are reflected in the Recon segment, and the excluded non-core product lines are comprised of the divested compression hosiery product line in the P&R segment and certain discontinued third-party OEM relationships in the Recon segment.

Comparable sales growth rate represents the change in Comparable sales for the current period from Comparable sales for the prior year period.

Comparable sales and Comparable sales growth rate assist our management in evaluating operating performance over time because the impact of significant acquisitions and divestitures or discontinuance of certain non-core product lines subsequent to prior periods may obscure underlying business trends and make the evaluation of period-over-period performance difficult.

Comparable sales and Comparable sales growth rate are presented for illustrative purposes only and do not and are not intended to comply with Article 11 of Regulation S-X promulgated by the SEC in respect of proforma financial information, and may differ, including materially, from proforma financial statements presented in accordance therewith.

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.

Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information calculated in accordance with GAAP or prepared in accordance with Regulation S-X.

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.

Three Months Ended

March 29, 2024 March 31, 2023

June 28, 2024 June 30, 2023

P&R Recon Total P&R Recon Total

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(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.

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

Six Months Ended

June 28, 2024 June 30, 2023

P&R Recon Total P&R Recon Total

(Dollars in millions)

Income (loss) from continuing operations (GAAP) (1)

$ (90.3) $ (37.5)

Income tax expense (benefit) (16.3) (11.8)

Other (income) expense, net (9.6) 0.1

Interest expense, net 37.0 9.7

Operating income (loss) (GAAP) $ (11.4) $ (67.8) (79.2) $ (22.6) $ (16.9) (39.5)

Operating income (loss) margin (2.1) % (13.4) % (7.6) % (4.3) % (5.4) % (4.7) %

Adjusted to add (deduct):

Restructuring and other charges (2)(3)

9.5 8.0 17.5 3.3 3.4 6.7

MDR and other costs (3)

5.2 4.3 9.5 8.2 8.6 16.8

Strategic transaction costs (3)

2.0 41.5 43.5 8.0 9.1 17.1

Stock-based compensation (3)

8.6 5.5 14.0 9.9 5.9 15.8

Depreciation and other amortization 9.1 48.2 57.3 11.5 29.3 40.7

Amortization of acquired intangibles 46.1 35.7 81.9 46.7 17.6 64.3

Inventory step-up — 29.0 29.0 — 0.1 0.1

Adjusted EBITDA (non-GAAP) $ 69.1 $ 104.4 $ 173.4 $ 65.0 $ 57.1 $ 122.1

Adjusted EBITDA margin (non-GAAP) 12.9 % 20.7 % 16.7 % 12.4 % 18.4 % 14.6 %

(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 six months ended June 30, 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

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)

The following table summarizes our sales for the three and six months ended June 28, 2024, respectively.

Three Months Ended Six Months Ended

June 28, 2024 June 30, 2023 Growth Rate

(In millions)

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Total Prevention & Recovery 277.8 273.5 1.6 % 536.8 524.2 2.4 %

259.0 250.7 3 % 250.7 3.3 %

Reconstructive:

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Total Reconstructive 247.4 155.0 59.6 % 504.7 310.4 62.6 %

257.3 155.4 65.5 % 240.3 7.0 %

Total $ 525.2 $ 428.5 22.6 % $ 1,041.4 $ 834.7 24.8 %

(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 following table summarizes sales on a Comparable sales and Comparable sales growth rate basis for the periods presented.

Three Months Ended Six Months Ended

June 28, 2024 June 30, 2023 Growth Rate

Comparable sales (1)

(In millions)

Prevention & Recovery:

Bracing & Support $ 117.5 $ 115.0 2.2 % $ 222.1 $ 219.3 1.3 %

Other P&R 68.0 65.3 4.0 % 131.6 125.2 5.1 %

International P&R 92.3 89.4 3.2 % 178.7 172.1 3.8 %

Total Prevention & Recovery 277.8 269.7 3.0 % 532.4 516.7 3.0 %

Reconstructive:

Reconstructive 122.1 120.7 1.1 % 245.8 239.6 2.6 %

International Reconstructive 125.3 111.4 12.5 % 258.4 229.9 12.4 %

Total Reconstructive 247.4 232.1 6.6 % 504.2 469.5 7.4 %

Total $ 525.2 $ 501.8 4.7 % $ 1,036.6 $ 986.2 5.1 %

(1) Comparable sales adjusts net sales for prior periods to include the sales of acquired businesses prior to our ownership from acquisitions that closed in the periods presented and to exclude the sales of divested businesses and certain discontinued Recon products lines in conjunction with the Lima Acquisition.

The acquired businesses include Lima and Novastep, which are reflected in the Recon segment, and the excluded non-core product lines are comprised of a divested compression hosiery product line in the P&R segment and certain discontinued third-party OEM relationships in the Recon segment.

Net sales for the three months ended June 28, 2024 increased from the prior year by $96.7 million, or 22.6% primarily attributable to an increase in sales from the Lima Acquisition and to a lesser extent the Novastep acquisition and growth in existing businesses.

Recon sales increased by $92.4 million, or 59.6%, of which $90.1 million was attributable to the Lima and the Novastep acquisitions.

Recon sales were negatively impacted by a $2.2 million decrease from the discontinuance of certain non-core product lines.

P&R increased by $4.3 million, or 1.6%, which was negatively impacted by a $3.8 million decrease in

sales from divesting a minor product line.

For the three months ended June 30, 2023, U.S.

GAAP basis net sales were $428.5 million.

The Comparable sales were $501.8 million for the same period.

In 2023, Lima and Novastep would have contributed $79.2 million to Comparable sales, offset by the impact of the divestiture and discontinuance of certain non-core product lines of $5.9 million.

Comparable sales growth for Recon was driven by approximately 7.1% increases in volume and market share gains, offset by unfavorable currency translation of 0.5%.

Comparable sales growth for P&R was driven by approximately 3.3% organic growth in volumes, offset by 0.3% unfavorable foreign currency translation.

The strengthening of the U.S.

Dollar relative to other currencies resulted in $2.0 million, or 0.4%, of unfavorable foreign currency translation impacts on total net sales for the three months ended June 28, 2024 from the prior year period.

Net sales for the six months ended June 28, 2024 increased from the prior year by $206.8 million, or 24.8% primarily attributable to an increase in sales from the Lima Acquisition and to a lesser extent the Novastep acquisition and growth in existing businesses.

Recon sales increased by $194.2 million, or 62.6%, of which $183.7 million was attributable to the Lima and the Novastep acquisitions.

Recon sales were negatively impacted by a $4.6 million decrease from the discontinuance of certain non-core product lines.

P&R sales increased by $12.6 million, or 2.4%, which was negatively impacted by a $3.2 million decrease from divesting a minor product line.

For the six months ended June 28, 2024, U.S.

GAAP basis net sales were $1,041.4 million.

The Comparable sales were $1,036.6 million for the same period.

For the six months ended June 28, 2024, the sales attributable to the non-core product lines, which were divested or discontinued, were $4.8 million.

For the six months ended June 30, 2023, U.S.

GAAP basis net sales were $834.7 million.

The Comparable sales were $986.2 million for the same period.

In 2023, Lima and Novastep would have contributed $164.2 million to Comparable sales, offset by the impact of the divestiture and discontinuance of certain non-core product lines of $12.6 million.

Comparable sales growth for Recon was driven by approximately 7.0% increases in volume and market share gains and favorable foreign currency translation of 0.4%.

Comparable sales growth for P&R was driven by approximately 3.1% organic growth in volumes, offset by 0.1% unfavorable foreign currency translation.

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.

Dollar relative to other currencies resulted in $1.4 million, or 0.1%, of favorable foreign currency translation impacts on total net sales for the six months ended June 28, 2024 from the prior year period.

Operating Results

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

Three Months Ended

March 29, 2024 March 31, 2023

The following table summarizes our results of continuing operations for the current year and prior year periods.

Three Months Ended Six Months Ended

June 28, 2024 June 30, 2023 June 28, 2024 June 30, 2023

(Dollars in millions)

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Restructuring and other charges (1)

$ 4.6 $ 3.8 $ 17.5 $ 6.7

MDR and other costs $ 4.5 $ 9.0 $ 9.5 $ 16.8

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Other expense (income) net $ (33.8) $ 0.8 $ (9.6) $ 0.1

$ 24.2 $ (0.7)

Income tax benefit $ (8.9) $ (4.7) $ (16.3) $ (11.8)

(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.

(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 six months ended June 30, 2023.

Three Months Ended June 28, 2024 Compared to Prior Year

Gross profit increased in the three months ended June 28, 2024 compared with the prior year period due to a $36.6 million increase in our Recon segment and a $3.9 million increase in our P&R segment.

The Gross profit increase was attributable to increased sales from the Lima and Novastep acquisitions, offset by an increase of $23.9 million in inventory fair value step-up amortization charges.

Gross profit margin decreased by (3.0)% due to the aforementioned increase in inventory fair value step-up amortization charges.

Selling, general and administrative expense increased $56.2 million in the three months ended June 28, 2024 compared to the prior year period, primarily due to increased commissions on increased 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 Recon 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.

Interest expense, net increased in the three months ended June 28, 2024 compared to the prior year period due to an increase in debt to finance the Lima Acquisition.

The effective tax rate for Net loss from continuing operations during the three months ended June 28, 2024 was 32.6%, which was higher than the 2024 U.S.

federal statutory tax rate of 21%, primarily due to tax credits for research and development, non-U.S.

income taxed at lower rates and non-taxable fair value gain on contingent acquisition shares.

This was partially offset by an increase 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.

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

federal statutory tax rate of 21%, primarily 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.

attributes, tax credits for research and development, and release of uncertain tax positions.

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.

Net loss from continuing operations increased in the three months ended June 28, 2024 compared with the prior year period, primarily due to a $17.3 million increase in strategic transactions costs from Lima integration activities, a $12.9 million increase in interest expense, net, and $8.7 million increase in amortization of acquired intangibles, offset by a $33.5 million mark-to-market gain on the Contingent Acquisition Shares liability.

Adjusted EBITDA and aEBITDA margin increased due to the Lima Acquisition.

Six Months Ended June 28, 2024 Compared to Prior Year

Gross profit increased in the six months ended June 28, 2024 compared with the prior year period due to a $94.9 million increase in our Recon segment and a $8.2 million increase in our P&R segment.

The Gross profit increase was attributable to increased sales from the Lima and Novastep acquisitions, offset by an increase of $28.8 million in inventory fair value step-up amortization charges.

Gross profit margin decreased by 1.6% due to the aforementioned increase in inventory fair value step-up amortization charges.

Selling, general and administrative expense increased $104.8 million in the six months ended June 28, 2024 compared to the prior year period, primarily due to increased commissions on increased 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 Recon 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 six months ended June 28, 2024 compared to the prior year period due to an increase in debt to finance the Lima Acquisition.

The effective tax rate for Net loss from continuing operations during the six months ended June 28, 2024 was 15.3%, which was lower than the 2024 U.S.

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

income taxed at lower rates and non-taxable fair value gain on contingent acquisition shares.

The effective tax rate for Net income from continuing operations during the six months ended June 30, 2023 was 24.0%, which was higher than the 2023 U.S.

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

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

attributes, tax credits for research and development, and release of uncertain tax positions.

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 six months ended June 28, 2024 compared with the prior year period by $52.8 million, primarily due to the $27.3 million increase in interest expense, net, a $37.2 million net increase in strategic transaction and restructuring costs driven by Lima activities, a loss of $11.1 million on the non-designated forward currency contracts for the Lima Acquisition, offset by a $20.1 million mark-to-market gain on the Contingent Acquisition Shares liability.

Adjusted EBITDA and aEBITDA margin increased due to the Lima Acquisition.

Business Segments

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

Three Months Ended

March 29, 2024 March 31, 2023

Three Months Ended Six Months Ended

June 28, 2024 June 30, 2023 June 28, 2024 June 30, 2023

(Dollars in millions)

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Research and development expense $ 9.2 $ 8.9 $ 18.0 $ 17.4

Amortization of acquired intangibles $ 22.9 $ 23.4 $ 46.1 $ 46.7

Restructuring and other charges $ 1.8 $ 2.0 $ 9.5 $ 3.1

Operating income (loss) (GAAP) $ 2.5 $ (4.4) $ (11.4) $ (22.6)

$ (13.9) $ (18.1)

Operating income (loss) margin (GAAP)

(5.4) % (7.2) %

Operating loss margin (GAAP) 0.9 % (1.6) % (2.1) % (4.3) %

Adjusted EBITDA (non-GAAP) $ 41.1 $ 39.3 $ 69.1 $ 65.0

Adjusted EBITDA margin (non-GAAP) 14.8 % 14.4 % 12.9 % 12.4 %

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.

Three Months Ended June 28, 2024 Compared to Prior Year

Net sales increased $4.3 million, or 1.6%, in the three months ended June 28, 2024 compared with the prior year period, which was negatively impacted by a $3.8 million decrease from divesting a minor product line.

Comparable sales growth for P&R was driven by approximately 3.3% organic growth in volumes, offset by 0.3% unfavorable foreign currency translation.

Gross profit increased $3.9 million and Gross profit margin increased by 60 basis points over the prior period due to operational efficiencies and improved mix due to the divestiture.

Selling, general and administrative expense decreased slightly and decreased as a percentage of net sales due to a reduction of EU MDR spending.

Operating income increased by $6.9 million due to the aforementioned gross profit increase and reduction of EU MDR spending, as well as lower depreciation and amortization.

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

Six Months Ended June 28, 2024 Compared to Prior Year

Net sales increased $12.6 million, or 2.4%, compared with the prior year period, which was negatively impacted by a $3.2 million decrease from divesting a minor product line.

Comparable sales growth for P&R was driven by approximately 3.1% organic growth in volumes, offset by 0.1% unfavorable foreign currency translation.

Gross profit increased $8.2 million and Gross profit margin increased by 30 basis points over the prior period due to operational efficiencies and improved mix due to the divestiture.

Selling, general and administrative expense decreased primarily due to reduction of strategic transaction costs and EU MDR spending.

Operating loss decreased due to the aforementioned Selling, general and administrative expense decrease and higher gross profit.

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

Reconstructive

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

Three Months Ended

March 29, 2024 March 31, 2023

Three Months Ended Six Months Ended

June 28, 2024 June 30, 2023 June 28, 2024 June 30, 2023

(Dollars in millions)

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Research and development expense $ 14.2 $ 10.0 $ 28.8 $ 19.7

Amortization of acquired intangibles $ 18.0 $ 8.9 $ 35.7 $ 17.6

Restructuring and other charges $ 2.8 $ 1.8 $ 8.0 $ 3.3

Operating loss (GAAP) $ (46.8) $ (10.1) $ (67.8) $ (16.9)

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Adjusted EBITDA margin (non-GAAP) 19.8 % 17.0 % 20.7 % 18.4 %

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.

Three Months Ended June 28, 2024 Compared to Prior Year

Net sal es increased by $92.4 million , or 59.6% , in the three months ended June 28, 2024, of which $90.1 million was attributable to the Lima and Novastep acquisitions.

Recon sales were negatively impacted by a $2.2 million decrease from the discontinuance of certain non-core product lines.

Comparable sales growth for Recon was driven by approximately 7.1% increases in volume and market share gains, offset by unfavorable foreign currency translation of 0.5%.

Gro ss profit increased over the same period , primarily due to higher net sales due to the Lima Acquisition, improved operating cost leverage, offset by an increase of $23.9 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.

Selling, general and administrative expense increased by $58.9 million over the same period primarily due to increased Strategic transactions costs associated with Lima integration activities, 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 Recon segment, which are investing in surgical productivity solutions and computer-assisted surgery technologies.

Operating loss increased, primarily due to a $17.1 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.

Six Months Ended June 28, 2024 Compared to Prior Year

Net sal es increased by $194.2 million , or 62.6% , of which $183.7 million was attributable to the Lima and the Novastep acquisitions.

Recon sales were negatively impacted by a $4.6 million decrease from the discontinuance of certain non-core product lines.

Comparable sales growth for Recon was driven by approximately 7.0% increases in volume and market share gains and favorable currency translation of 0.4%.

Gro ss profit increased $95.0 million in the six months ended June 28, 2024 compared to the prior year period , primarily due to h igher net sales due to the Lima Acquisition, improved operating leverage, offset by an increase of $28.8 million in inventory fair value step-up amortization charges.

The increase in inventory step-up charges led to a decrease in Gross profit margin.

Selling, general and administrative expense increased by $114.1 million over the same period primarily due to increased Strategic transactions costs associated with Lima integration activities, 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 Recon segment, which are investing in surgical productivity solutions and computer-assisted surgery technologies.

Operating loss increased, primarily due to a $32.4 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 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.

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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.

As of June 28, 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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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.

As of June 28, 2024, there was $385 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.

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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;

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) became 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).

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

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

Convertible Notes and Capped Calls

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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 $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.

Total letters of credit and surety bonds of $34.1 million were outstanding as of June 28, 2024.

As of June 28, 2024, we had $43.4 million of Cash, cash equivalents and restricted cash, a decrease of $1.4 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

Six Months Ended

June 28, 2024 June 30, 2023

(Dollars in millions)

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Payments for acquisitions, net of cash received, and investments (758.2) (98.7)

Payment for settlement of derivatives

Net cash used in investing activities (839.2) (166.0)

Net borrowings of debt 878.5 139.0

Proceeds from issuance of common stock, net 0.9 0.4

Other financing (11.5) (0.3)

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Cash flows from operating activities decreased $64.0 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.

This decrease includes a higher investment in working capital of $1.5 million, higher strategic transaction costs of $26.5 million, higher restructuring payments of $5.1 million and an increased cash paid for interest of $23.2 million.

Cash flows used in investing activities during the six months ended June 28, 2024 were $839.2 million compared to $166.0 million in the prior year period due to higher investments in the current year driven by the Lima Acquisition for $758.6 million, net of cash received.

Cash flows used in investing activities during the six months ended June 30, 2023 included the acquisition of Novastep for $96.9 million, net of cash received.

Cash flows provided by financing activities during the six months ended June 28, 2024 include $878.5 million of net debt borrowings primarily used for the Lima Acquisition, capital expenditures and operations.

Cash flows provided by financing activities for the six months ended June 30, 2023 include net debt borrowings of $139.0 million primarily used for the acquisition of Novastep and 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