ENOVIS CORPORATION
CONSOLIDATED BALANCE SHEETS
Dollars in thousands, except share amounts
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| December 31, |
| 2022 | | 2021 |
ASSETS | | | |
CURRENT ASSETS: | | | |
Cash and cash equivalents | $ | 24,295 | | | $ | 680,252 | |
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Trade receivables, less allowance for credit losses of $7,965 and $6,589 | 267,380 | | | 254,958 | |
Inventories, net | 426,643 | | | 356,233 | |
Prepaid expenses | 28,550 | | | 26,046 | |
Other current assets | 48,155 | | | 29,176 | |
Total current assets associated with discontinued operations | — | | | 956,614 | |
Total current assets | 795,023 | | | 2,303,279 | |
Property, plant and equipment, net | 236,741 | | | 235,113 | |
Goodwill | 1,983,588 | | | 1,934,258 | |
Intangible assets, net | 1,110,727 | | | 1,154,028 | |
Lease asset - right of use | 66,881 | | | 76,485 | |
Other assets | 80,288 | | | 74,700 | |
Total non-current assets associated with discontinued operations | — | | | 2,738,049 | |
Total assets | $ | 4,273,248 | | | $ | 8,515,912 | |
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LIABILITIES AND EQUITY | | | |
CURRENT LIABILITIES: | | | |
Current portion of long-term debt | $ | 219,279 | | | $ | 7,701 | |
Accounts payable | 135,628 | | | 155,208 | |
Accrued liabilities | 210,292 | | | 225,391 | |
Total current liabilities associated with discontinued operations | — | | | 635,284 | |
Total current liabilities | 565,199 | | | 1,023,584 | |
Long-term debt, less current portion | 40,000 | | | 2,078,625 | |
Non-current lease liability | 51,259 | | | 56,549 | |
Other liabilities | 166,989 | | | 122,159 | |
Total non-current liabilities associated with discontinued operations | — | | | 573,562 | |
Total liabilities | 823,447 | | | 3,854,479 | |
Equity: | | | |
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Common stock, $0.001 par value; 133,333,333 shares authorized; 54,228,619 and 52,083,078 issued and outstanding as of December 31, 2022 and December 31, 2021, respectively | 54 | | | 52 | |
Additional paid-in capital | 2,925,729 | | | 4,544,315 | |
Retained earnings | 575,732 | | | 589,024 | |
Accumulated other comprehensive loss | (53,430) | | | (516,013) | |
Total Enovis Corporation equity | 3,448,085 | | | 4,617,378 | |
Noncontrolling interest | 1,716 | | | 44,055 | |
Total equity | 3,449,801 | | | 4,661,433 | |
Total liabilities and equity | $ | 4,273,248 | | | $ | 8,515,912 | |
See Notes to Consolidated Financial Statements.
ENOVIS CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
Dollars in thousands, except share amounts and as noted
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| Common Stock | | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interest | Total |
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Balance at January 1, 2020 | 39,353,027 | | $ | 40 | | | | $ | 3,445,675 | | $ | 479,560 | | $ | (483,845) | | $ | 48,198 | | $ | 3,489,628 | |
Cumulative effect of accounting change | — | | — | | | | — | | (4,818) | | — | | — | | (4,818) | |
Net income | — | | — | | | | — | | 42,625 | | — | | 3,146 | | 45,771 | |
Distributions to noncontrolling owners | — | | — | | | | — | | — | | — | | (4,296) | | (4,296) | |
Other comprehensive income, net of tax benefit of $9,764 | — | | — | | | | — | | — | | 31,739 | | (2,561) | | 29,178 | |
Common stock-based award activity | 145,869 | | — | | | | 32,411 | | — | | — | | — | | 32,411 | |
Balance at December 31, 2020 | 39,498,896 | | 40 | | | | 3,478,086 | | 517,367 | | (452,106) | | 44,487 | | 3,587,874 | |
Net income | — | | — | | | | — | | 71,657 | | — | | 4,621 | | 76,278 | |
Distributions to noncontrolling owners | — | | — | | | | — | | — | | — | | (3,713) | | (3,713) | |
Other comprehensive income, net of tax expense of $14,945 | — | | — | | | | — | | — | | (63,907) | | (1,340) | | (65,247) | |
Common stock offering, net of issuance costs | 5,366,667 | | 5 | | | | 711,334 | | — | | — | | — | | 711,339 | |
Conversion of tangible equity units into common stock | 4,441,488 | | 4 | | | | (4) | | — | | — | | — | | — | |
Common stock issued for acquisition, net of issuance costs | 2,181,507 | | 2 | | | | 285,678 | | — | | — | | — | | 285,680 | |
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Common stock-based award activity | 594,520 | | 1 | | | | 69,221 | | — | | — | | — | | 69,222 | |
Balance at December 31, 2021 | 52,083,078 | | 52 | | | | 4,544,315 | | 589,024 | | (516,013) | | 44,055 | | 4,661,433 | |
Net income | — | | — | | | | — | | (13,292) | | — | | 1,533 | | (11,759) | |
Distributions to noncontrolling owners | — | | — | | | | — | | — | | — | | (1,591) | | (1,591) | |
Other comprehensive income, net of tax expense of $5,581 | — | | — | | | | — | | — | | (37,398) | | (2,116) | | (39,514) | |
Distribution of ESAB Corporation | — | | — | | | | (1,662,795) | | — | | 499,981 | | (40,510) | | (1,203,324) | |
Conversion of tangible equity units into common stock | 1,691,845 | | 2 | | | | (2) | | — | | — | | — | | — | |
Acquisition | — | | — | | | | — | | — | | — | | 345 | | 345 | |
Common stock-based award activity | 453,696 | | — | | | | 44,211 | | — | | — | | — | | 44,211 | |
Balance at December 31, 2022 | 54,228,619 | | $ | 54 | | | | $ | 2,925,729 | | $ | 575,732 | | $ | (53,430) | | $ | 1,716 | | $ | 3,449,801 | |
See Notes to Consolidated Financial Statements.
ENOVIS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands
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| Year Ended December 31, |
| 2022 | | 2021 | | 2020 | | |
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Cash flows from operating activities: | | | | | | | |
Net income (loss) | $ | (11,759) | | | $ | 76,278 | | | $ | 45,771 | | | |
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | | | | | |
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Depreciation, amortization and other impairment charges | 219,710 | | | 262,919 | | | 246,229 | | | |
Stock-based compensation expense | 38,955 | | | 35,350 | | | 28,911 | | | |
Non-cash interest expense | 3,921 | | | 4,752 | | | 5,739 | | | |
Gain on investment in ESAB Corporation | (102,669) | | | — | | | — | | | |
Gain on cost basis investment | (8,800) | | | — | | | — | | | |
Debt extinguishment charges | 20,396 | | | 29,870 | | | — | | | |
Deferred income tax expense (benefit) | 6,320 | | | (22,188) | | | (29,218) | | | |
(Gain) loss on sale of property, plant and equipment | 352 | | | (2,573) | | | (491) | | | |
Pension settlement gain | — | | | (11,208) | | | — | | | |
Changes in operating assets and liabilities: | | | | | | | |
Trade receivables, net | (45,189) | | | (110,985) | | | 42,688 | | | |
Inventories, net | (118,791) | | | (129,967) | | | 23,787 | | | |
Accounts payable | (11,843) | | | 178,467 | | | (30,747) | | | |
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Other operating assets and liabilities | (46,464) | | | 45,384 | | | (30,734) | | | |
Net cash (used in) provided by operating activities | (55,861) | | | 356,099 | | | 301,935 | | | |
Cash flows from investing activities: | | | | | | | |
Purchases of property, plant and equipment and intangibles | (105,450) | | | (104,237) | | | (114,785) | | | |
Proceeds from sale of property, plant and equipment | 2,746 | | | 7,033 | | | 9,552 | | | |
Acquisitions, net of cash received, and investments | (73,684) | | | (223,272) | | | (69,846) | | | |
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Net cash used in investing activities | (176,388) | | | (320,476) | | | (175,079) | | | |
Cash flows from financing activities: | | | | | | | |
Proceeds from borrowings on term credit facility | 450,000 | | | — | | | — | | | |
Payments under term credit facility | (785,000) | | | — | | | (40,000) | | | |
Proceeds from borrowings on revolving credit facilities and other | 65,000 | | | 991,494 | | | 860,681 | | | |
Repayments of borrowings on revolving credit facilities and other | (634,883) | | | (417,526) | | | (938,997) | | | |
Repayments of borrowings on Senior notes | (300,000) | | | (700,000) | | | — | | | |
Repayments of borrowings on Euro senior notes | (386,278) | | | — | | | — | | | |
Distribution from ESAB Corporation, net | 1,143,369 | | | — | | | — | | | |
Payment of debt issuance costs | (2,938) | | | — | | | (4,560) | | | |
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Proceeds from issuance of common stock, net | 5,814 | | | 745,179 | | | 3,500 | | | |
Payment of debt extinguishment costs | (12,704) | | | (24,375) | | | — | | | |
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Deferred consideration payments and other | (7,507) | | | (9,866) | | | (12,275) | | | |
Net cash (used in) provided by financing activities | (465,127) | | | 584,906 | | | (131,651) | | | |
Effect of foreign exchange rates on Cash and cash equivalents and Restricted Cash | 2,301 | | | (2,228) | | | (3,768) | | | |
(Decrease) increase in Cash and cash equivalents and Restricted cash | (695,075) | | | 618,301 | | | (8,563) | | | |
Cash and cash equivalents and Restricted Cash, beginning of period | 719,370 | | | 101,069 | | | 109,632 | | | |
Cash and cash equivalents, end of period | $ | 24,295 | | | $ | 719,370 | | | $ | 101,069 | | | |
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Supplemental disclosures: | | | | | | | |
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Interest payments | $ | 37,089 | | | $ | 85,487 | | | $ | 104,620 | | | |
Income tax payments, net | $ | 31,360 | | | $ | 47,188 | | | $ | 59,377 | | | |
Common stock issued for acquisition, net of issuance costs | $ | — | | | $ | 285,680 | | | $ | — | | | |
ESAB Corporation shares exchanged for debt, net of fees | $ | 230,532 | | | $ | — | | | $ | — | | | |
See Notes to Consolidated Financial Statements.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Operations
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. Colfax was a leading diversified technology company that provided fabrication technology and medical device products and services to customers around the world, principally under the ESAB and DJO brands. Following the completion of the Separation, the Company revised its reporting structure and conducts its business through two operating segments, “Prevention & Recovery” and “Reconstructive”. The segment results were retroactively restated to the current method the Company conducts its business for all years presented.
On April 4, 2022, the Company completed the separation of its fabrication technology business (the “Separation”) through a tax free, pro-rata distribution of 90% of the outstanding common stock of ESAB Corporation (“ESAB”) to Colfax stockholders. To affect the Separation, Colfax distributed to its stockholders one share of ESAB common stock for every three shares of Colfax common stock held at the close of business on March 22, 2022, with the Company initially retaining 10% of the shares of ESAB common stock immediately following the Separation. Upon completion of the Separation, Colfax, which retained the Company’s specialty medical technology business, changed its name to Enovis Corporation. On April 5, 2022, the Company began trading under the stock symbol “ENOV” on the New York Stock Exchange.
In connection with the Separation, ESAB issued $1.2 billion of new debt securities, the proceeds from which were used to fund a $1.2 billion cash distribution to Enovis upon Separation. The distribution proceeds were used by Enovis in conjunction with $450 million of borrowings on a term loan under the new Enovis Credit Agreement, as discussed below, and $52.3 million of cash on hand to repay $1.4 billion of outstanding debt and accrued interest on the Company’s prior credit facility, and $302.8 million of outstanding debt and accrued interest on its 2026 Notes, pay a redemption premium at 103.188% of the principal amount of the 2026 Notes, and pay other fees and expenses due at closing. Additionally, on April 7, 2022, the Company also completed the redemption of its Euro Senior Notes representing all of its outstanding €350 million principal 3.250% Senior Notes due 2025 at a redemption price of 100.813% of the principal amount.
Immediately following the Separation, the Company effected a one-for-three reverse stock split of all issued and outstanding shares of Enovis common stock. As a result of the reverse stock split, all share and per share figures contained in the accompanying Consolidated Financial Statements have been retroactively restated as if the reverse stock split occurred at the beginning of the periods presented.
The Company completed the divestiture of its 10% retained shares in ESAB in a tax-efficient exchange for $230.5 million of its $450 million term loan outstanding under the Credit Agreement on November 18, 2022.
The accompanying Consolidated Financial Statements present our historical financial position, results of operations, changes in equity and cash flows in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Certain reclassifications have been made to prior year financial information to conform to the current period presentation. Unless otherwise indicated, all amounts in the notes to the consolidated financial statements refer to continuing operations.
The accompanying Consolidated Financial Statements reflect the results of (1) ESAB, the Company’s former fabrication technology business; (2) charges, assets and liabilities for previously retained asbestos contingencies; and (3) divestiture-related expenses associated with our former Air and Gas Handling business (“Air & Gas”) that was sold in 2019 as a discontinued operation for all periods presented. See Note 4, “Discontinued Operations”, for further information.
The COVID-19 pandemic, its resulting impact on governments, businesses and individuals, and actions taken by them in response to the situation resulted in widespread economic disruptions, which significantly affected broader economies, financial markets, and overall demand for the Company’s products in fiscal year 2020. Other than a surge of COVID-19 cases due to the emergence of COVID-19 variants in the third quarter of 2021, the impacts lessened in 2021 and 2022 due to broadening access to COVID-19 vaccines and gradual relaxing of some government-mandated restrictions.
Sales in our Prevention & Recovery and Reconstructive segments typically peak in the fourth quarter. These historical seasonality trends were disrupted by the commercial impacts caused by the COVID-19 pandemic. General economic conditions may, however, impact future seasonal variations.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2. Summary of Significant Accounting Policies
Principles of Consolidation
The Company’s Consolidated Financial Statements are prepared in accordance with GAAP and include all majority-owned subsidiaries over which the Company exercises control and, when applicable, entities or joint ventures for which the Company has a controlling financial interest or is the primary beneficiary. When protective rights, substantive rights or other factors exist, further analysis is performed in order to determine whether or not there is a controlling financial interest. The Consolidated Financial Statements reflect the assets, liabilities, revenues and expenses of consolidated subsidiaries and the noncontrolling parties’ ownership share is presented as a noncontrolling interest. All significant intercompany accounts and transactions have been eliminated.
Investments
Investments where the Company has a significant influence but not a controlling interest, are accounted for using the equity method of accounting. Investments accounted for under the equity method are initially recorded at the amount of the Company’s initial investment and adjusted each period for the Company’s share of the investee’s income or loss and dividends paid.
The Company accounts for equity investments that do not have a readily determinable fair value as cost method investments under the measurement alternative under GAAP to the extent such investments are not subject to consolidation or the equity method of accounting as described above. Under the measurement alternative, these financial instruments are carried at cost, less any impairment, adjusted for changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. The Company accounts for investments as a noncurrent asset within Other assets in the Consolidated Financial Statements as the Company does not have the intent and ability to sell such assets within the next twelve months.
All equity investments are reviewed periodically for indications of other-than-temporary impairment, including, but not limited to, significant and sustained decreases in quoted market prices or a series of historic and projected operating losses by investees. If the decline in fair value is considered to be other-than-temporary, an impairment loss is recorded and the investment is written down to a new carrying value.
As of December 31, 2022, the Company held investments of $16.5 million in privately held companies, the majority of which are within the Prevention & Recovery operating segment. These investments represent minority ownership interests and are accounted for under the cost method as the Company does not have significant influence over the investees. The largest of the Company’s investments consist of a $10.0 million investment in HT Bioimaging Ltd., a company that has developed a non-invasive cancer scanning technology for veterinarians.
Revenue Recognition
The Company provides a variety of products to its customers with revenue being measured as the amount of consideration we expect to receive in exchange for transferring such products. Revenue is recognized at a point in time when we transfer control of our off-the-shelf products to the customer, which generally occurs when title passes upon shipment. The Company’s contracts have a single performance obligation as the promise to transfer the individual goods is not separately identifiable from other promises in the contract and, therefore, not distinct. Revenue recognition and billing typically occur simultaneously for contracts recognized at a point in time. Therefore, we do not have material revenues in excess of customer billings or billings to customers in excess of recognized revenues. Refer to Note 6, “Revenue”, and Note 15, “Accrued Liabilities”, for additional information on the Company’s contract liability balances.
The amount of revenue recognized reflects the consideration to which the Company expects to be entitled in exchange for transferring the goods or services. The nature of the Company’s contracts gives rise to certain types of variable consideration, including rebates 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. Estimates are based on historical or anticipated performance and represent the Company’s best judgment at the time. Any estimates are evaluated on a quarterly basis until the uncertainty is resolved. Additionally, the Company maintains provisions for estimated contractual allowances for reimbursement amounts from certain third-party payors based on negotiated contracts, historical experience for non-contracted
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
payors, and the impact of new contract terms or modifications of existing arrangements with these customers. These allowances are recorded as a reduction to sales in the same period that the sales are recognized.
The period of benefit for the Company’s incremental costs of obtaining a contract generally have less than a one-year duration; therefore, the Company applies the practical expedient available and expenses costs to obtain a contract when incurred.
Taxes Collected from Customers and Remitted to Governmental Authorities
The Company collects various taxes and fees as an agent in connection with the sale of products and remits these amounts to the respective taxing authorities. These taxes and fees have been presented on a net basis in the Consolidated Statements of Operations and are recorded as a component of Accrued liabilities in the Consolidated Balance Sheets until remitted to the respective taxing authority.
Research and Development Expense
Research and development costs are expensed as incurred. Costs include salaries, wages, consulting and depreciation and maintenance of facilities and equipment utilized in research, development and engineering activities relating to developing new products, as well as enhancing existing products with the latest technology and designs, creating new applications for existing products, lowering manufacturing costs and redesigning existing products to increase efficiency, improve durability, enhance performance and usability. The Company also receives new product and invention ideas from orthopedic surgeons and other healthcare professionals and seeks to obtain rights to ideas it considers promising from a clinical and commercial perspective through entering into either assignment or licensing agreements. The Company maintains contractual relationships with orthopedic surgeons who assists in developing products and may also provide consulting services in connection with our products.
Interest Expense, Net
Interest expense, net includes interest income of $0.2 million, $0.2 million and $0.3 million for the years ended December 31, 2022, 2021 and 2020, respectively, primarily associated with interest-bearing deposits of certain foreign subsidiaries.
Cash and Cash Equivalents
Cash and cash equivalents include all financial instruments purchased with an initial maturity of three months or less.
Trade Receivables
Trade receivables are presented net of an allowance for credit losses. The Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments as of January 1, 2020. The estimate of current expected credit losses on trade receivables considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Estimated credit losses are reviewed periodically by management.
Inventories
Inventories, net include the cost of material, labor and overhead and are stated at the lower of cost or net realizable value. Cost is determined under various methods including average cost and first-in, first-out. The Company periodically reviews its quantities of inventories on hand and compares these amounts to the expected usage of each particular product. The Company records a charge to Cost of sales for any amounts required to reduce the carrying value of inventories to its net realizable value.
Property, Plant and Equipment
Property, plant and equipment, net is stated at historical cost, which includes the fair values of such assets acquired through acquisitions, and depreciated by the straight-line method over the estimated useful lives of the related assets. Repair and maintenance expenditures are expensed as incurred unless the repair extends the useful life of the asset. The Company capitalizes surgical implant instruments that are provided free-of-charge to surgeons for use while implanting its surgical products and the related depreciation expense is recorded as a component of Selling, general and administrative expense.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Impairment of Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the costs in excess of the fair value of net assets acquired through acquisitions by the Company.
The Company evaluates the recoverability of Goodwill annually or more frequently if an event occurs or circumstances change in the interim that would more likely than not reduce the fair value of the asset below its carrying amount. The annual impairment test date elected by the Company is the first day of its fourth quarter. Goodwill is considered to be impaired when the carrying value of a reporting unit or asset exceeds its fair value. The Company currently has two reporting units: Prevention & Recovery and Reconstructive.
In the evaluation of Goodwill for impairment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting entity is less than its carrying value. If the Company determines that it is more likely than not for a reporting unit’s fair value to be greater than its carrying value, a calculation of the fair value is not performed. If the Company determines that it is more likely than not for a reporting unit’s fair value to be less than its carrying value, a calculation of the reporting entity’s fair value is performed and compared to the carrying value of that entity. In certain instances, the Company may elect to forgo the qualitative assessment and proceed directly to the quantitative impairment test. If the carrying value of a reporting unit exceeds its fair value, Goodwill of that reporting unit is impaired and an impairment loss is recorded equal to the excess of the reporting unit’s carrying value over its fair value.
When a quantitative impairment test is needed, the Company measures fair value of reporting units based on a present value of future discounted cash flows and a market valuation approach. The discounted cash flow models indicate the fair value of the reporting units based on the present value of the cash flows that the reporting units are expected to generate in the future. Significant estimates in the discounted cash flow models include the weighted average cost of capital, revenue growth rates, long-term rate of growth, profitability of the business, tax rates, and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison against certain market information. Significant estimates in the market approach model include identifying appropriate peer companies, market multiples and assessing earnings before interest, income taxes, depreciation and amortization.
For the year ended December 31, 2022, the Company performed a quantitative assessment of Goodwill for the Reconstructive and Prevention & Recovery reporting units, both of which indicated no impairment existed. The carrying amount of Goodwill of the Reconstructive and Prevention & Recovery reporting units for the year ended December 31, 2022 was $0.9 billion and $1.1 billion, respectively. The Company determined the fair value of the reporting units by equally weighting a discounted cash flow approach and market valuation approach, and the reporting unit’s fair value exceeded its carrying amount by approximately 8% and 9%, respectively. Determining the fair value of a reporting unit requires the application of judgment and involves the use of significant estimates and assumptions which can be affected by changes in business climate, economic conditions, the competitive environment and other factors. The Company bases these fair value estimates on assumptions the Company’s management believes to be reasonable but which are unpredictable and inherently uncertain. Future changes in the judgment, assumptions and estimates could result in significantly different estimates of fair value in the future. An increase in discount rates, a reduction in projected cash flows or a combination of the two could lead to a reduction in the estimated fair values, which may result in impairment charges that could materially affect the Company’s financial statements in any given year. For sensitivity analysis, the Company estimated the fair value of the Prevention & Recovery and Reconstructive reporting units if the Company reduced the long-term revenue growth rate by 25 basis points, and the resulting excess fair value over carrying value decreased by 120 and 130 basis points, respectively.
Upon the Separation and the revision of the Company’s operating segments, the Company evaluated and concluded that it has two reporting units, Prevention & Recovery and Reconstructive. An allocation of goodwill was performed to the new reporting units. A quantitative impairment test of Goodwill for the Prevention & Recovery and Reconstructive reporting units was performed for the years ended December 31, 2022, which indicated no impairment existed.
Impairment of Long-Lived Assets Other than Goodwill and Indefinite-Lived Intangible Assets
Intangible assets primarily represent acquired trade names, customer relationships, acquired technology and software license agreements. Intangible assets are being amortized on a straight-line basis over their estimated useful lives, which approximates the period of benefit, and ranges from three to twenty years.
The Company assesses its long-lived assets and finite-lived intangible assets for impairment whenever facts and circumstances indicate that the carrying amounts may not be fully recoverable. To analyze recoverability, the Company projects
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
undiscounted net future cash flows over the remaining lives of such assets. If these projected cash flows are less than the carrying amounts, an impairment loss equal to the difference between the carrying amount of the asset and its fair value would be recognized, resulting in a write-down of the assets with a corresponding charge to earnings. Assets held for sale are reported at the lower of the carrying amounts or fair value less cost to sell. Management determines fair value using the discounted cash flow method or other accepted valuation techniques. The Company did not record any asset impairment charges during the years ended December 31, 2022 and 2021. The Company recorded an asset impairment loss related to a facility closure totaling $1.6 million during the year ended December 31, 2020, as a component of Restructuring and other charges in the Consolidated Statements of Operations.
Derivatives
The Company is subject to foreign currency risk associated with the translation of the net assets of foreign subsidiaries to United States (“U.S.”) dollars on a periodic basis.
Derivative instruments are generally recognized on a gross basis in the Consolidated Balance Sheets in either Other current assets, Other assets, Accrued liabilities or Other liabilities depending upon their respective fair values and maturity dates. For all instruments designated as hedges, including net investment hedges and cash flow hedges, the Company formally documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and the strategy for using the hedging instrument. The Company assesses whether the relationship between the hedging instrument and the hedged item is highly effective at offsetting changes in the fair value both at inception of the hedging relationship and on an ongoing basis. For cash flow hedges and net investment hedges, unrealized gains and losses are recognized as a component of Accumulated other comprehensive loss in the Consolidated Balance Sheets to the extent that it is effective at offsetting the change in the fair value of the hedged item and realized gains and losses are recognized in the Consolidated Statements of Operations consistent with the underlying hedged instrument.
The Company does not enter into derivative contracts for speculative purposes.
See Note 17, “Financial Instruments and Fair Value Measurements” for additional information regarding the Company’s derivative instruments.
Income Taxes
Income taxes for the Company are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities in the Consolidated Financial Statements and their respective tax basis. Deferred income tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred income tax assets and liabilities are reported in Other assets and Other liabilities in the Company’s Consolidated Balance Sheets, respectively. The effect on deferred income tax assets and liabilities of a change in tax rates is generally recognized in Income tax expense (benefit) in the period that includes the enactment date. Global Intangible Low-Taxed Income (“GILTI”) is accounted for as a current tax expense in the year the tax is incurred.
Valuation allowances are recorded if it is more likely than not that some portion of the deferred income tax assets will not be realized. In evaluating the need for a valuation allowance, the Company considers various factors, including the expected level of future taxable income and available tax planning strategies. Any changes in judgment about the valuation allowance are recorded through Income tax expense (benefit) and are based on changes in facts and circumstances regarding realizability of deferred tax assets.
The Company must presume that an income tax position taken in a tax return will be examined by the relevant tax authority and determine whether it is more likely than not that the tax position will be sustained upon examination based upon the technical merits of the position. An income tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The Company establishes a liability for unrecognized income tax benefits for income tax positions for which it is more likely than not that a tax position will not be sustained upon examination by the respective taxing authority to the extent such tax positions reduce the Company’s income tax liability. The Company recognizes interest and penalties related to unrecognized income tax benefits in Income tax expense (benefit) in the Consolidated Statements of Operations.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Foreign Currency Exchange Gains and Losses
The Company’s financial statements are presented in U.S. dollars. The functional currencies of the Company’s operating subsidiaries are generally the local currencies of the countries in which each subsidiary is located. Assets and liabilities denominated in foreign currencies are translated at rates of exchange in effect at the balance sheet date. The amounts recorded in each year in foreign currency translation are net of income taxes to the extent the underlying equity balances in the entities are not deemed to be permanently reinvested. Revenues and expenses are translated at average rates of exchange in effect during the year.
Transactions in foreign currencies are translated at the exchange rate in effect at the date of each transaction. Differences in exchange rates during the period between the date a transaction denominated in a foreign currency is consummated and the date on which it is either settled or translated for inclusion in the Consolidated Balance Sheets are recognized in Selling, general and administrative expense or Interest expense, net in the Consolidated Statements of Operations for that period.
During the year ended December 31, 2022, the Company recognized net foreign currency transaction gain of $0.7 million in Interest expense, net and net foreign currency transaction loss of $0.6 million in Selling, general and administrative expense in the Consolidated Statements of Operations. During the year ended December 31, 2021, the Company recognized net foreign currency transaction loss of $0.5 million in Interest expense, net and net foreign currency transaction loss of $2.0 million in Selling, general and administrative expense in the Consolidated Statements of Operations. During the year ended December 31, 2020, the Company recognized net foreign currency transaction gain of $1.1 million in Interest expense, net and net foreign currency transaction loss of $1.6 million in Selling, general and administrative expense in the Consolidated Statements of Operations.
Debt Issuance Costs and Debt Discount
Costs directly related to the placement of debt are capitalized and amortized to Interest expense primarily using the effective interest method over the term of the related obligation. Further, the carrying value of debt is reduced by an original issue discount, which is accreted to Interest expense, net using the effective interest method over the term of the related obligation. As of December 31, 2022, $4.5 million and $0.2 million of deferred issuance costs were included in Other assets and as a reduction of Long-term debt, respectively. As of December 31, 2021, $5.2 million and $7.1 million of deferred issuance costs were included in Other assets and as a reduction of Long-term debt, respectively. See Note 13, “Debt” for additional discussion regarding the Company’s borrowing arrangements.
Use of Estimates
The Company makes certain estimates and assumptions in preparing its Consolidated Financial Statements in accordance with U.S. GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses for the period presented. Actual results may differ from those estimates.
Reclassifications
Certain prior period amounts have been reclassified to conform to current year presentations. The operating results of ESAB, which was separated on April 4, 2022, are presented as discontinued operations in the Consolidated Statement of Operations for all periods presented and the net assets of ESAB and the other entities that were part of the Separation, including asbestos contingencies, are presented as discontinued operations on the Consolidated Balance Sheet as of December 31, 2021. See Note 4, “Discontinued Operations” for further information. Amortization of acquired intangibles and Research and development expense are now separately presented on our Consolidated Statements of Operations; these amounts were previously included in Selling, general and administrative expense. Note 6, “Revenue” and Note 19, “Segment Information” have been further disaggregated to conform to current year presentation.
3. Recently Issued Accounting Pronouncements
The Company evaluates the adoption impacts of recently issued accounting pronouncements as well as material updates to previous pronouncements on the Company’s Consolidated Financial Statements. There were no new material accounting standards adopted in 2022 that impacted the Company.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. Discontinued Operations
Separation of Fabrication Technology Business
On April 4, 2022, the Company completed the Separation of its fabrication technology business into an independent, publicly traded company: ESAB, a global organization that develops, manufactures and supplies consumable welding and cutting products and equipment, as well as gas control equipment. The spin-off was affected through a pro rata distribution of 90% of the 60,034,311 outstanding common shares of ESAB to Enovis stockholders of record at the close of business on March 22, 2022 (the “Record Date”). Enovis stockholders retained their Enovis shares and received one share of ESAB for every three shares of Enovis stock they owned on the Record Date. ESAB began “regular way” trading on the New York Stock Exchange on April 5, 2022 under the symbol “ESAB”. In connection with the Separation, the Company received a one-time tax-free cash distribution from ESAB of $1.2 billion.
In connection with the Separation, Enovis and ESAB entered into various agreements to effect the Separation and provide a framework for ESAB’s relationship with Enovis after the Separation. These agreements include a separation and distribution agreement, a stockholders’ and registration rights agreement, an employee matters agreement, a tax matters agreement, a transition services agreement, an ESAB Business Excellence System (“EBS”) license agreement, and an intellectual property matters agreement (the “Agreements”). These Agreements govern the Separation between Enovis and ESAB of the assets, employees, liabilities and obligations (including its investments, property and employee benefits and tax-related assets and liabilities) of Enovis and its subsidiaries attributable to periods prior to, at and after the Separation and will govern certain relationships between Enovis and ESAB after the Separation. The impact of services to be provided to ESAB and agreed upon charges as part of the Separation are not expected to be material to our consolidated financial statements.
Asbestos Contingencies
The Company retained certain asbestos-related contingencies and insurance coverages from its previously divested businesses for which it did not retain an interest in the ongoing operations except for the contingencies. The net costs and cash flows associated with these contingencies and coverages were reported by the Company as discontinued operations. In conjunction with the Separation, all asbestos-related contingencies and insurance coverages from its divested businesses were transferred fully to ESAB. The Company has classified asbestos-related charges through the date of Separation in its Condensed Consolidated Statements of Operations as part of Income from discontinued operations, net of taxes. Income from discontinued operations, net of taxes on the Statements of Operations for the years ended December 31, 2022, 2021 and 2020 include pre-tax charges from previously retained asbestos-related contingencies of $3.2 million, $15.6 million and $10.6 million, respectively. Subsequent to the Separation, the asbestos-related charges and asbestos assets and liabilities are no longer reflected in the Enovis financial statements.
Divestiture-related Expenses Related to our former Air and Gas Handling Business
The Company sold Air & Gas in 2019. Accordingly, the accompanying Consolidated Financial Statements for all periods presented reflect the pre-tax divestiture-related expenses related to Air & Gas of $1.7 million, $9.1 million and $9.0 million for the years ended December 31, 2022, 2021 and 2020, respectively, as discontinued operations.
Summary of Items Treated as Discontinued Operations
As a result of the Separation and prior sale of Air & Gas, the operating results of (1) ESAB, the Company’s former fabrication technology business, (2) charges related to the previously retained asbestos contingencies and (3) Air & Gas divestiture-related expenses have been presented as discontinued operations in the Consolidated Statements of Operations for all periods presented. Additionally, the Consolidated Balance Sheet as of December 31, 2021 presents the Assets and Liabilities of the fabrication technology business and asbestos contingencies as discontinued operations.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The carrying value of the assets and liabilities of the Company’s former fabrication technology business and asbestos contingencies amounts presented as discontinued operations as of December 31, 2021 was as follows:
| | | | | |
| December 31, 2021 |
| (in thousands) |
ASSETS | |
Cash and cash equivalents | $ | 39,118 | |
Trade receivables, net | 383,742 | |
Inventories, net | 420,062 | |
Prepaid expenses | 52,140 | |
Other current assets | 61,552 | |
Total current assets | 956,614 | |
Property, plant and equipment, net | 286,278 | |
| |
Goodwill | 1,533,037 | |
Other intangibles, net | 521,434 | |
Lease asset - right of use | 107,944 | |
Other assets | 289,356 | |
Total assets associated with discontinued operations(1) | $ | 3,694,663 | |
| |
LIABILITIES | |
Current portion of long-term debt | $ | 613 | |
Accounts payable | 348,965 | |
Accrued liabilities | 285,706 | |
Total current liabilities | 635,284 | |
Long-term debt, less current portion | 54 | |
Non-current lease liability | 88,777 | |
Deferred tax liabilities | 116,198 | |
Other liabilities | 368,533 | |
Total liabilities associated with discontinued operations(1) | $ | 1,208,846 | |
(1) Total assets and liabilities include asbestos-related contingencies and insurance coverages in connection to the sales of the Fluid Handling and Air & Gas businesses. See Asbestos Contingencies section above for more information.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the financial results of the former fabrication technology business including all divestiture-related expenses incurred by the company and allocated interest expense; asbestos charges; divestiture-related expenses related to Air & Gas; and the combined income tax effect of those items for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (in thousands) |
Net sales | $ | 647,911 | | | $ | 2,428,115 | | | $ | 1,950,069 | |
Cost of sales | 423,580 | | | 1,592,132 | | | 1,265,604 | |
Selling, general and administrative expense | 125,529 | | | 477,040 | | | 434,360 | |
Restructuring and other charges | 5,304 | | | 18,954 | | | 21,632 | |
Asbestos charges | 3,194 | | | 15,578 | | | 10,619 | |
Divestiture-related expenses(1) | 46,684 | | | 29,668 | | | 9,040 | |
Operating income | 43,620 | | | 294,743 | | | 208,814 | |
Interest expense(2) | 8,035 | | | 43,481 | | | 51,438 | |
Pension settlement gain | — | | | (11,208) | | | — | |
Income from discontinued operations before income taxes | 35,585 | | | 262,470 | | | 157,376 | |
Income tax expense | 9,155 | | | 83,939 | | | 37,178 | |
Income from discontinued operations, net of taxes | $ | 26,430 | | | $ | 178,531 | | | $ | 120,198 | |
(1) Divestiture-related expenses include $45.0 million and $20.6 million for the years ended December 31, 2022 and 2021, respectively, for the Separation.
(2) Interest expense was allocated to discontinued operations based on allocating $1.2 billion of corporate level debt to discontinued operations consistent with the dividend received from ESAB and the debt repaid at the time of the Separation.
Total income attributable to noncontrolling interest related to ESAB, net of taxes for the years ended December 31, 2022, 2021 and 2020, was $1.0 million, $3.6 million, and $2.5 million, respectively. These amounts are presented as net income attributable to noncontrolling interest from discontinued operations - net of taxes on the Consolidated Statements of Operations.
The following table presents further detail into the financial results of the former fabrication technology business:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (in thousands) |
Depreciation | 7,671 | | | 32,452 | | | 32,893 | |
Amortization | 9,012 | | | 41,954 | | | 41,798 | |
Capital expenditures | 5,903 | | | 35,584 | | | 40,138 | |
Cash (used in) provided by operating activities related to discontinued operations for the years ended December 31, 2022, 2021 and 2020 was approximately $(27) million, $224 million, and $302 million, respectively. Cash used in investing activities related to discontinued operations for the years ended December 31, 2022, 2021 and 2020 was approximately $3 million, $35 million, and $35 million.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5. Acquisitions and Investments
2022 Acquisitions
In 2022, the Company completed four asset acquisitions, two business acquisitions, and one investment, which is carried at cost as it does not have a readily determinable fair value. Two of these transactions were completed by the Company’s Reconstructive segment, and the other five transactions were completed by the Prevention & Recovery segment. The asset acquisitions broaden the Company’s product offering and distribution network. Aggregate purchase consideration for the four asset acquisitions was $22.3 million, of which $12.6 million was paid in cash and $9.6 million consists of deferred and contingent consideration. The investment was acquired for $10.0 million in cash consideration. Pro forma revenues of the aforementioned acquisitions in the year ended December 31, 2022, if the aforementioned acquisitions were part of the Company since January 1, 2022, were approximately 1% of Enovis consolidated revenues from continuing operations.
On May 6, 2022, the Company completed a business acquisition in its Reconstructive segment of KICo Knee Innovation Company Pty Limited and subsidiaries, an Australian private company doing business as 360 Med Care, by acquiring 100% of its equity interests. 360 Med Care is a medical device distributor that bundles certain computer-assisted surgery and patient experience enhancement programs to add value to its device supply arrangements with surgeons, hospitals, and insurers. The acquisition is accounted for under the acquisition method of accounting, and accordingly, the Condensed Consolidated Financial Statements include the financial position and results of operations from the acquisition date. The Company paid $14.3 million for the acquisition, net of cash received, and recorded estimated contingent consideration at fair value of $12.8 million related to expected results over future revenue targets. The Company has preliminarily allocated $16.3 million to Goodwill and $18.2 million to intangible assets acquired. Purchase accounting procedures are ongoing and revisions to contingent consideration, intangible assets acquired, and adjustments for working capital true-ups may be recorded in future periods during the measurement period. 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.
Enovis made initial investments in Insight in 2020 and 2021, which were carried at cost. During the third quarter of 2022, the Company acquired an additional 53.7% interest in Insight for $34.2 million net of cash received, and recorded contingent consideration of $5.0 million, which is the maximum payable under the agreement based on Insight’s achievement of certain milestones related to ARVIS. As of December 31, 2022, Enovis holds a 99.5% interest in Insight and recognized $0.3 million noncontrolling equity interest in its financial statements attributed to Insight.
The Company has preliminarily allocated $36.3 million to Goodwill and $38.4 million to intangible assets acquired. Goodwill is primarily driven by expected synergies between ARVIS’ augmented reality surgical guidance system and our existing customer base and existing products. The Company does not expect any of the Goodwill to be deductible for tax purposes. Purchase accounting procedures are ongoing and revisions to contingent consideration, intangible assets acquired, and adjustments for working capital true-ups may be recorded in future periods during the measurement period.
As a result of obtaining control of Insight, the Company remeasured its initial investments to its fair value resulting in a $8.8 million gain.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Investments
As of December 31, 2022, the balance of investments held by the company without readily determinable fair values was $16.5 million. The investments are carried at cost minus impairments, if any, plus adjustments for fair value indicators from observable price changes in orderly transactions for the identical or similar investment of the same issuer. There have been no impairments or upward adjustments in the current year or since acquisition of the investments except for the gain on our previously held equity investment in Insight discussed above. As a result of acquiring control of Insight, Enovis now consolidates the assets, liabilities, and results of operations of Insight and therefore current year and previous investments in Insight of $16.6 million are no longer recorded as cost basis investments.
2021 Acquisitions
The Company completed five acquisitions in its Reconstructive segment in 2021, for net cash consideration of $201.6 million and equity consideration of $285.7 million. The acquisitions are accounted for under the acquisition method of accounting, and accordingly, the Consolidated Financial Statements include the financial position and results of operations from the respective acquisition date. The Consolidated Balance Sheet as of December 31, 2022 reflects our estimates of fair value and are subject to adjustment for certain of the acquisitions as discussed below. Pro forma revenues of the aforementioned acquisitions in the year ended December 31, 2021, if the aforementioned acquisitions were part of the Company since January 1, 2021, were approximately 12% of Enovis consolidated revenues from continuing operations. The Company also made three investments during the year ended December 31, 2021 for a total of $16.8 million. These investments are carried at cost as they do not have a readily determinable fair value.
On January 19, 2021, the Reconstructive segment acquired Trilliant Surgical (“Trilliant”), a national provider of foot and ankle orthopedic implants. The product technologies of Trilliant support the Reconstructive segment’s focused expansion into the adjacent foot and ankle market. Trilliant has a broad product portfolio that covers the full universe of foot reconstructive and fixation procedures, and includes the novel Arsenal Foot Plating System, designed for greater flexibility and speed of implant placement. On April 23, 2021, the Reconstructive segment acquired MedShape, Inc. (“MedShape”), a provider of innovative surgical solutions for foot and ankle surgeons using its patented superelastic nickel titanium (NiTiNOL) and shape memory polymer technologies. The acquisition further expands the Company’s foot and ankle platform. These two acquisitions were completed for total consideration, net of cash received, of $204.1 million, subject to certain adjustments. Net working capital and intangible assets acquired represent 7.3% and 36.5% of the total consideration exchanged for these two acquisitions, respectively, with the residual amount primarily attributable to Goodwill. The Goodwill acquired in the Trilliant acquisition of $30 million is deductible for income tax purposes. Expected synergies between Trilliant, MedShape, and DJO through this portfolio of foot and ankle products and cross-selling to existing and acquired customers are primary drivers of the acquired Goodwill. Pro forma revenue of the Trilliant and MedShape acquisitions were approximately 3% of Enovis’ consolidated revenues from continuing operations. The purchase accounting related to the Trilliant and MedShape acquisitions has been completed.
On July 28, 2021, the Reconstructive segment acquired Mathys AG Bettlach (“Mathys”) for total acquisition equity consideration of $285.7 million of Enovis Common stock, which included cash acquired of $14.7 million. Mathys, a Switzerland-based company, develops and distributes innovative products for artificial joint replacement, synthetic bone graft solutions and sports medicine. The acquisition expands the Reconstructive segment’s reconstructive product portfolio with Mathys’ complimentary surgical solutions and broadens its international customer base.
Purchase accounting procedures for this acquisition have been completed and the finalized allocation of the aggregate fair value of assets acquired and liabilities assumed as of the date of the Mathys acquisition are presented below. None of the Goodwill recognized is expected to be deductible for income tax purposes. Goodwill recognized for the Mathys acquisition is primarily attributable to synergies from cross-selling DJO products with the acquired customers and cost savings through supply chain management. The following table summarizes the final allocation of consideration related to the Mathys acquisition as of the acquisition date:
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | |
| July 28, 2021 |
| (In thousands) |
Trade receivables | $ | 19,578 | |
Inventories | 76,824 | |
Property, plant and equipment | 58,465 | |
Goodwill | 92,438 | |
Intangible assets | 106,000 | |
Accounts payable | (4,808) | |
Other assets and liabilities, net | (77,494) | |
Consideration, net of cash acquired | $ | 271,003 | |
The following table summarizes Intangible assets acquired in the Mathys acquisition, excluding Goodwill, as of the acquisition date:
| | | | | | | | | | | |
| Intangible | | Amortization |
| Asset | | Period |
| (In thousands) | | (Years) |
| | | |
Acquired technology | $ | 54,000 | | | 12 |
Customer relationships | 34,000 | | | 16 |
Trademarks | 18,000 | | | 20 |
Intangible assets | $ | 106,000 | | | |
2020 Acquisitions
Our Reconstructive segment completed five acquisitions in 2020 for total consideration, net of cash received, of $67.5 million. Total Goodwill acquired through the acquisitions was $21.4 million, of which $15.9 million is expected to be deductible for income tax purposes.
Acquisitions in our Prevention & Recovery segment included LiteCure LLC (“LiteCure”), a U.S. leader in high-powered laser rehabilitation products for human and veterinary medical applications. The acquisition was completed in the fourth quarter of 2020 for net cash consideration of $39.6 million. Net working capital and intangible assets acquired represent 10% and 69% of the total consideration paid, respectively, with the residual amount primarily attributable to Goodwill.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. Revenue
The Company provides orthopedic solutions, including products and services spanning the full continuum of patient care, from injury prevention to rehabilitation. While the Company’s sales are primarily derived from three sales channels including dealers and distributors, insurance, and direct to consumers and hospitals, substantially all its revenue is recognized at a point in time. The Company disaggregates its revenue into the following segments:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In thousands) |
Prevention & Recovery: | | | | | |
U.S. Bracing & Support | $ | 437,287 | | | $ | 432,963 | | | $ | 379,236 | |
U.S. Other P&R | 255,305 | | | 243,051 | | | 188,107 | |
International P&R(1) | 335,036 | | | 350,015 | | | 295,806 | |
Total Prevention & Recovery | 1,027,628 | | | 1,026,029 | | | 863,150 | |
| | | | | |
Reconstructive: | | | | | |
U.S. Reconstructive | 370,173 | | | 323,187 | | | 245,215 | |
International Reconstructive | 165,300 | | | 76,972 | | | 12,335 | |
Total Reconstructive | 535,473 | | | 400,159 | | | 257,550 | |
| | | | | |
Total | $ | 1,563,101 | | | $ | 1,426,188 | | | $ | 1,120,700 | |
(1) The year ended December 31, 2022 includes the unfavorable impact of $30.9 million of currency.
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.
Allowance for Credit Losses
The Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments as of January 1, 2020. The estimate of current expected credit losses on trade receivables considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management elected to disaggregate trade receivables into business segments due to risk characteristics unique to each segment given the individual lines of business and market. Pooling was further disaggregated based on either geography or product type.
The Company leveraged historical write-offs over a defined lookback period in deriving a historical loss rate. The expected credit loss model further considers current conditions and reasonable and supportable forecasts using an adjustment for current and projected macroeconomic factors. Management identified appropriate macroeconomic indicators based on a tangible correlation to historical losses considering the location and risks associated with the Company.
A summary of the activity in the Company’s allowance for credit losses included within Trade receivables in the Consolidated Balance Sheets is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| Balance at Beginning of Period | | Charged to Expense, net | | Write-Offs, Deductions and Other, net | | Foreign Currency Translation | | Balance at End of Period |
| (In thousands) |
Allowance for credit losses | $ | 6,589 | | | $ | 2,552 | | | $ | (963) | | | $ | (213) | | | $ | 7,965 | |
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
7. Net Income Per Share from Continuing Operations
Net income per share from continuing operations was computed as follows:
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 | | |
| (In thousands, except share and per share data) |
Computation of Net income (loss) per share from continuing operations - basic: | | | | | | | |
Net income (loss) from continuing operations attributable to Enovis Corporation(1) | $ | (38,756) | | | $ | (103,305) | | | $ | (75,119) | | | |
Weighted-average shares of Common stock outstanding – basic | 54,065,420 | | | 51,141,210 | | | 45,588,708 | | | |
Net income (loss) per share from continuing operations – basic | $ | (0.72) | | | $ | (2.02) | | | $ | (1.65) | | | |
| | | | | | | |
Computation of Net income (loss) per share from continuing operations - diluted: | | | | | | | |
Net income (loss) from continuing operations attributable to Enovis Corporation(1) | $ | (38,756) | | | $ | (103,305) | | | $ | (75,119) | | | |
Weighted-average shares of Common stock outstanding – basic | 54,065,420 | | | 51,141,210 | | | 45,588,708 | | | |
Net effect of potentially dilutive securities - stock options and restricted stock units | — | | | — | | | — | | | |
Weighted-average shares of Common stock outstanding – diluted | 54,065,420 | | | 51,141,210 | | | 45,588,708 | | | |
Net income (loss) per share from continuing operations – diluted | $ | (0.72) | | | $ | (2.02) | | | $ | (1.65) | | | |
(1) Net income from continuing operations attributable to Enovis Corporation for the respective periods is calculated using Net income from continuing operations less the income attributable to noncontrolling interest from continuing operations, net of taxes, of $0.6 million, $1.1 million and $0.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.
As a result of the one-for-three reverse stock split immediately following the Separation, all share and per share figures contained in the Consolidated Financial Statements have been retroactively restated as if the reverse stock split occurred at the beginning of the periods presented.
For the years ended December 31, 2021 and December 31, 2020, the weighted-average shares of Common stock outstanding - basic includes the impact of 6.1 million shares, as adjusted for the reverse stock split, for the actual or potential issuance of shares from tangible equity unit purchase contracts.
In January 2022, the final remaining amount of tangible equity unit purchase contracts were converted into approximately 1.7 million shares of the Company’s common stock, as adjusted for the reverse stock split. All the issued shares are included in the Common stock issued and outstanding as of December 31, 2022. See Note 14, “Equity”, for details.
For the year ended December 31, 2021, conversions of the Company’s tangible equity units resulted in the issuance of approximately 4.4 million shares, as adjusted for the reverse stock split, of Common stock. All issuances of Common stock related to the tangible equity units were converted at the minimum settlement rate of 4.0000 shares of Common stock for each purchase contract as a result of the Company’s share price.
For the year ended December 31, 2020, the weighted-average shares of Common stock outstanding - diluted includes the impact of an additional 0.3 million potentially issuable dilutive shares, as adjusted for the reverse stock split, related to tangible equity units as a result of the Company’s share price. See Note 14, “Equity”, for details.
The weighted-average computation of the dilutive effect of potentially issuable shares of Common stock under the treasury stock method for the years ended December 31, 2022, 2021 and 2020 excludes 1.1 million, 0.3 million and 1.4 million outstanding stock-based compensation awards, respectively, as their inclusion would be anti-dilutive.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
8. Income Taxes
Loss from continuing operations before income taxes and Income tax expense (benefit) consisted of the following:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In thousands) |
Income (loss) from continuing operations before income taxes: | | | | | |
Domestic operations | $ | 8,826 | | | $ | (129,903) | | | $ | (136,455) | |
Foreign operations | (10,895) | | | 8,122 | | | 17,449 | |
| $ | (2,069) | | | $ | (121,781) | | | $ | (119,006) | |
Income tax expense (benefit): | | | | | |
Current: | | | | | |
Federal | $ | 3,780 | | | $ | — | | | $ | — | |
State | 4,957 | | | 829 | | | 928 | |
Foreign | 3,405 | | | 9,862 | | | 6,521 | |
| 12,142 | | | 10,691 | | | 7,449 | |
Deferred: | | | | | |
Domestic operations | 73,370 | | | (29,801) | | | (37,705) | |
Foreign operations | (49,392) | | | (418) | | | (14,323) | |
| 23,978 | | | (30,219) | | | (52,028) | |
| $ | 36,120 | | | $ | (19,528) | | | $ | (44,579) | |
See Note 4, “Discontinued Operations” for the loss from discontinued operations and related income taxes.
The Company’s Income tax expense (benefit) from continuing operations differs from the amount that would be computed by applying the U.S. federal statutory rate as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In thousands) |
Taxes calculated at the U.S. federal statutory rate | $ | (435) | | | $ | (25,574) | | | $ | (24,991) | |
State taxes | 10,878 | | | (4,473) | | | (439) | |
Effect of tax rates on international operations | (5,106) | | | 681 | | | (5,246) | |
| | | | | |
Changes in valuation allowance | (12,126) | | | (4,496) | | | (20,327) | |
Changes in tax reserves | 1,724 | | | (2,332) | | | 2,168 | |
| | | | | |
| | | | | |
| | | | | |
Research and development tax credits | (2,599) | | | (2,392) | | | (2,248) | |
| | | | | |
Net items not deductible in an international jurisdiction | 1,859 | | | 772 | | | 40 | |
U.S. tax on international operations | 4,565 | | | 14,865 | | | 1,873 | |
Transaction related costs | 27,699 | | | — | | | — | |
Withholding taxes | 495 | | | 556 | | | 854 | |
Non-deductible employee compensation | 9,013 | | | 2,562 | | | 4,450 | |
| | | | | |
Other | 153 | | | 303 | | | (713) | |
Income tax expense (benefit) | $ | 36,120 | | | $ | (19,528) | | | $ | (44,579) | |
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred income taxes, net reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. The significant components of deferred tax assets and liabilities included in continuing operations are as follows:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (In thousands) |
Deferred tax assets: | | | |
Expenses currently not deductible | $ | 37,159 | | | $ | 42,297 | |
Net operating loss and interest expense limitation carryforward | 162,713 | | | 285,009 | |
Tax credit carryforward | 37,883 | | | 26,960 | |
Depreciation and amortization | 28,659 | | | 1,058 | |
Capitalized R&D expenditures | 29,579 | | | 23,281 | |
Non-current lease liability | 17,815 | | | 21,066 | |
Other | 2,171 | | | 1,680 | |
Valuation allowance | (93,542) | | | (111,812) | |
Deferred tax assets, net | 222,437 | | | 289,539 | |
Deferred tax liabilities: | | | |
Depreciation and amortization | (237,374) | | | (269,929) | |
| | | |
| | | |
Lease asset - right of use | (17,380) | | | (20,702) | |
Total deferred tax liabilities | (254,754) | | | (290,631) | |
Total deferred tax liabilities, net | $ | (32,317) | | | $ | (1,092) | |
The Company evaluates the recoverability of its deferred tax assets on a jurisdictional basis by considering whether deferred tax assets will be realized on a more likely than not basis. To the extent a portion or all of the applicable deferred tax assets do not meet the more likely than not threshold, a valuation allowance is recorded. During the year ended December 31, 2022, the valuation allowance decreased from $111.8 million to $93.5 million with a net decrease of $12.1 million recognized in Income tax expense (benefit) and a $6.7 million decrease related to changes in foreign currency rates. Consideration was given to tax planning strategies and, when applicable, future taxable income as to how much of the relevant deferred tax asset could be realized on a more likely than not basis.
The Company has U.S. net operating loss carryforwards of $31.2 million expiring in years 2023 through 2037 and $26.3 million that may be carried forward indefinitely and U.S. interest limitation carryforward of $55.7 million that may be carried forward indefinitely. The Company’s ability to use these various carryforwards to offset any taxable income generated in future taxable periods may be limited under Section 382 and other federal tax provisions. As of December 31, 2022, the Company had $16.6 million foreign net operating loss carryforwards primarily in Germany, France, and the United Kingdom that may be subject to local tax limitations including changes in ownership. The foreign net operating losses can be carried forward indefinitely, except in applicable jurisdictions that make up less than five percent of the available net operating losses. The company has $32.9 million of foreign interest limitation carryforward primarily in Germany, that may be carried forward indefinitely.
The Company has U.S. foreign tax and R&D tax credits that may be used to offset U.S. tax in previous or future tax periods subject to Section 382 and other federal provisions. The Company’s $24.3 million foreign tax credit can be carried back one year and carried forward to tax years 2023 through 2031. The Company’s $9.3 million R&D credit can be carried back one year and carried forward to tax years 2023 through 2042.
For the year ended December 31, 2022, undistributed earnings of the Company’s foreign subsidiaries are estimated to be $50.9 million, all of which is permanently reinvested; accordingly, the Company has assessed no deferred tax liability as of December 31, 2022 on such earnings. This is a decrease of $0.2 million as compared to the deferred tax liability as of December 31, 2021, which was transferred as part of the divestiture of ESAB.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company records a liability for unrecognized income tax benefits for the amount of benefit included in its previously filed income tax returns and in its financial results expected to be included in income tax returns to be filed for periods through the date of its Consolidated Financial Statements for income tax positions for which it is not more likely than not to be sustained upon examination by the respective taxing authority. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
| | | | | |
| (In thousands) |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Balance, January 1, 2020 | $ | 55,480 | |
| |
Addition for tax positions taken in prior periods | 5,911 | |
Addition for tax positions taken in the current period | 1,980 | |
Reductions related to settlements with taxing authorities | — | |
Reductions resulting from a lapse of applicable statute of limitations | (5,689) | |
Other, including the impact of foreign currency translation | 332 | |
Balance, December 31, 2020 | 58,014 | |
Acquisitions and divestitures | 4,450 | |
Addition for tax positions taken in prior periods | 228 | |
Addition for tax positions taken in the current period | 3,653 | |
Reductions related to settlements with taxing authorities | (425) | |
Reductions resulting from a lapse of applicable statute of limitations | (3,239) | |
Other, including the impact of foreign currency translation | (734) | |
Balance, December 31, 2021 | 61,947 | |
Acquisitions and divestitures | (23,250) | |
| |
Addition for tax positions taken in the current period | 462 | |
| |
Reductions resulting from a lapse of applicable statute of limitations | (244) | |
Other, including the impact of foreign currency translation | (616) | |
Balance, December 31, 2022 | $ | 38,299 | |
The Company is routinely examined by tax authorities around the world. Tax examinations remain in process in multiple countries, including but not limited to Germany, China, the United States and various U.S. states. The Company files numerous group and separate tax returns in U.S. federal and state jurisdictions, as well as international jurisdictions. In the U.S., tax years dating back to 2009 remain subject to examination, due to tax attributes available to be carried forward to open or future tax years. With some exceptions, other major tax jurisdictions generally are not subject to tax examinations for years beginning before 2016.
The Company records interest and penalties on uncertain tax positions as a component of Income tax expense (benefit), which was $1.1 million, $0.6 million and $0.7 million for the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022 and 2021, we had accrued $4.2 million and $7.5 million, respectively, of interest and penalties related to unrecognized tax benefits. Due to the difficulty in predicting with reasonable certainty when tax audits will be fully resolved and closed, the range of reasonably possible significant increases or decreases in the liability for unrecognized tax benefits that may occur within the next 12 months is difficult to ascertain. Currently, the Company estimates that it is reasonably possible that the expiration of various statutes of limitations, resolution of tax audits and court decisions may reduce its tax expense in the next 12 months up to $1.7 million. The gross amount of the unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate was $26.9 million as of December 31, 2022.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
9. Goodwill and Intangible Assets
The following table summarizes the activity in Goodwill, by segment during the years ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | |
| Prevention & Recovery | | Reconstructive | | Total |
| (In thousands) |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Balance, January 1, 2021 | $ | 1,102,461 | | | $ | 658,805 | | | $ | 1,761,266 | |
Goodwill attributable to acquisitions(1) | 2,826 | | | 187,255 | | | 190,081 | |
| | | | | |
Impact of foreign currency translation | (16,754) | | | (335) | | | (17,089) | |
Balance, December 31, 2021 | 1,088,533 | | | 845,725 | | | 1,934,258 | |
Goodwill attributable to acquisitions(1) | — | | | 61,241 | | | 61,241 | |
| | | | | |
Impact of foreign currency translation | (10,897) | | | (1,014) | | | (11,911) | |
Balance, December 31, 2022 | $ | 1,077,636 | | | $ | 905,952 | | | $ | 1,983,588 | |
| | | | | |
(1) Includes purchase accounting adjustments associated with acquisitions discussed in Note 5, “Acquisitions”.
The following table summarizes the Company’s Intangible assets, excluding Goodwill:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| (In thousands) |
| | | | | | | |
| | | | | | | |
Definite-Lived Intangible Assets | | | | | | | |
Acquired customer relationships | $ | 528,489 | | | $ | (215,962) | | | $ | 531,838 | | | $ | (158,229) | |
Acquired technology | 553,284 | | | (134,967) | | | 504,226 | | | (91,322) | |
Acquired trade names | 414,801 | | | (74,644) | | | 405,087 | | | (53,932) | |
Software | 72,371 | | | (39,202) | | | 43,378 | | | (27,442) | |
Other intangible assets | 9,917 | | | (3,360) | | | 1,699 | | | (1,275) | |
| $ | 1,578,862 | | | $ | (468,135) | | | $ | 1,486,228 | | | $ | (332,200) | |
Amortization expense related to acquired intangible assets, including acquired customer relationships, acquired technology, and acquired trade names, are presented on the face of the Consolidated Statements of Operations. Other intangible assets amortization expense consists primarily of amortization of software intangibles and is recorded as a component of Selling, general, and administrative expense in the Consolidated Statements of Operations. Total amortization expense is $133.7 million, $125.0 million, and $115.9 million for the years ended December 31, 2022, 2021 and 2020, respectively.
See Note 2, “Summary of Significant Accounting Policies” for discussion regarding impairment of Intangible assets.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Expected Amortization Expense
The Company’s expected annual amortization expense for intangible assets for the next five years is as follows:
| | | | | |
| December 31, 2022 |
| (In thousands) |
2023 | $ | 127,187 | |
2024 | 126,176 | |
2025 | 125,081 | |
2026 | 120,011 | |
2027 | 111,936 | |
10. Property, Plant and Equipment, Net
| | | | | | | | | | | | | | | | | |
| | | December 31, |
| Depreciable Life | | 2022 | | 2021 |
| (In years) | | (In thousands) |
Land | n/a | | $ | 5,935 | | | $ | 6,075 | |
Buildings and improvements | 5-40 | | 36,548 | | | 33,170 | |
Machinery and equipment | 3-15 | | 375,441 | | | 325,342 | |
| | | 417,924 | | | 364,587 | |
Accumulated depreciation | | | (181,183) | | | (129,474) | |
| | | $ | 236,741 | | | $ | 235,113 | |
Depreciation expense for the years ended December 31, 2022, 2021 and 2020, was $69.2 million, $62.0 million and $52.0 million, respectively.
11. Inventories, Net
Inventories, net consisted of the following:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (In thousands) |
Raw materials | $ | 100,038 | | | $ | 66,824 | |
Work in process | 28,164 | | | 29,506 | |
Finished goods | 357,143 | | | 298,450 | |
| 485,345 | | | 394,780 | |
Less: allowance for excess, slow-moving and obsolete inventory | (58,702) | | | (38,547) | |
| $ | 426,643 | | | $ | 356,233 | |
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12. Leases
The Company leases certain office spaces, warehouses, facilities, vehicles, and equipment. Leases with an initial term of
twelve months or less are not recorded on the balance sheet. Most leases include renewal options, which can extend the lease term into the future. The Company determines the lease term by assuming options that are reasonably certain of being renewed will be exercised. Certain of the Company’s leases include rental payments adjusted for inflation. The right-of-use lease asset and lease liability are recorded on the Consolidated Balance Sheet, with the current lease liability being included in Accrued liabilities.
| | | | | |
| December 31, 2022 |
| (In thousands) |
Future lease payments by year: | |
2023 | $ | 22,342 | |
2024 | 15,364 | |
2025 | 10,724 | |
2026 | 7,866 | |
2027 | 4,658 | |
Thereafter | 14,991 | |
Total | 75,945 | |
Less: present value discount | (6,522) | |
Present value of lease liabilities | $ | 69,423 | |
| |
Weighted-average remaining lease term (in years): | |
Operating leases | 5.87 |
Weighted-average discount rate: | |
Operating leases | 3.8 | % |
The Company’s operating leases extend for varying periods and, in some cases, contain renewal options that would extend the existing terms. During the years ended December 31, 2022, 2021 and 2020, the Company’s net rental expense related to operating leases was $23.0 million, $20.2 million and $22.3 million, respectively.
13. Debt
Long-term debt consisted of the following:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (In thousands) |
Term loan | $ | 219,279 | | | $ | 782,435 | |
Euro senior notes | — | | | 395,552 | |
TEU amortizing notes | — | | | 6,501 | |
2026 notes | — | | | 297,906 | |
Revolving credit facilities and other | 40,000 | | | 603,932 | |
Total debt | 259,279 | | | 2,086,326 | |
Less: current portion | (219,279) | | | (7,701) | |
Long-term debt | $ | 40,000 | | | $ | 2,078,625 | |
Debt Redemptions in Connection with the Separation
In conjunction with the Separation which occurred 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
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3.25% Euro Senior Notes due 2025 and its 6.375% Senior Notes due 2026. As a result of these changes, the Company recorded Debt extinguishment charges of $20.1 million in the second quarter of 2022, comprised of $12.7 million in redemption premiums and $7.4 million in noncash write-offs of original issue discount and deferred financing fees.
Enovis Term Loan and Revolving Credit Facility
The Enovis Credit Agreement consists 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 and an April 4, 2023 maturity date (the “Enovis Term Loan”). The Revolver contains a $50 million swing line loan sub-facility. Certain U.S. subsidiaries of the Company guarantee the obligations under the Credit Facility.
On November 18, 2022, the Company completed an exchange with a lender under the Enovis Credit Agreement of 6,003,431 shares of common stock of ESAB, representing all of the retained shares in ESAB following the Separation, for $230.5 million of the $450.0 million in term loan outstanding under the Credit Agreement, net of cost to sell.
The Enovis Credit Agreement contains customary covenants limiting the ability of the Company and its subsidiaries to, among other things, incur debt or liens, merge or consolidate with others, dispose of assets, make investments or pay dividends. In addition, the Enovis Credit Agreement contains financial covenants requiring the Company to maintain (i) a maximum total leverage ratio of not more than 4.00:1.00, with a step-down to 3.75:1.00 commencing with the fiscal quarter ending June 30, 2023, and a step-down to 3.50:1.00 commencing with the fiscal quarter ending June 30, 2024, and (ii) a minimum interest coverage ratio of 3.00:1.00. The Enovis Credit Agreement contains various events of default (including failure to comply with the covenants under the Enovis Credit Agreement and related agreements) and upon an event of default the lenders may, subject to various customary cure rights, require the immediate payment of all amounts outstanding under the Enovis Term Loan and the Enovis Revolver. As of December 31, 2022, the Company was in compliance with the covenants under the Enovis Credit Agreement.
As of December 31, 2022, the weighted-average interest rate of borrowings under the Enovis Credit Agreement was 5.71%, excluding accretion of original issue discount and deferred financing fees, and there was $860.0 million available on the Revolver.
The Company has $4.7 million in deferred financing fees recorded in conjunction with the Credit Facility as of December 31, 2022, which is being accreted to Interest expense, net primarily using the effective interest method over the life of the facility.
Euro Senior Notes
The Company had senior unsecured notes with an aggregate principal amount of €350 million due in May 2025, with an interest rate of 3.25%. The Euro Senior Notes were redeemed on April 7, 2022 at a 100.813% redemption premium after the completion of the Separation.
Tangible Equity Unit (“TEU”) Amortizing Notes
The Company previously had 6.50% TEU amortizing notes due in January 2022 at an initial principal amount of $15.6099 per note with equal quarterly cash installments of $1.4375 per note representing a payment of interest and partial payment of principal. The Company paid $6.5 million, $25.0 million, and $23.4 million of principal on the TEU amortizing notes in the years ended December 31, 2022, 2021, and 2020, respectively. The final installment payment was made on January 15, 2022. Additionally, in the first quarter of 2022, all of the remaining related TEU prepaid stock purchase contracts were converted to shares of common stock. See Note 14, “Equity” for further information.
2024 Notes and 2026 Notes
The Company had senior notes with a remaining principal amount of $300 million, which were due on February 15, 2026 and had an interest rate of 6.375% (the “2026 Notes”). The 2026 Notes were redeemed on April 7, 2022 at a 103.188% redemption premium after the completion of the Separation.
On April 24, 2021, the Company used the proceeds from its March 2021 equity offering to redeem all of its $600 million 6.0% senior notes due February 14, 2024 (the “2024 Notes”) and $100 million of the outstanding principal of its 2026 Notes for
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$724.4 million. The 2024 Notes were redeemed at a redemption price of 103.000% of their principal amount and the 2026 Notes were redeemed at a redemption price of 106.375% of their principal amount, plus, in each case, accrued and unpaid interest through the date of redemption. In the second quarter of 2021, a net loss on the early extinguishment of debt of $29.9 million was recorded and included $24.4 million of call premium on the retired debt.
Other Indebtedness
In addition to the debt agreements discussed above, the Company is party to various overdraft facilities with a borrowing capacity of $30.0 million. As of December 31, 2022, there were no outstanding borrowings under these facilities.
The Company is party to letter of credit facilities with an aggregate capacity of $15.0 million. Total letters of credit of $7.1 million were outstanding as of December 31, 2022.
Contractual Maturities
The contractual maturities of the Company’s debt are as follows:
| | | | | |
| December 31, 2022 |
| (In thousands) |
2023 | $ | 219,468 | |
2024 | — | |
2025 | — | |
2026 | — | |
2027 | 40,000 | |
Thereafter | — | |
Total contractual maturities | 259,468 | |
Debt discount | (189) | |
Total debt | $ | 259,279 | |
14. Equity
Common Stock
On March 19, 2021, the Company completed the underwritten public offering of 5.4 million shares of Colfax Common stock, as adjusted for the reverse stock split, resulting in net proceeds of approximately $711.3 million, after deducting offering expenses and underwriters’ discount and commissions.
On July 28, 2021, the Company issued 2.2 million shares of Colfax Common stock, as adjusted for the reverse stock split, to the former shareholders of Mathys for acquisition consideration of $285.7 million.
Share Repurchase Program
On February 12, 2018, the Company’s Board of Directors authorized the repurchase of up to $100 million of the Company’s Common stock from time-to-time on the open market or in privately negotiated transactions. The Board of Directors increased the repurchase authorization by an additional $100 million on June 6, 2018. On July 19, 2018, the Board of Directors increased the repurchase authorization by another $100 million. The timing, amount and method of shares repurchased is determined by management based on its evaluation of market conditions and other factors.
During the year ended December 31, 2018, the Company repurchased 2,149,808 shares, as adjusted for the reverse stock split, of our Common stock in open market transactions for $200 million. Since 2018, there have been no repurchases made under this program. As of December 31, 2022, the remaining stock repurchase authorization by the Company’s Board of Directors was $100 million. There is no term associated with the remaining repurchase authorization.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accumulated Other Comprehensive Loss
The following table presents the changes in the balances of each component of Accumulated other comprehensive loss including reclassifications out of Accumulated other comprehensive loss for the years ended December 31, 2022, 2021 and 2020. All amounts are net of tax and noncontrolling interest, if any.
| | | | | | | | | | | | | | | | | | | | | | | |
| Accumulated Other Comprehensive Loss Components |
| Net Unrecognized Pension And Other Post-Retirement Benefit Cost | | Foreign Currency Translation Adjustment | | Unrealized Gain (Loss) On Hedging Activities | | Total |
| (In thousands) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Balance at January 1, 2020 | $ | (106,500) | | | $ | (421,889) | | | $ | 44,544 | | | $ | (483,845) | |
Other comprehensive income (loss) before reclassifications: | | | | | | | |
Net actuarial loss | (8,169) | | | — | | | — | | | (8,169) | |
Foreign currency translation adjustment | (1,849) | | | 57,623 | | | 3,378 | | | 59,152 | |
Gain on long-term intra-entity foreign currency transactions | — | | | 3,289 | | | — | | | 3,289 | |
Loss on net investment hedges | — | | | — | | | (26,268) | | | (26,268) | |
Other comprehensive income (loss) before reclassifications | (10,018) | | | 60,912 | | | (22,890) | | | 28,004 | |
Amounts reclassified from Accumulated other comprehensive loss(1) | 3,735 | | | — | | | — | | | 3,735 | |
Net Other comprehensive income (loss) | (6,283) | | | 60,912 | | | (22,890) | | | 31,739 | |
Balance at December 31, 2020 | (112,783) | | | (360,977) | | | 21,654 | | | (452,106) | |
Other comprehensive income (loss) before reclassifications: | | | | | | | |
| | | | | | | |
Net actuarial gain | 20,866 | | | — | | | — | | | 20,866 | |
Foreign currency translation adjustment | 1,339 | | | (146,409) | | | (230) | | | (145,300) | |
| | | | | | | |
Gain on long-term intra-entity foreign currency transactions | — | | | 32,261 | | | — | | | 32,261 | |
Gain on net investment hedges | — | | | — | | | 23,247 | | | 23,247 | |
| | | | | | | |
Other comprehensive income (loss) before reclassifications: | 22,205 | | | (114,148) | | | 23,017 | | | (68,926) | |
Amounts reclassified from Accumulated other comprehensive loss(1) | 5,019 | | | — | | | — | | | 5,019 | |
| | | | | | | |
Net Other comprehensive income (loss) | 27,224 | | | (114,148) | | | 23,017 | | | (63,907) | |
| | | | | | | |
Balance at December 31, 2021 | (85,559) | | | (475,125) | | | 44,671 | | | (516,013) | |
Other comprehensive income (loss) before reclassifications: | | | | | | | |
Net actuarial gain | 12,207 | | | — | | | — | | | 12,207 | |
Foreign currency translation adjustment | 470 | | | (37,953) | | | — | | | (37,483) | |
Loss on long-term intra-entity foreign currency transactions | — | | | (21,779) | | | — | | | (21,779) | |
Gain on net investment hedges | — | | | — | | | 9,028 | | | 9,028 | |
Other comprehensive income (loss) before reclassifications: | 12,677 | | | (59,732) | | | 9,028 | | | (38,027) | |
Amounts reclassified from Accumulated other comprehensive loss(1) | 629 | | | — | | | — | | | 629 | |
Net Other comprehensive income (loss) | 13,306 | | | (59,732) | | | 9,028 | | | (37,398) | |
Distribution of ESAB Corporation | 84,460 | | | 469,220 | | | (53,699) | | | 499,981 | |
Balance at December 31, 2022 | $ | 12,207 | | | $ | (65,637) | | | $ | — | | | $ | (53,430) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(1) Included in the computation of net periodic benefit cost. See Note 16, “Defined Benefit Plans” for additional details.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During the years ended December 31, 2022, 2021 and 2020, Noncontrolling interest decreased by $2.1 million, $1.3 million, and $2.6 million, respectively, as a result of Other comprehensive income, primarily due to foreign currency translation adjustment.
Share-Based Payments
On June 7, 2022, the shareholders of the Company approved an amendment (the “Amendment”) to the Company’s 2020 Omnibus Incentive Plan (the “2020 Plan”), which was originally adopted by the shareholders of the Company on May 21, 2020. The Amendment authorizes an additional 745,000 shares of common stock of the Company and did not make any other changes to the 2020 Plan. Upon the approval of the 2020 Plan, no additional ordinary shares were to be granted under the Company’s previously approved plans, including the Company’s 2016 Omnibus Incentive Plan dated May 13, 2016. All awards previously granted and outstanding under the prior plans remain subject to the terms of those prior plans. The 2020 Plan provides the Compensation and Human Capital Management Committee of the Company’s Board of Directors (“Compensation Committee”) discretion in creating employee equity incentives. Awards under the 2020 Plan may be made in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based stock, performance-based stock units, dividend equivalents, and other stock-based awards.
The Company measures and recognizes compensation expense related to share-based payments based on the fair value of the instruments issued, net of an estimated forfeiture rate. Stock-based compensation expense is generally recognized as a component of Selling, general and administrative expense in the Consolidated Statements of Operations, as payroll costs of the employees receiving the awards are recorded in the same line item.
The Company’s Consolidated Statements of Operations reflect the following amounts related to stock-based compensation:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In thousands) |
Stock-based compensation expense(1) | $ | 38,955 | | | $ | 35,350 | | | $ | 28,911 | |
Deferred tax benefit | 1,236 | | | 2,658 | | | 1,804 | |
(1) Stock-based compensation expense includes $2.1 million, $7.7 million and $6.6 million of expense included in Income from discontinued operations on the Company’s Consolidated Statements of Operations for the years ended December 31, 2022, 2021 and 2020, respectively.
As of December 31, 2022, the Company had $29.7 million of unrecognized compensation expense related to stock-based awards that will be recognized over a weighted-average period of 1.1 years. The intrinsic value of awards exercised or issued upon vesting was $37.2 million, $48.6 million, and $11.5 million during the years ended December 31, 2022, 2021 and 2020, respectively.
Stock Options
Under the 2020 Plan, the Company may grant options to purchase Common stock, with a maximum term of 10 years at a purchase price equal to the market value of the Company’s Common stock on the date of grant.
Stock-based compensation expense for stock option awards is based upon the grant-date fair value using the Black-Scholes option pricing model. The Company recognizes compensation expense for stock option awards on a straight-line basis over the requisite service period of the entire award. The following table shows the weighted-average assumptions used to calculate the fair value of stock option awards using the Black-Scholes option pricing model, as well as the weighted-average fair value of options granted:
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Expected period that options will be outstanding (in years) | 4.77 | | 4.50 | | 4.62 |
Interest rate (based on U.S. Treasury yields at the time of grant) | 2.10 | % | | 0.61 | % | | 1.09 | % |
Volatility | 42.90 | % | | 43.10 | % | | 37.76 | % |
Dividend yield | — | | | — | | | — | |
Weighted-average fair value of options granted(1) | $ | 27.48 | | | $ | 27.64 | | | $ | 20.22 | |
(1) The weighted-average fair value of options granted in 2021 and 2020 have been adjusted by a factor of 1.7 due to the Separation and reverse stock split.
.
As a result of the Separation, beginning in April 2022, expected volatility is based on the weighted average historical stock price volatility of a group of peer companies for the expected term of the option. Prior to April 2022, expected volatility was estimated based on the historical volatility of the Company’s stock price. The Company considers historical data to estimate forfeitures within the valuation model. Groups of employees that have similar historical exercise behavior are considered together for valuation purposes. The Company has elected to estimate the expected life of an award based upon the Securities and Exchange Commission-approved “simplified method” noted under the provisions of Staff Accounting Bulletin No. 107 with the continued use of this method extended under the provisions of Staff Accounting Bulletin No. 110.
Stock option activity is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Options(1) | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (In years) | | Aggregate Intrinsic Value(2) (In thousands) |
Outstanding at January 1, 2020 | 2,749,870 | | | $ | 53.66 | | | | | |
Granted | 363,740 | | | 51.78 | | | | | |
Exercised | (74,435) | | | 46.98 | | | | | |
Forfeited and expired | (334,105) | | | 77.77 | | | | | |
Outstanding at December 31, 2020 | 2,705,070 | | | 50.61 | | | | | |
Granted | 331,375 | | | 65.08 | | | | | |
Exercised | (712,810) | | | 48.91 | | | | | |
Forfeited and expired | (170,529) | | | 97.46 | | | | | |
Outstanding at December 31, 2021 | 2,153,106 | | | 49.70 | | | | | |
Granted | 154,552 | | | 70.23 | | | | | |
Exercised | (127,261) | | | 45.69 | | | | | |
Forfeited and expired | (407,069) | | | 72.53 | | | | | |
Adjustment due to ESAB Separation(3) | (425,651) | | | 57.64 | | | | | |
Outstanding at December 31, 2022 | 1,347,677 | | | 59.96 | | | 3.68 | | $ | 3,721 | |
Vested or expected to vest at December 31, 2022 | 1,341,299 | | | 59.90 | | | 3.67 | | 3,721 | |
Exercisable at December 31, 2022 | 1,009,553 | | | 56.07 | | | 3.12 | | 3,628 | |
(1) The outstanding options as of December 31, 2021 and the option activity prior to December 31, 2021 have been adjusted by a factor of 1.7 due to the Separation and reverse stock split.
(2) The aggregate intrinsic value is based upon the difference between the Company’s closing stock price at the date of the Consolidated Balance Sheet and the exercise price of the stock option for in-the-money stock options. The intrinsic value of outstanding stock options fluctuates based upon the trading value of the Company’s Common stock.
(3) Reflects the cancellation of outstanding options held by ESAB employees as of April 4, 2022, which were replaced with ESAB options issued by ESAB Corp. as part of the Separation.
The total intrinsic value of options exercised during the years ended December 31, 2022, 2021 and 2020 was $1.5 million, $21.4 million and $1.1 million, respectively. The fair value of options vested during the years ended December 31, 2022, 2021 and 2020 was $7.4 million, $9.0 million and $11.9 million, respectively.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted Stock Units
Under the 2020 Plan, the Compensation Committee may award performance-based restricted stock units (“PRSUs”), the vesting of which is contingent upon meeting service conditions and various performance goals.
During the years ended December 31, 2022, 2021 and 2020, the Company granted certain employees PRSUs, the vesting of which is fully based on the Company’s total shareholder return (“TSR”) ranking among a peer group over a three-year performance period. The awards also have a service requirement that equals the respective performance periods. The final achievement of all outstanding PRSU awards was determined as of April 4, 2022 based on the current performance as of the time of the Separation. It was determined that 100% of the TSR metric was achieved for the PRSUs granted during the years ended December 31, 2022 and 2021, while 70% of the TSR metric was achieved for the PRSUs granted during the year ended December 31, 2020. The achievement factors were determined in accordance with the applicable criteria established by the Compensation Committee. While the achievement factor of the outstanding awards has been determined, they remain subject to the awards’ service period requirements and will therefore continue to vest over the original term of the award.
PRSUs with TSR conditions are valued at grant date using a binomial-lattice model (i.e., Monte Carlo simulation model). PRSUs with TSR conditions are recognized on a straight-line basis over the performance periods regardless of the performance condition achievement because the probability is factored into the valuation of the award. The related compensation expense for each of the awards is recognized, on a straight-line basis, over the vesting period.
Under the 2020 Plan, the Compensation Committee may also award non-performance-based restricted stock units (“RSUs”) to select executives, employees and outside directors, which typically vest three years after the date of grant. With limited exceptions, the employee must remain in service until the vesting date. The Compensation Committee determines the terms and conditions of each award, including the restriction period and other criteria applicable to the awards. Directors may also elect to defer their annual board fees into RSUs with immediate vesting. Delivery of the shares underlying these director restricted stock units is deferred until termination of the director’s service on the Company’s Board of Directors.
The activity in the Company’s PRSUs and RSUs is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| PRSUs | | RSUs |
| Number of Units(1) | | Weighted- Average Grant-Date Fair Value | | Number of Units(1) | | Weighted- Average Grant-Date Fair Value |
Nonvested at January 1, 2020 | 436,103 | | | $ | 52.48 | | | 383,836 | | | $ | 45.54 | |
Granted | 84,110 | | | 86.55 | | | 323,526 | | | 59.27 | |
Vested | (60,958) | | | 50.83 | | | (165,192) | | | 42.74 | |
Forfeited and expired | (29,019) | | | 47.48 | | | (52,516) | | | 49.84 | |
Nonvested at December 31, 2020 | 430,236 | | | 59.70 | | | 489,654 | | | 55.06 | |
Granted | 146,322 | | | 77.84 | | | 464,279 | | | 78.84 | |
Vested | (113,991) | | | 52.75 | | | (248,405) | | | 51.71 | |
Forfeited and expired | (96,492) | | | 48.30 | | | (60,311) | | | 63.95 | |
Nonvested at December 31, 2021 | 366,075 | | | 72.13 | | | 645,217 | | | 69.44 | |
Granted | 192,921 | | | 47.89 | | | 303,752 | | | 67.58 | |
Vested | (230,310) | | | 49.69 | | | (243,485) | | | 64.11 | |
Forfeited and expired | (35,516) | | | 46.07 | | | (70,914) | | | 69.22 | |
Adjustment due to ESAB Separation(2) | (32,373) | | | 46.07 | | | (131,291) | | | 71.52 | |
Nonvested at December 31, 2022 | 260,797 | | | 77.34 | | | 503,279 | | | 71.33 | |
(1) The outstanding awards as of December 31, 2021 and the award activity prior to December 31, 2021, have been adjusted by a factor of 1.7 due to the Separation and reverse stock split.
(2) Reflects the cancellation of unvested awards held by ESAB employees as of April 4, 2022, which were replaced with ESAB awards issued by ESAB as part of the Separation.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair value of shares vested during the years ended December 31, 2022, 2021 and 2020 was $32.1 million, $18.3 million and $9.7 million, respectively.
TEU offering
On January 11, 2019, the Company issued $460 million in TEUs with a 5.75% interest rate, comprised of 4.6 million units at $100 per unit. Total cash of $447.7 million was received upon closing. The proceeds from the issuance of the TEUs were allocated 84.4% to equity (the “TEU prepaid stock purchase contracts”) and 15.6% to debt (the “TEU amortizing notes”) based on the relative fair value of the respective components of each TEU. See Note 13, “Debt” for additional information on the TEU amortizing notes. The TEU prepaid stock purchase contracts were mandatorily converted into shares of Company common stock on January 15, 2022, unless previously settled at the holder’s option. All the TEU prepaid stock purchase contracts converted at the minimum settlement rate. Approximately 1.3 million and 3.3 million TEU prepaid stock purchase contracts were settled into approximately 1.7 million and 4.4 million shares of Company common stock, as adjusted for the reverse stock split, during the years ended December 31, 2022 and 2021, respectively. Since the 4.6 million TEU prepaid stock purchase contracts were mandatorily converted into shares of Company common stock at the minimum settlement rate or greater, 6.1 million shares, as adjusted for the reverse stock split, are included in basic net income per share calculations for all periods presented. See Note 7, “Net Income Per Share from Continuing Operations” for additional information.
15. Accrued Liabilities
Accrued liabilities in the Consolidated Balance Sheets consisted of the following:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (In thousands) |
Accrued compensation and related benefits | $ | 51,384 | | | $ | 66,290 | |
Accrued taxes | 13,676 | | | 12,970 | |
| | | |
Accrued freight | 3,955 | | | 5,299 | |
Contingent consideration - current portion | 8,812 | | | 1,816 | |
Warranty liability- current portion | 2,804 | | | 2,503 | |
Accrued restructuring liability - current portion | 1,090 | | | 2,170 | |
Accrued third-party commissions | 24,958 | | | 22,362 | |
Customer advances and billings in excess of costs incurred | 3,560 | | | 9,203 | |
Lease liability - current portion | 24,281 | | | 21,936 | |
Accrued interest | 2,921 | | | 11,066 | |
Accrued rebates | 13,715 | | | 12,584 | |
Accrued professional fees | 15,670 | | | 13,711 | |
Accrued royalties | 5,777 | | | 5,045 | |
Other | 37,689 | | | 38,436 | |
| $ | 210,292 | | | $ | 225,391 | |
Accrued Restructuring Liability
The Company’s restructuring programs include a series of actions to reduce the structural costs of the Company. A summary of the activity in the Company’s restructuring liability included in Accrued liabilities and Other liabilities in the Consolidated Balance Sheets is as follows:
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| Balance at Beginning of Period | | | | Provisions | | Payments | | | | Balance at End of Period(4) |
| (In thousands) |
Restructuring and other charges: |
| | | | | | | | | | | |
Termination benefits(1) | $ | 2,470 | | | | | $ | 3,944 | | | $ | (5,441) | | | | | $ | 973 | |
Facility closure costs and other(2) | 358 | | | | | 12,864 | | | (13,104) | | | | | 118 | |
Total | $ | 2,828 | | | | | 16,808 | | | $ | (18,545) | | | | | $ | 1,091 | |
Non-cash charges(3) | | | | | 2,152 | | | | | | | |
Total Provisions(5) | | | | | $ | 18,960 | | | | | | | |
(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 and product lines.
(3) The Company’s charges include $1.7 million classified as Cost of sales on the Company’s Consolidated Statements of Operations for the year ended December 31, 2022. The remaining $17.2 million of restructuring expense is recorded as Restructuring and other charges on the Company’s Consolidated statements of Operations for the year ended December 31, 2022.
(4) As of December 31, 2022, all of the restructuring liability was included in Accrued liabilities.
(5) $9.6 million and $9.4 million of the Company’s total provisions is related to the Prevention & Recovery and Reconstructive segments, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Balance at Beginning of Period | | | | Provisions | | Payments | | Foreign Currency Translation | | Balance at End of Period(4) |
| (In thousands) |
Restructuring and other charges: |
| | | | | | | | | | | |
Termination benefits(1) | $ | 1,884 | | | | | $ | 4,036 | | | $ | (3,441) | | | $ | (9) | | | $ | 2,470 | |
Facility closure costs(2) | 297 | | | | | 4,627 | | | (4,566) | | | — | | | 358 | |
Total | $ | 2,181 | | | | | 8,663 | | | $ | (8,007) | | | $ | (9) | | | $ | 2,828 | |
Non-cash charges(3) | | | | | 5,251 | | | | | | | |
Total Provisions(5) | | | | | $ | 13,914 | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
(1) Includes severance and other termination benefits, including outplacement services.
(2) Includes the cost of relocating associates, relocating equipment and lease termination expense in connection with the closure and optimization of facilities and product lines.
(3) The Company’s charges include $5.2 million classified as Cost of sales on the Company’s Consolidated Statements of Operations for the year ended December 31, 2021.The remaining $8.7 million of restructuring expense is recorded as Restructuring and other charges on the Company’s Consolidated statements of Operations for the year ended December 31, 2021.
(4) As of December 31, 2021, all of the restructuring liability was included in Accrued liabilities. In the Accrued liabilities table above, $0.4 million and $0.3 million of the Company’s restructuring liability is included in Accrued compensation and related benefits and Other, respectively.
(5) $11.5 million and $2.4 million of the Company’s total provisions is related to the Prevention & Recovery and Reconstructive segments, respectively.
16. Defined Benefit Plans
The Company sponsors various defined benefit plans and defined contribution plans for certain eligible employees or former employees. Since the Separation, all of the Company’s defined benefit plans are based outside of the U.S and the Company does not sponsor any other post-retirement benefit plans. The Company uses December 31st as the measurement date for all of its employee benefit plans.
As part of the Separation, all plans sponsored by ESAB and certain U.S. defined benefit and other post-retirement plans, formerly sponsored by the Company, were transferred to ESAB as of March 21, 2022. As a result of the transfer, the related net plan obligations of approximately $70 million are reflected as discontinued operations within the Company’s Consolidated Balance Sheet as of December 31, 2021. The impact of transferring the plans to ESAB is shown as Divestitures in the tables
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
below. The following tables include all plans historically sponsored by the Company prior to the transfer to ESAB. See Note 4, “Discontinued Operations” for further information.
The following table summarizes the total changes in the Company’s pension and accrued post-retirement benefits and plan assets and includes a statement of the plans’ funded status. The amounts presented as of December 31, 2021 and the changes in benefit obligation and plan assets in 2022 include three months of activity of the ESAB plans prior to the Separation.
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Post-Retirement Benefits |
| Year Ended December 31, | | Year Ended December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In thousands) |
Change in benefit obligation: | | | | | | | |
Projected benefit obligation, beginning of year | $ | 455,067 | | | $ | 379,295 | | | $ | 12,078 | | | $ | 13,344 | |
Acquisitions(1) | — | | | 101,312 | | | — | | | — | |
Service cost | 4,703 | | | 3,719 | | | 4 | | | 14 | |
Interest cost | 1,821 | | | 4,642 | | | 61 | | | 189 | |
Actuarial gain(2) | (21,586) | | | (11,171) | | | — | | | (650) | |
Foreign exchange effect | (4,844) | | | (6,569) | | | (7) | | | (7) | |
Benefits paid | (5,724) | | | (22,073) | | | (231) | | | (812) | |
Divestitures(3) | (337,045) | | | — | | | (11,905) | | | — | |
Other | 2,683 | | | 5,912 | | | — | | | — | |
Projected benefit obligation, end of year | $ | 95,075 | | | $ | 455,067 | | | $ | — | | | $ | 12,078 | |
Accumulated benefit obligation, end of year | $ | 91,527 | | | $ | 447,275 | | | $ | — | | | $ | 12,078 | |
Change in plan assets: | | | | | | | |
Fair value of plan assets, beginning of year | $ | 366,820 | | | $ | 267,254 | | | $ | — | | | $ | — | |
Acquisitions(1) | — | | | 72,263 | | | — | | | — | |
Actual return on plan assets | (4,193) | | | 27,554 | | | — | | | — | |
Employer contribution | 3,416 | | | 6,531 | | | 231 | | | 812 | |
Foreign exchange effect | (2,599) | | | (1,374) | | | — | | | — | |
Benefits paid | (5,724) | | | (22,073) | | | (231) | | | (812) | |
Divestitures(3) | (282,534) | | | — | | | — | | | — | |
Settlements(4) | — | | | 11,272 | | | — | | | — | |
Other | 2,510 | | | 5,393 | | | — | | | — | |
Fair value of plan assets, end of year | $ | 77,696 | | | $ | 366,820 | | | $ | — | | | $ | — | |
Funded status, end of year | $ | (17,379) | | | $ | (88,247) | | | $ | — | | | $ | (12,078) | |
Amounts recognized on the Consolidated Balance Sheet at December 31: | | | | | | | |
Non-current assets(5) | $ | — | | | $ | 7,733 | | | $ | — | | | $ | — | |
| | | | | | | |
Current liabilities(6) | (174) | | | (3,564) | | | — | | | (923) | |
Non-current liabilities(6) | (17,205) | | | (92,416) | | | — | | | (11,155) | |
| | | | | | | |
| | | | | | | |
Total | $ | (17,379) | | | $ | (88,247) | | | $ | — | | | $ | (12,078) | |
(1) Acquisitions for 2021 relate to our acquisition of Mathys. See Note 5, “Acquisitions”, for further information.
(2) The actuarial gains for 2022 and 2021 are primarily due to the increases in discount rates in most markets.
(3) Divestitures are related to the Separation.
(4) Settlements includes $11.2 million classified as Pension settlement gain included in discontinued operations for 2021, when independent trustees of a company pension plan agreed to merge that plan with another company pension plan and contribute its surplus assets.
(5) As of December 31, 2021, all of the non-current plan assets are associated with discontinued operations.
(6) As of December 31, 2021, current pension liabilities and non-current pension liabilities of $3.4 million and $62.2 million, respectively, are associated with discontinued operations. Additionally, all of the other post-retirement benefits liabilities are associated with discontinued operations.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 31, 2022, all remaining Enovis plans had projected benefit obligations in excess of the fair value of plan assets. As of December 31, 2021, for pension plans with projected benefit obligations in excess of plan assets, the projected benefit obligation and fair value of plan assets were $185.0 million and $87.5 million, respectively.
The projected benefit obligation decreased by $360.0 million in the year ended December 31, 2022 compared to an increase of $75.8 million in the year ended December 31, 2021. In the year ended December 31, 2022, the single largest driver was a decrease of $337.0 million due to the divestiture of ESAB. In addition, there was an actuarial gain of $21.6 million. In the year ended December 31, 2021, the single largest driver was an increase of $101.3 million from the Mathys acquisition. This was offset by benefits paid of $22.1 million, a foreign exchange gain of $6.6 million, and an actuarial gain of $11.2 million, of which approximately $7.8 million related to domestic pension plans and $3.4 million related to foreign pension plans.
The following table summarizes the changes in the Company’s foreign pension benefit obligation, which is determined based upon an employee’s expected date of separation, and plan assets, included in the table above, and includes a statement of the plans’ funded status. The amounts presented as of December 31, 2021 and the changes in benefit obligation and plan assets in 2022 include three months of activity of the ESAB plans prior to the Separation.
| | | | | | | | | | | |
| Foreign Pension Benefits |
| Year Ended December 31, |
| 2022 | | 2021 |
| (In thousands) |
Change in benefit obligation: | | | |
Projected benefit obligation, beginning of year | $ | 252,739 | | | $ | 157,195 | |
Acquisitions(1) | — | | | 101,312 | |
Service cost | 4,703 | | | 3,719 | |
Interest cost | 897 | | | 1,741 | |
Actuarial loss (gain)(2) | (21,586) | | | (3,449) | |
Foreign exchange effect | (4,844) | | | (6,569) | |
Benefits paid | (1,854) | | | (7,122) | |
Divestitures(3) | (137,663) | | | — | |
Other | 2,683 | | | 5,912 | |
Projected benefit obligation, end of year | $ | 95,075 | | | $ | 252,739 | |
Accumulated benefit obligation, end of year | $ | 91,527 | | | $ | 244,946 | |
Change in plan assets: | | | |
Fair value of plan assets, beginning of year | $ | 165,561 | | | $ | 73,114 | |
Acquisitions(1) | — | | | 72,263 | |
Actual return on plan assets | (6,557) | | | 5,665 | |
Employer contribution | 3,378 | | | 6,350 | |
Foreign exchange effect | (2,599) | | | (1,374) | |
Benefits paid | (1,854) | | | (7,122) | |
Divestitures(3) | (82,743) | | | — | |
Settlements(4) | — | | | 11,272 | |
Other | 2,510 | | | 5,393 | |
Fair value of plan assets, end of year | $ | 77,696 | | | $ | 165,561 | |
Funded status, end of year | $ | (17,379) | | | $ | (87,178) | |
(1) Acquisitions in the year ended December 31, 2021 relate to our acquisition of Mathys. See Note 5, “Acquisitions”, for further information.
(2) The actuarial gains for 2022 and 2021 are primarily due to the increases in discount rates in all markets.
(3) Divestitures are related to the Separation.
(4) Settlements includes $11.2 million classified as Pension settlement gain included in discontinued operations for the year ended December 31, 2021.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Expected contributions to the Company’s pension plans for the year ending December 31, 2023 are $3.3 million. The following benefit payments are expected to be paid during each respective fiscal year:
| | | | | | | | | |
| Pension Benefits | | |
| All Plans | | | |
| (In thousands) |
2023 | $ | 4,710 | | | | | |
2024 | 5,120 | | | | | |
2025 | 5,838 | | | | | |
2026 | 5,096 | | | | | |
2027 | 5,055 | | | | | |
2028 - 2031 | 28,098 | | | | | |
The Company’s primary investment objective for its pension plan assets is to provide a source of retirement income for the plans’ participants and beneficiaries. The assets are invested with the goal of preserving principal while providing a reasonable real rate of return over the long term. Diversification of assets is achieved through strategic allocations to various asset classes. Actual allocations to each asset class vary due to periodic investment strategy changes, market value fluctuations, the length of time it takes to fully implement investment allocation positions, and the timing of benefit payments and contributions. The asset allocation is monitored and rebalanced as required, as frequently as on a quarterly basis in some instances. The following are the actual and target allocation percentages for the Company’s pension plan assets:
| | | | | | | | | | | | | | | | | |
| Actual Asset Allocation December 31, | | Target |
| 2022 | | 2021 | | Allocation |
U.S. Plans:(1) | | | |
Equity securities: | | | | | |
U.S. | | | 45 | % | | |
International | | | 15 | % | | |
Fixed income | | | 38 | % | | |
Other | | | — | % | | |
Cash and cash equivalents | | | 1 | % | | |
Foreign Plans: | | | | | |
Equity securities | 35 | % | | 28 | % | | 25%-43% |
Fixed income securities | 27 | % | | 27 | % | | 24%-43% |
Cash and cash equivalents | 2 | % | | 2 | % | | 0%-10% |
Other | 36 | % | | 43 | % | | 25%-45% |
(1) As of December 31, 2022, all U.S. plans have been divested as a result of the Separation.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the Company’s pension plan assets for each fair value hierarchy level for the periods presented follows (see Note 17, “Financial Instruments and Fair Value Measurements”, for further description of the levels within the fair value hierarchy):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Measured at Net Asset Value | | Level One | | Level Two | | Level Three | | Total |
| (In thousands) |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Foreign Plans: | | | | | | | | | |
Cash and cash equivalents | $ | — | | | $ | 1,250 | | | $ | — | | | $ | — | | | $ | 1,250 | |
Equity securities | — | | | 27,074 | | | — | | | — | | | 27,074 | |
Non-U.S. government and corporate bonds | — | | | 21,224 | | | — | | | — | | | 21,224 | |
Other(1) | — | | | — | | | 28,148 | | | — | | | 28,148 | |
| $ | — | | | $ | 49,548 | | | $ | 28,148 | | | $ | — | | | $ | 77,696 | |
(1) Represents diversified portfolio funds, reinsurance contracts and money market funds.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Measured at Net Asset Value(1) | | Level One | | Level Two | | Level Three | | Total |
| (In thousands) |
U.S. Plans: | | | | | | | | | |
Cash and cash equivalents(2) | $ | — | | | $ | 1,699 | | | $ | — | | | $ | — | | | $ | 1,699 | |
Equity securities: | | | | | | | | | |
U.S. large cap | 52,810 | | | — | | | — | | | — | | | 52,810 | |
U.S. small/mid cap | 21,983 | | | 15,501 | | | — | | | — | | | 37,484 | |
International | 31,094 | | | — | | | — | | | — | | | 31,094 | |
Fixed income mutual funds: | | | | | | | | | |
U.S. government and corporate | 77,084 | | | — | | | — | | | — | | | 77,084 | |
Other(3) | — | | | 1,088 | | | — | | | — | | | 1,088 | |
Foreign Plans: | | | | | | | | | |
Cash and cash equivalents | — | | | 3,029 | | | — | | | — | | | 3,029 | |
Equity securities | — | | | 46,475 | | | — | | | — | | | 46,475 | |
Non-U.S. government and corporate bonds | — | | | 45,480 | | | — | | | — | | | 45,480 | |
Other(3) | — | | | — | | | 70,577 | | | — | | | 70,577 | |
| $ | 182,971 | | | $ | 113,272 | | | $ | 70,577 | | | $ | — | | | $ | 366,820 | |
(1) Certain investments that are measured at fair value using the NAV have not been classified in the fair value hierarchy. These investments, consisting primarily of common/collective trusts, are valued using the NAV provided by the Trustee. The NAV is based on the underlying investments held by the fund, that are traded in an active market, less its liabilities. These investments are able to be redeemed in the near-term.
(2) The weighted-average interest crediting rates received in Cash and cash equivalents of U.S plans are immaterial relative to total plan assets.
(3) Represents diversified portfolio funds, reinsurance contracts and money market funds.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table sets forth the components of Net periodic benefit (income) cost and Other comprehensive (gain) loss of the Company’s defined benefit pension plans and other post-retirement employee benefit plans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Post-Retirement Benefits |
| Year Ended December 31, | | Year Ended December 31, |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| (In thousands) |
Components of Net Periodic Benefit (Income) Cost: | | | | | | | | | | | |
Service cost | $ | 4,703 | | | $ | 3,719 | | | $ | 1,933 | | | $ | 4 | | | $ | 14 | | | $ | 8 | |
Interest cost | 1,821 | | | 4,642 | | | 7,454 | | | 61 | | | 189 | | | 313 | |
Amortization | 1,187 | | | 5,953 | | | 4,960 | | | (36) | | | (109) | | | (231) | |
Settlement (gain) loss | — | | | (11,157) | | | 99 | | | — | | | — | | | — | |
Other | (20) | | | 2 | | | 143 | | | — | | | — | | | — | |
Expected return on plan assets | (4,789) | | | (12,819) | | | (12,773) | | | — | | | — | | | — | |
Net periodic benefit (income) cost | $ | 2,902 | | | $ | (9,660) | | | $ | 1,816 | | | $ | 29 | | | $ | 94 | | | $ | 90 | |
Change in Plan Assets and Benefit Obligations Recognized in Other Comprehensive (Gain) Loss: | | | | | | | | | | | |
Current year net actuarial (gain) loss | $ | (14,728) | | | $ | (27,385) | | | $ | 10,379 | | | $ | — | | | $ | (651) | | | $ | 1,143 | |
Current year prior service cost | 221 | | | — | | | 74 | | | — | | | — | | | — | |
Less amounts included in net periodic benefit (income) cost: | | | | | | | | | | | |
Amortization of net (gain) loss | (1,135) | | | (5,899) | | | (4,914) | | | 36 | | | 109 | | | 231 | |
Settlement/divestiture/other gain | — | | | (51) | | | (177) | | | — | | | — | | | — | |
Amortization of prior service cost | (52) | | | (65) | | | (46) | | | — | | | — | | | — | |
Total recognized in Other comprehensive (gain) loss | $ | (15,694) | | | $ | (33,400) | | | $ | 5,316 | | | $ | 36 | | | $ | (542) | | | $ | 1,374 | |
Net periodic benefit (income) cost of $0.3 million, $(9.9) million, and $2.4 million, for the years ended December 31, 2022, 2021 and 2020, respectively are included in Income from discontinued operations. Each component of Net periodic benefit (income) cost from continuing operations is included in Selling, general and administrative expense.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table sets forth the components of Net periodic benefit (income) cost and Other comprehensive (gain) loss of the foreign defined benefit pension plans, included in the table above:
| | | | | | | | | | | | | | | | | |
| Foreign Pension Benefits |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In thousands) |
Components of Net Periodic Benefit (Income) Cost: | |
Service cost | $ | 4,703 | | | $ | 3,719 | | | $ | 1,933 | |
Interest cost | 897 | | | 1,741 | | | 2,315 | |
Amortization | 273 | | | 1,223 | | | 747 | |
Settlement (gain) loss | — | | | (11,157) | | | 99 | |
Other | (20) | | | 2 | | | 143 | |
Expected return on plan assets | (2,425) | | | (3,015) | | | (2,397) | |
Net periodic benefit (income) cost | $ | 3,428 | | | $ | (7,487) | | | $ | 2,840 | |
Change in Plan Assets and Benefit Obligations Recognized in Other Comprehensive (Gain) Loss: | | | | | |
Current year net actuarial (gain) loss | $ | (14,728) | | | $ | (7,577) | | | $ | 6,226 | |
Current year prior service cost | 221 | | | — | | | 74 | |
Less amounts included in net periodic benefit (income) cost: | | | | | |
Amortization of net (gain) loss | (221) | | | (1,169) | | | (701) | |
Settlement/divestiture/other gain | — | | | (51) | | | (177) | |
Amortization of prior service cost | (52) | | | (65) | | | (46) | |
Total recognized in Other comprehensive (gain) loss | $ | (14,780) | | | $ | (8,862) | | | $ | 5,376 | |
The components of net unrecognized pension and other post-retirement benefit cost included in Accumulated other comprehensive income (loss) in the Consolidated Balance Sheets that have not been recognized as a component of Net periodic benefit (income) cost are as follows:
| | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | | | Other Post-Retirement Benefits |
| December 31, | | | | December 31, |
| 2022 | | 2021 | | | | 2021 |
| (In thousands) |
Net actuarial loss (gain) | $ | (16,620) | | | $ | 72,612 | | | | | $ | (2,573) | |
Prior service cost | 488 | | | 412 | | | | | — | |
Total | $ | (16,132) | | | $ | 73,024 | | | | | $ | (2,573) | |
The key economic assumptions used in the measurement of the Company’s pension and other post-retirement benefit obligations are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Post-Retirement Benefits |
| December 31, | | December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Weighted-average discount rate: | | | | | | | |
All plans | 2.2 | % | | 1.7 | % | | — | % | | 2.6 | % |
Foreign plans | 2.2 | % | | 1.2 | % | | — | % | | — | % |
Weighted-average rate of increase in compensation levels for active foreign plans | 1.5 | % | | 0.9 | % | | — | % | | — | % |
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The key economic assumptions used in the computation of Net periodic benefit (income) cost are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Post-Retirement Benefits |
| Year Ended December 31, | | Year Ended December 31, |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Weighted-average discount rate: | | | | | | | | | | | |
All plans | 1.7 | % | | 1.7 | % | | 2.5 | % | | 2.6 | % | | 2.1 | % | | 3.0 | % |
Foreign plans | 1.2 | % | | 1.4 | % | | 1.9 | % | | — | % | | — | % | | — | % |
Weighted-average expected return on plan assets: | | | | | | | | | | | |
All plans | 4.3 | % | | 5.2 | % | | 5.7 | % | | — | % | | — | % | | — | % |
Foreign plans | 2.8 | % | | 3.6 | % | | 4.1 | % | | — | % | | — | % | | — | % |
Weighted-average rate of increase in compensation levels for active foreign plans | 1.7 | % | | 0.6 | % | | 0.8 | % | | — | % | | — | % | | — | % |
In determining discount rates, the Company utilizes the single discount rate equivalent to discounting the expected future cash flows from each plan using the yields at each duration from a published yield curve as of the measurement date.
The expected long-term rate of return on plan assets was based on the Company’s investment policy target allocation of the asset portfolio between various asset classes and the expected real returns of each asset class over various periods of time that are consistent with the long-term nature of the underlying obligations of these plans.
The Company maintains defined contribution plans for its employees. The Company’s expense in continuing operations for the years ended December 31, 2022, 2021 and 2020 was $6.6 million, $5.4 million and $4.8 million, respectively.
17. Financial Instruments and Fair Value Measurements
The Company utilizes fair value measurement guidance prescribed by accounting standards to value its financial instruments. The guidance establishes a fair value hierarchy based on the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
Level One: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
Level Two: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level Three: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The carrying values of financial instruments, including Trade receivables, other receivables and Accounts payable, approximate their fair values due to their short-term maturities. The estimated fair value of the Company’s debt of $0.3 billion and $2.1 billion as of December 31, 2022 and 2021, respectively, was based on current interest rates for similar types of borrowings and is in Level Two of the fair value hierarchy. 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 December 31, 2022, the Company held $22.8 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
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 year ended December 31, 2022, the company recorded contingent consideration of $20.1 million in conjunction with current acquisitions as well as an adjustment to reduce contingent consideration by $3.3 million from a prior acquisition, which was reflected in Selling, general and administrative expense in the Consolidated Statements of Operations. The gross range of outcomes for contingent consideration arrangements that have a fixed limit is zero to $11.7 million. There are two contingent consideration arrangements that have no limits and are based on a percentage of sales in excess of a benchmark over a one-year period and five-year period, respectively.
There were no other transfers in or out of Level One, Two or Three during the years ended December 31, 2022 and 2021.
A summary of the Company’s assets and liabilities that are measured at fair value on a recurring basis for each fair value hierarchy level for the periods presented is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Level One | | Level Two | | Level Three | | Total |
| (In thousands) |
Assets: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Deferred compensation plans | $ | — | | | $ | 10,324 | | | $ | — | | | $ | 10,324 | |
| $ | — | | | $ | 10,324 | | | $ | — | | | $ | 10,324 | |
| | | | | | | |
Liabilities: | | | | | | | |
| | | | | | | |
Foreign currency contracts - not designated as hedges | $ | — | | | $ | 35 | | | $ | — | | | $ | 35 | |
| | | | | | | |
| | | | | | | |
Deferred compensation plans | — | | | 10,324 | | | — | | | 10,324 | |
Contingent consideration | — | | | — | | | 22,808 | | | 22,808 | |
| | | | | | | |
| $ | — | | | $ | 10,359 | | | $ | 22,808 | | | $ | 33,167 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Level One | | Level Two | | Level Three | | Total |
| (In thousands) |
Assets: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Foreign currency contracts - not designated as hedges | $ | — | | | $ | 5 | | | $ | — | | | $ | 5 | |
| | | | | | | |
| | | | | | | |
Deferred compensation plans | — | | | 11,213 | | | — | | | 11,213 | |
| $ | — | | | $ | 11,218 | | | $ | — | | | $ | 11,218 | |
| | | | | | | |
Liabilities: | | | | | | | |
| | | | | | | |
Foreign currency contracts - not designated as hedges | $ | — | | | $ | 260 | | | $ | — | | | $ | 260 | |
| | | | | | | |
| | | | | | | |
Deferred compensation plans | — | | | 11,213 | | | — | | | 11,213 | |
| | | | | | | |
Contingent consideration | — | | | — | | | 5,000 | | | 5,000 | |
| $ | — | | | $ | 11,473 | | | $ | 5,000 | | | $ | 16,473 | |
Deferred Compensation Plans
The Company maintains deferred compensation plans for the benefit of certain employees and non-executive officers. As of December 31, 2022 and 2021, the fair values of these plans were $10.3 million and $11.2 million, respectively. These plans are deemed to be Level Two within fair value hierarchy.
Derivatives
The Company periodically enters into foreign currency derivative contracts. As the Company has manufacturing sites internationally in Europe, Africa, and Asia and sells its products globally, the Company is exposed to movements in the exchange rates of various currencies. As a result, the Company enters into foreign currency swaps and forward contracts to mitigate this exchange rate risk. As the Company’s borrowings under the Credit Facility include variable interest rates, the
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company may periodically enter into interest rate swap or collar agreements to mitigate interest rate risk. Commodity derivative contracts can be used to manage costs of raw materials used in the Company’s production processes. There were no changes during the periods presented in the Company’s valuation techniques used to measure asset and liability fair values on a recurring basis.
Foreign Currency Contracts
Foreign currency contracts are measured using broker quotations or observable market transactions in either listed or over-the-counter markets. The Company primarily uses foreign currency contracts to mitigate the risk associated with customer forward sale agreements denominated in currencies other than the applicable local currency, and to match costs and expected revenues where production facilities have a different currency than the selling currency.
As of December 31, 2022 and 2021, the Company had foreign currency contracts related to purchases and sales with notional values of $0.8 million and $7.6 million, respectively.
The Company recognized the following in its Consolidated Financial Statements related to its derivative instruments:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In thousands) |
Contracts Designated as Hedges: | | | | | |
| | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Unrealized gain (loss) on net investment hedges(1) | $ | — | | | $ | 23,247 | | | $ | (26,268) | |
Contracts Not Designated in a Hedge Relationship: | | | | | |
| | | | | |
| | | | | |
Foreign Currency Contracts: | | | | | |
Unrealized gain (loss) | (35) | | | (255) | | | — | |
Realized gain (loss) | (577) | | | (104) | | | — | |
| | | | | |
| | | | | |
| | | | | |
(1) The unrealized gain (loss) on net investment hedges is attributable to the change in valuation of Euro denominated debt. In 2022, the Euro denominated debt was extinguished upon the Separation.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. Concentrations of credit risk are considered to exist when there are amounts collectible from multiple counterparties with similar characteristics, which could cause their ability to meet contractual obligations to be similarly impacted by economic or other conditions. The Company performs credit evaluations of its customers prior to delivery or commencement of services and normally does not require collateral. Letters of credit are occasionally required when the Company deems necessary. There are no customers that represent more than 10% of the Company’s Accounts receivable, net as of December 31, 2022, 2021, and 2020.
18. Commitments and Contingencies
General Litigation
The Company is involved in various pending legal proceedings arising out of the ordinary course of the Company’s business. None of these legal 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 and the litigation and claims described in the preceding paragraphs, management of the Company believes that it will either prevail, has adequate insurance coverage or has established appropriate accruals to cover potential liabilities. Legal costs related to proceedings or claims are recorded when 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 legal 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.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Off-Balance Sheet Arrangements
As of December 31, 2022, the Company had $162.0 million of unconditional purchase obligations with suppliers, the majority of which is expected to be paid by December 31, 2023.
19. Segment Information
The Company conducts its continuing operations through the Prevention & Recovery and Reconstructive operating segments, which also represent the Company’s reportable segments.
• Prevention & Recovery - a leader in orthopedic solutions and recovery sciences, providing devices, software and services across the patient care continuum from injury prevention to rehabilitation after surgery, injury, or from degenerative disease.
•Reconstructive - 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.
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 from Net loss from continuing operations the effect of restructuring and certain other charges, MDR and related costs, acquisition-related intangible asset amortization and other non-cash charges, strategic transaction costs, stock-based compensation, insurance settlement gain, and inventory step-up charges from the operating income of the Company’s operating segments.
The Company’s segment results were as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In thousands) |
Net sales: | | | | | |
Prevention & Recovery | $ | 1,027,628 | | | $ | 1,026,029 | | | $ | 863,150 | |
Reconstructive | 535,473 | | | 400,159 | | | 257,550 | |
Total Net sales | $ | 1,563,101 | | | $ | 1,426,188 | | | $ | 1,120,700 | |
| | | | | |
Segment Adjusted EBITDA(1): | | | | | |
Prevention & Recovery | $ | 141,344 | | | $ | 133,500 | | | $ | 112,562 | |
Reconstructive | 94,726 | | | 72,496 | | | 48,973 | |
Total Adjusted EBITDA(1) | $ | 236,070 | | | $ | 205,996 | | | $ | 161,535 | |
| | | | | |
Depreciation, amortization and impairment | | | | | |
Prevention & Recovery | $ | 104,458 | | | $ | 97,898 | | | $ | 108,174 | |
Reconstructive | 98,507 | | | 89,091 | | | 59,729 | |
Total depreciation, amortization and impairment | $ | 202,965 | | | $ | 186,989 | | | $ | 167,903 | |
| | | | | |
Capital expenditures: | | | | | |
Prevention & Recovery | $ | 25,140 | | | $ | 19,514 | | | $ | 31,953 | |
Reconstructive | 74,407 | | | 49,077 | | | 42,671 | |
Total capital expenditures | $ | 99,547 | | | $ | 68,591 | | | $ | 74,624 | |
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(1) The following is a reconciliation of Income from continuing operations before income taxes to Adjusted EBITDA:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In thousands) |
Loss from continuing operations before income taxes (GAAP) | $ | (2,069) | | | $ | (121,781) | | | $ | (119,006) | |
Restructuring and other charges(1) | 18,960 | | | 13,914 | | | 23,314 | |
MDR and other costs(2) | 16,709 | | | 7,949 | | | 6,900 | |
Strategic transaction costs | 61,024 | | | 23,448 | | | 2,800 | |
Stock-based compensation | 31,493 | | | 25,737 | | | 22,500 | |
Depreciation and other amortization | 76,664 | | | 70,069 | | | 64,597 | |
Amortization of acquired intangibles | 126,301 | | | 116,920 | | | 103,306 | |
Insurance settlement gain(3) | (36,705) | | | — | | | — | |
Inventory step-up | 12,802 | | | 10,758 | | | 4,300 | |
Interest expense, net | 24,052 | | | 29,112 | | | 52,824 | |
Debt extinguishment charges | 20,396 | | | 29,870 | | | — | |
Gain on investment in ESAB Corporation | (102,669) | | | — | | | — | |
Gain on cost basis investment | (8,800) | | | — | | | — | |
Other income | (2,088) | | | — | | | — | |
Adjusted EBITDA (non-GAAP) | $ | 236,070 | | | $ | 205,996 | | | $ | 161,535 | |
(1) Restructuring and other charges includes $1.7 million, $5.2 million and $6.6 million of expense classified as Cost of sales on the Company’s Consolidated Statements of Operations for the years ended December 31, 2022, 2021 and 2020, respectively.
(2) Primarily related to costs specific to compliance with medical device reporting regulations and other requirements of the European Union MDR. These costs are classified as Selling, general and administrative expense on our Consolidated Statements of Operations.
(3) Insurance settlement gain is related to the 2019 acquisition of DJO.
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021(1) |
| (In thousands) |
Total assets: | | | |
Prevention & Recovery | $ | 2,470,917 | | | $ | 2,966,646 | |
Reconstructive | 1,802,331 | | | 1,854,603 | |
Total | $ | 4,273,248 | | | $ | 4,821,249 | |
(1) Represents assets from continuing operations including allocation of centrally managed cash and cash equivalents. Total assets related to discontinued operations was $3.7 billion.
The detail of the Company’s operations by geography is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In thousands) |
Net sales by origin(1): | | | | | |
United States | $ | 1,062,765 | | | $ | 1,030,440 | | | $ | 839,972 | |
Foreign locations | 500,336 | | | 395,748 | | | 280,728 | |
Total | $ | 1,563,101 | | | $ | 1,426,188 | | | $ | 1,120,700 | |
(1) The Company attributes revenues from external customers to individual countries based upon the country in which the sale was originated.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (In thousands) |
Property, plant and equipment, net(1): | | | |
United States | $ | 157,897 | | | $ | 153,073 | |
Switzerland | 41,113 | | | 47,721 | |
Germany | 16,450 | | | 15,440 | |
Mexico | 6,605 | | | 4,085 | |
Australia | 3,528 | | | 3,002 | |
Other foreign locations | 11,148 | | | 11,792 | |
Total | $ | 236,741 | | | $ | 235,113 | |
(1) As the Company does not allocate all long-lived assets (specifically intangible assets) to each individual country, evaluation of long-lived assets in total is impracticable.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
20. Selected Quarterly Data—(unaudited)
Provided below is selected unaudited quarterly financial data for the years ended December 31, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended |
| April 1, 2022 | | July 1, 2022(1) | | September 30, 2022(2) | | December 31, 2022(3) |
| (In thousands, except per share data) |
Net sales | $ | 375,457 | | | $ | 395,117 | | | $ | 383,814 | | | $ | 408,713 | |
Gross profit | 205,900 | | | 215,906 | | | 215,824 | | | 231,753 | |
Net income (loss) from continuing operations | (38,055) | | | 120,651 | | | (65,949) | | | (54,836) | |
Income (loss) from discontinued operations, net of taxes | 54,356 | | | (43,666) | | | (527) | | | 16,267 | |
Less: net income attributable to noncontrolling interest from continuing operations - net of taxes | 267 | | | 130 | | | 136 | | | 34 | |
Less: net income attributable to noncontrolling interest from discontinued operations - net of taxes | 966 | | | — | | | — | | | — | |
Net income (loss) attributable to Enovis Corporation | 15,068 | | | 76,855 | | | (66,612) | | | (38,603) | |
| | | | | | | |
Net income (loss) per share - basic | | | | | | | |
Continuing operations | $ | (0.76) | | | $ | 2.23 | | | $ | (1.22) | | | $ | (1.01) | |
Discontinued operations | $ | 1.04 | | | $ | (0.81) | | | $ | (0.01) | | | $ | 0.30 | |
Consolidated operations | $ | 0.28 | | | $ | 1.42 | | | $ | (1.23) | | | $ | (0.71) | |
| | | | | | | |
Net income (loss) per share - diluted | | | | | | | |
Continuing operations | $ | (0.76) | | | $ | 2.21 | | | $ | (1.22) | | | $ | (1.01) | |
Discontinued operations | $ | 1.04 | | | $ | (0.80) | | | $ | (0.01) | | | $ | 0.30 | |
Consolidated operations | $ | 0.28 | | | $ | 1.41 | | | $ | (1.23) | | | $ | (0.71) | |
(1) The results for the quarter ended July 1, 2022 include the impact of a $135.5 million gain on the Company’s investment in ESAB, an insurance settlement gain of $33.0 million and debt extinguishment charges of $20.1 million.
(2) The results for the quarter ended September 30, 2022 include the impact of a $63.1 million loss on the Company’s investment in ESAB and an $8.8 million gain on the Company’s investment in Insight.
(3) The results for the quarter ended December 31, 2022 include income tax expense of $52.3 million which includes tax impacts associated with transaction costs, a $30.3 million gain on the Company’s investment in ESAB, and an insurance settlement gain of $4.6 million.
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended |
| April 2, 2021 | | July 2, 2021(1) | | October 1, 2021 | | December 31, 2021 |
| (In thousands, except per share data) |
Net sales | $ | 311,083 | | | $ | 356,124 | | | $ | 359,923 | | | $ | 399,058 | |
Gross profit | 171,282 | | | 200,593 | | | 197,876 | | | 207,924 | |
Net loss from continuing operations | (31,854) | | | (42,127) | | | (13,578) | | | (14,694) | |
Income from discontinued operations, net of taxes
| 52,094 | | | 71,829 | | | 40,435 | | | 14,173 | |
Less: net income attributable to noncontrolling interest from continuing operations - net of taxes | 290 | | | 355 | | | 191 | | | 216 | |
Less: net income attributable to noncontrolling interest from discontinued operations - net of taxes | 876 | | | 705 | | | 818 | | | 1,170 | |
Net income (loss) attributable to Enovis Corporation | 19,074 | | | 28,642 | | | 25,848 | | | (1,907) | |
| | | | | | | |
Net income (loss) per share - basic | | | | | | | |
Continuing operations | $ | (0.69) | | | $ | (0.83) | | | $ | (0.26) | | | $ | (0.28) | |
Discontinued operations | $ | 1.10 | | | $ | 1.39 | | | $ | 0.75 | | | $ | 0.24 | |
Consolidated operations | $ | 0.41 | | | $ | 0.56 | | | $ | 0.49 | | | $ | (0.04) | |
| | | | | | | |
Net income (loss) per share - diluted | | | | | | | |
Continuing operations | $ | (0.69) | | | $ | (0.83) | | | $ | (0.26) | | | $ | (0.28) | |
Discontinued operations | $ | 1.10 | | | $ | 1.39 | | | $ | 0.75 | | | $ | 0.24 | |
Consolidated operations | $ | 0.40 | | | $ | 0.56 | | | $ | 0.49 | | | $ | (0.04) | |
(1) The results for the quarter ended July 2, 2021 include a $29.9 million impact from debt extinguishment charges.