# Enovis CORP (ENOV) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Enovis CORP's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1420800/000142080023000008/cfx-20221231.htm
Accession: 0001420800-23-000008
Filing date: 2023-03-01
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ENOV/
All MD&A years: /company/ENOV/mda/
Previous year: /company/ENOV/mda/fy2021/ (FY 2021)
Next year: /company/ENOV/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of Company’s management. This MD&A is divided into four main sections:

•Overview

•Results of Operations

•Liquidity and Capital Resources

•Critical Accounting Policies

MD&A should be read together with Part I, Item 1A. “Risk Factors” and the accompanying Consolidated Financial Statements and Notes to Consolidated Financial Statements included in Item 8. of this Form 10-K. The MD&A includes forward-looking statements. For a discussion of important factors that could cause actual results to differ materially from the results referred to in these forward-looking statements, see “Special Note Regarding Forward-Looking Statements.”

Overview

Enovis is a medical technology company focused on developing clinically differentiated solutions that generate measurably better patient outcomes and transform workflows by manufacturing and distributing high-quality medical devices with a broad range of products used for reconstructive surgery, rehabilitation, pain management and physical therapy. Our products address the continuum of patient care from injury prevention to rehabilitation after surgery or injury or from degenerative disease, enabling people to regain or maintain their natural motion. Please see Part I, Item 1. “Business” for a discussion of Enovis’s objectives and methodologies for delivering shareholder value.

Post-Separation, Enovis conducts its operations through two operating segments: Prevention & Recovery (“P&R”) and Reconstructive (“Recon”).

•Prevention & Recovery - a leader in orthopedic solutions, providing devices, software and services across the patient care continuum from injury prevention to rehabilitation after surgery, injury, or from degenerative disease.

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

We have a global footprint, with production facilities in North America, Europe, Africa, and Asia. We serve a global customer base across multiple markets through a combination of direct sales and third-party distribution channels. Our customer base is highly diversified in the medical markets.

Integral to our operations is our business management system, EGX. EGX is our culture and includes our values and behaviors, a comprehensive set of tools, and repeatable, teachable processes that we use to drive continuous improvement and create superior value for our customers, shareholders and associates. We believe that our management team’s access to, and experience in, the application of the EGX methodology is one of our primary competitive strengths.

Results of Operations

The following discussion of Results of Operations addresses the comparison of the periods presented. Our management evaluates the operating results of each of its reportable segments based upon Net sales and Adjusted EBITDA as defined in the “Non-GAAP Measures” section.

Items Affecting Comparability of Reported Results

Our financial performance and growth are driven by many factors, principally our ability to serve customers with market-leading delivery and innovation; the mix of products sold in any period; the impact of competitive forces, economic and market conditions; reimbursement levels for products in certain medical sales channels; availability of capital and attractive acquisition opportunities; our ability to continuously improve our cost structure; fluctuations in the relationship of foreign currencies to the U.S. dollar; and our ability to pass cost increases on to customers through pricing. These key factors have impacted our results

35

of operations in the past and are likely to affect them in the future. The comparability of our operating results for the year ended December 31, 2022 to the comparable periods is affected by the following additional significant items:

The Separation

On April 4, 2022, we completed the Separation through a tax-free, pro-rata distribution of 90% of the outstanding common stock of ESAB to our stockholders. We initially retained 10% of the shares of ESAB common stock immediately following the Separation. On November 18, 2022, we completed an exchange with a lender under our Enovis Credit Agreement of 6,003,431 shares of common stock of ESAB, representing all of our retained shares, for $230.5 million in term loan outstanding under our Enovis Credit Agreement. We recorded a gain of $102.7 million on the exchange of the shares representing the excess of fair value, less cost to sell, over our cost basis in the investment.

Once the Separation was completed in the second quarter of 2022, we began classifying the results from the fabrication technology business for the comparable periods presented as a discontinued operation in our financial statements. Accordingly, the results of our fabrication technology businesses are excluded from continuing operations in the accompanying financials for the years ended December 31, 2022, 2021, and 2020.

We expect that the Separation allows each company to: (1) optimize capital allocation for internal investment, mergers and acquisitions, and return of capital to shareholders; (2) tailor investment to its specific business profile and strategic priorities in the most efficient manner possible; (3) increase operating flexibility and resources to capitalize on growth opportunities in its respective markets; and (4) improve both investor alignment with its clear value proposition and the ability for investors to value it based on its distinct strategic, operational and financial characteristics. The Separation also provides each company with an appropriately valued acquisition currency that can be used for larger, transformational transactions. Please see Part I. Item 1A. “Risk Factors” in this Form 10-K for further discussion of the Company’s risks relating to the Separation.

Strategic Acquisitions

We complement our organic growth plans with strategic acquisitions and other investments. Acquisitions can significantly affect our reported results, and we report the change in our Net sales between periods both from existing and acquired businesses. The change in Net sales due to acquisitions for the years ended December 31, 2022 and 2021 presented in this filing represents the incremental sales in comparison to the portion of the prior period during which we did not own the business.

During the year ended December 31, 2022, the Company completed two business acquisitions for aggregate net cash consideration of $50.5 million. In the second quarter of 2022, the Company acquired KICo Knee Innovation Company Pty Limited and subsidiaries, an Australian private company doing business as 360 Med Care, which is a medical device distributor that bundles certain computer-assisted surgery and patient experience enhancement programs to add value to the device supply arrangements with surgeons, hospitals, and insurers. In the third quarter of 2022, the Company acquired a controlling interest in Insight Medical Systems, the flagship product of which is the ARVIS surgical navigation system.

During the year ended December 31, 2021, the Company completed five acquisitions for aggregate net cash consideration of $201.6 million and aggregate equity consideration of $285.7 million. In the first quarter of 2021, the Company acquired Trilliant Surgical, a national provider of foot and ankle orthopedic implants. In the second quarter of 2021, the Company acquired MedShape, Inc., a provider of innovative surgical solutions for foot and ankle surgeons using its patented superelastic nickel titanium (NiTiNOL) and shape memory polymer technologies. These two acquisitions were completed for total consideration, net of cash received, of $204.1 million, subject to certain adjustments. The Trilliant and MedShape acquisitions, along with the 2020 acquisition of the Scandinavian Total Ankle Replacement System and Finger Joint Arthroplasty Portfolio, created our growth product portfolio in the foot and ankle surgical market. In the third quarter of 2021, the Company acquired Mathys AG Bettlach (“Mathys”), a Switzerland-based company that develops and distributes innovative products for artificial joint replacement, synthetic bone graft solutions and sports medicine, for total acquisition equity consideration of $285.7 million of Colfax Common stock. The Mathys acquisition expanded our reconstructive product portfolio with its complementary surgical solutions and broadened our reach outside the U.S.

During the year ended December 31, 2020, the Company completed five acquisitions for total consideration, net of cash received, of $67.5 million, subject to certain purchase price adjustments. This included the fourth quarter acquisition of LiteCure LLC, a U.S. leader in high-powered laser rehab products for human and veterinary medical applications for net cash consideration after purchase price adjustments of $39.6 million.

36

Global Operations

During 2022, approximately 32% of our sales are derived from operations outside the U.S., the majority of which is in Europe with the remaining portion mostly in the Asia-Pacific region. Accordingly, we can be affected by market demand, economic and political factors in countries in Europe and the Asia-Pacific region, and significant movements in foreign exchange rates. Our ability to grow and our financial performance will be affected by our ability to address challenges and opportunities that are a consequence of expanding our global operations through our recent acquisitions, including efficiently utilizing our international sales channels, manufacturing and distribution capabilities, participating in the expansion of market opportunities, successfully completing global acquisitions and engineering innovative new product applications to create better patient outcomes. 

The majority of our Net sales derived from operations outside the U.S. are denominated in currencies other than the U.S. dollar. Similar portions of our manufacturing and employee costs are also outside the U.S. and denominated in currencies other than the U.S. dollar. Changes in foreign exchange rates can impact our results of operations and are quantified when significant. For the year ended December 31, 2022 compared to 2021, fluctuations in foreign currencies decreased Net sales and Gross profit by approximately 2.5% and decreased operating expenses by approximately 2%.

Seasonality

Although sales in our Prevention & Recovery and Reconstructive segments typically peak in the fourth quarter, these historical seasonality trends were disrupted by the commercial impacts caused by the COVID-19 pandemic. General economic conditions may, however, impact future seasonal variations.

Material Costs

Our principal raw materials and components are foam ethylene vinyl acetate, copolymer for our bracing and vascular products in our Prevention & Recovery segment and cobalt chromium alloy, stainless steel alloys, titanium alloy and ultra high molecular weight polyethylene in our Reconstructive segment. Prices for raw materials, energy and commodities are subject to volatility and are influenced by worldwide economic conditions. Input cost inflation historically has not been a material factor to our gross margin; however, inflation effects have increased since 2021 and are expected to continue to remain elevated for at least the near term. In response, we have been enacting tactical price increases to certain products, mainly in the Prevention & Recovery segment. Although we seek to proactively manage inflation risk, future changes in component and raw material costs may adversely impact earnings or our margins. Prices for raw materials, energy and commodities are also influenced by import duties and tariffs, world supply and demand balances, inventory levels, availability of substitute materials, currency exchange rates, anticipated or perceived shortages, geopolitical tensions, government trade practices and regulations and other factors.

Sales and Cost Mix

Gross profit margins within our operating segments vary primarily based on the type of product and distribution channel. Reconstructive products tend to have higher gross margins than the Prevention & Recovery products.

The mix of sales was as follows for the periods presented:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["Prevention & Recovery","66","%","","72","%","","77","%"],["Reconstructive(1)","34","%","","28","%","","23","%"]]
[[/GREPCENT_TABLE]]

(1) The changes from the year ended December 31, 2020 to 2022 reflects the impact from acquisitions and double-digit growth.

37

Non-GAAP Measures

Adjusted EBITDA

Adjusted EBITDA and Adjusted EBITDA margin, two non-GAAP performance measures, are included in this report because they are key metrics used by our management to assess our operating performance. Adjusted EBITDA excludes from Net income (loss) from continuing operations the effect of income tax expense (benefit), Other income, non-operating (gain) loss on investments, debt extinguishment charges, interest expense, net, restructuring and other charges, Medical Device Regulation (MDR) fees and other costs, strategic transaction costs, stock-based compensation, depreciation and other amortization, acquisition-related intangible asset amortization, insurance settlement (gain) loss, and fair value charges on acquired inventory. We also present Adjusted EBITDA and Adjusted EBITDA margin by operating segment, which are subject to the same adjustments. Operating income (loss), adjusted EBITDA and adjusted EBITDA margins at the operating segment level also include allocations of certain central function expenses not directly attributable to either operating segment. Adjusted EBITDA assists our management in comparing operating performance over time because certain items may obscure underlying business trends and make comparisons of long-term performance difficult, as they are of a nature and/or size that occur with inconsistent frequency or relate to discrete restructuring plans and other initiatives that are fundamentally different from our ongoing productivity improvements. Our management also believes that presenting these measures allows investors to view our performance using the same measures that we use in evaluating our financial and business performance and trends.

Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information calculated in accordance with GAAP. Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures. The following tables set forth a reconciliation of net loss from continuing operations, the most directly comparable financial statement measure, to Adjusted EBITDA for the years ended December 31, 2022, 2021 and 2020.

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2022"],["","Prevention & Recovery","","Reconstructive","","Total"],["","(Dollars in millions)"],["Net loss from continuing operations (GAAP)(1)","","","","","$","(38.2)"],["Income tax expense","","","","","36.1"],["Other income","","","","","(2.1)"],["Gain on cost basis investment","","","","","(8.8)"],["Gain on investment in ESAB Corporation","","","","","(102.7)"],["Debt extinguishment charges","","","","","20.4"],["Interest expense, net","","","","","24.1"],["Operating loss (GAAP)","$","(18.2)","","","$","(52.9)","","","(71.2)"],["Operating loss margin","(1.8)","%","","(9.9)","%","","(4.6)","%"],["Adjusted to add (deduct):"],["Restructuring and other charges(2)","9.6","","","9.4","","","19.0"],["MDR and other costs(3)","9.8","","","6.9","","","16.7"],["Strategic transaction costs(3)","39.9","","","21.2","","","61.0"],["Stock-based compensation(3)","20.2","","","11.3","","","31.5"],["Depreciation and other amortization","24.4","","","52.3","","","76.7"],["Amortization of acquired intangibles","80.1","","","46.2","","","126.3"],["Insurance settlement gain(3)","(24.4)","","","(12.3)","","","(36.7)"],["Inventory step-up","\u2014","","","12.8","","","12.8"],["Adjusted EBITDA (non-GAAP)","$","141.3","","","$","94.7","","","$","236.1"],["Adjusted EBITDA margin (non-GAAP)","13.8","%","","17.7","%","","15.1","%"]]
[[/GREPCENT_TABLE]]

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

(2) Restructuring and other charges in the Prevention & Recovery segment includes $1.7 million of expense classified as Cost of sales on the Company’s Consolidated Statements of Operations.

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

38

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2021"],["","Prevention & Recovery","","Reconstructive","","Total"],["","(Dollars in millions)"],["Net loss from continuing operations (GAAP)(1)","","","","","$","(102.3)"],["Income tax benefit","","","","","(19.5)"],["Debt extinguishment charges","","","","","29.9"],["Interest expense, net","","","","","29.1"],["Operating loss (GAAP)","$","(14.9)","","","$","(47.9)","","","(62.8)"],["Operating loss margin","(1.5)","%","","(12.0)","%","","(4.4)","%"],["Adjusted to add:"],["Restructuring and other charges(2)","11.5","","","2.4","","","13.9"],["MDR and other costs(3)","5.7","","","2.2","","","7.9"],["Strategic transaction costs(3)","14.8","","","8.6","","","23.4"],["Stock-based compensation(3)","17.8","","","7.9","","","25.7"],["Depreciation and other amortization","25.3","","","44.8","","","70.1"],["Amortization of acquired intangibles","72.6","","","44.3","","","116.9"],["Inventory step-up","0.7","","","10.1","","","10.8"],["Adjusted EBITDA (non-GAAP)","$","133.5","","","$","72.5","","","$","206.0"],["Adjusted EBITDA margin (non-GAAP)","13.0","%","","18.1","%","","14.4","%"]]
[[/GREPCENT_TABLE]]

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

(2) Restructuring and other charges in the Prevention & Recovery segment includes $5.2 million of expense classified as Cost of sales on the Company’s Consolidated Statements of Operations.

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2020"],["","Prevention & Recovery","","Reconstructive","","Total"],["","(Dollars in millions)"],["Net loss from continuing operations (GAAP)(1)","","","","","$","(74.4)"],["Income tax benefit","","","","","(44.6)"],["Interest expense, net","","","","","52.8"],["Operating loss (GAAP)","$","(43.9)","","","$","(22.3)","","","(66.2)"],["Operating loss margin","(5.1)","%","","(8.6)","%","","(5.9)","%"],["Adjusted to add:"],["Restructuring and other charges(2)","19.6","","","3.8","","","23.3"],["MDR and other costs(3)","5.0","","","1.9","","","6.9"],["Strategic transaction costs(3)","2.2","","","0.6","","","2.8"],["Stock-based compensation(3)","17.3","","","5.2","","","22.5"],["Depreciation and other amortization","25.2","","","39.3","","","64.6"],["Amortization of acquired intangibles","82.9","","","20.4","","","103.3"],["Inventory step-up","4.3","","","\u2014","","","4.3"],["Adjusted EBITDA (non-GAAP)","$","112.6","","","$","49.0","","","$","161.5"],["Adjusted EBITDA margin (non-GAAP)","13.0","%","","19.0","%","","14.4","%"]]
[[/GREPCENT_TABLE]]

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

(2) Restructuring and other charges in the Prevention & Recovery segment includes $6.6 million of expense classified as Cost of sales on the Company’s Consolidated Statements of Operations.

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

39

Total Company

Sales

Net sales from continuing operations increased to $1.6 billion in 2022 from $1.4 billion in 2021. The following table presents the components of changes in our consolidated Net sales.

[[GREPCENT_TABLE]]
[["","Net Sales"],["","$","","%"],["","(Dollars in millions)"],["For the year ended December 31, 2020","$","1,120.7"],["Components of Change:"],["Existing businesses(1)","154.3","","","13.8","%"],["Acquisitions(2)","139.5","","","12.4","%"],["Foreign currency translation(3)","11.7","","","1.0","%"],["","305.5","","","27.2","%"],["For the year ended December 31, 2021","$","1,426.2"],["Components of Change:"],["Existing businesses(1)","79.6","","","5.6","%"],["Acquisitions(2)","93.3","","","6.5","%"],["Foreign currency translation(3)","(36.0)","","","(2.5)","%"],["","136.9","","","9.6","%"],["For the year ended December 31, 2022","$","1,563.1"]]
[[/GREPCENT_TABLE]]

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

(2) Represents the incremental sales as a result of acquisitions closed subsequent to the beginning of the prior year period.

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

2022 Compared to 2021

Net sales increased during 2022 as compared to 2021 primarily due to an increase in sales from existing businesses across both of our segments and sales from acquired businesses in our Reconstructive segment, partially offset by foreign currency headwinds primarily in our Prevention & Recovery segment. In our Reconstructive segment, existing business sales increased $47.1 million, or 11.8%, due to significantly higher sales volumes than the prior year across all product lines driven by market outperformance, new product launches, and reduced COVID impacts. In our Prevention & Recovery segment, existing business sales increased $32.5 million, or 3.2%, due to improved sales volumes and inflation-related pricing increases. Net sales from acquisitions increased during 2022 as compared to 2021 primarily due to the Mathys, Trilliant, and Medshape acquisitions in our Reconstructive segment that closed in 2021. The strengthening of the U.S. dollar relative to other currencies, most notably the Euro, caused a $36.0 million unfavorable currency translation impact.

2021 Compared to 2020

Net sales increased during 2021 as compared to 2020 due to the recovery from the COVID-related sales downturn in 2020, inflation-related pricing increases, sales from acquisitions, new product sales, and foreign currency tailwinds. In our Reconstructive segment, existing business sales increased $36.1 million, or 14.0%, primarily due to a recovery in sales volumes from the decline related to COVID-19 and expansion in the reconstructive product group from market outperformance and new product launches. In our Prevention & Recovery segment, existing business sales increased $117.6 million, or 13.6%, primarily due to a recovery in sales volumes from the decline related to COVID, as well as inflation-related pricing increases and foreign currency tailwinds. Net sales from acquisitions increased during 2021 as compared to 2020 primarily due to acquisitions that closed in 2021 and the fourth quarter of 2020. The weakening of the U.S. dollar relative to other currencies, most notably the Euro, led to an $11.7 million favorable currency translation impact.

40

Operating Results

The following table summarizes our results from continuing operations for the comparable three-year period.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","(Dollars in millions)"],["Gross profit","$","869.4","","","$","777.7","","","$","603.6"],["Gross profit margin","55.6","%","","54.5","%","","53.9","%"],["Selling, general and administrative expense","$","772.9","","","$","665.8","","","$","515.5"],["Research and development expense","$","60.8","","","$","49.1","","","$","34.3"],["Operating loss","$","(71.2)","","","$","(62.8)","","","$","(66.2)"],["Operating loss margin","(4.6)","%","","(4.4)","%","","(5.9)","%"],["Net loss from continuing operations","$","(38.2)","","","$","(102.3)","","","$","(74.4)"],["Net loss margin from continuing operations (GAAP)","(2.4)","%","","(7.2)","%","","(6.6)","%"],["Adjusted EBITDA (non-GAAP)","$","236.1","","","$","206.0","","","$","161.5"],["Adjusted EBITDA margin (non-GAAP)","15.1","%","","14.4","%","","14.4","%"],["Items excluded from Adjusted EBITDA:"],["Restructuring and other charges(1)","$","19.0","","","$","13.9","","","$","23.3"],["MDR and other costs","$","16.7","","","$","7.9","","","$","6.9"],["Strategic transaction costs","$","61.0","","","$","23.4","","","$","2.8"],["Stock-based compensation","$","31.5","","","$","25.7","","","$","22.5"],["Depreciation and other amortization","$","76.7","","","$","70.1","","","$","64.6"],["Amortization of acquired intangibles","$","126.3","","","$","116.9","","","$","103.3"],["Insurance settlement gain","$","(36.7)","","","$","\u2014","","","$","\u2014"],["Inventory step-up","$","12.8","","","$","10.8","","","$","4.3"],["Interest expense, net","$","24.1","","","$","29.1","","","$","52.8"],["Debt extinguishment charges","$","20.4","","","$","29.9","","","$","\u2014"],["Income tax expense (benefit)","$","36.1","","","$","(19.5)","","","$","(44.6)"]]
[[/GREPCENT_TABLE]]

(1) Restructuring and other charges includes $1.7 million, $5.2 million and $6.6 million of expense classified as Cost of sales on the Company’s Consolidated Statements of Operations for the years ended December 31, 2022, 2021 and 2020, respectively.

2022 Compared to 2021

Gross profit increased $91.7 million during 2022 in comparison to 2021 due to an $89.5 million increase in our Reconstructive segment. The Gross profit increase was attributable to contributions from recent business acquisitions and increased sales in our existing businesses, partially offset by inflation of supply chain, logistics, and other costs, unfavorable foreign currency translation effects, and higher inventory step-up charges of $2.0 million. Gross profit margin increased due to segment performance, including pricing and other benefits, offset by inflation of supply chain, logistics, and other costs.

Selling, general and administrative expense increased $107.1 million primarily due to a $50.3 million increase in costs associated with acquisitions and the related integration costs from the newly acquired businesses within our Reconstructive segment and a $37.6 million increase in strategic transaction costs, driven by Separation-related costs incurred in the first half of 2022. Research and development costs also increased compared to the prior year period primarily due to increased spend within recently acquired businesses in our Reconstructive segment. Amortization of acquired intangibles and Depreciation and other amortization also increased compared to the prior year period due to acquisition-related increases.

On November 18, 2022, we completed an exchange with a lender under our Enovis Credit Agreement of 6,003,431 shares of common stock of ESAB, representing all of our retained interest in ESAB, for $230.5 million of the $450 million in term loan outstanding under the Enovis Credit Agreement. We recorded a gain of $102.7 million on the disposition of the investment representing the fair value in excess of cost basis.

41

During the year ended December 31, 2022, we recorded a net insurance settlement gain of $36.7 million which was related to the 2019 acquisition of DJO and which, along with the aforementioned gain on the disposition of the ESAB investment, significantly impacted our results.

Debt extinguishment charges of $20.4 million were recorded in the year ended December 31, 2022. Charges of $20.1 million were recorded in 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 in conjunction with the Separation. Additionally, $0.3 million of noncash write-offs of deferred financing fees were recorded in conjunction with the aforementioned debt-for-equity exchange during the fourth quarter of 2022. Debt extinguishment charges of $29.9 million were recorded in the second quarter of 2021 due to an early redemption of certain senior notes.

Interest expense, net decreased by $5.0 million, primarily due to a reduction in debt balances as a result of the Separation-related debt redemptions at the beginning of the second quarter of 2022.

The effective tax rate for Net income from continuing operations during 2022 was (1,745.8)% on a loss from continuing operations before income taxes, which was different than the 2022 U.S. federal statutory tax rate of 21% mainly due to the net impact of U.S. tax on non-deductible costs and capital gains on current year transactions. These were partially offset by the reduction of valuation allowances on U.S. and German net operating losses, and interest limitation carryforwards. The effective tax rate for 2021 was 16.0% on a loss from continuing operations before income taxes, which was lower than the 2021 U.S. federal statutory tax rate of 21% mainly due to the impact of additional U.S. tax on international operations and certain non-deductible expenses. These were offset by the net impact of reduction of valuation allowance on U.S. federal net operating losses.

Net loss from continuing operations decreased primarily due to the gain on the ESAB common stock, as well as the insurance settlement gain and acquisition-related sales, offset by costs associated with the Separation and acquisition-related costs. Net loss margin from continuing operations decreased by 480 basis points due to the aforementioned factors. Adjusted EBITDA increased due to organic growth and lower operating expenses in existing businesses, partially offset by inflation of supply chain, logistics, and other costs. Adjusted EBITDA margin excluding the effects of recent acquisitions and foreign currency pressures increased by approximately 150 basis points. Our recent acquisitions were dilutive to the margin by approximately 70 basis points and are expected to be accretive to margins in future years.

2021 Compared to 2020

Gross profit increased $174.0 million during 2021 in comparison to 2020 due to an $87.3 million increase in our Prevention & Recovery Segment and an $86.8 million increase in our Reconstructive segment. The Gross profit increase was primarily attributable to higher sales volumes and related improved production efficiencies compared to 2020 during which sales volumes were negatively impacted by the COVID-19 pandemic. During 2021, Gross profit and gross profit margin also increased due to acquisitions, new product initiatives and favorable foreign currency impacts, partially offset by increased supply chain and logistic costs in both segments.

Selling, general and administrative expense increased $150.3 million primarily due to a $103.7 million increase in costs associated with acquisitions and the related integration costs from the newly acquired businesses, primarily within our Reconstructive segment, the cessation of prior year temporary cost reduction measures that were taken in response to COVID-19, and increased sales commissions from higher sales levels. A $20.6 million increase in strategic transaction costs primarily related to the Separation also increased Selling, general and administrative expense during 2021.

Debt extinguishment charges of $29.9 million were recorded in the second quarter of 2021 due to an early redemption of certain senior notes. Interest expense, net decreased by $23.7 million, primarily due to an overall reduction in debt balances during the current year as a result of the aforementioned redemption of senior notes.

The effective tax rate for 2021 was 16.0% on a loss from continuing operations before income taxes, which was lower than the 2021 U.S. federal statutory tax rate of 21% mainly due to the impact of additional U.S. tax on international operations and certain non-deductible expenses. These were offset by the impact of the reduction of valuation allowance on U.S federal net operating losses. The effective tax rate for 2020 was 37.5% on a loss from continuing operations before income taxes, which was higher than the 2020 U.S. federal statutory tax rate of 21% mainly due to the net impact of reduction of valuation

42

allowance on U.S. federal, state and foreign net operating losses. These were offset by the impact of additional U.S. tax on international operations and certain non-deductible expenses.

Net loss from continuing operations increased in 2021 compared to 2020, largely due to the cessation of aforementioned temporary cost reductions implemented during 2020 in reaction to COVID-driven sales reductions, higher income tax expense, as well as increased supply chain and logistic costs, offset by increased sales from the 2021 COVID recovery. During 2021, we also incurred debt extinguishment charges, increased strategic transaction costs related to the Separation, and higher sales commissions related to greater sales. Net loss margin from continuing operations increased by 60 basis points due to the aforementioned factors. Adjusted EBITDA increased primarily due to the improved sales volumes and new product initiatives, partially offset by the aforementioned supply chain and logistic costs and sales commission increases, and the cessation of the aforementioned temporary cost reductions. Adjusted EBITDA margin remained flat due to the above reasons, the impacts of which were offset by costs associated with recent acquisitions which were dilutive to the margin, but are expected to be accretive in future years.

43

Business Segments

As discussed further above, we report results in two reportable segments: Prevention & Recovery and Reconstructive. Operating loss, adjusted EBITDA and adjusted EBITDA margins at the operating segment level also include allocations of certain central function expenses not directly attributable to either operating segment. See See Item 7. “Non-GAAP Measures” for a further discussion and reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures.

Prevention & Recovery

We develop, manufacture, and distribute rigid bracing products, orthopedic soft goods, vascular systems and compression garments, and hot and cold therapy products and offer robust recovery sciences products in the clinical rehabilitation and sports medicine markets such as bone growth stimulators and electrical stimulators used for pain management. Our Prevention & Recovery products are marketed under several brand names, most notably DJO, to orthopedic specialists, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers, and other healthcare professionals who treat patients with a variety of treatment needs including musculoskeletal conditions resulting from degenerative diseases, deformities, traumatic events and sports-related injuries. Many of our medical devices and related accessories are used by athletes and other patients for injury prevention and at-home physical therapy treatments. We reach a diverse customer base through multiple distribution channels, including independent distributors, direct salespeople, and directly to patients.

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","(Dollars in millions)"],["Net sales","$","1,027.6","","","$","1,026.0","","","$","863.2"],["Gross profit","$","518.2","","","$","516.1","","","$","428.8"],["Gross profit margin","50.4","%","","50.3","%","","49.7","%"],["Selling, general and administrative expense","$","438.9","","","$","421.9","","","$","352.8"],["Research and development expense","$","33.5","","","$","30.2","","","$","24.1"],["Operating loss (GAAP)","$","(18.2)","","","$","(14.9)","","","$","(43.9)"],["Operating loss margin (GAAP)","(1.8)","%","","(1.5)","%","","(5.1)","%"],["Adjusted EBITDA (non-GAAP)","$","141.3","","","$","133.5","","","$","112.6"],["Adjusted EBITDA margin (non-GAAP)","13.8","%","","13.0","%","","13.0","%"]]
[[/GREPCENT_TABLE]]

2022 Compared to 2021

Net sales in our Prevention & Recovery segment increased $1.6 million in the year ended December 31, 2022 compared with the prior year period, driven by organic growth in existing businesses which was aided by pricing increases to mitigate inflation, mostly offset by $30.9 million of currency translation pressure. Gross profit increased $2.1 million due to the improved sales, offset by inflation of supply chain, logistics, and other costs and unfavorable foreign currency effects. Gross profit margin increased 10 basis points for the same reasons. Selling, general and administrative expense increased primarily due to increased costs related to the Separation, offset by lower central costs. Adjusted EBITDA and Adjusted EBITDA margin increased due to the reduction in central cost allocations, partially offset by inflation of supply chain, logistics, and other costs.

2021 Compared to 2020

Net sales in our Prevention & Recovery segment increased $162.9 million during 2021 compared to 2020 due to the strong recovery from the COVID-19 effects that impacted 2020, as well as new product initiatives, acquisition-related sales growth of $33.5 million, and a $11.2 million favorable foreign currency translation impact. Gross profit increased $87.3 million as a result of improved sales volumes and production efficiencies, offset by inflation-related pricing and cost increases. Gross profit margin increased 60 basis points for the same reasons. Selling, general and administrative expense increased primarily due to the cessation of temporary cost reductions implemented in 2020 and higher sales commissions in the current year. Adjusted EBITDA and Adjusted EBITDA margin increased due to the improved sales volumes, partially offset by increased Selling, general and administrative costs and cost increases over the same period.

44

Reconstructive

We develop, manufacture, and market a wide variety of knee, hip, shoulder, elbow, foot, ankle, and finger implant products and surgical productivity solutions that serve the orthopedic reconstructive joint implant market. Our products are primarily used by surgeons for surgical procedures.

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

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","2022","","2021","","2020"],["","","","(Dollars in millions)"],["Net sales","","","$","535.5","","","$","400.2","","","$","257.6"],["Gross profit","","","$","351.1","","","$","261.6","","","$","174.8"],["Gross profit margin","","","65.6","%","","65.4","%","","67.9","%"],["Selling, general and administrative expense","","","$","334.0","","","$","243.8","","","$","162.6"],["Research and development expense","","","$","27.4","","","$","18.9","","","$","10.1"],["Operating loss (GAAP)","","","$","(52.9)","","","$","(47.9)","","","$","(22.3)"],["Operating loss margin (GAAP)","","","(9.9)","%","","(12.0)","%","","(8.6)","%"],["Adjusted EBITDA (non-GAAP)","","","$","94.7","","","$","72.5","","","$","49.0"],["Adjusted EBITDA margin (non-GAAP)","","","17.7","%","","18.1","%","","19.0","%"]]
[[/GREPCENT_TABLE]]

2022 Compared to 2021

Net sales increased for our Reconstructive segment in the year ended December 31, 2022 compared with the prior year, primarily due to acquisition-related sales growth of $93.3 million and existing business sales growth of $47.1 million. Sales were negatively impacted in 2021, most notably the second half of the year, due to COVID-19 surges and a related deceleration in elective surgical procedure volumes. Gross profit and gross profit margin increased primarily due to acquisition and existing business growth, partially offset by inflation of supply chain, logistics, and other costs. Selling, general and administrative expense also increased primarily due to $50.3 million of costs from acquisitions, including integration costs for the newly-acquired businesses, as well as increased central costs, including costs associated with the Separation. Adjusted EBITDA increased primarily due to growth in existing businesses, partially offset by inflation of supply chain, logistics, and other costs. Without the impact of recent acquisition, Adjusted EBITDA margin increased 260 basis points compared to prior year. Recent acquisitions were dilutive to the margin by approximately 300 basis points, but are expected to be accretive to margins in future years.

2021 Compared to 2020

Net sales increased for our Reconstructive segment during year ended December 31, 2021 compared with the prior year due to a recovery in sales volumes from the COVID-19-related declines during 2020, as well as continued expansion from market outperformance and new product launches, acquisition-related sales growth of $106.0 million and a favorable foreign currency translation impact of $0.5 million. After a surge of COVID-19 cases in the fourth quarter of 2020, which negatively impacted sales volumes early in 2021, sales volumes began normalizing late in the first quarter and through the second quarter of 2021. However, as a result of the increase in cases of COVID-19 variants during the second half of 2021, recovery slowed during this period, primarily due to a deceleration in elective surgical procedure volumes. Gross profit increased due to improved sales volumes and acquisition-related growth, partially offset by increased supply chain and logistic costs. Gross profit margin decreased because of recent acquisitions, which were dilutive to the 2021 margins, but are expected to be accretive in future years. Selling, general and administrative expense also increased primarily due to the additional costs from newly-acquired businesses and related integration costs, the cessation of temporary employee cost reductions implemented during 2020, and higher sales commissions in 2021. Adjusted EBITDA margin decreased because of recent acquisitions, which were dilutive to the 2021 margins, but are expected to be accretive in future years.

45

Liquidity and Capital Resources

Overview

We finance our long-term capital and working capital requirements through a combination of cash flows from operating activities, various borrowings and the issuances of equity. We expect that our primary ongoing requirements for cash will be for working capital, funding of acquisitions, capital expenditures, restructuring cash outflows, and interest and principal repayments on amounts drawn on our revolving credit facility. We believe we could raise additional funds in the form of debt or equity if it was determined to be appropriate for strategic acquisitions or other corporate purposes.

ESAB Separation

We completed the separation of ESAB on April 4, 2022, through a tax-free, pro-rata distribution of 90% of the outstanding common stock of ESAB to our shareholders. At the time of the Separation, we retained 10% of the shares of ESAB common stock.

In connection with the Separation, ESAB issued $1.2 billion of new debt securities, the proceeds from which were used to fund a $1.2 billion cash distribution to us upon Separation. We used the distribution proceeds in conjunction with $450 million of borrowings on a term loan under our Enovis Credit Agreement and $52.3 million of cash on hand to repay $1.4 billion of outstanding debt and accrued interest on our prior credit facility, $302.8 million of outstanding debt and accrued interest on our senior notes due February 15, 2026 (“2026 Notes”), as well as a redemption premium at 103.188% of the principal amount of our 2026 Notes, and other fees and expenses due at closing. Additionally, on April 7, 2022, we completed the redemption of our senior unsecured notes due April 2025 (“Euro Senior Notes”) representing all of our outstanding €350 million principal 3.250% Senior Notes due 2025 at a redemption price of 100.813% of the principal amount and accrued interest for $391.2 million. See section Enovis Term Loan and Revolving Credit Facility in Note 13, “Debt” in the accompanying Notes to Consolidated Financial Statements for more detail on the new Enovis Credit Agreement.

In the second quarter of 2022, we recorded Debt extinguishment charges of $20.1 million, including $12.7 million of redemption premiums on the retired debt instruments and $7.4 million in noncash write-offs of original issue discount and deferred financing fees.

On November 18, 2022, we divested the retained ESAB shares to a lender under the Enovis Credit Agreement in a tax-efficient exchange for extinguishing $230.5 million of our outstanding term loan under the Enovis Credit Agreement.

Equity Capital

In connection with the Separation, we effected a one-for-three reverse stock split of all issued and outstanding shares of Enovis common stock. As a result of the reverse stock split, all share and per share figures, as applicable, contained in the accompanying Consolidated Financial Statements and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations have been retroactively restated as if the reverse stock split occurred at the beginning of the periods presented.

On March 19, 2021, we completed the underwritten public offering of 5.4 million shares of our Common stock, as adjusted for the reverse stock split, resulting in net proceeds of $711.3 million, after deducting offering expenses and underwriters’ discount and commissions. We used the proceeds to pay down a certain portion of our senior notes.

On July 28, 2021, the Company issued 2.2 million shares of Common stock, as adjusted for the reverse stock split, to the former shareholders of Mathys for acquisition consideration of $285.7 million.

In 2018, our Board of Directors authorized the repurchase of our Common stock from time-to-time on the open market or in privately negotiated transactions. No stock repurchases have been made under this plan since the third quarter of 2018. As of December 31, 2022, the remaining stock repurchase authorization provided by our Board of Directors was $100.0 million. The timing, amount, and method of shares repurchased is determined by management based on its evaluation of market conditions and other factors. There is no term associated with the remaining repurchase authorization.

Enovis Term Loan and Revolving Credit Facility

On April 4, 2022, we entered into a new credit agreement (the “Enovis Credit Agreement”), consisting of a $900 million revolving credit facility (the “Revolver”) with an April 4, 2027 maturity date and a term loan with an initial aggregate principal

46

amount of $450 million and an April 4, 2023 maturity date (the “Enovis Term Loan”). 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 in Enovis Term Loan outstanding under the Enovis Credit Agreement, net of cost to sell. The remaining $219.5 million outstanding balance on the Enovis Term Loan matures on April 4, 2023, and we expect to use the Revolver to pay the balance due.

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 4.00:1.00, with a step-down to 3.75:1.00 commencing with the fiscal quarter ending June 30, 2023, and a step-down to 3.50:1.00 commencing with the fiscal quarter ending June 30, 2024, 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 Term Loan and the Revolver. As of December 31, 2022, the Company was in compliance with the covenants under the Enovis Credit Agreement.

As of December 31, 2022, the weighted-average interest rate of borrowings under the Enovis Credit Agreement was 5.71%, excluding accretion of original issue discount and deferred financing fees, and there was $860.0 million available on the Revolver.

Euro Notes

In 2017, we issued senior unsecured notes with an aggregate principal amount of €350 million due in May 2025, with an interest rate of 3.25% (the “Euro Notes”). The Euro Notes were redeemed on April 7, 2022 at 100.813% of the principal amount after the completion of the Separation.

Tangible Equity Unit (“TEU”) Amortizing Notes

In 2019, we issued 5.75% TEU amortizing notes due in January 2022 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 Company paid $6.5 million, $25.0 million, and $23.4 million of principal on the TEU amortizing notes in the years ended December 31, 2022, 2021, and 2020, respectively. The final installment payment was made on January 15, 2022. Additionally, in the first quarter of 2022, all of the remaining related TEU prepaid stock purchase contracts were converted to shares of common stock. See Note 14, “Equity” for further information.

2024 Notes and 2026 Notes

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

On April 24, 2021, the Company used the proceeds from its March 2021 equity offering to redeem all of its $600 million 6.0% senior notes due February 14, 2024 (the “2024 Notes”) and $100 million of the outstanding principal of its 2026 Notes for $724.4 million. The 2024 Notes were redeemed at a redemption price of 103.000% of their principal amount and the 2026 Notes were redeemed at a redemption price of 106.375% of their principal amount, plus, in each case, accrued and unpaid interest through the date of redemption. In the second quarter of 2021, a net loss on the early extinguishment of debt of $29.9 million was recorded and included $24.4 million of call premium on the retired debt.

Other Indebtedness

In addition, we are party to various bilateral credit facilities with a borrowing capacity of $30.0 million. As of December 31, 2022, there were no outstanding borrowings under these facilities.

47

We are also party to letter of credit facilities with an aggregate capacity of $15.0 million. Total letters of credit of $7.1 million were outstanding as of December 31, 2022.

We believe that our sources of liquidity are adequate to fund our operations for the next twelve months and the foreseeable future.

Cash Flows

As of December 31, 2022, we had $24.3 million of Cash and cash equivalents, a decrease of $695.1 million from the $719.4 million of Cash and cash equivalents on hand as of December 31, 2021. The Cash and cash equivalents as of December 31, 2021 include $39.1 million related to the ESAB business reported in Total current assets associated with discontinued operations on the Consolidated Balance Sheet. The following table summarizes the change in Cash and cash equivalents during the periods indicated and includes cash flows related to discontinued operations:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","(Dollars in millions)"],["Net cash provided by (used in) operating activities","$","(55.9)","","","$","356.1","","","$","301.9"],["Purchases of property, plant and equipment and intangibles","(105.5)","","","(104.2)","","","(114.8)"],["Proceeds from sale of property, plant and equipment","2.7","","","7.0","","","9.6"],["Acquisitions, net of cash received, and investments","(73.7)","","","(223.3)","","","(69.8)"],["Net cash used in investing activities","(176.4)","","","(320.5)","","","(175.1)"],["Repayments of debt, net","(1,591.2)","","","(126.0)","","","(118.3)"],["Distribution from ESAB Corporation, net","1,143.4","","","\u2014","","","\u2014"],["Proceeds from issuance of common stock, net","5.8","","","745.2","","","3.5"],["Payment of debt extinguishment costs","(12.7)","","","(24.4)","","","\u2014"],["Deferred consideration payments and other","(10.4)","","","(9.9)","","","(16.8)"],["Net cash provided by (used in) financing activities","(465.1)","","","584.9","","","(131.7)"],["Effect of foreign exchange rates on Cash and cash equivalents","2.3","","","(2.2)","","","(3.8)"],["Increase (decrease) in Cash and cash equivalents","$","(695.1)","","","$","618.3","","","$","(8.6)"]]
[[/GREPCENT_TABLE]]

Cash (used in) provided by operating activities related to discontinued operations for the years ended December 31, 2022, 2021, and 2020 was $(27) million, $224 million, and $302 million, respectively.

Cash flows from operating activities can fluctuate significantly from period to period due to changes in working capital and the timing of payments for items such as restructuring and strategic transaction costs such as Separation costs. Changes in significant operating cash flow items are discussed below.

•Operating cash flows from continuing operations working capital was a use of $116.0 million in 2022, primarily due to business growth and increases in inventory to insulate for supply chain volatility. Comparative results was a net inflow of $8.2 million for 2021 and a net outflow of $33.9 million for 2020.

•During 2022 and 2021, cash paid for strategic transaction costs in our continuing operations were $61.0 million and $23.4 million, respectively. These costs were primarily related to the Separation.

•Cash paid for interest was $37.1 million, $85.5 million and $104.6 million for 2022, 2021 and 2020, respectively. The decrease from 2021 to 2022 is primarily a result of the change in our capital structure due to the Separation. At the time of the Separation, the Company’s total debt of $2.1 billion was repaid and replaced with a $450 million term loan. The decrease from 2020 to 2021 is primarily due to debt repaid in 2021 with the $745.2 million of proceeds from the issuance of our common stock.

•During 2022, 2021, and 2020 cash payments of $18.5 million, $8.0 million and $22.5 million, respectively, were made related to our restructuring initiatives.

48

•Cash provided by operating activities for 2022 included a net one-time $36.7 million inflow attributable to insurance settlements and 2021 includes a one-time cash inflow from a $36.0 million U.S. federal tax refund received in the first quarter of 2021.

Cash flows used in investing activities for 2022, 2021 and 2020 include $73.7 million, $223.3 million and $69.8 million, respectively, for acquisitions and investments. Refer to Note 5 “Acquisitions” in the accompanying Notes to the Consolidated Financial Statements for more information. Additionally, cash flows used in investing activities in 2022, 2021, and 2020 include $105.5 million, $104.2 million and $114.8 million, respectively, for purchases of property, plant, equipment, and intangibles. Included in these amounts is $5.9 million, $35.6 million and $40.1 million for 2022, 2021 and 2020, respectively, related to discontinued operations.

Cash flows used in financing activities in 2022 includes $1.6 billion net repayment of borrowings, which included the outstanding debt on our prior credit facility, 2026 Notes and Euro Senior Notes, partially offset by borrowings on a term loan under our new credit facility. The repayments were primarily funded by a $1.2 billion cash distribution from ESAB to us upon Separation. Cash flows provided by financing activities in 2021 include $745.2 million in proceeds from the issuance of common stock, partially offset by net debt repayments of $126.0 million. Cash flows used in financing activities for 2020 include net debt repayments of $118.3 million.

Our Cash and cash equivalents as of December 31, 2022 include $12.6 million held in jurisdictions outside the U.S. Cash repatriation of non-U.S. cash into the U.S. may be subject to taxes, other local statutory restrictions and minority owner distributions.

Contractual Obligations

Debt

As of December 31, 2022, the Company’s Term Loan and Revolver had principal amounts outstanding of $219.5 million and $40.0 million, respectively. The Term Loan matures on April 4, 2023. There are no required principal payments due on the Revolver within 12 months and it matures on April 4, 2027.

Interest Payments on Debt

Based on December 31, 2022 outstanding balances and our expectation to repay the Term Loan with borrowings on the Revolver on April 4, 2023, we estimate future interest payments associated with the Term Loan and Revolver of $3.3 million and $60.3 million, respectively, with $3.3 million and $11.7 million payable within 12 months. Variable interest payments are estimated using a static rate of 5.89% for the Term Loan and 5.68% for the Revolver, respectively.

Operating Leases

The Company leases certain office spaces, warehouses, facilities, vehicles, and equipment. As of December 31, 2022, the Company had fixed lease payment obligations of $75.9 million, with $22.3 million payable within 12 months.

Purchase Obligations

As of December 31, 2022, the Company had other purchase obligations of $162.0 million, with $156.8 million payable within 12 months. Purchase obligations herein exclude open purchase orders for goods or services that are provided on demand as the timing of which is not certain.

We have funding requirements associated with our pension plans as of December 31, 2022, which are estimated to be $3.3 million for the year ending December 31, 2023. Other long-term liabilities, such as those for other legal claims, employee benefit plan obligations, deferred income taxes and liabilities for unrecognized income tax benefits, are excluded from this disclosure since they are not contractually fixed as to timing and amount.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that provide liquidity, capital resources, market or credit risk support that expose us to any liability that is not reflected in our Consolidated Financial Statements at December 31, 2022 other than outstanding letters of credit of $7.1 million and unconditional purchase obligations with suppliers of $162.0 million.

49

Critical Accounting Policies

The methods, estimates and judgments we use in applying our critical accounting policies have a significant impact on our results of operations and financial position. We evaluate our estimates and judgments on an ongoing basis. Our estimates are based upon our historical experience, our evaluation of business and macroeconomic trends and information from other outside sources, as appropriate. Our experience and assumptions form the basis for our judgments about the carrying value of 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.

We believe the following accounting policies are the most critical in that they are important to the financial statements and they require the most difficult, subjective or complex judgments in the preparation of the financial statements. For a detailed discussion on the application of these and other accounting policies, see Note 2, “Summary of Significant Accounting Policies” in the accompanying Notes to Consolidated Financial Statements in this Form 10-K.

Goodwill and Intangible Assets

Goodwill represents the costs in excess of the fair value of net assets acquired associated with our business acquisitions. Our business acquisitions typically result in the recognition of Goodwill, developed technology, trade name or trademark, and customer relationship intangible assets, which affect the amount of future period amortization expense and possible impairment charges that we may incur. The fair values of acquired intangibles are determined using estimates and assumptions based on information available near the acquisition date. Significant assumptions include the discount rates, projected net sales and operating income metrics, royalty rates and technology obsolescence rates. These assumptions are forward looking and could be affected by future economic and market conditions. We engage third-party valuation specialists who review the critical assumptions and calculations of the fair value of acquired intangible assets in connection with our significant acquisitions. In connection with our acquisitions of 360 Med Care and Insight during the year ended December 31, 2022, we recognized aggregate Goodwill of approximately $53 million and identifiable intangible assets of approximately $57 million. Refer to Notes 2, 5 and 9 to the Consolidated Financial Statements for a description of the Company’s policies relating to Goodwill and intangible assets.

We evaluate the recoverability of Goodwill and indefinite-lived intangible assets annually or more frequently if an event occurs or circumstances change in the interim that would more likely than not reduce the fair value of the asset below its carrying amount. Goodwill and indefinite-lived intangible assets are considered to be impaired when the carrying value of a reporting unit or asset exceeds its value.

In the evaluation of Goodwill for impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting entity is less than its carrying value. If we determine that it is more likely than not for a reporting unit’s fair value to be greater than its carrying value, a calculation of the fair value is not performed. If we determine that it is more likely than not for a reporting unit’s fair value to be less than its carrying value, a calculation of the fair value is performed and compared to the carrying value of that reporting unit. In certain instances, we may elect to forgo the qualitative assessment and proceed directly to the quantitative impairment test. If the carrying value of a reporting unit exceeds its fair value, Goodwill of that reporting unit is impaired and an impairment loss is recorded equal to the excess of the carrying value over its fair value.

Generally, we measure fair value of reporting units based on a present value of future discounted cash flows and a market valuation approach. The discounted cash flow models indicate the fair value of the reporting units based on the present value of the cash flows that the reporting units are expected to generate in the future. Significant estimates in the discounted cash flow models include the weighted average cost of capital, revenue growth rates, long-term rate of growth, profitability of our business, tax rates, and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison against certain market information. Significant estimates in the market approach model include identifying appropriate market multiples and assessing earnings before interest, income taxes, depreciation and amortization.

Due to overall market declines as a result of the COVID-19 pandemic, management decided to forgo the qualitative assessment and performed quantitative Goodwill impairment tests for the years ended December 31, 2020 and 2021, which resulted in no impairment.

Upon the Separation in April 2022, Goodwill was allocated on a relative fair value basis between the Company’s new reporting units Reconstructive and Prevention & Recovery.

50

For the year ended December 31, 2022, management performed a quantitative assessment of Goodwill for the Reconstructive and Prevention & Recovery reporting units, both of which indicated no impairment existed. The carrying amount of Goodwill of the Reconstructive and Prevention & Recovery reporting units for the year ended December 31, 2022 was $0.9 billion and $1.1 billion, respectively. We determined the fair value of the reporting units by equally weighting a discounted cash flow approach and market valuation approach, and the reporting unit’s fair value exceeded its carrying amount by approximately 8% and 9%, respectively. Determining the fair value of a reporting unit requires the application of judgment and involves the use of significant estimates and assumptions which can be affected by changes in business climate, economic conditions, the competitive environment and other factors. We base these fair value estimates on assumptions our management believes to be reasonable but which are unpredictable and inherently uncertain. Future changes in the judgment, assumptions and estimates could result in significantly different estimates of fair value in the future. An increase in discount rates, a reduction in projected cash flows or a combination of the two could lead to a reduction in the estimated fair values, which may result in impairment charges that could materially affect our financial statements in any given year. For sensitivity analysis, we estimated the fair value of the Prevention & Recovery and Reconstructive reporting units if we reduced the long-term revenue growth rate by 25 basis points, and the resulting excess fair value over carrying value decreased by 120 and 130 basis points, respectively.

A sustained decline in our end-markets and geographic markets could increase the risk of impairments in future years. Actual results could differ from our estimates and projections, which would also affect the assessment of impairment. As of December 31, 2022, we have Goodwill of $2.0 billion that is subject to at least annual review for impairment. See Note 9, “Goodwill and Intangible Assets”, in the accompanying Notes to Consolidated Financial Statements for further information.

Income Taxes

We account for income taxes under the asset and liability method, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion of the deferred tax asset will not be realized. In evaluating the need for a valuation allowance, we consider various factors, including the expected level of future taxable income and available tax planning strategies. If actual results differ from the assumptions made in the evaluation of our valuation allowance, we record a change in valuation allowance through income tax expense in the period such determination is made.

Accounting Standards Codification 740, “Income Taxes” prescribes a recognition threshold and measurement attribute for a position taken in a tax return. Under this standard, we must presume the income tax position will be examined by a relevant tax authority and determine whether it is more likely than not that the income tax position will be sustained upon examination based on its technical merits. An income tax position that meets the more-likely-than-not recognition threshold is then measured to determine the amount of the benefit to be recognized in the financial statements. Liabilities for unrecognized income tax benefits are reviewed periodically and are adjusted as events occur that affect our estimates, such as the availability of new information, the lapsing of applicable statutes of limitations, the conclusion of tax audits and, if applicable, the conclusion of any court proceedings. To the extent we prevail in matters for which liabilities for unrecognized tax benefits have been established or are required to pay amounts in excess of our liabilities for unrecognized tax benefits, our effective income tax rate in a given period could be materially affected. We recognize interest and penalties related to unrecognized tax benefits in the Consolidated Statements of Operations as part of Income tax expense (benefit). Net liabilities for unrecognized income tax benefits, including accrued interest and penalties, were $42.1 million as of December 31, 2022 and are included in Other liabilities or as a reduction to deferred tax assets in the accompanying Consolidated Balance Sheet.

Revenue Recognition

We account for revenue in accordance with Topic 606, “Revenue from Contracts with Customers”. We recognize revenue when control of promised goods or services is transferred to the customer. The amount of revenue recognized reflects the consideration to which we expect to be entitled in exchange for transferring the goods or services. The nature of our contracts gives rise to certain types of variable consideration, including rebates and other discounts. We include 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. Estimates are based on historical or anticipated performance and represent our best judgment at the time. Any estimates are evaluated on a quarterly basis until the uncertainty is resolved. Additionally, related to sales of our medical device products and services, we maintain provisions for estimated contractual allowances for reimbursement amounts from certain third-party payors based on negotiated contracts, historical experience for non-contracted payors, and the impact of new contract terms or modifications of existing arrangements with these customers. We report these allowances as a reduction to Net sales.

51

We provide a variety of products and services to our customers. Most of our contracts consist of a single, distinct performance obligation or promise to transfer goods or services to a customer. For contracts that include multiple performance obligations, we allocate the total transaction price to each performance obligation using our best estimate of the standalone selling price of each identified performance obligation.

A majority of the revenue we recognize relates to contracts with customers for standard or off-the-shelf products. As control typically transfers to the customer upon shipment of the product in these circumstances, revenue is generally recognized at that point in time. For service contracts, we recognize revenue ratably over the period of performance as the customer simultaneously receives and consumes the benefits of the services provided.

Any recognized revenues in excess of customer billings are recorded as a component of Trade receivables. Billings to customers in excess of recognized revenues are recorded as a component of Accrued liabilities. Each contract is evaluated individually to determine the net asset or net liability position. Substantially all of our revenue is recognized at a point in time, and revenue recognition and billing typically occur simultaneously.

The period of benefit for our incremental costs of obtaining a contract would generally have less than a one-year duration; therefore, we apply the practical expedient available and expense costs to obtain a contract when incurred.

Trade receivables are presented net of an allowance for credit losses. The Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments as of January 1, 2020. The 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. The allowance for credit losses was $8.0 million, $6.6 million, and $6.8 million as of December 31, 2022, 2021, and 2020, respectively.

Recently Issued Accounting Pronouncements

For detailed information regarding recently issued accounting pronouncements and the expected impact on our financial statements, see Note 3, “Recently Issued Accounting Pronouncements” in the accompanying Notes to Consolidated Financial Statements included in this Form 10-K.

52