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Income (Loss) [Parenthetical]
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(Exact
name of registrant as specified in its charter)
iDelaware
i54-1887631
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i2711 Centerville Road,
iSuite
400
iWilmington,
iDelaware
i19808
(Address
of principal executive offices)
(Zip Code)
i(302)
i252-9160
(Registrant’s
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, par value $0.001 per share
iENOV
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes ☑ No ☐
Indicate by check mark whether
the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Smaller reporting company i☐ Emerging
growth company i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☑
As
ofNovember 3, 2023, there were i54,594,143 shares of the registrant’s common stock, par value $.001 per share, outstanding.
Trade
receivables, less allowance for credit losses of $i8,711 and $i7,965
i277,029
i267,380
Inventories,
net
i470,913
i426,643
Prepaid expenses
i28,974
i28,550
Other
current assets
i45,142
i48,155
Total current assets
i854,187
i795,023
Property,
plant and equipment, net
i260,190
i236,741
Goodwill
i2,027,154
i1,983,588
Intangible
assets, net
i1,100,959
i1,110,727
Lease
asset - right of use
i63,487
i66,881
Other
assets
i94,940
i80,288
Total assets
$
i4,400,917
$
i4,273,248
LIABILITIES
AND EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt
$
i—
$
i219,279
Accounts
payable
i125,060
i135,628
Accrued liabilities
i230,224
i210,292
Total
current liabilities
i355,284
i565,199
Long-term debt, less current
portion
i395,000
i40,000
Non-current
lease liability
i49,176
i51,259
Other
liabilities
i159,725
i166,989
Total
liabilities
i959,185
i823,447
Equity:
Common
stock, $ii0.001/ par value; ii133,333,333/
shares authorized; ii54,564,997/ and ii54,228,619/
shares issued and outstanding as of September 29, 2023 and December 31, 2022, respectively
i55
i54
Additional
paid-in capital
i2,952,975
i2,925,729
Retained
earnings
i539,507
i575,732
Accumulated
other comprehensive loss
(i52,915)
(i53,430)
Total
Enovis Corporation equity
i3,439,622
i3,448,085
Noncontrolling
interest
i2,110
i1,716
Total equity
i3,441,732
i3,449,801
Total
liabilities and equity
$
i4,400,917
$
i4,273,248
See
Notes to Condensed Consolidated Financial Statements.
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation, amortization and other impairment charges
i160,493
i167,453
Stock-based
compensation expense
i25,758
i27,799
Non-cash
interest expense
i2,117
i3,021
Unrealized gain on investment in ESAB
Corporation
i—
(i72,412)
Gain
on cost basis investment
i—
(i8,800)
Debt
extinguishment charges
i—
i20,104
Deferred
income tax expense (benefit)
(i20,612)
(i3,458)
(Gain)
loss on sale of property, plant and equipment
(i14,832)
i352
Changes
in operating assets and liabilities:
Trade receivables, net
(i6,527)
(i43,315)
Inventories,
net
(i29,917)
(i119,145)
Accounts
payable
(i12,379)
i34,147
Other
operating assets and liabilities
(i1,717)
(i52,459)
Net
cash provided by (used in) operating activities
i66,573
(i19,903)
Cash
flows from investing activities:
Purchases of property, plant and equipment and intangibles
(i94,279)
(i68,668)
Proceeds
from sale of property, plant and equipment
i42,571
i2,746
Payments
for acquisitions, net of cash received, and investments
(i131,387)
(i73,390)
Net
cash used in investing activities
(i183,095)
(i139,312)
Cash
flows from financing activities:
Proceeds from borrowings on term credit facility
i—
i450,000
Repayments
of borrowings under term credit facility
(i219,468)
(i785,000)
Proceeds
from borrowings on revolving credit facilities and other
i400,000
i—
Repayments
of borrowings on revolving credit facilities and other
(i47,345)
(i608,877)
Repayments
of borrowings on Euro senior notes
i—
(i386,278)
Repayments
of borrowings on Senior notes
i—
(i300,000)
Distribution
from ESAB Corporation, net
i—
i1,143,369
Payment
of debt issuance costs
(i8,000)
(i2,938)
Proceeds
from issuance of common stock, net
i1,489
i2,530
Payment
of debt extinguishment costs
i—
(i12,704)
Deferred
consideration payments and other
(i1,668)
(i6,857)
Net
cash provided by (used in) financing activities
i125,008
(i506,755)
Effect
of foreign exchange rates on Cash and cash equivalents
(i652)
i1,557
Increase
(decrease) in Cash and cash equivalents
i7,834
(i664,413)
Cash
and cash equivalents, beginning of period
i24,295
i719,370
Cash
and cash equivalents, end of period
$
i32,129
$
i54,957
See
Notes to Condensed Consolidated Financial Statements.
6
ENOVIS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. iGeneral
Enovis Corporation (the “Company” or “Enovis”) was previously Colfax Corporation (“Colfax”) until its separation into two differentiated, independent, and publicly traded companies on April 4, 2022 (the “Separation”). Upon completion of the Separation, the Company retained its specialty medical technology business, changed its name to Enovis Corporation, and began trading under the stock symbol “ENOV” on the New York Stock Exchange on April 5, 2022. Enovis is an innovation-driven medical technology growth company dedicated to developing clinically differentiated solutions that generate measurably better patient outcomes and transform workflows. The
Company conducts its business through itwo operating segments, “Prevention & Recovery” and “Reconstructive.” The Prevention & Recovery segment provides orthopedic and recovery science solutions, including devices, software, and services across the patient care continuum from injury prevention to rehabilitation after surgery, injury, or from degenerative disease. The Reconstructive segment provides surgical implant solutions, offering a comprehensive suite of reconstructive joint products for the hip, knee, shoulder, elbow, foot, ankle, and finger and surgical productivity tools.
iThe
Condensed Consolidated Financial Statements included in this quarterly report have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and reflect, in the opinion of management, all adjustments, which consist solely of normal recurring adjustments, necessary to present fairly the Company’s financial position and results of operations as of and for the periods indicated. Certain prior period amounts have been reclassified to conform to the current period presentation. The Condensed Consolidated Balance Sheet as of December 31, 2022 is derived from
the Company’s audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the SEC’s rules and regulations for interim financial statements. The Condensed Consolidated Financial Statements included herein should be read in conjunction with the audited financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”), filed with the SEC on March 1, 2023.
iThe
Company makes certain estimates and assumptions in preparing its Condensed Consolidated Financial Statements in accordance with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the Condensed Consolidated Financial Statements, and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from those estimates.
2. iRecently
Issued Accounting Pronouncements
The Company has not adopted any new accounting standards during the nine months ended September 29, 2023. iThere are no recently issued accounting pronouncements that are expected to have a material effect on the Company’s financial position, results of operations or cash flows.
3.
iDiscontinued Operations
The Company’s discontinued operations include the following: (1) operating results of ESAB Corporation (“ESAB”) for the first quarter of 2022 prior to Separation, (2) charges for the first quarter of 2022 related to previously retained asbestos contingencies from certain divested businesses for which the
Company did not retain an interest in the ongoing operations and that were fully transferred to ESAB in conjunction with the Separation, (3) certain expenses related to the Separation in 2022, (4) a charge related to the release of a tax indemnification receivable from ESAB and release of uncertain tax positions in the second quarter of 2023, and (5) gain on disposal from the sale of a facility retained from a prior divestiture.
7
ENOVIS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
i
The
following table presents the financial results of the Company’s discontinued operations:
(Loss)
income from discontinued operations before income taxes
i17,169
(i527)
i11,158
i35,801
Income
tax (benefit) expense(3)
i558
i—
(i9,938)
i25,638
(Loss)
income from discontinued operations, net of taxes
$
i16,611
$
(i527)
$
i21,096
$
i10,163
(1)
Divestiture-related expenses and other includes costs (benefits) relating to a facility retained from a prior divestiture, a charge for the release of a tax indemnification receivable from ESAB during the second quarter of 2023, and charges of $i45.0 million associated with the Separation for the nine months ended September 30, 2022.
(2) Interest expense was allocated to discontinued
operations in 2022 based on allocating $i1.2 billion of corporate level debt to discontinued operations consistent with the dividend received from ESAB and the debt repaid at the time of the Separation.
(3) Includes benefit of release of uncertain tax positions in the second quarter of 2023.
/
Cash
used in operating activities related to discontinued operations was $i1.2 million and $i26.8 million
for the nine months ended September 29, 2023 and September 30, 2022, respectively. Cash provided by investing activities related to discontinued operations for the nine months ended September 29, 2023 was $i42.6 million. Cash used in investing activities related to discontinued operations for the nine months ended September 30, 2022 was $i3.2 million.
4.
iAcquisitions and Investments
Lima Acquisition Purchase Agreement
On September 22, 2023, the Company entered into a definitive stock purchase agreement to acquire LimaCorporate S.p.A. (“Lima”), a privately held global orthopedic company focused on restoring motion through digital innovation and customized hardware, at an enterprise
value of €i800 million (the “Lima Acquisition”), consisting of (i) approximately €i700 million in cash consideration, which includes repayment of certain indebtedness, to be paid at closing, and (ii)
i1,942,686 shares of common stock of Enovis valued at €i100 million based
on the ithirty-day volume weighted average price of the Company’s common stock as of the close of business day on September 21, 2023, and which are expected to be issued within ieighteen
months following the closing of the Lima Acquisition, in each case subject to certain adjustments and conditions as provided for in the purchase agreement. The closing of the Lima Acquisition is subject to the receipt of applicable regulatory approvals and other customary closing conditions and is expected to be completed in the first quarter of 2024.
8
ENOVIS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
2023 Acquisitions
On
June 28, 2023, the Company completed the Novastep business combination in its Reconstructive segment. Novastep is a leading player in Minimally Invasive Surgery (MIS) foot and ankle solutions with a best-in-class MIS bunion system serving a rapidly growing portion of the global bunion segment. The acquisition is accounted for under the acquisition method of accounting, and accordingly, the Condensed Consolidated Financial Statements include the financial position and results of operations from the acquisition date. The Company paid $i96.9 million
for the acquisition, net of cash received. The Company has allocated $i41.7 million to goodwill and $i52.0 million
to intangible assets acquired. The acquisition accounting reflects our preliminary estimates and are subject to adjustment. The acquired goodwill value is primarily driven by the expected synergies from cross-selling Novastep products to existing Enovis foot & ankle customers. The acquisition broadens our reconstructive product offerings for the foot and ankle market and expands our customer base in Europe. Purchase accounting procedures are ongoing and revisions may be recorded in future periods during the measurement period.
On July 20, 2023, the Company completed an asset acquisition in its Reconstructive segment for an external fixation product line from D.N.E., LLC, a developer of a broad line of external fixation products, including circular
frames, pin-to-bar frames, and mini-fixators for use in foot and ankle surgeries. The Company paid $i28.2 million for the asset acquisition and assigned $i25.8 million
to intangible assets, $i1.9 million to finished goods inventory and $i0.5 million to property, plant and equipment. The acquisition of these assets, primarily the developed technology, is an important step in creating a more
robust product portfolio for the foot & ankle business unit.
2022 Acquisitions
During the nine months ended September 30, 2022, the Company completed ifour asset acquisitions, itwo
business combinations, and ione investment which is recorded using the equity method of accounting. iTwo of these transactions were completed by the Company’s Reconstructive segment,
and the other ifive transactions were completed by the Prevention & Recovery segment. The asset acquisitions broaden the Company’s product offering and distribution network. Aggregate purchase consideration for the ifour
asset acquisitions was $i22.3 million, of which $i12.6 million was paid in cash and $i9.6 million
of deferred and contingent consideration. The investment was acquired for $i10.0 million in cash consideration.
On May 6, 2022, the Company completed a business combination in its Reconstructive segment of KICo Knee Innovation Company Pty Limited and subsidiaries, an Australian
private company doing business as 360 Med Care, by acquiring i100% of its equity interests. 360 Med Care is a medical device distributor that bundles certain computer-assisted surgery and patient experience enhancement programs to add value to its device supply arrangements with surgeons, hospitals, and insurers. The acquisition is accounted for under the acquisition method of accounting, and accordingly, the Condensed Consolidated Financial Statements include the financial position and results of operations from the acquisition date. The
Company paid $i14.3 million for the acquisition, net of cash received, and recorded estimated contingent consideration at fair value of $i12.8 million related
to expected results over future revenue targets. The Company allocated $i16.3 million to goodwill and $i18.2 million
to intangible assets acquired. The purchase price accounting for this acquisition was finalized during the quarter ended June 30, 2023. The 360 Med Care acquisition broadens our customer base in Australia and adds to our overall product offerings.
On July 5, 2022, the Reconstructive segment of the Company acquired a controlling interest of Insight Medical Systems (“Insight”). Insight’s flagship solution, ARVIS, is an FDA-cleared augmented reality solution precisely engineered for the specific needs of hip and knee replacement surgery. The ARVIS navigation unit consists of a hands-free heads-up display worn by the surgeon which provides surgical guidance at the point of care in a streamlined, space-conserving
and cost-effective manner compared to traditional robotic offerings. The acquisition is accounted for under the acquisition method of accounting as a step-acquisition, and accordingly, the Condensed Consolidated Financial Statements include the financial position and results of operations from the acquisition date.
The Company made initial investments in Insight in 2020 and 2021, which were initially carried at cost. During the third quarter of 2022, the Company acquired an additional i53.7%
interest in Insight for $i34.2 million net of cash received, and recorded contingent consideration of $i5.0 million, which is the maximum amount payable under the
agreement based on Insight’s achievement of certain milestones related to ARVIS. The Company holds a i99.5% interest in Insight and recognized an initial $i0.3
million noncontrolling equity interest in its financial statements attributed to Insight.
9
ENOVIS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
The Company allocated $i36.3
million to goodwill and $i38.4 million to intangible assets acquired. The purchase price accounting for this acquisition was finalized. Goodwill is primarily driven by expected synergies between ARVIS’ augmented reality surgical guidance system and the Company’s existing customer base and existing products. The
Company does not expect any of the goodwill to be deductible for tax purposes.
As a result of obtaining control of Insight, the Company remeasured its initial investments to fair value, resulting in a $i8.8 million gain in the fourth quarter of 2022.
Investments
As
of September 29, 2023, the balance of investments held by the Company without readily determinable fair values was $i20.6 million. The majority of these investments are carried at cost minus impairments, if any, plus adjustments for fair value indicators from observable price changes in orderly transactions for the identical or similar investment of the same issuer.
There have been iino/
impairments or upward adjustments in the current year or since acquisition of these investments. iOne investment is accounted for under the equity method of accounting and is recorded at the initial investment amount, adjusted each period for the Company’s share of the income or loss.
5. iRevenue
The
Company provides orthopedic solutions, including products and services spanning the full continuum of patient care, from injury prevention to rehabilitation. While the Company’s sales are primarily derived from three sales channels including dealers and distributors, insurance, and direct to consumers and hospitals, substantially all of the Company’s revenue is recognized at a point in time. iThe
Company disaggregates its revenue into the following segments:
(1)
Includes favorable currency impact of $i3.3 million and unfavorable currency impacts of $i0.7 million for the three and nine months ended September
29, 2023, respectively.
(2) Includes favorable currency impact of $i2.2 million and $i1.8 million for the three
and nine months ended September 29, 2023, respectively.
Given the nature of the businesses, the Company does not generally have unsatisfied performance obligations with an original contract duration of greater than one year.
The nature of the Company’s contracts gives rise to certain types of variable consideration, including rebates, implicit price concessions, and other discounts. The
Company includes estimated amounts of variable consideration in the transaction price to the extent that it is probable there will not be a significant reversal of revenue.
10
ENOVIS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Allowance for Credit Losses
The Company’s estimate of current expected
credit losses on trade receivables considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. In calculating and applying its current expected credit losses, the Company disaggregates trade receivables into business segments due to risk characteristics unique to each segment given the individual lines of business and market. The business segments are further disaggregated based on either geography or product type. The Company uses a loss rate methodology in calculating its current expected credit losses, considering historical write-offs over a defined lookback period in deriving a historical loss rate. The expected credit loss model considers current conditions and reasonable and supportable forecasts for current and projected macroeconomic
factors.
i
A summary of the activity in the Company’s allowance for credit losses included within Trade receivables in the Condensed Consolidated Balance Sheets is as follows:
Computation of Net income (loss) per share from continuing operations - basic:
Net income (loss) from continuing operations attributable to Enovis Corporation(1)
$
(i19,491)
$
(i66,085)
$
(i57,321)
$
i16,114
Weighted-average
shares of Common stock outstanding – basic
i54,549,369
i54,136,889
i54,462,319
i54,025,144
Net
income (loss) per share from continuing operations – basic
$
(i0.36)
$
(i1.22)
$
(i1.05)
$
i0.30
Computation
of Net income (loss) per share from continuing operations - diluted:
Net income (loss) from continuing operations attributable to Enovis Corporation(1)
$
(i19,491)
$
(i66,085)
$
(i57,321)
$
i16,114
Weighted-average
shares of Common stock outstanding – basic
i54,549,369
i54,136,889
i54,462,319
i54,025,144
Net
effect of potentially dilutive securities - stock options and restricted stock units
i—
i—
i—
i434,859
Weighted-average
shares of Common stock outstanding – diluted
i54,549,369
i54,136,889
i54,462,319
i54,460,003
Net
income (loss) per share from continuing operations – diluted
$
(i0.36)
$
(i1.22)
$
(i1.05)
$
i0.30
(1)Net income (loss) from continuing operations attributable to Enovis Corporation for the respective periods is calculated using Net income (loss) from continuing operations less the continuing operations component of the income attributable to noncontrolling interest, net of taxes.
/
11
ENOVIS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
The
following weighted average computations of potentially dilutive shares of Common stock from stock-based compensation awards were excluded from the calculation of Weighted-average shares of Common stock outstanding – diluted as inclusion would be anti-dilutive in Net income (loss) per share:
Income (loss) from continuing operations before income taxes
(i25,503)
(i78,278)
(i74,785)
i471
Income
tax expense (benefit)
(i6,052)
(i12,329)
(i17,878)
(i16,176)
Effective
tax rate:
i23.7
%
i15.8
%
i23.9
%
(i3,434.4)
%
The
effective tax rates for the three and nine months ended September 29, 2023, were slightly higher than the 2023 federal statutory rate of 21% mainly due to non-U.S. income taxed at lower rates, release of valuation allowance on non-U.S. attributes, tax credits for research and development, and release of uncertain tax positions. This was partially offset by other non-deductible expenses and U.S. taxation on international operations.
The effective tax rates for the three and nine months ended September 30, 2022, were lower than the 2022 U.S. federal statutory rate of 21% mainly due to non-taxable unrealized (gain) loss on the investment in ESAB Corporation and gain on cost basis investment, partially offset by non-deductible costs related to the tax-free Separation.
12
ENOVIS
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
i
8. Equity
Share Repurchase Program
In 2018, the
Company’s Board of Directors authorized the repurchase of shares of the Company’s Common stock from time-to-time on the open market or in privately negotiated transactions. No repurchases of the Company’s Common stock have been made under this plan since the third quarter of 2018. As of September 29, 2023, the remaining stock repurchase authorization provided by the Board of Directors was $i100
million. The timing, amount and method of shares repurchased is determined by management based on its evaluation of market conditions and other factors. There is no term associated with the remaining repurchase authorization.
Accumulated Other Comprehensive Income (Loss)
The following tables present the changes in the balances of each component of Accumulated other comprehensive income (loss) including reclassifications out of Accumulated other comprehensive loss for the nine months ended September 29, 2023 and September 30, 2022. All amounts are presented net of tax and noncontrolling interest, if any.
i
Accumulated
Other Comprehensive Income (Loss) Components
In conjunction with the Separation on April 4, 2022, the Company repaid all obligations under its previous credit agreement and entered into a new credit agreement (the “Enovis Credit Agreement”) with certain of its existing bank lenders. Additionally, on April 7, 2022, after the completion of the Separation, the Company completed the redemptions of its i3.25%
Euro Senior Notes due 2025 (the “Euro Senior Notes”) and its i6.375% Senior Notes due 2026 (the “2026 Notes”). As a result of these changes, the Company recorded Debt extinguishment charges of $i20.1 million
during the second quarter of 2022, comprised of $i12.7 million in redemption premiums and $i7.4 million in noncash write-offs of original issue discount and deferred financing fees.
Enovis
Term Loan and Revolving Credit Facility
The Enovis Credit Agreement became effective on April 4, 2022 and consists of a $i900 million revolving credit facility (the “Revolver”) with an April 4, 2027 maturity date. The Enovis Credit Agreement also had a term loan with an initial aggregate principal amount of $i450
million (the “Enovis Term Loan”) which was fully extinguished during the first quarter of 2023. The Revolver contains a $i50 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 i6,003,431 shares of common stock of ESAB, representing all of the retained shares in ESAB following the Separation, for $i230.5 million
of the $i450.0 million Enovis Term Loan that was outstanding at that time under the Enovis Credit Agreement, net of cost to sell. On March 1, 2023, the Company extinguished the remaining outstanding balance on the Enovis Term Loan with borrowings on the Revolver.
The Enovis Credit Agreement contains customary covenants limiting the ability of the
Company and its subsidiaries to, among other things, incur debt or liens, merge or consolidate with others, dispose of assets, make investments, or pay dividends. In addition, the Enovis Credit Agreement contains financial covenants requiring the Company to maintain (i) a maximum total leverage ratio of not more than i3.75:1.00 for the fiscal quarter ending June 30, 2023 and thereafter,
stepping
14
ENOVIS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
down to i3.50:1.00 for the fiscal quarter ending June 30, 2024 and thereafter, and (ii) a minimum
interest coverage ratio of i3.00:1:00. The Enovis Credit Agreement contains various events of default (including failure to comply with the covenants under the Enovis Credit Agreement and related agreements), and upon an event of default the lenders may, subject to various customary cure rights, require the immediate payment of all amounts outstanding under the Enovis Credit Agreement. As of September 29, 2023, the Company was in compliance with the covenants under the
Enovis Credit Agreement.
As of September 29, 2023, the weighted-average interest rate of borrowings under the Enovis Credit Agreement was i6.54%, excluding accretion of original issue discount and deferred financing fees, and there was $i505
million available on the Revolver.
Euro Senior Notes
The Company previously had senior unsecured notes with an aggregate principal amount of €i350 million due in May 2025, with an interest rate of i3.25%.
The Euro Senior Notes were redeemed on April 7, 2022 at a i100.813% redemption premium after the completion of the Separation.
Tangible Equity Unit (“TEU”) Amortizing Notes
The Company previously had i6.50%
TEU amortizing notes at an initial principal amount of $i15.6099 per note with equal quarterly cash installments of $i1.4375 per note representing a payment of interest and partial payment of principal. The final installment payment of $i6.5
million principal was made on January 15, 2022.
2026 Notes
The Company previously had senior notes with a remaining principal amount of $i300 million due on February 15, 2026 with an interest rate of i6.375%.
The 2026 Notes were redeemed on April 7, 2022 at a i103.188% redemption premium after the completion of the Separation.
Commitment Letter and Financing for Lima Acquisition
On September 22, 2023, the Company entered
into a commitment letter (the “Commitment Letter”) to obtain an $i800 million senior bridge facility for financing the Lima Acquisition (the “Bridge Facility”). The funding of the Bridge Facility, if needed, is subject to the satisfaction of certain customary conditions. The Bridge Facility will be reduced by an equivalent amount of the net cash proceeds of the incurrence of a new term loan facility, the issuance by the Company of debt, equity or equity-linked
securities in a public offering or private placement, or the disposition of assets prior to the consummation of the Lima Acquisition and upon other specified events, subject to certain exceptions set forth in the Commitment Letter.
The Commitment Letter requires the Company to use commercially reasonable efforts to arrange and syndicate a $i400 million senior term loan facility,
the proceeds of which will be used to refinance and/or reduce the commitments under all or a portion of the Bridge Facility. The financing requirements under the Commitment Letter were completed in October 2023, as follows.
On October 23, 2023the Company entered into an amendment to the Enovis Credit Agreement (the “Amendment”). The Amendment provides for a new term loan commitment in the aggregate amount of $i400 million,
which reduced, on a dollar-for-dollar basis, the commitments under the Commitment Letter. The term loan facility extended to the Company under the Amendment will be available on the date the Lima Acquisition is consummated. The term loan requires quarterly principal repayments at i1.25% of the initial aggregate principal amount and ultimately matures on April 4, 2027.
Pursuant to the Amendment,
effective as of the date of consummation of the Lima Acquisition, (i) all facilities under the Credit Agreement (including the Term Loan Facility) will become secured by certain personal property of the Company and certain of its subsidiaries, subject to limitations and exclusions; (ii) the financial covenant under the Credit Agreement will be adjusted from total leverage ratio to senior secured leverage ratio and will require the senior secured leverage ratio to be no more than i3.75:1.00
with a step down to i3.50:1.00 commencing with the fiscal quarter ending June 30, 2024; (iii) certain changes to the negative covenants will become effective (including restrictions on repayments of junior financing and amendments to junior financing documents); and (iv) certain additional changes will be implemented (including the removal of the guaranty fallaway provision).
15
ENOVIS
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
On October 24, 2023, the Company issued $i460 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 i3.875%, payable semiannually in arrears on April 15 and October 15 of each year, beginning April 15, 2024 and will mature on October 15, 2028 unless earlier repurchased, redeemed, or converted.
Holders may convert their 2028 Notes under the following conditions at any time prior to the close of business on the business day immediately preceding April 15, 2028 in multiples
of $1,000 principal amount, only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on December 31, 2023 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least i20 trading days (whether or not consecutive) during the period of i30
consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to i130% of the conversion price on each applicable trading day; (ii) during the ifive
business day period after any ifive consecutive trading day period (the “measurement period”) in which the “trading price” per $1,000 principal amount of 2028 Notes, as determined following a request by a holder of 2028 Notes in accordance with the procedures described below, for each trading day of the measurement period was less than i98%
of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; (iii) if the Company calls any or all of the 2028 Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (iv) upon the occurrence of specified corporate events as described in the indenture governing the 2028 Notes.
In addition, holders may convert their 2028 Notes, in multiples of $1,000 principal amount, at their option at any time beginning on or after April 15,
2028 until the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the foregoing circumstances. The conversion rate is 17.1474 shares of common stock per $1,000 principal amount of 2028 Notes (equivalent to an initial conversion price of approximately $i58.32 per share of common stock), subject to adjustment upon the occurrence of certain specified events as set forth in the indenture governing the 2028 Notes. Upon conversion, the
Company will pay cash up to the aggregate principal amount of the 2028 Notes to be converted and pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at its election, in respect of the remainder,
The Company also entered into privately negotiated capped call transactions with certain of the initial purchasers of the 2028 Notes and paid $i62 million
to the counterparties. The capped call transactions are intended generally to mitigate potential dilution to the Company’s common stock upon conversion of any Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. If, however, the market price per share of common stock exceeds $i89.72, the initial cap price of the capped call
transactions, there would be dilution effect and/or no offset of any cash payments, in each case, attributable to the amount by which the market price of the common stock exceeds the cap price.
Other Indebtedness
In addition to the debt agreements discussed above, the Company is party to overdraft facilities with a borrowing capacity of $i30.0
million. Total letters of credit and surety bonds of $i11.2 million were outstanding as of September 29, 2023.
Deferred Financing Fees
The Company has $i11.7 million
in deferred financing fees of which $i3.7 million was recorded in conjunction with the Enovis Credit Agreement as of September 29, 2023 and are accreted to Interest expense, net primarily using a straight-line method over the life of the facility. The balance of $i8.0 million
was recorded in September 2023 related to the Commitment Letter discussed above and is amortized over the life of the Bridge Facility. Upon the completion of the amendment to the Enovis Credit Agreement and senior unsecured convertible notes offering in October 2023, the Bridge Facility was terminated and the unamortized balance of the Bridge Facility deferred financing fees will be written-off in the fourth quarter of 2023.
16
ENOVIS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
11. iAccrued Liabilities
i
Accrued liabilities in the Condensed Consolidated Balance Sheets consisted of the following:
Customer
advances and billings in excess of costs incurred
i3,082
i3,560
Warranty
liability
i2,846
i2,804
Accrued
restructuring liability
i2,159
i1,090
Accrued
interest
i388
i2,921
Other
i57,980
i37,689
$
i230,224
$
i210,292
/
Accrued
Restructuring Liability
The Company’s restructuring programs include a series of actions to reduce the structural costs of the Company. iA summary of the activity in the Company’s restructuring liability included in Accrued liabilities in the Condensed Consolidated Balance Sheets is
as follows:
(1) Includes
severance and other termination benefits, including outplacement services.
(2) Includes the cost of relocating associates, relocating equipment, lease termination expense and other costs in connection with the closure and optimization of facilities, site cost structures, and product lines.
(3) For the nine months ended September 29, 2023, $i6.2 million and $i5.9
million of the Company’s total provisions were related to the Prevention & Recovery and Reconstructive segments, respectively. Restructuring and other charges includes $i0.3 million of expense classified as Cost of sales on the Company’s Condensed Consolidated Statements of Operations for the nine months ended September 29, 2023.
17
ENOVIS
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
12. iFinancial Instruments and Fair Value Measurements
The Company utilizes fair value measurement guidance prescribed by accounting standards to value its financial instruments.
The guidance establishes a fair value hierarchy based on the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
Level One: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
Level Two: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level Three:
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement
The carrying values of financial instruments, including trade receivables, other receivables and accounts payable, approximate their fair values due to their short-term maturities. The carrying value of the Company’s revolving credit facility debt, which bears a variable interest rate indexed to the Secured Overnight Financing Rate (SOFR), approximates fair value as it reprices when market interest rates change. The estimated fair values may not represent actual values of the financial
instruments that could be realized as of the balance sheet date or that will be realized in the future.
As of September 29, 2023, the Company held $i26.5 million in Level Three liabilities arising from contingent consideration related to acquisitions. The fair value of the contingent consideration liabilities is determined using unobservable inputs
and the inputs vary based on the nature of the purchase agreements. These inputs can include the estimated amount and timing of projected cash flows, the risk-adjusted discount rate used to present value the projected cash flows, and the probability of the acquired company attaining certain targets stated within the purchase agreements. A change in these unobservable inputs to a different amount might result in a significantly higher or lower fair value measurement at the reporting date due to the nature of uncertainty inherent to the estimates. During the nine months ended September 29, 2023the Company recorded a reduction in contingent consideration of $i0.8 million
due to a final agreement on the payout from an acquisition in 2020 and payments of $i0.9 million, offset by increases for interest accretion and effect of foreign currency. The gross range of outcomes for contingent consideration arrangements that have a fixed limit on the maximum payout is izero
to $i10.0 million. There are itwo
contingent consideration arrangements that have no limits and are based on a percentage of sales in excess of a benchmark over ithree and ifive-year
periods, respectively.
There were no transfers in or out of Level One, Two or Three during the nine months ended September 29, 2023.
i
Total
Contingent Consideration Rollforward
Beginning Balance
Charges
Interest
Payments
Foreign Exchange
Ending Balance
(In thousands)
Contingent Consideration
$i27,809
$(i832)
$i1,133
$(i868)
$(i741)
$i26,500
/
Deferred
Compensation Plans
The Company maintains deferred compensation plans for the benefit of certain employees and non-executive officers. As of September 29, 2023 and December 31, 2022 the fair value of these plans were $i12.9 million and $i10.3
million, respectively. These plans are deemed to be Level Two within the fair value hierarchy.
The Company’s objective in using forward currency contracts is to add stability to the Company’s earnings and to protect the U.S. Dollar value of forecasted transactions. To accomplish this objective, the Company has entered into forward currency
18
ENOVIS
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
contract agreements between the U.S. Dollar and the Mexican Peso as part of its risk management strategy. These forward currency contract agreements are designated and qualify as cash flow hedges.
The gain or loss on a derivative instrument designated as a cash flow hedge is recorded in Unrealized gain (loss) on hedging activities, net of tax within the Company’s
unaudited Consolidated Statements of Comprehensive Income (Loss) until the underlying third party transaction occurs. When the underlying third-party transaction occurs, the Company recognizes the gain or loss in earnings within Cost of Sales in its unaudited Condensed Consolidated Statements of Operations. The contracts are recorded at fair value and deemed to be Level Two in the fair value hierarchy.
At September 29, 2023, the Company’s forward currency contracts have a Mexican Peso
notional amount of approximately $i1,260.0 million and a U.S. Dollar aggregate notional amount of $i71.9 million. During the three and nine months ended September 29, 2023, the
Company recognized a realized gain of $ii0.2/ million on its Condensed Consolidated
Statements of Operations related to its forward currency contracts designated as cash flow hedges. There was nothing recognized in 2022 as the Mexican Peso forward currency program was established in the second quarter of 2023.
The Company also used a non-designated forward currency contract for the purpose of managing its exposure to currency exchange rate risk related to the Euro-denominated purchase price of Novastep, which closed in June 2023. During the second quarter of 2023, the Company recognized a loss of $i1.5 million
on its Condensed Consolidated Statements of Operations related to the settlement of this non-designated forward currency contract. The loss is recorded in Other expense, net on Condensed Consolidated Statements of Operations.
Net Investment Hedges
On April 18, 2023, the Company entered into cross-currency swap agreements to hedge its net investment in its Swiss Franc-denominated subsidiaries against adverse movements in exchange rates between the U.S. Dollar and the Swiss Franc. These
swap agreements are designated and qualify as net investment hedges. These contracts have a Swiss Franc notional amount of approximately ₣i403 million and a U.S. Dollar aggregate notional amount of $i450 million
at September 29, 2023.
Cross-currency swaps involve the receipt of functional-currency fixed-rate amounts from a counterparty in exchange for the Company making foreign-currency fixed-rate payments over the life of the agreement. For derivatives designated as net investment hedges, the gain or loss on the derivative is reported in the Condensed Consolidated Balance Sheet as part of Accumulated other comprehensive (loss) and in the Company’s Condensed Consolidated Statements of Comprehensive Income (Loss) as part of the foreign currency translation adjustment. Amounts are reclassified out of Accumulated other comprehensive loss into earnings when the hedged net investment
is either sold or substantially liquidated.
During the three and nine months ended September 29, 2023, the Company received interest income on its cross-currency swap derivatives of $i2.6 million and $i4.7 million,
respectively, which is included within Interest expense, net in the Condensed Consolidated Statements of Operations.
i
The following table presents the effect of the Company’s designated hedging instruments on Accumulated other comprehensive income (loss) for the three and nine months ended September 29, 2023 and 2022:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
i
The following table presents the fair value of the Company’s derivative financial instruments as well as their classification on the Condensed Consolidated Balance Sheets as of September 29,
2023 and December 31, 2022:
(In thousands)
Location on Unaudited Consolidated Balance Sheets (1)
(1)
The Company classifies derivative assets and liabilities as current when the settlement date of the contract is one year or less.
/
13. iCommitments
and Contingencies
The Company is involved in various pending legal, regulatory, and other proceedings arising out of the ordinary course of the Company’s business. None of these proceedings are expected to have a material adverse effect on the financial condition, results of operations or cash flow of the Company. With respect to these proceedings, management of the Company believes that either it will prevail, has adequate insurance coverage or has established appropriate accruals to cover potential liabilities. Legal costs related to
proceedings or claims are recorded as incurred. Other costs that management estimates may be paid related to the claims are accrued when the liability is considered probable and the amount can be reasonably estimated. There can be no assurance, however, as to the ultimate outcome of any of these matters, and if all or substantially all of these proceedings were to be determined adverse to the Company, there could be a material adverse effect on the financial condition, results of operations or cash flow of the Company.
For further description of the Company’s litigation and contingencies, reference is made to Note 18, “Commitments
and Contingencies” in the Notes to Consolidated Financial Statements in the 2022 Form 10-K.
14. iSegment Information
The Company conducts its continuing operations through the Prevention & Recovery and Reconstructive operating segments,
which also represent the Company’s reportable segments.
▪Prevention & Recovery -a leader in orthopedic solutions and recovery sciences, providing devices, software, and services across the patient care continuum from injury prevention to rehabilitation after surgery, injury, or from degenerative disease.
•Reconstructive - an innovation market-leader positioned in the fast-growing surgical implant business, offering a comprehensive suite of reconstructive joint products for the hip, knee, shoulder, elbow, foot, ankle, and finger and surgical productivity tools.
The
Company’s management, including the chief operating decision maker, evaluates the operating results of each of its reportable segments based upon Net sales and Adjusted EBITDA, which excludes the effect of Other (income) expense, net, non-operating (gain) loss on investments, debt extinguishment charges, interest expense, net, restructuring and certain other charges, Medical Device Regulation (MDR) and other costs, strategic transaction costs, stock-based compensation, depreciation and other amortization, acquisition-related intangible asset amortization, insurance settlement loss (gain), and inventory step-up charges from the results of the Company’s operating segments.
20
ENOVIS
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income (loss) from continuing operations before income taxes (GAAP)
$
(i25,503)
$
(i78,278)
$
(i74,785)
$
i471
Restructuring
and other charges (1)
i5,341
i2,989
i12,083
i8,497
MDR
and other costs (2)
i6,228
i3,600
i23,021
i10,648
Strategic
transaction costs
i10,482
i8,146
i27,547
i32,549
Stock-based
compensation
i8,366
i7,205
i24,142
i21,734
Depreciation
and other amortization
i21,492
i18,159
i62,237
i56,109
Amortization
of acquired intangibles
i33,967
i31,993
i98,256
i94,603
Inventory
step-up
i2
i2,061
i148
i12,038
Interest
expense, net
i5,768
i6,334
i15,496
i17,944
Other
(income) expense, net
(i757)
(i300)
(i665)
(i300)
Debt
extinguishment charges
i—
i—
i—
i20,104
Insurance
settlement loss (gain) (3)
i—
i975
i—
(i32,059)
Gain
on cost basis investment
i—
(i8,800)
i—
(i8,800)
Unrealized
(gain) loss on investment in ESAB Corporation
i—
i63,125
i—
(i72,412)
Adjusted
EBITDA (non-GAAP)
$
i65,386
$
i57,209
$
i187,480
$
i161,126
(1)
Restructuring and other charges includes $i— million and $i0.3 million of expense classified as Cost of sales on the Company’s
Condensed Consolidated Statements of Operations for the three and nine months ended September 29, 2023, respectively. Restructuring and other charges includes $i— million and $i0.8
million of expense classified as Cost of sales on the Company’s Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022, respectively.
(2) Primarily related to costs specific to compliance with medical device reporting regulations and other requirements of the European Union Medical Devices Regulation. These costs are classified as Selling, general and administrative expense on our Condensed Consolidated Statements of Operations.
(3) Insurance settlement gain is related to the 2019 acquisition of DJO.
/
21
ENOVIS
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
15. iSubsequent Events
Precision AI Acquisition
On October 5, 2023, the Company
completed a business combination in its Reconstructive segment of Precision AI, an Australian company specializing in the development of surgical planning software in multiple areas of the body. The acquisition will be accounted for under the acquisition method of accounting, and accordingly, the Condensed Consolidated Financial Statements will include the financial position and results of operations beginning the next fiscal quarter. The Company paid $i27.5 million for the acquisition,
net of cash received, and estimated $i12.4 million contingent consideration related to certain regulatory milestones in 2024.
Financing for Lima Acquisition
In October 2023, the Company entered into an amendment to the Enovis Credit Agreement and issued $i460 million
aggregate principal amount of senior unsecured convertible notes in conjunction with financing the Lima Acquisition which is expected to close in the first quarter of 2024. See Note 10. “Debt” in our Notes to Condensed Consolidated Financial Statements included in this Form 10-Q for additional information.
22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion of the financial condition and results of operations of Enovis Corporation (“Enovis,”“the Company,”“we,”“our,” and “us”) should be read in conjunction with the Condensed Consolidated Financial Statements and related footnotes included in Part I. Item 1. “Financial Statements” of this Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2023 (this “Form 10-Q”) and the Consolidated Financial Statements and related footnotes included in Part II. Item 8. “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 1,
2023.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Form 10-Q is filed with the SEC. Statements other than statements of historical fact are statements could be deemed forward-looking statements, including statements regarding: the
Company’s pending acquisition (the “Lima Acquisition”) of LimaCorporate S.p.A. (“Lima”); the impacts of the completed spin-off of ESAB Corporation (“ESAB”) into an independent publicly traded company (the “Separation”); the expected financial and operating performance of, and future opportunities for, the Company following the Separation; the impact of public health emergencies and global pandemics (including COVID-19); projections of revenue, profit margins, expenses, tax provisions and tax rates, earnings or losses from operations, impact of foreign exchange rates, cash flows, synergies or other financial items; plans, strategies and objectives of management for future operations including statements relating to potential acquisitions, compensation plans or purchase commitments; developments, performance, industry or market rankings relating to products
or services; future economic conditions or performance, including the impact of increasing inflationary pressures; the outcome of outstanding claims or legal proceedings; potential gains and recoveries of costs; assumptions underlying any of the foregoing; and any other statements that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future. Forward-looking statements may be characterized by terminology such as “believe,”“anticipate,”“should,”“would,”“could,”“intend,”“plan,”“will,”“expect,”“estimate,”“project,”“positioned,”“strategy,”“targets,”“aims,”“seeks,”“sees,” and similar expressions. These statements are based on assumptions and assessments made by our management as of the filing of this Form 10-Q in light of their experience and perception of historical
trends, current conditions, expected future developments and other factors we believe to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties and actual results could differ materially due to numerous factors, including but not limited to the following:
•the ability of the Company to successfully complete the proposed acquisition of Lima on the anticipated terms and timing, including obtaining required regulatory approvals and other conditions to the completion of the acquisition;
•the financing arrangements relating to the Lima Acquisition;
•the
effects of the Lima Acquisition on the Company’s and Lima’s operations;
•the potential impact of the announcement or the consummation of the acquisition of Lima on relationships with customers, suppliers and other third parties;
•an inability to identify, finance, acquire and successfully integrate suitable acquisition candidates;
•the availability of additional capital and our inability to pursue our growth strategy without it;
•our indebtedness and our debt agreements, which contain
restrictions that may limit our flexibility in operating our business;
•our restructuring activities, which may subject us to additional uncertainty in our operating results;
•any impairment in the value of our intangible assets, including goodwill;
23
•a material disruption at any of our manufacturing facilities;
•any failure to maintain, protect and defend our intellectual property rights;
•the
effects of the COVID-19 global pandemic;
•significant movements in foreign currency exchange rates;
•the availability of raw materials, as well as parts and components used in our products, as well as the impact of raw material, energy and labor price fluctuations and supply shortages;
•the competitive environment in which we operate;
•our reliance on a variety of distribution methods to market and sell our medical device products;
•extensive government regulation and oversight of our products;
•safety
issues or recalls of our products;
•failure to comply with federal and state regulations related to the manufacture of our products;
•improper marketing or promotion of our products;
•risks associated with the clinical trial process;
•failure to comply with governmental regulations for products for which we obtain clearance or approval;
•our exposure to product liability claims;
•our inability
to obtain coverage and adequate levels of reimbursement from third party payors for our medical device products;
•audits or denials of claims by government officials;
•federal and state health reform and cost control efforts;
•our failure or the failure of our employees or third parties with which we have relationships to comply with healthcare laws and regulations;
•our relationships with leading surgeons and our ability to comply with enhanced disclosure requirements regarding payments to physicians;
•actual
or perceived failures to comply with applicable data protection, privacy and security laws, regulations, standards and other requirements;
•service interruptions, data corruption, cyber-based attacks or network security breaches affecting our information technology infrastructure;
•noncompliance with anti-bribery laws, export control regulations, economic sanctions or other trade laws;
•our inability to achieve some or all of the expected benefits of the Separation;
•if the Separation and/or certain related transactions do not qualify as transactions that are generally tax-free for
U.S. federal income tax purposes, we and our stockholders could be subject to significant tax liabilities;
•potential indemnification liabilities to ESAB pursuant to the Separation and distribution agreement and other related agreements;
24
•changes in the general economy;
•disruptions in the global economy caused by the ongoing conflict between Russia and Ukraine;
•the loss of key members of our leadership team, or the inability
to attract, develop, engage, and retain qualified employees; and
•other risks and factors listed in Part II, Item 1A. “Risk Factors” in this Form 10-Q and Part 1, Item 1A. “Risk Factors” in Part I of our 2022 Form 10-K.
Any such forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ materially from those envisaged by such forward-looking statements. We do not assume any obligation and do not intend to update any forward-looking statement, except as required by law. See “Risk Factors” in this Form 10-Q and our 2022 Form 10-K for a further discussion regarding some of the reasons that actual results may be materially different from those that we anticipate.
25
Overview
Please see Part I, Item 1. “Business” in our 2022 Form 10-K for a discussion of the Company’s objectives and methodologies for delivering shareholder value.
Following the Separation, the Company changed its name from “Colfax Corporation” to “Enovis Corporation,” began operating its business as “Enovis” and, as of April 5, 2022, the Company’s common stock began trading under the new ticker symbol “ENOV.”
See the Results of Operations section below for further information on the Separation.
Enovis conducts its operations through two operating segments: Prevention & Recovery and Reconstructive.
•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 - an innovation market-leader positioned in the fast-growing surgical implant business, offering a comprehensive suite of reconstructive
joint products for the hip, knee, shoulder, elbow, foot, ankle, and finger and surgical productivity tools.
We have a global footprint, with production facilities in North America, Europe, North Africa, and Asia. We serve a global customer base across multiple markets through a combination of direct sales and third-party distribution channels. Our customer base is highly diversified in the medical market.
Integral to our operations is our business management system, Enovis Growth Excellence (“EGX”). EGX includes our values and behaviors, a comprehensive set of tools, and repeatable, teachable processes that we use to drive continuous improvement and create superior value for our customers, shareholders, and associates. We believe that our management team’s access to, and experience in, the application
of the EGX methodology is one of our primary competitive strengths.
Results of Operations
The following discussion of Results of Operations addresses the comparison of the periods presented. Our management evaluates the operating results of each of its reportable segments based upon Net sales and Adjusted EBITDA, as defined in the “Non-GAAP Measures” section below.
Items Affecting Comparability of Reported Results and Other Recent Developments
The
comparability of our operating results for the three and nine months ended September 29, 2023 to the comparable period in 2022 is affected by the following significant items:
Strategic Acquisitions
We complement our organic growth plans with strategic acquisitions. Acquisitions can significantly affect our reported results, 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 three and nine months ended September 29, 2023 presented in this filing represents the incremental sales as a result of acquisitions that closed subsequent to the beginning of the comparable prior period.
During
the nine months ended September 29, 2023, we completed one business combination and one asset acquisition in our Reconstructive segment. On June 28, 2023, we acquired Novastep, a leading player in Minimally Invasive Surgery (MIS) foot and ankle solutions for total consideration of $96.9 million. The Novastep best-in-class MIS bunion system serves a rapidly growing portion of the global bunion segment. On July 20, 2023, we completed the asset acquisition of SEAL, developers of a broad line of external fixation products for total consideration of $28.2 million.
During the year ended December 31, 2022, we completed two business combinations in
our Reconstructive segment for aggregate net cash consideration of $50.5 million and four asset acquisitions in our Prevention & Recovery segment for total consideration of $22.3 million, of which $12.6 million was paid in cash and $9.6 million consists of deferred and contingent consideration. In the second quarter of 2022, we acquired KICo Knee Innovation Company Pty Limited and subsidiaries, an
26
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, we acquired a controlling interest in Insight Medical Systems, whose flagship product is the ARVIS surgical navigation system.
On September 22, 2023, as discussed more fully in Note 4, “Acquisitions and Investments,” in our Notes to Condensed Consolidated Financial Statements included in this Form 10-Q, we entered into a definitive agreement to acquire Lima, a privately held global orthopedic company focused on restoring motion through digital innovation and customized hardware. We have incurred and expect to continue to incur non-recurring costs associated with the Lima Acquisition. The closing of the Lima Acquisition is subject to the receipt of applicable regulatory approvals and other customary closing conditions and is expected to be completed in the first
quarter of 2024.
Foreign Currency Fluctuations
During the three and nine months ended September 29, 2023, approximately 31% and 32% of our sales, respectively, were 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 three months ended September 29, 2023 compared to the three months ended September 30, 2022, fluctuations in foreign currencies increased Net sales by 1.4%, increased Gross profit
by approximately 0.3%, and increased operating expenses by approximately 1.7%. For the nine months ended September 29, 2023 compared to the nine months ended September 30, 2022, fluctuations in foreign currencies increased Net sales by 0.1%, decreased Gross profit by approximately 0.6%, and increased operating expenses by approximately 0.3%. 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
Sales in our Prevention & Recovery and Reconstructive segments typically peak in the fourth quarter. General economic conditions and other factors may, however, impact future seasonal variations.
27
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) expense, net, non-operating (gain) loss on investments, debt extinguishment charges, Interest expense, net, Restructuring and other charges, Medical Device Regulation (MDR) fees and other costs, strategic transaction costs, stock-based compensation, depreciation and other amortization, acquisition-related intangible asset amortization, insurance settlement gain, and fair value charges on acquired
inventory. We also present Adjusted EBITDA and Adjusted EBITDA margin by operating segment, which are subject to the same adjustments. Operating income (loss), adjusted EBITDA and adjusted EBITDA margins at the operating segment level also include allocations of certain central function expenses not directly attributable to either operating segment. Adjusted EBITDA assists our management in comparing operating performance over time because certain items may obscure underlying business trends and make comparisons of long-term performance difficult, as they are of a nature and/or size that occur with inconsistent frequency or relate to discrete restructuring plans and other initiatives that are fundamentally different from our ongoing productivity improvements. Our management also believes that presenting these measures allows investors to view our performance using the same measures that we use in evaluating our financial and business performance and trends.
Non-GAAP
financial measures should not be considered in isolation from, or as a substitute for, financial information calculated in accordance with GAAP. Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures. The following tables set forth a reconciliation of net income (loss) from continuing operations, the most directly comparable financial statement measure, to Adjusted EBITDA, for the three and nine months ended September 29, 2023 and September 30, 2022.
Net income (loss) from continuing operations (GAAP) (1)
$
(56.9)
$
16.6
Income tax benefit
(17.9)
(16.2)
Other
(income) expense, net
(0.7)
(0.3)
Unrealized (gain) loss on investment in ESAB Corporation
—
(72.4)
Gain
on cost basis investment
—
(8.8)
Debt extinguishment charges
—
20.1
Interest
expense, net
15.5
17.9
Operating loss (GAAP)
$
(21.8)
$
(38.1)
(60.0)
$
(1.4)
$
(41.6)
(43.0)
Operating
loss margin
(2.7)
%
(8.3)
%
(4.8)
%
(0.2)
%
(10.7)
%
(3.7)
%
Adjusted to add
(deduct):
Restructuring and other charges (2)
6.2
5.9
12.1
4.7
3.8
8.5
MDR
and other costs (3)
11.6
11.4
23.0
7.1
3.6
10.6
Strategic transaction costs (3)
10.6
16.9
27.5
21.6
11.0
32.5
Stock-based
compensation (3)
15.3
8.8
24.1
14.4
7.3
21.7
Depreciation and other amortization
17.0
45.2
62.2
17.7
38.4
56.1
Amortization
of acquired intangibles
70.2
28.1
98.3
58.4
36.3
94.6
Insurance settlement (gain) loss (3)
—
—
—
(21.4)
(10.6)
(32.1)
Inventory
step-up
—
0.1
0.1
—
12.0
12.0
Adjusted EBITDA (non-GAAP)
$
109.1
$
78.4
$
187.5
$
101.1
$
60.1
$
161.1
Adjusted
EBITDA margin (non-GAAP)
13.7
%
17.1
%
15.0
%
13.2
%
15.4
%
14.0
%
(1) Non-operating
components of Net income (loss) from continuing operations are not allocated to the segments.
(2) Restructuring and other charges includes $0.3 million and $0.8 million of expense classified as Cost of sales on our Condensed Consolidated Statements of Operations for the nine months ended September 29, 2023 and September 30, 2022, respectively.
(3) Certain amounts are allocated to the segments as a percentage of revenue as the costs are not discrete to either segment.
29
Total Company
Sales
Net sales for the three and nine months ended September 29, 2023 increased from the three and nine months ended September 30, 2022. The following table presents the components of changes in our consolidated Net sales.
(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.
The increase in Net sales during the three and nine months ended September 29, 2023 compared to the prior year period was primarily attributable to an increase in sales from existing businesses across both of our segments, while acquisition and favorable foreign currency translation also added to the growth to a lesser extent. Existing business sales in our Reconstructive segment increased $13.1 million and $60.0 million during the three and nine months ended September 29, 2023, respectively, due to higher sales volumes compared to the prior year period, driven by broad market strength and market
outperformance. Existing business sales in our Prevention & Recovery segment increased $10.5 million and $30.1 million during the three and nine months ended September 29, 2023, respectively, due to volume and inflation-related pricing increases. Net sales from acquisitions increased in the three and nine months ended September 29, 2023 primarily due to the Novastep acquisition in June 2023. The weakening of the U.S. dollar relative to other currencies resulted in $5.5 million and $1.0 million favorable foreign currency translation impacts during the three and nine months ended September 29, 2023.
30
Operating Results
The following table summarizes our results of continuing operations for the comparable periods.
Unrealized (gain) loss on investment in ESAB Corporation
$
—
$
63.1
$
—
$
(72.4)
Gain
on cost basis investment
$
—
$
(8.8)
$
—
$
(8.8)
Interest expense, net
$
5.8
$
6.3
$
15.5
$
17.9
Debt
extinguishment charges
$
—
$
—
$
—
$
20.1
Other income
$
(0.8)
$
(0.3)
$
(0.7)
$
(0.3)
Income
tax benefit
$
(6.1)
$
(12.3)
$
(17.9)
$
(16.2)
(1) Restructuring and other charges includes $— million and $0.3 million of expense classified as Cost of sales on the Company’s Condensed Consolidated Statements of Operations for the
three and nine months ended September 29, 2023, respectively. Restructuring and other charges includes $— million and $0.8 million of expense classified as Cost of sales on the Company’s Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022, respectively.
Gross profit increased in the three months ended September
29, 2023 compared with the prior year period due to a $15.9 million increase in our Reconstructive segment and a $11.2 million increase in our Prevention & Recovery segment. 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 $2.1 million in inventory fair value step-up amortization charges. Gross profit margin increased due to the aforementioned factors.
Selling, general and administrative expense increased $22.0 million in the three months ended September 29, 2023 compared to the prior year period, 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. Research and development costs also increased compared to the prior year period, primarily due to increased spend within recently acquired
31
businesses in our Reconstructive segment, which is investing in surgical productivity solutions and computer-assisted surgery technologies. Amortization of acquired intangibles and Depreciation and other amortization also increased compared to the prior year period due to business acquisitions.
Interest expense, net decreased in the three months ended September 29, 2023 compared to the prior year period due to a reduction in debt balances as a result of the extinguishment of the
outstanding balance of the Enovis Term Loan and interest savings from $2.6 million interest received on the Swiss Franc cross-currency swap agreements.
The effective tax rate for Net loss from continuing operations during the three months ended September 29, 2023 was 23.7%, which differed from the 2023 U.S. federal statutory tax rate of 21%, primarily due to non-U.S. income taxed at lower rates, release of valuation allowance on non-U.S attributes, tax credits for research and development, and release of uncertain tax positions. This was offset by other non-deductible expenses and U.S. taxation on international operations. The effective tax rate for Net loss from continuing operations during the three months ended September 30, 2022 was 15.8%, which was lower than the 2022 U.S. federal
statutory tax rate of 21% mainly due to non-taxable unrealized loss 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 decreased in the three months ended September 29, 2023 compared with the prior year period, primarily due to the one-time items in the prior year period, including the Unrealized loss on investment in ESAB Corporation and Gain on cost basis investment and the aforementioned Gross profit and Selling, general, and administrative increases. Adjusted EBITDA increased due to organic growth. Adjusted EBITDA margin excluding the effects of recent acquisitions and foreign currency pressures increased by approximately 180 basis points. Our recent acquisitions in our Reconstructive segment, which were dilutive to the
net loss margin from continuing operations and to Adjusted EBITDA margin by approximately 20 basis points, are expected to be accretive to margins in future years.
Gross profit increased in the nine months ended September 29, 2023 compared with the prior year period due to a $64.6 million increase in our Reconstructive segment and a $24.2 million increase in our Prevention & Recovery segment. 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 $11.9 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 $55.0 million in the nine months ended September 29, 2023 compared to the prior year period, 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 reduction of strategic transaction costs. 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, 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.
Interest expense, net decreased in the nine months ended September 29, 2023 compared to the prior year period 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 $4.7 million interest received on the Swiss Franc cross-currency swap agreements.
The effective tax rate for Net loss from continuing operations during
the nine months ended September 29, 2023 was 23.9%, which differed from the 2023 U.S. federal statutory tax rate of 21%, primarily due to non-U.S. income taxed at lower rates, release of valuation allowance on non-U.S attributes, tax credits for research and development, and release of uncertain tax positions. This was offset by other non-deductible expenses and U.S. taxation on international operations. The effective tax rate for Net income from continuing operations during the nine months ended September 30, 2022 was (3,434.4)%, 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.
32
Net loss from continuing operations increased in the nine months ended September 29, 2023 compared with the prior year period, 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, and Insurance settlement gain, partially offset by the reduction of debt extinguishment charges and the aforementioned Gross profit and Selling, general, and administrative increases. Adjusted EBITDA increased due to organic growth. Adjusted EBITDA margin excluding the effects of recent acquisitions and foreign currency pressures increased by approximately 180 basis points. Our recent acquisitions in our Reconstructive segment, which were dilutive to the net loss margin from continuing operations and to Adjusted EBITDA margin by approximately 20 basis points, are expected to be accretive
to margins in future years.
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 Item 2. “Non-GAAP Measures” for a further discussion and reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures.
Prevention & Recovery
We
develop, manufacture, and distribute rigid bracing products, orthopedic soft goods, vascular systems, and compression garments, and hot and cold therapy products and offer robust recovery sciences products in the clinical rehabilitation and sports medicine markets such as bone growth stimulators and electrical stimulators used for pain management. Our Prevention & Recovery products are marketed under several brand names, most notably DJO, to orthopedic specialists, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers, and other healthcare professionals who treat patients with a variety of treatment needs including musculoskeletal conditions resulting from degenerative diseases, deformities, traumatic events and sports-related injuries. Many of our medical devices and related accessories are used by athletes and other patients for injury prevention and at-home physical therapy treatments. We reach
a diverse customer base through multiple distribution channels, including independent distributors, direct salespeople, and directly to patients.
The following table summarizes selected financial results for our Prevention & Recovery segment:
Net sales in our Prevention & Recovery segment increased $13.8 million, or 5.4%, in the three months ended September 29, 2023 compared with the prior year period, driven by increases in volume and inflation-related pricing increases. Gross profit increased $11.2 million due to inflation-related pricing increases, improved sales mix in our existing businesses, and reductions in freight costs. Gross profit margin increased 150 basis points due to the aforementioned factors. Selling, general and administrative expense increased slightly due to investment to support
growth and spending on MDR and other costs, partially offset by a reduction of allocated corporate costs due to the growth in the Reconstructive segment. Operating loss increased due to a one-time Insurance settlement gain in 2022, as well as higher acquisition amortization, offset by improved sales mix in our existing businesses. Adjusted EBITDA and Adjusted EBITDA margin increased due to improved sales mix.
Net
sales in our Prevention and Recovery segment increased $29.4 million, or 3.8%, despite currency translation pressure of $0.7 million in the nine months ended September 29, 2023 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 $24.2 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 110 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 primarily due to investment to support growth, spending on MDR and other costs, offset by a reduction of allocated corporate
costs due to the growth in the Reconstructive segment. Operating loss increased due to an insurance settlement gain recorded in the second quarter of 2022 and higher 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 nine months ended September 29, 2023 compared to the prior year period.
Reconstructive
We develop, manufacture, and market a wide variety of knee, hip, shoulder, elbow, foot, ankle, and finger implant products and surgical productivity solutions that serve the orthopedic reconstructive joint implant market. Our
products are primarily used by surgeons for surgical procedures.
The following table summarizes the selected financial results for our Reconstructive segment:
Net sales in our Reconstructive segment increased in the three months ended September 29, 2023 compared to the prior year period, by $19.9 million, or 15.6%, primarily due to higher sales volumes driven by broad market strength and market outperformance. Gross profit and profit margin increased over the same period, primarily due to increased sales in our existing businesses, improved operating cost leverage, and the benefit of a decrease of $2.1 million in inventory fair value step-up amortization charges. Selling, general and administrative expense increased
over the same period 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. Research and development expense increased compared to the prior year period, primarily due to increased spend within recently acquired businesses in our Reconstructive segment, which are investing in surgical productivity solutions and computer-assisted surgery technologies. Operating loss increased, primarily due to an insurance settlement gain recorded in the second quarter of 2022, partially offset by the aforementioned factors driving organic growth. Adjusted EBITDA increased primarily due to growth in existing businesses and improved operating cost leverage. Without the impact of recent acquisitions, Adjusted EBITDA margins increased 120 basis points compared to prior year. Recent acquisitions were dilutive to the margin by approximately 60 basis points
but are expected to be accretive to margins in future years.
Net sales increased in our Reconstructive segment by $68.4 million, or 17.6%, primarily due to higher sales volumes driven by broad market strength and market outperformance. Gross profit increased in the nine months ended September 29, 2023 compared to the prior
year period, primarily due to increased sales in our existing businesses, improved operating cost leverage, and the benefit of a decrease of $11.9 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 over the same period 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. Research and development expense increased compared to the prior year period, primarily due to increased spend within recently acquired businesses in our Reconstructive segment, 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. 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 increased primarily due to growth in existing businesses and improved operating cost leverage. Without the impact of recent acquisitions, Adjusted EBITDA margins increased 230 basis points compared to prior year. Recent acquisitions were dilutive to the margin by approximately 60 basis points but are expected to be accretive to margins in future years.
35
Liquidity
and Capital Resources
Overview
We finance our long-term capital and working capital requirements through a combination of cash flows from operating activities, various borrowings, and the issuances of equity. We expect that our primary ongoing requirements for cash will be for working capital, funding of acquisitions, capital expenditures, restructuring and other non-routine costs, and interest and principal repayments on amounts drawn on our revolving credit facility. We believe we could raise additional funds in the form of debt or equity if it were determined to be appropriate for strategic acquisitions or other corporate purposes. We believe that our sources of liquidity are adequate to fund our operations for the next twelve months.
Equity
Capital
In 2018, our Board of Directors authorized the repurchase of our common stock from time-to-time on the open market or in privately negotiated transactions. No stock repurchases have been made under this plan since the third quarter of 2018. As of September 29, 2023, 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.
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 million (the “Enovis Term Loan”) which was fully extinguished during the first quarter of 2023. The Revolver contains a $50 million swing line loan sub-facility. Certain U.S. subsidiaries of the Company guarantee the obligations under the Enovis Credit Agreement.
On November 18, 2022, we completed an exchange with a lender under the
Enovis Credit Agreement of 6,003,431 shares of common stock of ESAB, representing all of the retained shares in ESAB following the Separation, for $230.5 million of the $450.0 million Enovis Term Loan that was outstanding at that time outstanding under the Enovis Credit Agreement, net of cost to sell. The remaining balance on the Enovis Term Loan was extinguished on March 1, 2023, with proceeds from 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 current maximum total leverage ratio of not more than 3.75:1.00 and thereafter, stepping down to 3.50:1.00 for the fiscal quarter ending June 30, 2024 and thereafter, and (ii) a minimum interest coverage ratio of 3.00:1:00. The Enovis Credit Agreement contains various events of default (including failure to comply with the covenants under the Enovis Credit Agreement and related agreements) and upon an event of default the lenders may, subject to various customary cure rights, require the immediate payment of all amounts outstanding under the Revolver.
In connection with the Lima Acquisition, on October
23, 2023 we entered into an amendment to the Enovis Credit Agreement (the “Amendment”). The Amendment provides for a new term loan commitment in the aggregate amount of $400 million. The term loan facility extended to us under the Amendment will be available on the date the Lima Acquisition is consummated, will amortize at 1.25%, and mature on April 4, 2027.
Pursuant to the Amendment, effective as of the date of consummation of the Lima Acquisition, (i) all facilities under the Credit Agreement (including the Term Loan Facility) will become secured by certain personal property of the Company and certain of its subsidiaries, subject to limitations and exclusions;
(ii) the financial covenant under the Credit Agreement will be adjusted from total leverage ratio to senior secured leverage ratio and will require the senior secured leverage ratio to be no more than 3.75:1.00 with a step down to 3.50:1.00 commencing with the fiscal quarter ending June 30, 2024; (iii) certain changes to the negative covenants will become effective (including restrictions on repayments of junior financing and amendments to junior financing documents); and (iv) certain additional changes will be implemented (including the removal of the guaranty fallaway provision).
36
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.
Other Indebtedness
In addition, we are party to overdraft facilities with a borrowing capacity of $30.0 million. Total letters of credit and surety bonds of $11.2 million were outstanding as of September 29, 2023.
Cash Flows
As
of September 29, 2023, we had $32.1 million of Cash and cash equivalents, an increase of $7.8 million from the balance as of December 31, 2022 of $24.3 million. The following table summarizes the change in Cash and cash equivalents during the periods indicated:
Net cash provided by (used in) operating activities
$
66.6
$
(19.9)
Purchases
of property, plant and equipment and intangibles
(94.3)
(68.7)
Proceeds from sale of property, plant and equipment
42.6
2.7
Payments for acquisitions, net of cash received, and investments
(131.4)
(73.4)
Net
cash used in investing activities
(183.1)
(139.3)
Net borrowings (repayments) of debt
133.2
(1,630.2)
Distribution from ESAB Corporation, net
—
1,143.4
Proceeds
from issuance of common stock, net
1.5
2.5
Payment of debt extinguishment costs
—
(12.7)
Other financing (1)
(9.7)
(9.8)
Net
cash provided by (used in) financing activities
125.0
(506.8)
Effect of foreign exchange rates on Cash and cash equivalents
(0.7)
1.6
Increase (decrease) in Cash and cash equivalents
$
7.8
$
(664.4)
(1) Primarily
includes payments of debt issuance costs and deferred consideration payments, which are fixed payments for acquisitions which are contractually paid in years after the acquisition date.
Cash used in operating activities related to discontinued operations for the nine months ended September 29, 2023 and nine months ended September 30, 2022 was $1.2 million and $26.8 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. Excluding the impact of cash used in discontinued operations, cash flows from operating activities increased $60.9 million year-over-year. This increase includes a lower investment in working capital of $20 million, a decrease in cash paid for interest of $18 million, and favorable changes in accrued compensation and benefits of approximately $13 million.
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Cash flows used in investing activities during the nine months ended September 29, 2023 were $183.1 million compared to $139.3 million in the prior year period due to higher investments in the current year driven by acquisition of Novastep for $96.9 million,
net of cash received; partially offset by proceeds from sale of an asset previously classified as held for sale for $42.6 million. The amounts included in Purchases of property, plant and equipment and intangibles related to discontinued operations for the nine months ended September 30, 2022 were $5.9 million. The amounts included in Proceeds from sale of property, plant and equipment related to discontinued operations for the nine months ended September 30, 2022 were $2.7 million.
Cash flows provided by financing activities during the nine months ended September 29, 2023 include $133.2 million of net debt borrowings primarily used for the acquisitions of Novastep and SEAL. Cash flows used in financing activities
for the nine months ended September 30, 2022 include net debt repayments of $1,630.2 million, partially offset by the Distribution from ESAB Corporation, net of $1,143.4 million.
Critical Accounting Policies and Estimates
The methods, estimates and judgments that we use in applying our critical accounting policies have a significant impact on our results of operations and financial position. We evaluate our estimates and judgments on an ongoing basis. Our estimates are based upon our historical experience, our evaluation of business and macroeconomic trends and information from other outside sources, as appropriate. Our experience
and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what our management anticipates, and different assumptions or estimates about the future could have a material impact on our results of operations and financial position.
There have been no significant additions or changes to the methods, estimates and judgments included in “Item 7A. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies” in our 2022 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
We are exposed to market risk from changes in short-term interest rates, foreign currency exchange rates and commodity prices that could impact our results of operations and financial condition. We address our exposure to these risks through our normal operating and financing activities. We do not enter into derivative contracts for speculative purposes.
Interest Rate Risk
We are subject to exposure from changes in short-term interest rates related to interest payments on our borrowing arrangements. A significant amount of our borrowings as of September 29, 2023 are variable-rate facilities
based on the Secured Overnight Financing Rate (SOFR). In order to mitigate our interest rate risk, we may enter into interest rate swap or collar agreements. A hypothetical increase in interest rates of 1% during the three and nine months ended September 29, 2023 would have increased Interest expense for our variable rate-based debt by approximately $1.0 million and $2.5 million, respectively.
Exchange Rate Risk
We are exposed to movements in the exchange rates of various currencies against the U.S. dollar and against the currencies of other countries in which we manufacture and sell products and services. During the three and nine months ended September 29, 2023, approximately 31% and 32% of our sales,
respectively, were derived from operations outside the U.S. We have manufacturing operations in certain foreign countries including Mexico, Switzerland, Germany, Tunisia, and China. Sales are more highly weighted toward the U.S. dollar and Euro than other currencies. We also have significant contractual obligations in U.S. dollars that are met with cash flows in other currencies as well as U.S. dollars. To better match revenue and expense, as well as cash needs from contractual liabilities, we may enter into currency swaps and forward contracts.
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We also face exchange rate risk from our investments in subsidiaries
owned and operated in foreign countries. Our cross-currency swap agreements hedge our net investment in its Swiss Franc-denominated subsidiaries against adverse movements in exchange rates between the U.S. Dollar and the Swiss Franc. These swap agreements are designated and qualify as net investment hedges of our Swiss Franc net asset position. The effect of a change in currency exchange rates on our investment in Swiss Franc subsidiaries, offset by the unrealized gain or loss the cross-currency swap investment hedges, is reflected in the Accumulated other comprehensive loss component of Equity.
We also face exchange rate risk from intercompany transactions between affiliates. Although we use the U.S. dollar
as our functional currency for reporting purposes, we have manufacturing sites throughout the world, and a substantial portion of our costs are incurred and sales are generated in foreign currencies. Costs incurred and sales recorded by subsidiaries operating outside of the U.S. are translated into U.S. dollars using exchange rates effective during the respective period. As a result, we are exposed to movements in the exchange rates of various currencies against the U.S. dollar. Similarly, tax costs may increase or decrease as local currencies strengthen or weaken against the U.S. dollar.
Commodity Price Risk
We are exposed to changes in the prices of raw materials used in our production processes. In order to
manage commodity price risk, we periodically enter into fixed price contracts directly with suppliers.
See Note 12, “Financial Instruments and Fair Value Measurements” in our Notes to Condensed Consolidated Financial Statements included in this Form 10-Q for additional information regarding our derivative instruments.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under
the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act, as of September 29, 2023. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Form 10-Q, our disclosure controls and procedures were effective in providing reasonable assurance that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosures.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as
defined in Rule 13a-15(f)) identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Discussion
of legal proceedings is incorporated by reference to Note 13, “Commitments and Contingencies,” in the Notes to Condensed Consolidated Financial Statements included in Part I. Item 1. “Financial Statements” of this Form 10-Q.
Item 1A. Risk Factors
An investment in our common stock involves a high degree of risk. You should carefully consider the risks set forth in “Part I. Item 1A. Risk Factors” of the 2022 Form 10-K and the other information set forth in this Form 10-Q, the 2022 Form 10-K, and the additional information in the other reports we file with the SEC. If any of the risks contained in those reports actually occur, our business, results
of operation, financial condition, and liquidity could be harmed, the value of our securities could decline, and you could lose all or part of your investment. With the exception of the following, there have been no material changes in the risk factors set forth in “Part I. Item 1A. Risk Factors” in the 2022 Form 10-K.
Acquisitions have formed a significant part of our growth strategy in the past and are expected to continue to do so. If we are unable to identify suitable acquisition candidates, complete any proposed acquisitions or successfully integrate the businesses we acquire, our growth strategy may not succeed and we may not realize the anticipated benefits of our acquisitions.
We intend to seek acquisition opportunities both to expand into new markets and to enhance our position in our
existing markets. However, our ability to do so will depend on a number of steps, including our ability to: obtain debt or equity financing that we may need to complete proposed acquisitions; identify suitable acquisition candidates; negotiate appropriate acquisition terms; complete the proposed acquisitions; and integrate the acquired business into our existing operations. If we fail to achieve any of these steps, our growth strategy may not be successful. For example, we recently entered into an agreement to acquire Lima. If the Lima Acquisition is not completed for any reason, our business and financial results may be adversely affected.
Acquisitions involve numerous risks, including difficulties in the assimilation of the operations, systems, controls, technologies, personnel, services and products of the acquired company, the potential loss of key employees, customers, suppliers
and distributors of the acquired company, and the diversion of our management’s attention from other business concerns. The failure to successfully integrate acquired businesses in a timely manner, or at all, or the incurrence of significant unanticipated expenses associated with integration activities, including information technology integration fees, legal compliance costs, facility closure costs and other restructuring expenses, could have an adverse effect on our business, financial condition and results of operations.
In addition, the anticipated benefits of an acquisition may not be realized fully or at all, or may take longer to realize than we expect. Actual operating, technological, strategic and sales synergies, if achieved at all, may be less significant than we expect or may take longer to achieve than anticipated. If we are not able to realize the anticipated benefits and
synergies from our acquisitions within a reasonable time, our business, financial condition and results of operations may be adversely affected. For example, we have made a number of assumptions relating to the Lima Acquisition, including with respect to economic and business conditions, the performance of the Lima business, and other matters, and our failure to identify or understand the magnitudes of challenges associated with the Lima Acquisition could result in incorrect expectations of future results and increased risk of unanticipated or unknown issues or liabilities.
Additionally, we may underestimate or fail to discover liabilities relating to acquisitions during our due diligence investigations and we, as the successor owner of an acquired company, might be responsible for those liabilities. Such liabilities could have a material adverse effect on our business, financial condition
and results of operations.
Our indebtedness could adversely affect our financial condition and restricts us in ways that limit our flexibility in operating our business.
We have outstanding debt and other financial obligations and significant unused borrowing capacity, we incurred additional indebtedness in connection with the Lima Acquisition, and may incur or assume more debt in the future. Our debt level and related debt service obligations could have negative consequences, including: requiring us to dedicate significant cash flow from operations to the payment of amounts payable on our debt, which would reduce the funds we have available for other purposes; making it more difficult or expensive for us to obtain any necessary future financing; increasing our leverage and reducing our flexibility in
planning for or reacting to changes in our industry and market conditions; making us more vulnerable in the event of a downturn in our business; and exposing us to interest rate risk given our debt obligations at variable interest
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rates. In addition, our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to financial, business, legislative, regulatory, and other factors, some of which are beyond our control. We may not continue to generate operating cash flow in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to
generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
Additionally, the Enovis Credit Agreement, which governs our term loan and revolving credit facility, contains various covenants that limit our ability to engage in specified types of transactions. These covenants limit the Company’s ability to incur debt or liens, merge or consolidate with others, dispose of assets,
or make investments or pay dividends. The Enovis Credit Agreement also contains financial covenants requiring the Company to satisfy and maintain compliance with a total leverage ratio and an interest coverage ratio. Upon an event of default, the lenders may, subject to various customary cure rights, require the immediate payment of all amounts outstanding. These restrictions could have a material adverse effect on our business, financial condition and results of operations. In addition, certain provisions in the indenture governing the 2028 Notes may delay or prevent an attempted takeover of us that might be financially advantageous to stockholders.
The convertibility of the 2028 Notes subjects us to various
risks. If the conditional conversion feature of the 2028 Notes is triggered, holders will be entitled to convert the 2028 Notes at any time during specified periods. In the case of any such election, we would be required to settle any converted principal amount of such notes in cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the notes as a current liability rather than long-term liability, resulting in a material reduction of our net working capital. The guidance governing the accounting treatment for the 2028 Notes was adopted relatively recently, and we cannot be sure whether changes or interpretations that may be made to accounting standards could either result in us accounting for the 2028 Notes in a different manner or have a material effect on our reported financial results. A substantial
number of shares of our common stock is reserved for issuance upon conversion of the notes, and their issuance or the perception that such issuances may occur could adversely affect the market price of our common stock. In addition, the market price of our common stock could be affected by sales of our common stock by investors who view the 2028 Notes as a more attractive means of equity participation in us and by hedging or arbitrage trading activity involving our common stock.
In connection with the pricing of the 2028 Notes, we entered into capped call transactions with the option counterparties
. The option counterparties and/or their respective affiliates may modify their hedge positions, which could cause an increase or
decrease in the market price of our common stock. In addition, any or
all of the option counterparties might default under the capped call transactions. Global economic conditions have resulted in the actual or perceived failure or financial difficulties of several financial institutions and could adversely impact the option counterparties’ performance under the capped call transactions. Upon a default by an option counterparty, we may also suffer adverse tax consequences and/or more dilution than we currently anticipate with respect to our common stock. We can provide no assurance as to the financial stability or viability of the option counterparties.
The risk of non-compliance with non-U.S. laws, regulations and policies could adversely affect our results of operations, financial condition or strategic objectives.
The Lima Acquisition will introduce us into a number
of new geographic markets, subjecting us to additional non-U.S. laws, regulations and policies which do not currently apply to us, and will increase our exposure to certain other geographic markets as well as their laws and regulations. These laws and regulations are complex, change frequently, have become more stringent over time, could increase our cost of doing business, and could result in conflicting legal requirements. These laws and regulations include international labor and employment laws, environmental regulations and reporting requirements, data privacy requirements, and local laws prohibiting corrupt payments to government officials, antitrust and other regulatory laws. We will be subject to the risk that we, our employees, our agents, or our affiliated entities, or their respective officers, directors, employees and agents, may take actions determined to be in violation of any of these laws, regulations or policies, for which we might be held responsible.
Actual or alleged violations could result in substantial fines, sanctions, civil or criminal penalties, debarment from government contracts, curtailment of operations in certain jurisdictions, competitive or reputational harm, litigation or regulatory action and other consequences that might adversely affect our results of operations, financial condition or strategic objectives.
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Item 2. Unregistered Sales of Equity Securities,
Use of Proceeds, and Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5.
Other Information
During the three and nine months ended September 29, 2023, iiiinone
of our directors or officers adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement as defined in Item 408 of Regulation S-K///.
Certification of Chief Executive Officer
pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Cover Page Interactive Data File - The cover page from this Quarterly Report on Form 10-Q for the quarter ended September 29, 2023 is formatted in Inline XBRL (included as Exhibit 101).
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
