# Enovis CORP (ENOV) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Enovis CORP's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1420800/000142080024000006/cfx-20231231.htm
Accession: 0001420800-24-000006
Filing date: 2024-02-22
Report date: 2023-12-31
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/fy2022/ (FY 2022)
Next year: /company/ENOV/mda/fy2024/ (FY 2024)

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”).

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

•Recon - 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

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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, 2023 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 in our financial statements prior to its spin-off as a separate public company are excluded from continuing operations in the accompanying financials for the years ended December 31, 2022 and 2021.

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, 2023 and 2022 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, 2023, we completed one business combination and two asset acquisitions in Recon. On June 28, 2023, we acquired Novastep, a leading player in Minimally Invasive Surgery (MIS) foot and ankle solutions for total consideration of $96.9 million. The Novastep best-in-class MIS bunion system serves a rapidly growing portion of the global bunion segment. On July 20, 2023, we completed the asset acquisition of SEAL, developers of a broad line of external fixation products for total consideration of $28.2 million. These two acquisitions are valuable additions serving to enhance the offerings under our foot & ankle product lines. On October 5, 2023, we acquired 100% interest in Precision AI, a developer of surgical planning software. This asset acquisition complements our current product offerings with advanced surgical planning software. The software has capabilities to be used for shoulder reconstruction and there is opportunity to expand this to additional anatomies.

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. 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 our common stock. The Mathys acquisition expanded our reconstructive product portfolio with its complementary surgical solutions and broadened our reach internationally.

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Global Operations

During 2023, 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, 2023 compared to 2022, fluctuations in foreign currencies increased net sales by 0.4%, decreased gross profit by 0.3%, and increased operating expenses by 0.5%. The unfavorable impact on gross profits is due to the Mexican peso strengthening and its effect on costs at one of our primary manufacturing facilities.

Seasonality

Although sales in P&R and Recon 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 P&R and cobalt chromium alloy, stainless steel alloys, titanium alloy and ultra high molecular weight polyethylene in Recon. 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 P&R. 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,"],["","2023","","2022","","2021"],["P&R","63","%","","66","%","","72","%"],["Recon(1)","37","%","","34","%","","28","%"]]
[[/GREPCENT_TABLE]]

(1) The change in mix from the year ended December 31, 2021 to 2023 reflects the impact from acquisitions and double-digit growth in Recon. With the acquisition of Lima in Recon on January 3, 2024, the sales mix is expected to further increase in Recon.

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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, net;, non-operating (gain) loss on investments; debt extinguishment charges; interest expense, net; restructuring and other charges; Medical Device Regulation (“MDR”) fees and other costs; strategic transaction costs; stock-based compensation; depreciation and other amortization; acquisition-related intangible asset amortization; insurance settlement (gain) 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, 2023, 2022 and 2021.

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2023"],["","P&R","","Recon","","Total"],["","(Dollars in millions)"],["Net loss from continuing operations (GAAP)(1)","","","","","$","(53.8)"],["Income tax benefit","","","","","(13.3)"],["Other income, net","","","","","(25.7)"],["Debt extinguishment charges","","","","","7.3"],["Interest expense, net","","","","","19.8"],["Operating loss (GAAP)","$","(24.7)","","","$","(41.0)","","","(65.7)"],["Operating loss margin","(2.3)","%","","(6.5)","%","","(3.8)","%"],["Adjusted to add:"],["Restructuring and other charges(2)","13.5","","","6.4","","","20.0"],["MDR and other costs","14.5","","","12.9","","","27.4"],["Strategic transaction costs(3)","13.2","","","25.1","","","38.3"],["Stock-based compensation(3)","20.2","","","11.8","","","32.1"],["Depreciation and other amortization","22.2","","","61.4","","","83.6"],["Amortization of acquired intangibles","93.6","","","40.0","","","133.5"],["Inventory step-up","\u2014","","","0.1","","","0.1"],["Adjusted EBITDA (non-GAAP)","$","152.5","","","$","116.7","","","$","269.2"],["Adjusted EBITDA margin (non-GAAP)","14.2","%","","18.5","%","","15.8","%"]]
[[/GREPCENT_TABLE]]

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

(2) Restructuring and other charges in P&R includes $2.6 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.

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[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2022"],["","P&R","","Recon","","Total"],["","(Dollars in millions)"],["Net loss from continuing operations (GAAP)(1)","","","","","$","(38.2)"],["Income tax expense","","","","","36.1"],["Other income, net","","","","","(2.1)"],["Gain on cost basis investment","","","","","(8.8)"],["Gain on investment in ESAB Corporation","","","","","(102.7)"],["Debt extinguishment charges","","","","","20.4"],["Interest expense, net","","","","","24.1"],["Operating loss (GAAP)","$","(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","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 P&R 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.

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2021"],["","P&R","","Recon","","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)","","","$","(47.9)","","","(62.8)"],["Operating loss margin","(1.5)","%","","(12.0)","%","","(4.4)","%"],["Adjusted to add:"],["Restructuring and other charges(2)","11.5","","","2.4","","","13.9"],["MDR and other costs","5.7","","","2.2","","","7.9"],["Strategic transaction costs(3)","14.8","","","8.6","","","23.4"],["Stock-based compensation(3)","17.8","","","7.9","","","25.7"],["Depreciation and other amortization","25.3","","","44.8","","","70.1"],["Amortization of acquired intangibles","72.6","","","44.3","","","116.9"],["Inventory step-up","0.7","","","10.1","","","10.8"],["Adjusted EBITDA (non-GAAP)","$","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 P&R 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.

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Total Company

Sales

Net sales increased by $144.1 million or 9.2% to $1.7 billion for the year ended December 31, 2023 compared with the prior year period. The following table presents the components of changes in our consolidated Net sales for the years ended December 31, 2023 and 2022.

[[GREPCENT_TABLE]]
[["","Net Sales"],["","$","","%"],["","(Dollars in millions)"],["For the year ended December 31, 2021","$","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","$","1,563.1"],["Components of Change:"],["Existing Businesses(1)","123.8","","","7.9","%"],["Acquisitions(2)","14.3","","","0.9","%"],["Foreign Currency Translation(3)","6.1","","","0.4","%"],["","144.1","","","9.2","%"],["For the year ended December 31, 2023","$","1,707.2"]]
[[/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.

2023 Compared to 2022

Net sales increased during 2023 as compared to 2022 primarily due to an increase in sales from existing businesses across both of our segments and to a lesser extent sales from acquired businesses in Recon and favorable foreign currency translation. In Recon, existing business sales increased $76.7 million, or 14.3% due to significantly higher sales volumes than the prior year across all product lines driven by market outperformance and new product launches. In P&R, existing business sales increased $47.1 million, or 4.6% due to improved sales volumes and inflation-related pricing increases. Net sales from acquisitions increased during 2023 primarily due to the Novastep and 360 Med Care acquisitions in Recon that closed in 2023 and 2022, respectively. Lastly, the weakening of the U.S. dollar relative to other currencies, most notably the Swiss Franc and Euro, caused a $6.1 million favorable currency translation impact.

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 Recon, partially offset by foreign currency headwinds primarily in P&R. In Recon, 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 P&R, 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 Recon 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.

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Operating Results

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["","(Dollars in millions)"],["Gross profit","$","990.8","","","$","869.4","","","$","777.7"],["Gross profit margin","58.0","%","","55.6","%","","54.5","%"],["Selling, general and administrative expense","$","830.3","","","$","772.9","","","$","665.8"],["Research and development expense","$","75.3","","","$","60.8","","","$","49.1"],["Operating loss","$","(65.7)","","","$","(71.2)","","","$","(62.8)"],["Operating loss margin","(3.8)","%","","(4.6)","%","","(4.4)","%"],["Net loss from continuing operations","$","(53.8)","","","$","(38.2)","","","$","(102.3)"],["Net loss margin from continuing operations (GAAP)","(3.2)","%","","(2.4)","%","","(7.2)","%"],["Adjusted EBITDA (non-GAAP)","$","269.2","","","$","236.1","","","$","206.0"],["Adjusted EBITDA margin (non-GAAP)","15.8","%","","15.1","%","","14.4","%"],["Items excluded from Adjusted EBITDA:"],["Restructuring and other charges(1)","$","20.0","","","$","19.0","","","$","13.9"],["MDR and other costs","$","27.4","","","$","16.7","","","$","7.9"],["Strategic transaction costs","$","38.3","","","$","61.0","","","$","23.4"],["Stock-based compensation","$","32.1","","","$","31.5","","","$","25.7"],["Depreciation and other amortization","$","83.6","","","$","76.7","","","$","70.1"],["Amortization of acquired intangibles","$","133.5","","","$","126.3","","","$","116.9"],["Insurance settlement gain","$","\u2014","","","$","(36.7)","","","$","\u2014"],["Inventory step-up","$","0.1","","","$","12.8","","","$","10.8"],["Interest expense, net","$","19.7","","","$","24.1","","","$","29.1"],["Debt extinguishment charges","$","7.3","","","$","20.4","","","$","29.9"],["Other income, net","$","(25.7)","","","$","(2.1)","","","$","\u2014"],["Income tax expense (benefit)","$","(13.3)","","","$","36.1","","","$","(19.5)"]]
[[/GREPCENT_TABLE]]

(1) Restructuring and other charges includes $2.6 million, $1.7 million and $5.2 million of expense classified as Cost of sales on the Company’s Consolidated Statements of Operations for the years ended December 31, 2023, 2022 and 2021, respectively.

2023 Compared to 2022

Gross profit increased $121.4 million during 2023 in comparison to 2022 due to a $82.1 million increase in Recon and a $39.3 million increase in P&R. The Gross profit increase was attributable to increased sales in our existing businesses from volume and inflation-related pricing increases, improved operating cost leverage, and the benefit of a decrease of $12.7 million in inventory fair value step-up amortization charges, partially offset by unfavorable foreign currency translation and inflation in supply chain, logistics, and other costs. Gross profit margin increased due to the aforementioned factors.

Selling, general and administrative expense increased $57.4 million during 2023 in comparison to 2022, primarily due to increased commissions driven by higher sales, investments to support growth, spending on MDR and other costs, and cost inflation, partially offset by cost reduction initiatives and a net decrease in Strategic transactions costs. Research and development costs also increased compared to the prior year period, primarily due to increased spend within recently acquired businesses in Recon, which are investing in surgical productivity solutions and computer-assisted surgery technologies. Amortization of acquired intangibles and Depreciation and other amortization also increased compared to the prior year period due to business acquisitions.

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Interest expense, net decreased $4.4 million during 2023 in comparison to 2022 due to a reduction in debt balances as a result of the Separation-related debt redemptions at the beginning of the second quarter of 2022, the extinguishment of the outstanding balance of the Enovis Term Loan, and interest savings from $7.3 million interest received on the Swiss Franc cross-currency swap agreements.

Other income, net increased primarily due to the gain on the foreign currency forward contract to manage the exposure to currency exchange rate risk related to the Euro-denominated purchase price of Lima.

The effective tax rate for Net loss from continuing operations during 2023 was 19.8%, which differed from the 2023 U.S. federal statutory tax rate of 21%, primarily due to a build in valuation allowance on interest limitation carryforwards, non-deductible expenses and U.S. taxation on international operations. This was offset by a release of uncertain tax positions, tax credits for research and development and non-U.S. income taxed at lower rates. The effective tax rate for Net income from continuing operations during 2022 was (1,745.8)%, which differed from the 2022 U.S. federal statutory tax rate of 21% mainly due to non-taxable unrealized gain on the investment in ESAB and gain on cost basis investment, offset by non-deductible costs related to the tax-free Separation.

Net loss from continuing operations increased $15.6 million during 2023 in comparison to 2022, primarily due to one-time income items in the prior year period, including the Unrealized gain on investment in ESAB Corporation, Gain on cost basis investment, Insurance settlement gain, partially offset by the reduction of debt extinguishment charges and the aforementioned net impact of the Gross profit and Selling, general, and administrative increases as well as the decrease in Interest expense, net and the impact of unfavorable discrete tax items in 2022. Adjusted EBITDA increased due to organic growth. Adjusted EBITDA margin excluding the effects of recent acquisitions and foreign currency pressures increased by approximately 130 basis points. Our recent acquisitions in Recon were dilutive to the net loss margin from continuing operations and to Adjusted EBITDA margin by approximately 20 basis points and are expected to be accretive to margins in future years.

2022 Compared to 2021

Gross profit increased $91.7 million during 2022 in comparison to 2021 due to an $89.5 million increase in Recon. 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 Recon 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 Recon. 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 $450.0 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.

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.

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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.

Business Segments

As discussed further above, we report results in two reportable segments: P&R and Recon. Operating loss, adjusted EBITDA and adjusted EBITDA margins at the operating segment level also include allocations of certain central function expenses not directly attributable to either operating segment. See 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.

P&R

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. P&R 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 P&R:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["","(Dollars in millions)"],["Net sales","$","1,076.8","","","$","1,027.6","","","$","1,026.0"],["Gross profit","$","557.5","","","$","518.2","","","$","516.1"],["Gross profit margin","51.8","%","","50.4","%","","50.3","%"],["Selling, general and administrative expenses","$","442.7","","","$","438.9","","","$","421.9"],["Research and development expense","$","35.1","","","$","33.5","","","$","30.2"],["Operating loss (GAAP)","$","(24.7)","","","$","(18.2)","","","$","(14.9)"],["Operating loss margin","(2.3)","%","","(1.8)","%","","(1.5)","%"],["Adjusted EBITDA (non-GAAP)","$","152.5","","","$","141.3","","","$","133.5"],["Adjusted EBITDA margin (non-GAAP)","14.2","%","","13.8","%","","13.0","%"]]
[[/GREPCENT_TABLE]]

46

2023 Compared to 2022

Net sales in P&R increased $49.2 million, or 4.8%, compared with the prior year period, driven by organic growth in existing businesses which was aided by pricing increases to mitigate inflation. Gross profit increased $39.3 million due to the improved sales, offset by the effect of unfavorable foreign currency and inflation of supply chain, logistics, and other costs. Gross profit margin increased 140 basis points due to improved sales mix and inflation-related customer pricing, partially offset by the effect of unfavorable foreign currency in a primary manufacturing facility. Selling, general and administrative expense increased $3.8 million, which included an increase of $30.5 million, or 7%, primarily due to investment to support growth in the business, spending on MDR and other costs, largely offset by a reduction of in allocated Strategic transaction costs of $26.7 million which were higher in 2022 due to the Separation. Operating loss increased due to an insurance settlement gain recorded in the second quarter of 2022, an increase of $13.5 million in amortization of acquired intangibles, and the net increase in the aforementioned selling, general and administrative expenses, partially offset by the higher gross profit. Adjusted EBITDA and Adjusted EBITDA margin increased due to improved sales mix, partially offset by unfavorable foreign currency impacts in a primary manufacturing facility during the year ended December 31, 2023 compared to the prior year.

2022 Compared to 2021

Net sales in P&R 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.

Recon

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 selected financial data for Recon:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["","(Dollars in millions)"],["Net sales","$","630.4","","","$","535.5","","","$","400.2"],["Gross profit","$","433.2","","","$","351.1","","","$","261.6"],["Gross profit margin","68.7","%","","65.6","%","","65.4","%"],["Selling, general and administrative expenses","$","387.6","","","$","334.0","","","$","243.8"],["Research and development expense","$","40.3","","","$","27.4","","","$","18.9"],["Operating loss (GAAP)","$","(41.0)","","","$","(52.9)","","","$","(47.9)"],["Operating loss margin","(6.5)","%","","(9.9)","%","","(12.0)","%"],["Adjusted EBITDA (non-GAAP)","$","116.7","","","$","94.7","","","$","72.5"],["Adjusted EBITDA margin (non-GAAP)","18.5","%","","17.7","%","","18.1","%"]]
[[/GREPCENT_TABLE]]

47

2023 Compared to 2022

Net sales increased in Recon by $94.9 million, or 17.7%, primarily due to higher sales volumes driven by broad market strength and market outperformance. Gross profit increased in the year ended December 31, 2023 compared to the prior year, primarily due to increased sales in our existing businesses, improved operating cost leverage, and the benefit of a decrease of $12.7 million in inventory fair value step-up amortization charges, which also led to an increase in Gross profit margin. Selling, general and administrative expense increased $53.6 million, including an increase of $43.1 million, or 15%, due to the growth in Recon from increased commissions driven by higher sales, investments to support growth, spending on MDR, and cost inflation, as well as a net increase in Strategic transactions costs of $3.9 million from an increase in deal and integration costs for the Lima and Novastep acquisitions offset by a decrease of Separation costs. Research and development expense increased compared to the prior year period, primarily due to increased spend within recently acquired businesses which are investing in surgical productivity solutions and computer-assisted surgery technologies. Operating loss decreased primarily due to the aforementioned factors driving organic growth, offset by an insurance settlement gain recorded in the second quarter of 2022 and an increase of $6.2 million in amortization of acquired intangibles. Adjusted EBITDA increased primarily due to growth in existing businesses and operating leverage, partially offset by inflation of supply chain, logistics, and other costs. Without the impact of recent acquisitions, Adjusted EBITDA increased 150 basis points compared to prior year. The recent acquisitions of Novastep and 360 Med Care were dilutive to the margin by approximately 70 basis points but are expected to be accretive to margins in future years.

2022 Compared to 2021

Net sales increased for Recon 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.

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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 our term loan and 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 €350.0 million principal 3.25% 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.

On September 22, 2023, the Company agreed to issue 1.9 million shares of our common stock to the seller of Lima for acquisition consideration of €100 million based on the thirty-day volume weighted average price of the Company’s common stock as of the close of business on September 21, 2023. These shares are expected to be issued within eighteen months following the closing of the Lima Acquisition, subject to certain adjustments and conditions as provided for in the Lima Acquisition purchase agreement.

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

49

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 amount of $450.0 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 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 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, 2023, the Company was in compliance with the covenants under the Enovis Credit Agreement.

On October 23, 2023 the Company entered into an amendment to the Enovis Credit Agreement (the “Amendment”). The Amendment provided for a new term loan commitment in the aggregate amount of $400 million (the “Term Loan Facility”). The Term Loan Facility extended to the Company under the Amendment was funded on January 3, 2024, the date the Lima Acquisition was consummated. The Term Loan Facility 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 January 3, 2024, the date of consummation of the Lima Acquisition, (i) all facilities under the Enovis Credit Agreement (including the Term Loan Facility) became secured by certain personal property of the Company and certain of its subsidiaries, subject to limitations and exclusions; (ii) the financial covenant under the Enovis Credit Agreement was be adjusted from total leverage ratio to senior secured leverage ratio and requires 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 became effective (including restrictions on repayments of junior financing and amendments to junior financing documents); and (iv) certain additional changes were implemented (including the removal of the guaranty fallaway provision).

As of December 31, 2023, the weighted-average interest rate of borrowings under the Enovis Credit Agreement was 6.58%, excluding accretion of original issue discount and deferred financing fees, and there was $880.0 million available on the Revolver.

Euro Senior Notes

In 2017, we issued senior unsecured notes with an aggregate principal amount of €350.0 million due in May 2025, with an interest rate of 3.25%. The Euro Senior 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 and $25.0 million of principal on the TEU amortizing notes in the years ended December 31, 2022 and 2021, respectively. The final installment payment was made on January 15, 2022. Additionally, in the first quarter of

50

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 $600.0 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.

Convertible Notes and Capped Calls

In connection with the signing of the definitive stock purchase agreement for the Lima Acquisition, we entered into several financing agreements in October 2023. On October 24, 2023, we issued $460 million aggregate principal amount of senior unsecured convertible notes in a private placement pursuant to Rule 144A (the “2028 Notes”). The 2028 Notes have an interest rate of 3.875%, payable semiannually in arrears on April 15 and October 15 of each year, beginning April 15, 2024. The 2028 Notes will mature on October 15, 2028 unless earlier repurchased, redeemed, or converted.

We also entered into privately negotiated capped call transactions with certain of the initial purchasers of the 2028 Notes. The capped call transactions are intended generally to mitigate potential dilution to our common stock upon conversion of any 2028 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2028 Notes, as the case may be, with such reduction and/or offset subject to a cap. The $62 million capped call payment was classified as equity since it meets the derivative scope exception included in ASC 815 Derivative and Hedging.

Other Indebtedness

In addition, we are party to various bilateral credit facilities with a borrowing capacity of $30.0 million. Total letters of credit of $11.5 million were outstanding as of December 31, 2023.

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

51

Cash Flows

As of December 31, 2023, we had $44.8 million of Cash and cash equivalents and restricted cash, an increase of $20.5 million from the $24.3 million of Cash and cash equivalents on hand as of December 31, 2022. 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,"],["","2023","","2022","","2021"],["","(Dollars in millions)"],["Net cash provided by (used in) operating activities","$","135.0","","","$","(55.9)","","","$","356.1"],["Purchases of property, plant and equipment and intangibles","(122.2)","","","(105.5)","","","(104.2)"],["Proceeds from sale of property, plant and equipment","32.6","","","2.7","","","7.0"],["Payments for acquisitions, net of cash received, and investments","(152.8)","","","(73.7)","","","(223.3)"],["Net cash used in investing activities","(242.5)","","","(176.4)","","","(320.5)"],["Proceeds from (repayments of) borrowings, net","217.2","","","(1,591.2)","","","(126.0)"],["Distribution from ESAB Corporation, net","\u2014","","","1,143.4","","","\u2014"],["Proceeds from issuance of common stock, net","1.8","","","5.8","","","745.2"],["Payment of capped call transactions","(62.0)","","","\u2014","","","\u2014"],["Payment of debt extinguishment costs","\u2014","","","(12.7)","","","(24.4)"],["Other financing","(29.2)","","","(10.4)","","","(9.9)"],["Net cash provided by (used in) financing activities","127.8","","","(465.1)","","","584.9"],["Effect of foreign exchange rates on Cash and cash equivalents","0.2","","","2.3","","","(2.2)"],["Increase (decrease) in Cash and cash equivalents and restricted cash","$","20.5","","","$","(695.1)","","","$","618.3"]]
[[/GREPCENT_TABLE]]

Cash (used in) provided by operating activities related to discontinued operations for the years ended December 31, 2023, 2022 and 2021 was $(2) million, $(27) million, and $224 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, interest, income taxes and strategic transaction costs. Changes in significant operating cash flow items are discussed below.

•Operating cash flows (used in) provided by continuing operations working capital was $(47.7) million, $(116.0) million, and $8.2 million for the years ended December 31, 2023, 2022 and 2021, respectively. The uses in 2023 and 2022 are primarily due to business growth and increases in inventory to insulate for supply chain volatility.

•Cash paid for strategic transaction costs in our continuing operations were $38.3 million, $61.0 million and $23.4 million for the years ended December 31, 2023, 2022 and 2021, respectively. These costs were related to the Separation, business development and integration costs of recent acquisitions.

•Cash paid for interest was $16.3 million, $37.1 million and $85.5 million for the years ended December 31, 2023, 2022 and 2021, respectively. The decreases are 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 $450.0 million term loan that was further reduced by $230.5 million in November 2022 with the exchange of ESAB shares.

•During 2023, 2022, and 2021 cash payments of $16.2 million, $18.5 million and $8.0 million, respectively, were made related to our restructuring initiatives.

•Cash paid for MDR and other costs were $27.4 million, $16.7 million, and $7.9 million for the years ended December 31, 2023, 2022 and 2021, respectively.

•2023 includes a favorable change in accrued compensation and benefits of approximately $20.0 million.

•2021 includes a one-time cash inflow from a $36.0 million U.S. federal tax refund received in the first quarter of 2021.

52

Cash flows used in investing activities for 2023, 2022 and 2021 include $152.8 million, $73.7 million, and $223.3 million, respectively, for acquisitions and investments. Refer to Note 5 “Acquisitions and Investments” in the accompanying Notes to the Consolidated Financial Statements for more information. Additionally, cash flows used in investing activities in 2023, 2022, and 2021 include $122.2 million, $105.5 million, and $104.2 million, respectively, for purchases of property, plant, equipment, and intangibles. Included in these amounts is $5.9 million and $35.6 million for 2022, and 2021, respectively, related to discontinued operations. The $32.6 million proceeds from sale of property, plant and equipment in 2023 is from the sale of a facility related to our discontinued operations.

Cash flows provided by financing activities in 2023 include net debt borrowings of $217.2 million, partially offset by amounts paid for the capped call transactions of $62.0 million and debt issuance costs of $25.7 million. 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.

Our Cash and cash equivalents as of December 31, 2023 include $19.4 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, 2023, the Company’s Revolver and senior unsecured convertible notes (the “2028 Notes”) had principal amounts outstanding of $20.0 million and $460.0 million, respectively. There are no required principal payments due on the Revolver within 12 months and it matures on April 4, 2027. The 2028 Notes have an interest rate of 3.875%, payable semi annually 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.

Interest Payments on Debt

Based on December 31, 2023 outstanding balances we estimate future interest payments associated with the senior unsecured convertible notes and Revolver of $83.5 million and $4.9 million, respectively, with $18.1 million and $1.2 million payable within 12 months. Variable interest payments are estimated using a static rate of 3.875% for the senior unsecured convertible notes and 5.68% for the Revolver, respectively.

Operating Leases

The Company leases certain office space, warehouse, distribution, and production facilities, as well as vehicles and equipment. As of December 31, 2023, the Company had fixed lease payment obligations of $71.7 million, with $19.5 million payable within 12 months.

53

Purchase Obligations

As of December 31, 2023, the Company had other purchase obligations of $145.9 million, with $135.3 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, 2023, which are estimated to be $3.5 million for the year ending December 31, 2024. 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, 2023 other than outstanding letters of credit of $11.5 million and unconditional purchase obligations with suppliers of $145.9 million.

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 acquisition of Novastep during the year ended December 31, 2023, we recognized Goodwill of approximately $44 million and identifiable intangible assets of approximately $52 million. 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

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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, 2022 and 2023, 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.

For the year ended December 31, 2023, 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 Prevention & Recovery and Reconstructive reporting units for the year ended December 31, 2023 was $1.1 billion and $1.0 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 4% and 8%, 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 130 and 150 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, 2023, we have Goodwill of $2.1 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.

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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 benefit. Net liabilities for unrecognized income tax benefits, including accrued interest and penalties, were $34.1 million as of December 31, 2023 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.

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 under ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. 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 $9.7 million and $8.0 million as of December 31, 2023 and 2022, 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.

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