SEC Filing - Enovis

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cfx-20230929

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM			10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 29, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-34045

Enovis Corporation

(Exact name of registrant as specified in its charter)


Delaware		54-1887631
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2711 Centerville Road,	Suite 400
Wilmington,	Delaware	19808
(Address of principal executive offices)		(Zip Code)


(302)			252-9160
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	ENOV	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☑ Accelerated filer ☐ Non-accelerated filer ☐

Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of November 3, 2023, there were 54,594,143 shares of the registrant’s common stock, par value $.001 per share, outstanding.

TABLE OF CONTENTS


			Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements			2
Condensed Consolidated Statements of Operations			2
Condensed Consolidated Statements of Comprehensive Income (Loss)			3
Condensed Consolidated Balance Sheets			4
Condensed Consolidated Statements of Equity			5
Condensed Consolidated Statements of Cash Flows			6
Notes to Condensed Consolidated Financial Statements			7
Note 1. General			7
Note 2. Recently Issued Accounting Pronouncements			7
Note 3. Discontinued Operations			7
Note 4. Acquisitions and Investments			8
Note 5. Revenue			10
Note 6. Net Loss Per Share from Continuing Operations			11
Note 7. Income Taxes			12
Note 8. Equity			13
Note 9. Inventories, Net			14
Note 10. Debt			14
Note 11. Accrued Liabilities			17
Note 12. Financial Instruments and Fair Value Measurements			17
Note 13. Commitments and Contingencies			20
Note 14. Segment Information			20
Note 15. Subsequent Events			22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3. Quantitative and Qualitative Disclosures About Market Risk			38
Item 4. Controls and Procedures			40

PART II - OTHER INFORMATION
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 3. Defaults Upon Senior Securities			43
Item 4. Mine Safety Disclosures			43
Item 5. Other Information			43
Item 6. Exhibits			44

SIGNATURES			44

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ENOVIS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Dollars in thousands, except per share amounts

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Net sales	$	417,524	$	383,814	$	1,252,177	$	1,154,388
Cost of sales	174,558		167,990		525,787		516,758
Gross profit	242,966		215,824		726,390		637,630
Selling, general and administrative expense	204,248		182,187		619,294		564,324
Research and development expense	19,901		15,599		57,012		46,102
Amortization of acquired intangibles	33,967		31,993		98,256		94,603
Insurance settlement loss (gain)	—		975		—		(32,059)
Restructuring and other charges	5,342		2,989		11,782		7,653
Operating income (loss)	(20,492)		(17,919)		(59,954)		(42,993)

Interest expense, net	5,768		6,334		15,496		17,944
Debt extinguishment charges	—		—		—		20,104
Unrealized (gain) loss on investment in ESAB Corporation	—		63,125		—		(72,412)
Gain on cost basis investment	—		(8,800)		—		(8,800)
Other (income) expense, net	(757)		(300)		(665)		(300)
Income (loss) from continuing operations before income taxes	(25,503)		(78,278)		(74,785)		471
Income tax benefit	(6,052)		(12,329)		(17,878)		(16,176)
Net income (loss) from continuing operations	(19,451)		(65,949)		(56,907)		16,647



Income (loss) from discontinued operations, net of taxes	16,611		(527)		21,096		10,163
Net income (loss)	(2,840)		(66,476)		(35,811)		26,810
Less: net income attributable to noncontrolling interest from continuing operations - net of taxes	40		136		414		533
Less: net income attributable to noncontrolling interest from discontinued operations - net of taxes	—		—		—		966
Net income (loss) attributable to Enovis Corporation	$	(2,880)	$	(66,612)	$	(36,225)	$	25,311
Net income (loss) per share - basic
Continuing operations	$	(0.36)	$	(1.22)	$	(1.05)	$	0.30
Discontinued operations	$	0.30	$	(0.01)	$	0.39	$	0.17
Consolidated operations	$	(0.05)	$	(1.23)	$	(0.67)	$	0.47
Net income (loss) per share - diluted
Continuing operations	$	(0.36)	$	(1.22)	$	(1.05)	$	0.30
Discontinued operations	$	0.30	$	(0.01)	$	0.39	$	0.17
Consolidated operations	$	(0.05)	$	(1.23)	$	(0.67)	$	0.46

See Notes to Condensed Consolidated Financial Statements.

ENOVIS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Dollars in thousands

(Unaudited)


	Three Months Ended			Nine Months Ended
		September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Net income (loss)		$	(2,840)	$	(66,476)	$	(35,811)	$	26,810
Other comprehensive income (loss):
Foreign currency translation, net of tax expense of $—, $—, $— and 338		(18,057)		(28,836)		3,838		(113,173)
Unrealized gain (loss) on hedging activities, net of tax expense (benefit) of $1,009, $—, $(731) and $2,711		3,159		—		(2,290)		9,028


Amounts reclassified from Accumulated other comprehensive loss:
Amortization of pension and other post-retirement net actuarial gain (loss), net of tax expense (benefit) of $(75), $—, $(116) and $199		(339)		—		(1,221)		629


Reclassification of hedging gain (loss), net of tax expense (benefit) of $—, $—, $— and $—		168		—		168		—
Other comprehensive income (loss)		(15,069)		(28,836)		495		(103,516)
Comprehensive income (loss)		(17,909)		(95,312)		(35,316)		(76,706)
Less: comprehensive income (loss) attributable to noncontrolling interest		(12)		(1,030)		394		(1,438)
Comprehensive income (loss) attributable to Enovis Corporation		$	(17,897)	$	(94,282)	$	(35,710)	$	(75,268)

See Notes to Condensed Consolidated Financial Statements.

ENOVIS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

Dollars in thousands, except share amounts

(Unaudited)


	September 29, 2023		December 31, 2022
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	32,129	$	24,295

Trade receivables, less allowance for credit losses of $8,711 and $7,965	277,029		267,380
Inventories, net	470,913		426,643
Prepaid expenses	28,974		28,550
Other current assets	45,142		48,155
Total current assets	854,187		795,023
Property, plant and equipment, net	260,190		236,741
Goodwill	2,027,154		1,983,588
Intangible assets, net	1,100,959		1,110,727
Lease asset - right of use	63,487		66,881
Other assets	94,940		80,288
Total assets	$	4,400,917	$	4,273,248

LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt	$	—	$	219,279
Accounts payable	125,060		135,628
Accrued liabilities	230,224		210,292
Total current liabilities	355,284		565,199
Long-term debt, less current portion	395,000		40,000
Non-current lease liability	49,176		51,259
Other liabilities	159,725		166,989
Total liabilities	959,185		823,447
Equity:
Common stock, $0.001 par value; 133,333,333 shares authorized; 54,564,997 and 54,228,619 shares issued and outstanding as of September 29, 2023 and December 31, 2022, respectively	55		54
Additional paid-in capital	2,952,975		2,925,729
Retained earnings	539,507		575,732
Accumulated other comprehensive loss	(52,915)		(53,430)
Total Enovis Corporation equity	3,439,622		3,448,085
Noncontrolling interest	2,110		1,716
Total equity	3,441,732		3,449,801
Total liabilities and equity	$	4,400,917	$	4,273,248

See Notes to Condensed Consolidated Financial Statements.

ENOVIS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

Dollars in thousands, except share amounts

(Unaudited)


	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Noncontrolling Interest		Total
	Shares	Amount
Balance at December 31, 2022	54,228,619	$	54	$	2,925,729	$	575,732	$	(53,430)	$	1,716	$	3,449,801
Net loss	—	—		—		(23,350)		—		192		(23,158)

Other comprehensive income, net of tax of $—	—	—		—		—		10,560		24		10,584


Common stock-based award activity	264,535	—		8,044		—		—		—		8,044
Balance at March 31, 2023	54,493,154	54		2,933,773		552,382		(42,870)		1,932		3,445,271
Net loss	—	—		—		(9,995)		—		182		(9,813)

Other comprehensive income, net of tax of $(1,781)	—	—		—		—		4,972		8		4,980


Common stock-based award activity	40,957	1		10,321		—		—		—		10,322
Balance at June 30, 2023	54,534,111	55		2,944,094		542,387		(37,898)		2,122		3,450,760
Net loss	—	—		—		(2,880)		—		40		(2,840)

Other comprehensive income, net of tax of $934	—	—		—		—		(15,017)		(52)		(15,069)


Common stock-based award activity	30,886	—		8,881		—		—		—		8,881
Balance at September 29, 2023	54,564,997	$	55	$	2,952,975	$	539,507	$	(52,915)	$	2,110	$	3,441,732


	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Noncontrolling Interest		Total
	Shares	Amount
Balance at December 31, 2021	52,083,078	$	52	$	4,544,315	$	589,024	$	(516,013)	$	44,055	$	4,661,433
Net income	—	—		—		15,068		—		1,233		16,301
Distributions to noncontrolling owners	—	—		—		—		—		(941)		(941)
Other comprehensive loss, net of tax of $3,248	—	—		—		—		(43,466)		(338)		(43,804)
Conversion of tangible equity units into common stock	1,691,845	2		(2)		—		—		—		—
Common stock-based award activity	255,957	—		11,056		—		—		—		11,056
Balance at April 1, 2022	54,030,880	54		4,555,369		604,092		(559,479)		44,009		4,644,045
Net loss	—	—		—		76,855		—		130		76,985
Other comprehensive loss, net of tax of $—	—	—		—		—		(29,443)		(1,433)		(30,876)
Distribution of ESAB Corporation	—	—		(1,666,732)		—		499,981		(40,510)		(1,207,261)
Common stock-based award activity	80,238	—		8,570		—		—		—		8,570
Balance at July 1, 2022	54,111,118	54		2,897,207		680,947		(88,941)		2,196		3,491,463
Net loss	—	—		—		(66,612)		—		136		(66,476)

Other comprehensive loss, net of tax of $—	—	—		—		—		(27,670)		(1,166)		(28,836)
Adjustments to distribution of ESAB Corporation	—	—		2,451		—		—		—		2,451

Acquisition of Insight (see Note 4)	—	—		—		—		—		345		345
Common stock-based award activity	37,197	—		9,255		—		—		—		9,255
Balance at September 30, 2022	54,148,315	$	54	$	2,908,913	$	614,335	$	(116,611)	$	1,511	$	3,408,202

See Notes to Condensed Consolidated Financial Statements.

ENOVIS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in thousands

(Unaudited)


	Nine Months Ended
	September 29, 2023		September 30, 2022
Cash flows from operating activities:
Net income (loss)	$	(35,811)	$	26,810
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation, amortization and other impairment charges	160,493		167,453
Stock-based compensation expense	25,758		27,799
Non-cash interest expense	2,117		3,021
Unrealized gain on investment in ESAB Corporation	—		(72,412)
Gain on cost basis investment	—		(8,800)
Debt extinguishment charges	—		20,104
Deferred income tax expense (benefit)	(20,612)		(3,458)
(Gain) loss on sale of property, plant and equipment	(14,832)		352
Changes in operating assets and liabilities:
Trade receivables, net	(6,527)		(43,315)
Inventories, net	(29,917)		(119,145)
Accounts payable	(12,379)		34,147
Other operating assets and liabilities	(1,717)		(52,459)
Net cash provided by (used in) operating activities	66,573		(19,903)
Cash flows from investing activities:
Purchases of property, plant and equipment and intangibles	(94,279)		(68,668)
Proceeds from sale of property, plant and equipment	42,571		2,746
Payments for acquisitions, net of cash received, and investments	(131,387)		(73,390)



Net cash used in investing activities	(183,095)		(139,312)
Cash flows from financing activities:
Proceeds from borrowings on term credit facility	—		450,000
Repayments of borrowings under term credit facility	(219,468)		(785,000)
Proceeds from borrowings on revolving credit facilities and other	400,000		—
Repayments of borrowings on revolving credit facilities and other	(47,345)		(608,877)
Repayments of borrowings on Euro senior notes	—		(386,278)
Repayments of borrowings on Senior notes	—		(300,000)
Distribution from ESAB Corporation, net	—		1,143,369
Payment of debt issuance costs	(8,000)		(2,938)

Proceeds from issuance of common stock, net	1,489		2,530


Payment of debt extinguishment costs	—		(12,704)
Deferred consideration payments and other	(1,668)		(6,857)
Net cash provided by (used in) financing activities	125,008		(506,755)
Effect of foreign exchange rates on Cash and cash equivalents	(652)		1,557
Increase (decrease) in Cash and cash equivalents	7,834		(664,413)
Cash and cash equivalents, beginning of period	24,295		719,370
Cash and cash equivalents, end of period	$	32,129	$	54,957

See Notes to Condensed Consolidated Financial Statements.

ENOVIS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. General

Enovis Corporation (the “Company” or “Enovis”) was previously Colfax Corporation (“Colfax”) until its separation into two differentiated, independent, and publicly traded companies on April 4, 2022 (the “Separation”). Upon completion of the Separation, the Company retained its specialty medical technology business, changed its name to Enovis Corporation, and began trading under the stock symbol “ENOV” on the New York Stock Exchange on April 5, 2022. Enovis is an innovation-driven medical technology growth company dedicated to developing clinically differentiated solutions that generate measurably better patient outcomes and transform workflows. The Company conducts its business through two operating segments, “Prevention & Recovery” and “Reconstructive.” The Prevention & Recovery segment provides orthopedic and recovery science solutions, including devices, software, and services across the patient care continuum from injury prevention to rehabilitation after surgery, injury, or from degenerative disease. The Reconstructive segment provides surgical implant solutions, offering a comprehensive suite of reconstructive joint products for the hip, knee, shoulder, elbow, foot, ankle, and finger and surgical productivity tools.

The Condensed Consolidated Financial Statements included in this quarterly report have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and reflect, in the opinion of management, all adjustments, which consist solely of normal recurring adjustments, necessary to present fairly the Company’s financial position and results of operations as of and for the periods indicated. Certain prior period amounts have been reclassified to conform to the current period presentation. The Condensed Consolidated Balance Sheet as of December 31, 2022 is derived from the Company’s audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the SEC’s rules and regulations for interim financial statements. The Condensed Consolidated Financial Statements included herein should be read in conjunction with the audited financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”), filed with the SEC on March 1, 2023.

The Company makes certain estimates and assumptions in preparing its Condensed Consolidated Financial Statements in accordance with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the Condensed Consolidated Financial Statements, and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from those estimates.

2. Recently Issued Accounting Pronouncements

The Company has not adopted any new accounting standards during the nine months ended September 29, 2023. There are no recently issued accounting pronouncements that are expected to have a material effect on the Company’s financial position, results of operations or cash flows.

3. Discontinued Operations

The Company’s discontinued operations include the following: (1) operating results of ESAB Corporation (“ESAB”) for the first quarter of 2022 prior to Separation, (2) charges for the first quarter of 2022 related to previously retained asbestos contingencies from certain divested businesses for which the Company did not retain an interest in the ongoing operations and that were fully transferred to ESAB in conjunction with the Separation, (3) certain expenses related to the Separation in 2022, (4) a charge related to the release of a tax indemnification receivable from ESAB and release of uncertain tax positions in the second quarter of 2023, and (5) gain on disposal from the sale of a facility retained from a prior divestiture.

ENOVIS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The following table presents the financial results of the Company’s discontinued operations:


	Three Months Ended				Nine Months Ended
	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
	(in thousands)
Net sales	$	—	$	—	$	—	$	647,911
Cost of sales	—		—		—		423,580
Selling, general and administrative expense	—		—		—		125,529
Gain on disposal of facility	(15,517)		—		(15,517)		—
Restructuring and other charges	—		—		—		5,304
Asbestos charges	—		—		—		3,194
Divestiture-related expenses and other(1)	(1,652)		527		4,359		46,468
Operating (loss) income	17,169		(527)		11,158		43,836
Interest expense(2)	—		—		—		8,035


(Loss) income from discontinued operations before income taxes	17,169		(527)		11,158		35,801
Income tax (benefit) expense(3)	558		—		(9,938)		25,638
(Loss) income from discontinued operations, net of taxes	$	16,611	$	(527)	$	21,096	$	10,163

(1) Divestiture-related expenses and other includes costs (benefits) relating to a facility retained from a prior divestiture, a charge for the release of a tax indemnification receivable from ESAB during the second quarter of 2023, and charges of $45.0 million associated with the Separation for the nine months ended September 30, 2022.

(2) Interest expense was allocated to discontinued operations in 2022 based on allocating $1.2 billion of corporate level debt to discontinued operations consistent with the dividend received from ESAB and the debt repaid at the time of the Separation.

(3) Includes benefit of release of uncertain tax positions in the second quarter of 2023.

Cash used in operating activities related to discontinued operations was $1.2 million and $26.8 million for the nine months ended September 29, 2023 and September 30, 2022, respectively. Cash provided by investing activities related to discontinued operations for the nine months ended September 29, 2023 was $42.6 million. Cash used in investing activities related to discontinued operations for the nine months ended September 30, 2022 was $3.2 million.

4. Acquisitions and Investments

Lima Acquisition Purchase Agreement

On September 22, 2023, the Company entered into a definitive stock purchase agreement to acquire LimaCorporate S.p.A. (“Lima”), a privately held global orthopedic company focused on restoring motion through digital innovation and customized hardware, at an enterprise value of €800 million (the “Lima Acquisition”), consisting of (i) approximately €700 million in cash consideration, which includes repayment of certain indebtedness, to be paid at closing, and (ii) 1,942,686 shares of common stock of Enovis valued at €100 million based on the thirty-day volume weighted average price of the Company’s common stock as of the close of business day on September 21, 2023, and which are expected to be issued within eighteen months following the closing of the Lima Acquisition, in each case subject to certain adjustments and conditions as provided for in the purchase agreement. 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.

ENOVIS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

2023 Acquisitions

On June 28, 2023, the Company completed the Novastep business combination in its Reconstructive segment. Novastep is a leading player in Minimally Invasive Surgery (MIS) foot and ankle solutions with a best-in-class MIS bunion system serving a rapidly growing portion of the global bunion segment. The acquisition is accounted for under the acquisition method of accounting, and accordingly, the Condensed Consolidated Financial Statements include the financial position and results of operations from the acquisition date. The Company paid $96.9 million for the acquisition, net of cash received. The Company has allocated $41.7 million to goodwill and $52.0 million to intangible assets acquired. The acquisition accounting reflects our preliminary estimates and are subject to adjustment. The acquired goodwill value is primarily driven by the expected synergies from cross-selling Novastep products to existing Enovis foot & ankle customers. The acquisition broadens our reconstructive product offerings for the foot and ankle market and expands our customer base in Europe. Purchase accounting procedures are ongoing and revisions may be recorded in future periods during the measurement period.

On July 20, 2023, the Company completed an asset acquisition in its Reconstructive segment for an external fixation product line from D.N.E., LLC, a developer of a broad line of external fixation products, including circular frames, pin-to-bar frames, and mini-fixators for use in foot and ankle surgeries. The Company paid $28.2 million for the asset acquisition and assigned $25.8 million to intangible assets, $1.9 million to finished goods inventory and $0.5 million to property, plant and equipment. The acquisition of these assets, primarily the developed technology, is an important step in creating a more robust product portfolio for the foot & ankle business unit.

2022 Acquisitions

During the nine months ended September 30, 2022, the Company completed four asset acquisitions, two business combinations, and one investment which is recorded using the equity method of accounting. Two of these transactions were completed by the Company’s Reconstructive segment, and the other five transactions were completed by the Prevention & Recovery segment. The asset acquisitions broaden the Company’s product offering and distribution network. Aggregate purchase consideration for the four asset acquisitions was $22.3 million, of which $12.6 million was paid in cash and $9.6 million of deferred and contingent consideration. The investment was acquired for $10.0 million in cash consideration.

On May 6, 2022, the Company completed a business combination in its Reconstructive segment of KICo Knee Innovation Company Pty Limited and subsidiaries, an Australian private company doing business as 360 Med Care, by acquiring 100% of its equity interests. 360 Med Care is a medical device distributor that bundles certain computer-assisted surgery and patient experience enhancement programs to add value to its device supply arrangements with surgeons, hospitals, and insurers. The acquisition is accounted for under the acquisition method of accounting, and accordingly, the Condensed Consolidated Financial Statements include the financial position and results of operations from the acquisition date. The Company paid $14.3 million for the acquisition, net of cash received, and recorded estimated contingent consideration at fair value of $12.8 million related to expected results over future revenue targets. The Company allocated $16.3 million to goodwill and $18.2 million to intangible assets acquired. The purchase price accounting for this acquisition was finalized during the quarter ended June 30, 2023. The 360 Med Care acquisition broadens our customer base in Australia and adds to our overall product offerings.

On July 5, 2022, the Reconstructive segment of the Company acquired a controlling interest of Insight Medical Systems (“Insight”). Insight’s flagship solution, ARVIS, is an FDA-cleared augmented reality solution precisely engineered for the specific needs of hip and knee replacement surgery. The ARVIS navigation unit consists of a hands-free heads-up display worn by the surgeon which provides surgical guidance at the point of care in a streamlined, space-conserving and cost-effective manner compared to traditional robotic offerings. The acquisition is accounted for under the acquisition method of accounting as a step-acquisition, and accordingly, the Condensed Consolidated Financial Statements include the financial position and results of operations from the acquisition date.

The Company made initial investments in Insight in 2020 and 2021, which were initially carried at cost. During the third quarter of 2022, the Company acquired an additional 53.7% interest in Insight for $34.2 million net of cash received, and recorded contingent consideration of $5.0 million, which is the maximum amount payable under the agreement based on Insight’s achievement of certain milestones related to ARVIS. The Company holds a 99.5% interest in Insight and recognized an initial $0.3 million noncontrolling equity interest in its financial statements attributed to Insight.

ENOVIS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The Company allocated $36.3 million to goodwill and $38.4 million to intangible assets acquired. The purchase price accounting for this acquisition was finalized. Goodwill is primarily driven by expected synergies between ARVIS’ augmented reality surgical guidance system and the Company’s existing customer base and existing products. The Company does not expect any of the goodwill to be deductible for tax purposes.

As a result of obtaining control of Insight, the Company remeasured its initial investments to fair value, resulting in a $8.8 million gain in the fourth quarter of 2022.

Investments

As of September 29, 2023, the balance of investments held by the Company without readily determinable fair values was $20.6 million. The majority of these investments are carried at cost minus impairments, if any, plus adjustments for fair value indicators from observable price changes in orderly transactions for the identical or similar investment of the same issuer. There have been no impairments or upward adjustments in the current year or since acquisition of these investments. One investment is accounted for under the equity method of accounting and is recorded at the initial investment amount, adjusted each period for the Company’s share of the income or loss.

5. Revenue

The Company provides orthopedic solutions, including products and services spanning the full continuum of patient care, from injury prevention to rehabilitation. While the Company’s sales are primarily derived from three sales channels including dealers and distributors, insurance, and direct to consumers and hospitals, substantially all of the Company’s revenue is recognized at a point in time. The Company disaggregates its revenue into the following segments:


	Three Months Ended				Nine Months Ended
	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
	(In thousands)
Prevention & Recovery:
U.S. Bracing & Support	$	118,384	$	112,276	$	337,722	$	326,496
U.S. Other P&R	68,217		65,677		198,293		188,687
International P&R (1)	83,686		78,549		258,487		249,937
Total Prevention & Recovery	270,287		256,502		794,502		765,120

Reconstructive:
U.S. Reconstructive	99,720		89,039		309,358		268,161
International Reconstructive (2)	47,517		38,273		148,317		121,107
Total Reconstructive	147,237		127,312		457,675		389,268

Total	$	417,524	$	383,814	$	1,252,177	$	1,154,388

(1) Includes favorable currency impact of $3.3 million and unfavorable currency impacts of $0.7 million for the three and nine months ended September 29, 2023, respectively.

(2) Includes favorable currency impact of $2.2 million and $1.8 million for the three and nine months ended September 29, 2023, respectively.

Given the nature of the businesses, the Company does not generally have unsatisfied performance obligations with an original contract duration of greater than one year.

The nature of the Company’s contracts gives rise to certain types of variable consideration, including rebates, implicit price concessions, and other discounts. The Company includes estimated amounts of variable consideration in the transaction price to the extent that it is probable there will not be a significant reversal of revenue.

ENOVIS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Allowance for Credit Losses

The Company’s estimate of current expected credit losses on trade receivables considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. In calculating and applying its current expected credit losses, the Company disaggregates trade receivables into business segments due to risk characteristics unique to each segment given the individual lines of business and market. The business segments are further disaggregated based on either geography or product type. The Company uses a loss rate methodology in calculating its current expected credit losses, considering historical write-offs over a defined lookback period in deriving a historical loss rate. The expected credit loss model considers current conditions and reasonable and supportable forecasts for current and projected macroeconomic factors.

A summary of the activity in the Company’s allowance for credit losses included within Trade receivables in the Condensed Consolidated Balance Sheets is as follows:


	Nine Months Ended September 29, 2023
	Balance at Beginning of Period		Charged to Expense, net		Write-Offs, Deductions and Other, net		Foreign Currency Translation		Balance at End of Period
	(In thousands)
Allowance for credit losses	$	7,965	$	3,269	$	(2,499)	$	(24)	$	8,711

6. Net Income (Loss) Per Share from Continuing Operations

Net income (loss) per share from continuing operations was computed using treasury stock method as follows:


	Three Months Ended			Nine Months Ended
		September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
		(In thousands, except share and per share data)
Computation of Net income (loss) per share from continuing operations - basic:
Net income (loss) from continuing operations attributable to Enovis Corporation(1)		$	(19,491)	$	(66,085)	$	(57,321)	$	16,114
Weighted-average shares of Common stock outstanding – basic		54,549,369		54,136,889		54,462,319		54,025,144
Net income (loss) per share from continuing operations – basic		$	(0.36)	$	(1.22)	$	(1.05)	$	0.30

Computation of Net income (loss) per share from continuing operations - diluted:
Net income (loss) from continuing operations attributable to Enovis Corporation(1)		$	(19,491)	$	(66,085)	$	(57,321)	$	16,114
Weighted-average shares of Common stock outstanding – basic		54,549,369		54,136,889		54,462,319		54,025,144
Net effect of potentially dilutive securities - stock options and restricted stock units		—		—		—		434,859
Weighted-average shares of Common stock outstanding – diluted		54,549,369		54,136,889		54,462,319		54,460,003
Net income (loss) per share from continuing operations – diluted		$	(0.36)	$	(1.22)	$	(1.05)	$	0.30

(1) Net income (loss) from continuing operations attributable to Enovis Corporation for the respective periods is calculated using Net income (loss) from continuing operations less the continuing operations component of the income attributable to noncontrolling interest, net of taxes.

ENOVIS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The following weighted average computations of potentially dilutive shares of Common stock from stock-based compensation awards were excluded from the calculation of Weighted-average shares of Common stock outstanding – diluted as inclusion would be anti-dilutive in Net income (loss) per share:

Three Months Ended

Nine Months Ended

September 29, 2023

September 30, 2022

September 29, 2023

September 30, 2022

(In thousands, except share data)

Weighted average computation of potentially dilutive shares of Common stock excluded from diluted computation, as inclusion would be anti-dilutive

1,073,464

462,624

1,127,227

432,789

7. Income Taxes


	Three Months Ended				Nine Months Ended
	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
	In thousands
Income (loss) from continuing operations before income taxes	(25,503)		(78,278)		(74,785)		471
Income tax expense (benefit)	(6,052)		(12,329)		(17,878)		(16,176)
Effective tax rate:	23.7	%	15.8	%	23.9	%	(3,434.4)	%

The effective tax rates for the three and nine months ended September 29, 2023, were slightly higher than the 2023 federal statutory rate of 21% mainly 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 partially offset by other non-deductible expenses and U.S. taxation on international operations.

The effective tax rates for the three and nine months ended September 30, 2022, were lower than the 2022 U.S. federal statutory rate of 21% mainly due to non-taxable unrealized (gain) loss on the investment in ESAB Corporation and gain on cost basis investment, partially offset by non-deductible costs related to the tax-free Separation.

ENOVIS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

8. Equity

Share Repurchase Program

In 2018, the Company’s Board of Directors authorized the repurchase of shares of the Company’s Common stock from time-to-time on the open market or in privately negotiated transactions. No repurchases of the Company’s Common stock have been made under this plan since the third quarter of 2018. As of September 29, 2023, the remaining stock repurchase authorization provided by the 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.

Accumulated Other Comprehensive Income (Loss)

The following tables present the changes in the balances of each component of Accumulated other comprehensive income (loss) including reclassifications out of Accumulated other comprehensive loss for the nine months ended September 29, 2023 and September 30, 2022. All amounts are presented net of tax and noncontrolling interest, if any.


	Accumulated Other Comprehensive Income (Loss) Components
	Net Unrecognized Pension Benefit Cost		Foreign Currency Translation Adjustment		Unrealized Gain (Loss) on Hedging Activities		Total
	(In thousands)

Balance at January 1, 2023	$	12,207	$	(65,637)	$	—	$	(53,430)

Other comprehensive income (loss) before reclassifications:

Foreign currency translation adjustment	108		3,750		—		3,858

Loss on net investment hedges	—		—		(2,290)		(2,290)


Other comprehensive income (loss) before reclassifications	108		3,750		(2,290)		1,568
Amounts reclassified from Accumulated other comprehensive income (loss)	(1,221)		—		168		(1,053)

Net Other comprehensive income (loss)	(1,113)		3,750		(2,122)		515

Balance at September 29, 2023	$	11,094	$	(61,887)	$	(2,122)	$	(52,915)


	Accumulated Other Comprehensive Loss Components
	Net Unrecognized Pension and Other Post-Retirement Benefit Cost		Foreign Currency Translation Adjustment		Unrealized Gain on Hedging Activities		Total
	(In thousands)
Balance at January 1, 2022	$	(85,559)	$	(475,125)	$	44,671	$	(516,013)

Other comprehensive income (loss) before reclassifications:

Foreign currency translation adjustment	470		(88,927)		—		(88,457)
Loss on long-term intra-entity foreign currency transactions	—		(21,779)		—		(21,779)
Gain on net investment hedges	—		—		9,028		9,028


Other comprehensive income (loss) before reclassifications	470		(110,706)		9,028		(101,208)
Amounts reclassified from Accumulated other comprehensive loss	629		—		—		629

Net Other comprehensive income (loss)	1,099		(110,706)		9,028		(100,579)
Distribution of ESAB Corporation	84,460		469,220		(53,699)		499,981
Balance at September 30, 2022	$	—	$	(116,611)	$	—	$	(116,611)

ENOVIS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

9. Inventories, Net

Inventories, net consisted of the following:


	September 29, 2023		December 31, 2022
	(In thousands)
Raw materials	$	91,832	$	100,038
Work in process	37,874		28,164
Finished goods	403,375		357,143
	533,081		485,345
Less: Allowance for excess, slow-moving and obsolete inventory	(62,168)		(58,702)
	$	470,913	$	426,643

10. Debt

Long-term debt consisted of the following:


	September 29, 2023		December 31, 2022
	(In thousands)
Term loan	$	—	$	219,279




Revolving credit facilities and other	395,000		40,000
Total debt	395,000		259,279
Less: current portion	—		(219,279)
Long-term debt	$	395,000	$	40,000

Debt Redemptions

In conjunction with the Separation on April 4, 2022, the Company repaid all obligations under its previous credit agreement and entered into a new credit agreement (the “Enovis Credit Agreement”) with certain of its existing bank lenders. Additionally, on April 7, 2022, after the completion of the Separation, the Company completed the redemptions of its 3.25% Euro Senior Notes due 2025 (the “Euro Senior Notes”) and its 6.375% Senior Notes due 2026 (the “2026 Notes”). As a result of these changes, the Company recorded Debt extinguishment charges of $20.1 million during the second quarter of 2022, comprised of $12.7 million in redemption premiums and $7.4 million in noncash write-offs of original issue discount and deferred financing fees.

Enovis Term Loan and Revolving Credit Facility

The Enovis Credit Agreement became effective on April 4, 2022 and consists of a $900 million revolving credit facility (the “Revolver”) with an April 4, 2027 maturity date. The Enovis Credit Agreement also had a term loan with an initial aggregate principal amount of $450 million (the “Enovis Term Loan”) which was fully extinguished during the first quarter of 2023. The Revolver contains a $50 million swing line loan sub-facility. Certain U.S. subsidiaries of the Company guarantee the obligations under the Enovis Credit Agreement.

On November 18, 2022, the Company completed an exchange with a lender under the Enovis Credit Agreement of 6,003,431 shares of common stock of ESAB, representing all of the retained shares in ESAB following the Separation, for $230.5 million of the $450.0 million Enovis Term Loan that was outstanding at that time under the Enovis Credit Agreement, net of cost to sell. On March 1, 2023, the Company extinguished the remaining outstanding balance on the Enovis Term Loan with borrowings 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 total leverage ratio of not more than 3.75:1.00 for the fiscal quarter ending June 30, 2023 and thereafter, stepping

ENOVIS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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 Enovis Credit Agreement. As of September 29, 2023, the Company was in compliance with the covenants under the Enovis Credit Agreement.

As of September 29, 2023, the weighted-average interest rate of borrowings under the Enovis Credit Agreement was 6.54%, excluding accretion of original issue discount and deferred financing fees, and there was $505 million available on the Revolver.

Euro Senior Notes

The Company previously had senior unsecured notes with an aggregate principal amount of €350 million due in May 2025, with an interest rate of 3.25%. The Euro Senior Notes were redeemed on April 7, 2022 at a 100.813% redemption premium after the completion of the Separation.

Tangible Equity Unit (“TEU”) Amortizing Notes

The Company previously had 6.50% TEU amortizing notes at an initial principal amount of $15.6099 per note with equal quarterly cash installments of $1.4375 per note representing a payment of interest and partial payment of principal. The final installment payment of $6.5 million principal was made on January 15, 2022.

2026 Notes

The Company previously had senior notes with a remaining principal amount of $300 million due on February 15, 2026 with an interest rate of 6.375%. The 2026 Notes were redeemed on April 7, 2022 at a 103.188% redemption premium after the completion of the Separation.

Commitment Letter and Financing for Lima Acquisition

On September 22, 2023, the Company entered into a commitment letter (the “Commitment Letter”) to obtain an $800 million senior bridge facility for financing the Lima Acquisition (the “Bridge Facility”). The funding of the Bridge Facility, if needed, is subject to the satisfaction of certain customary conditions. The Bridge Facility will be reduced by an equivalent amount of the net cash proceeds of the incurrence of a new term loan facility, the issuance by the Company of debt, equity or equity-linked securities in a public offering or private placement, or the disposition of assets prior to the consummation of the Lima Acquisition and upon other specified events, subject to certain exceptions set forth in the Commitment Letter.

The Commitment Letter requires the Company to use commercially reasonable efforts to arrange and syndicate a $400 million senior term loan facility, the proceeds of which will be used to refinance and/or reduce the commitments under all or a portion of the Bridge Facility. The financing requirements under the Commitment Letter were completed in October 2023, as follows.

On October 23, 2023 the Company 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, which reduced, on a dollar-for-dollar basis, the commitments under the Commitment Letter. The term loan facility extended to the Company under the Amendment will be available on the date the Lima Acquisition is consummated. The term loan requires quarterly principal repayments at 1.25% of the initial aggregate principal amount and ultimately matures on April 4, 2027.

Pursuant to the Amendment, effective as of the date of consummation of the Lima Acquisition, (i) all facilities under the Credit Agreement (including the Term Loan Facility) will become secured by certain personal property of the Company and certain of its subsidiaries, subject to limitations and exclusions; (ii) the financial covenant under the Credit Agreement will be adjusted from total leverage ratio to senior secured leverage ratio and will require the senior secured leverage ratio to be no more than 3.75:1.00 with a step down to 3.50:1.00 commencing with the fiscal quarter ending June 30, 2024; (iii) certain changes to the negative covenants will become effective (including restrictions on repayments of junior financing and amendments to junior financing documents); and (iv) certain additional changes will be implemented (including the removal of the guaranty fallaway provision).

ENOVIS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

On October 24, 2023, the Company 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 and will mature on October 15, 2028 unless earlier repurchased, redeemed, or converted.

Holders may convert their 2028 Notes under the following conditions at any time prior to the close of business on the business day immediately preceding April 15, 2028 in multiples of $1,000 principal amount, only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on December 31, 2023 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the “trading price” per $1,000 principal amount of 2028 Notes, as determined following a request by a holder of 2028 Notes in accordance with the procedures described below, for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; (iii) if the Company calls any or all of the 2028 Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (iv) upon the occurrence of specified corporate events as described in the indenture governing the 2028 Notes.

In addition, holders may convert their 2028 Notes, in multiples of $1,000 principal amount, at their option at any time beginning on or after April 15, 2028 until the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the foregoing circumstances. The conversion rate is 17.1474 shares of common stock per $1,000 principal amount of 2028 Notes (equivalent to an initial conversion price of approximately $58.32 per share of common stock), subject to adjustment upon the occurrence of certain specified events as set forth in the indenture governing the 2028 Notes. Upon conversion, the Company will pay cash up to the aggregate principal amount of the 2028 Notes to be converted and pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at its election, in respect of the remainder,

The Company also entered into privately negotiated capped call transactions with certain of the initial purchasers of the 2028 Notes and paid $62 million to the counterparties. The capped call transactions are intended generally to mitigate potential dilution to the Company’s common stock upon conversion of any Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. If, however, the market price per share of common stock exceeds $89.72, the initial cap price of the capped call transactions, there would be dilution effect and/or no offset of any cash payments, in each case, attributable to the amount by which the market price of the common stock exceeds the cap price.

Other Indebtedness

In addition to the debt agreements discussed above, the Company is 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.

Deferred Financing Fees

The Company has $11.7 million in deferred financing fees of which $3.7 million was recorded in conjunction with the Enovis Credit Agreement as of September 29, 2023 and are accreted to Interest expense, net primarily using a straight-line method over the life of the facility. The balance of $8.0 million was recorded in September 2023 related to the Commitment Letter discussed above and is amortized over the life of the Bridge Facility. Upon the completion of the amendment to the Enovis Credit Agreement and senior unsecured convertible notes offering in October 2023, the Bridge Facility was terminated and the unamortized balance of the Bridge Facility deferred financing fees will be written-off in the fourth quarter of 2023.

ENOVIS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

11. Accrued Liabilities

Accrued liabilities in the Condensed Consolidated Balance Sheets consisted of the following:


	September 29, 2023		December 31, 2022
	(In thousands)
Accrued compensation and related benefits	$	64,384	$	51,384
Accrued third-party commissions	25,378		24,958
Lease liability - current portion	20,910		24,281
Accrued taxes	15,106		13,676
Accrued rebates	11,600		13,715
Accrued professional fees	9,737		15,670
Contingent consideration - current portion	7,790		8,812
Accrued royalties	5,288		5,777
Accrued freight	3,576		3,955
Customer advances and billings in excess of costs incurred	3,082		3,560
Warranty liability	2,846		2,804
Accrued restructuring liability	2,159		1,090
Accrued interest	388		2,921
Other	57,980		37,689
	$	230,224	$	210,292

Accrued Restructuring Liability

The Company’s restructuring programs include a series of actions to reduce the structural costs of the Company. A summary of the activity in the Company’s restructuring liability included in Accrued liabilities in the Condensed Consolidated Balance Sheets is as follows:


	Nine Months Ended September 29, 2023
	Balance at Beginning of Period		Provisions		Payments		Balance at End of Period
	(In thousands)
Restructuring and other charges:
Termination benefits(1)	$	972	$	4,930	$	(3,824)	$	2,078
Facility closure costs and other(2)	118		6,852		(6,889)		81
Total	$	1,090	11,782		$	(10,713)	$	2,159
Non-cash charges(2)			301
Total Provisions(3)			$	12,083

(1) Includes severance and other termination benefits, including outplacement services.

(2) Includes the cost of relocating associates, relocating equipment, lease termination expense and other costs in connection with the closure and optimization of facilities, site cost structures, and product lines.

(3) For the nine months ended September 29, 2023, $6.2 million and $5.9 million of the Company’s total provisions were related to the Prevention & Recovery and Reconstructive segments, respectively. 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 nine months ended September 29, 2023.

ENOVIS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

12. Financial Instruments and Fair Value Measurements

The Company utilizes fair value measurement guidance prescribed by accounting standards to value its financial instruments. The guidance establishes a fair value hierarchy based on the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

Level One: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.

Level Two: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level Three: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement

The carrying values of financial instruments, including trade receivables, other receivables and accounts payable, approximate their fair values due to their short-term maturities. The carrying value of the Company’s revolving credit facility debt, which bears a variable interest rate indexed to the Secured Overnight Financing Rate (SOFR), approximates fair value as it reprices when market interest rates change. The estimated fair values may not represent actual values of the financial instruments that could be realized as of the balance sheet date or that will be realized in the future.

As of September 29, 2023, the Company held $26.5 million in Level Three liabilities arising from contingent consideration related to acquisitions. The fair value of the contingent consideration liabilities is determined using unobservable inputs and the inputs vary based on the nature of the purchase agreements. These inputs can include the estimated amount and timing of projected cash flows, the risk-adjusted discount rate used to present value the projected cash flows, and the probability of the acquired company attaining certain targets stated within the purchase agreements. A change in these unobservable inputs to a different amount might result in a significantly higher or lower fair value measurement at the reporting date due to the nature of uncertainty inherent to the estimates. During the nine months ended September 29, 2023 the Company recorded a reduction in contingent consideration of $0.8 million due to a final agreement on the payout from an acquisition in 2020 and payments of $0.9 million, offset by increases for interest accretion and effect of foreign currency. The gross range of outcomes for contingent consideration arrangements that have a fixed limit on the maximum payout is zero to $10.0 million. There are two contingent consideration arrangements that have no limits and are based on a percentage of sales in excess of a benchmark over three and five-year periods, respectively.

There were no transfers in or out of Level One, Two or Three during the nine months ended September 29, 2023.


	Total Contingent Consideration Rollforward
	Beginning Balance	Charges	Interest	Payments	Foreign Exchange	Ending Balance
	(In thousands)
Contingent Consideration	$27,809	$(832)	$1,133	$(868)	$(741)	$26,500

Deferred Compensation Plans

The Company maintains deferred compensation plans for the benefit of certain employees and non-executive officers. As of September 29, 2023 and December 31, 2022 the fair value of these plans were $12.9 million and $10.3 million, respectively. These plans are deemed to be Level Two within the fair value hierarchy.

Forward Currency Contracts

The Company’s objective in using forward currency contracts is to add stability to the Company’s earnings and to protect the U.S. Dollar value of forecasted transactions. To accomplish this objective, the Company has entered into forward currency

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

contract agreements between the U.S. Dollar and the Mexican Peso as part of its risk management strategy. These forward currency contract agreements are designated and qualify as cash flow hedges.

The gain or loss on a derivative instrument designated as a cash flow hedge is recorded in Unrealized gain (loss) on hedging activities, net of tax within the Company’s unaudited Consolidated Statements of Comprehensive Income (Loss) until the underlying third party transaction occurs. When the underlying third-party transaction occurs, the Company recognizes the gain or loss in earnings within Cost of Sales in its unaudited Condensed Consolidated Statements of Operations. The contracts are recorded at fair value and deemed to be Level Two in the fair value hierarchy.

At September 29, 2023, the Company’s forward currency contracts have a Mexican Peso notional amount of approximately $1,260.0 million and a U.S. Dollar aggregate notional amount of $71.9 million. During the three and nine months ended September 29, 2023, the Company recognized a realized gain of $0.2 million on its Condensed Consolidated Statements of Operations related to its forward currency contracts designated as cash flow hedges. There was nothing recognized in 2022 as the Mexican Peso forward currency program was established in the second quarter of 2023.

The Company also used a non-designated forward currency contract for the purpose of managing its exposure to currency exchange rate risk related to the Euro-denominated purchase price of Novastep, which closed in June 2023. During the second quarter of 2023, the Company recognized a loss of $1.5 million on its Condensed Consolidated Statements of Operations related to the settlement of this non-designated forward currency contract. The loss is recorded in Other expense, net on Condensed Consolidated Statements of Operations.

Net Investment Hedges

On April 18, 2023, the Company entered into cross-currency swap agreements to hedge its net investment in its Swiss Franc-denominated subsidiaries against adverse movements in exchange rates between the U.S. Dollar and the Swiss Franc. These swap agreements are designated and qualify as net investment hedges. These contracts have a Swiss Franc notional amount of approximately ₣403 million and a U.S. Dollar aggregate notional amount of $450 million at September 29, 2023.

Cross-currency swaps involve the receipt of functional-currency fixed-rate amounts from a counterparty in exchange for the Company making foreign-currency fixed-rate payments over the life of the agreement. For derivatives designated as net investment hedges, the gain or loss on the derivative is reported in the Condensed Consolidated Balance Sheet as part of Accumulated other comprehensive (loss) and in the Company’s Condensed Consolidated Statements of Comprehensive Income (Loss) as part of the foreign currency translation adjustment. Amounts are reclassified out of Accumulated other comprehensive loss into earnings when the hedged net investment is either sold or substantially liquidated.

During the three and nine months ended September 29, 2023, the Company received interest income on its cross-currency swap derivatives of $2.6 million and $4.7 million, respectively, which is included within Interest expense, net in the Condensed Consolidated Statements of Operations.

The following table presents the effect of the Company’s designated hedging instruments on Accumulated other comprehensive income (loss) for the three and nine months ended September 29, 2023 and 2022:


	Three Months Ended				Nine Months Ended
	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
	(In thousands)
Gain (loss) on cross-currency swaps	$	5,991	$	—	$	(1,199)	$	—
Gain (loss) on forward currency contracts	(1,654)		—		(1,654)		—
	$	4,337	$	—	$	(2,853)	$	—

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The following table presents the fair value of the Company’s derivative financial instruments as well as their classification on the Condensed Consolidated Balance Sheets as of September 29, 2023 and December 31, 2022:


(In thousands)	Location on Unaudited Consolidated Balance Sheets (1)	September 29, 2023		December 31, 2022
Derivative Assets
Forward currency contracts	Other current assets	12		—
Cross-currency swaps	Other current assets	7,524		—


Total Derivative Assets		$	7,536	$	—

Derivative Liabilities
Forward currency contracts	Other current liabilities	1,150		—

Forward currency contracts	Other long-term liabilities	684		—
Cross-currency swaps	Other long-term liabilities	8,723		—
Total Derivative Liabilities		$	10,557	$	—

(1) The Company classifies derivative assets and liabilities as current when the settlement date of the contract is one year or less.

13. Commitments and Contingencies

The Company is involved in various pending legal, regulatory, and other proceedings arising out of the ordinary course of the Company’s business. None of these proceedings are expected to have a material adverse effect on the financial condition, results of operations or cash flow of the Company. With respect to these proceedings, management of the Company believes that either it will prevail, has adequate insurance coverage or has established appropriate accruals to cover potential liabilities. Legal costs related to proceedings or claims are recorded as incurred. Other costs that management estimates may be paid related to the claims are accrued when the liability is considered probable and the amount can be reasonably estimated. There can be no assurance, however, as to the ultimate outcome of any of these matters, and if all or substantially all of these proceedings were to be determined adverse to the Company, there could be a material adverse effect on the financial condition, results of operations or cash flow of the Company.

For further description of the Company’s litigation and contingencies, reference is made to Note 18, “Commitments and Contingencies” in the Notes to Consolidated Financial Statements in the 2022 Form 10-K.

14. Segment Information

The Company conducts its continuing operations through the Prevention & Recovery and Reconstructive operating segments, which also represent the Company’s reportable segments.

▪Prevention & Recovery - a leader in orthopedic solutions and recovery sciences, 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.

The Company’s management, including the chief operating decision maker, evaluates the operating results of each of its reportable segments based upon Net sales and Adjusted EBITDA, which excludes the effect of Other (income) expense, net, non-operating (gain) loss on investments, debt extinguishment charges, interest expense, net, restructuring and certain other charges, Medical Device Regulation (MDR) and other costs, strategic transaction costs, stock-based compensation, depreciation and other amortization, acquisition-related intangible asset amortization, insurance settlement loss (gain), and inventory step-up charges from the results of the Company’s operating segments.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The Company’s segment results were as follows:


	Three Months Ended				Nine Months Ended
	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
	(In thousands)
Net sales:
Prevention & Recovery	$	270,287	$	256,502	$	794,502	$	765,120
Reconstructive	147,237		127,312		457,675		389,268
	$	417,524	$	383,814	$	1,252,177	$	1,154,388
Segment Adjusted EBITDA(1):
Prevention & Recovery	$	44,102	$	39,532	$	109,123	$	101,050
Reconstructive	21,284		17,677		78,357		60,076
	$	65,386	$	57,209	$	187,480	$	161,126

(1) The following is a reconciliation of Income (loss) from continuing operations before income taxes to Adjusted EBITDA:


	Three Months Ended				Nine Months Ended
	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
	(In thousands)
Income (loss) from continuing operations before income taxes (GAAP)	$	(25,503)	$	(78,278)	$	(74,785)	$	471
Restructuring and other charges (1)	5,341		2,989		12,083		8,497
MDR and other costs (2)	6,228		3,600		23,021		10,648
Strategic transaction costs	10,482		8,146		27,547		32,549
Stock-based compensation	8,366		7,205		24,142		21,734
Depreciation and other amortization	21,492		18,159		62,237		56,109
Amortization of acquired intangibles	33,967		31,993		98,256		94,603
Inventory step-up	2		2,061		148		12,038
Interest expense, net	5,768		6,334		15,496		17,944
Other (income) expense, net	(757)		(300)		(665)		(300)
Debt extinguishment charges	—		—		—		20,104
Insurance settlement loss (gain) (3)	—		975		—		(32,059)
Gain on cost basis investment	—		(