PART I
Item 1. Business
General
On April 4, 2022, we completed the separation of the last of our industrial businesses, the fabrication technology business, through a tax-free, pro-rata distribution of 90% of the outstanding common stock of ESAB Corporation (“ESAB”) to Colfax stockholders. Prior to the Separation, we were a leading diversified industrial technology company that provides airprovided fabrication technology and gas handling and fabrication technologymedical device products and services to customers around the world, principally under the HowdenESAB and DJO Brands. To affect the Separation, we distributed to our stockholders one share of ESAB brands. Thecommon stock for every three shares of Colfax common stock held at the close of business on March 22, 2022, with the Company has been builtretaining 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 and began trading under the stock symbol “ENOV” on the New York Stock Exchange on April 5, 2022. Immediately following the Separation, the Company effected a one-for-three reverse stock split of all issued and outstanding shares of Enovis common stock. Following the the completion of the Separation, the Company revised its reporting structure and conducts its business through a series of acquisitions, as well as organic growth, since its foundingtwo operating segments, “Prevention & Recovery” and “Reconstructive”.
We divested our remaining 10% ownership stake in 1995. We seek to build an enduring premier global enterpriseESAB on November 18, 2022 by applying the Colfax Business System (“CBS”) to pursue growth in revenues and improvements in profit and cash flow.
Each year, ColfaxEnovis associates in every business develop aggressive strategic and operating plans whichthat are based on the principle of the Voice of the Customer. In these plans, we are clear about our market realities, our threats, our risks, our opportunities and, most importantly, our vision. Our belief is that when we use the tools of CBSEGX to drive the implementation of these plans, we are able to uniquely provide customers with the world classworld-class quality, delivery, cost and innovation they require. We believe that performance ultimately helps our customers and ColfaxEnovis sustainably grow and succeed.
The COVID-19 pandemic has caused economic disruptions since its emergence in 2020. The emergence of variants and outbreaks have continued to cause some volatility which slowed the pace of recovery in 2022. The pandemic and actions taken in response to it, as well as other market dynamics in recent periods, have had a variety of impacts on our results of operations during the periods presented, including adverse impacts on sales levels. We continue to experience cost inflation, supply chain challenges, such as logistics delays, as well as staffing shortages experienced by our customers (healthcare providers) that continue to reduce capacity and procedures. We are taking actions in an effort to mitigate impacts to our supply chain, including purchasing and producing additional inventory to protect our ability to meet customer demand; however, we expect these pressures to continue. In addition, there may be developments outside our control that require us to further adjust our operations. Given the potential dynamic nature of this situation, including the rise, prevalence and severity of variants of the
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virus, we cannot reasonably estimate the full impacts of COVID-19 on our financial condition, results of operations or cash flows in the future.
Reportable Segments
We report our operations through the AirPrevention & Recovery and Gas Handling and Fabrication TechnologyReconstructive segments. For certain financial information, including Net sales and long-lived assets by geographic area, see Note 17, “Segment Information” in the accompanying Notes to Consolidated Financial Statements in this Form 10-K.
We formulate, develop, manufacture and supply consumable productsdistribute high-quality medical devices and equipment for use inservices across the cutting, joining and automated weldingcontinuum of steels, aluminum and other metals and metal alloys. For the year ended December 31, 2017, welding consumables represented approximately 42% of our total Net sales. Our fabrication technology products are marketed under several brand names, most notably ESAB, which we believe is well known in the international welding industry. ESAB’s comprehensive range of welding consumables includes electrodes, cored and solid wires and fluxes usingpatient care from injury prevention to joint replacement to rehabilitation after surgery, injury or from degenerative disease, enabling people to regain or maintain their natural motion. We reach a wide range of specialty and other materials, and cutting consumables includes electrodes, nozzles, shields and tips. ESAB’s fabrication technology equipment ranges from portable welding machines to large customized automated cutting and welding systems. Products are sold into a wide range of end markets, including infrastructure, wind power, marine, pipelines, mobile/off-highway equipment, oil, gas, and mining. Our salesdiverse customer base through multiple distribution channels, that include both independent distributors and direct salespeople, depending on geography and end market.provide a wide range of medical devices and related products to orthopedic specialists and other healthcare professionals operating in a variety of patient treatment settings and to retail consumers.
Prevention & Recovery
Our Prevention & Recovery segment includes products that are used by orthopedic specialists, surgeons, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers and other healthcare professionals to treat patients with musculoskeletal conditions resulting from degenerative diseases, deformities, traumatic events and sports-related injuries. In addition, many of our non-surgical medical devices and related accessories are used by athletes and patients for injury prevention and at-home physical therapy treatment. Our Prevention & Recovery product lines include rigid and soft orthopedic bracing, hot and cold therapy, bone growth stimulators, vascular therapy systems and compression garments, therapeutic shoes and inserts, electrical stimulators used for pain management and physical therapy products.
Reconstructive
Our Reconstructive segment is an innovation-driven leader offering a comprehensive suite of reconstructive joint products for the hip, knee, shoulder, elbow, foot, ankle, and finger and surgical productivity tools.
The following discussions of Industry and Competition, International Operations, Research and Development, Intellectual Property, Raw Materials and Backlog, Seasonality, Working Capital, Associates and Company Information and Access to SEC Reports includediscussion includes information that is common to both of our reportable segments, unless indicated otherwise.
Industry and Competition
Our productsPrevention & Recovery segment generates approximately 67% of its revenues in the U.S. and services are marketed worldwide.the majority of the remaining balance in Europe. The markets served byin which our Air and Gas Handling segment are fragmented and competitive. Because we compete in selected niches of these markets and due to the diversity of our products and services, no single company competes directly with us across all our markets. We encounter a wide variety of competitors that differ by product line, including well-established regional competitors, competitors with greater specialization in particular markets, as well as larger competitors. The markets that our Fabrication TechnologyPrevention & Recovery segment competes in are also served by Lincoln Electrichighly competitive and the welding business within Illinois Tool Works, Inc.
Our Reconstructive segment generates approximately 69% of its revenues in the U.S. and the majority of the remaining balance in Europe. The markets in which our Reconstructive segment competes are highly competitive and fragmented. We believe the principal elements of competition are innovation to create better patient outcomes, product quality, product reliability, brand names, and price. We compete in the Reconstructive segment with large companies that have significantly greater financial, marketing and other resources than we do, as well as numerous smaller niche companies. Key competitors competitors for our Reconstructive segment include Stryker, Zimmer Biomet, and DePuy Synthes, the medical device business within Johnson & Johnson.
Given our history of innovation and the experience of our management team, we are capable of effectively competing in our markets. The comprehensive range of products we offer enables us to reach a diverse customer base through multiple distribution channels with numerous opportunities to increase our growth across our markets. Our management believes that we are a leading competitor in each of our markets.markets with leading and well-recognized brands.
International Operations
Our productsprincipal market for our Prevention & Recovery and services are available worldwide. We believe this geographic diversity allows us to draw on the skills of a global workforce, provides stability to our operations, allows us to drive economies of scale, provides revenue streams that may offset economic trends in individual economies and offers an opportunity to access new markets for products. In addition, we believe that our exposure to developing economies will provide additional opportunities for growth in the future. Our principal marketsReconstructive segments outside the U.S. are in Europe, Asia, the Middle East and South America.is Europe. For the year ended December 31, 2017,2022, approximately 78%32% of our Net sales were shipped to locationsderived from operations outside of the U.S., the majority of which is in Europe with approximately 51.2% shipped to locationsthe remaining portion mostly in emerging markets.the Asia-Pacific region.
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Our international operations subject us to certain risks. See Part I. Item 1A. “Risk Factors—Risks Related to Our Business— and Operations”. The majority of our sales are derived from international operations. We are subject to specific risks associated with international operations.”
Research and Development
Our research and development activities vary by operating segment, focusing on innovation; developing new products, software and services;services, as well as the enhancement of existing products with the latest technology and updated designs; creating new applications for existing products; lowering the cost of manufacturing our existing products; and redesigning existing product lines to increase efficiency, improve durability, enhance performance and enhance performance.usability.
Intellectual Property
We rely on a combination of intellectual property rights, including patents, trademarks, copyrights, trade secrets and contractual provisions to protect our intellectual property.property both in the U.S. and around the world for both segments. Although we highlight recent additions to our patent portfolio as part of our marketing efforts, we do not consider any one patent or trademark or any group thereof essential to our business as a whole or to any of our business operations. We also rely on proprietary product knowledge and manufacturing processes in our operations. We do not rely solely on our patents and other intellectual property rights to maintain our competitive position. We believe that the development and marketing of new products and improvement of existing ones is, and will continue to be, more important to our competitive position than relying solely on existing products and intellectual property.
Raw Materials and Backlog
We obtain raw materials, component parts and supplies from a variety of global sources, generally each from more than one supplier. Our principal raw materials and components for our Prevention & Recovery segment are metals, castings, motors, sealsethylene-vinyl acetate copolymer form for our bracing and bearings.vascular products. Our principal raw materials and components for our Reconstructive segment are cobalt-chromium alloy, stainless steel alloys, titanium alloy and ultra-high molecular weight polyethylene for our surgical implant products. Recent global supply chain issues have created challenges in acquiring certain raw materials, component parts and supplies; however, our general use of more than one supplier for these helps to mitigate the risk of shortages or delays in the global supply chain. Refer to the Risk Factor captioned “We are dependent on the availability of raw materials, as well as parts and components used in our products,” for more information on this risk. We believe that our sources of raw materials are adequate for our needs for the foreseeable future and the loss of any one supplier would not have a material adverse effect on our business or results of operations.
Our sales typically peak in the fourth quarter; however, the business impact caused by the COVID-19 pandemic has distorted the effects of historical seasonality patterns.
Regulatory Environment
U.S. Food and Drug Administration Regulation
In the United States, our products generally are subject to regulation by the FDA as medical devices pursuant to the Federal Food Drug and Cosmetic Act (the “FDCA”). The FDA regulates the development, design, non-clinical and clinical research, manufacturing, safety, efficacy, labeling, packaging, storage, installation, servicing, recordkeeping, premarket clearance or approval, adverse event reporting, advertising, promotion, marketing and distribution, and import and export of medical devices to ensure that medical devices distributed domestically are safe and effective for their intended uses and otherwise meet the requirements of the FDCA.
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FDA Premarket Clearance and Approval Requirements
Unless an exemption applies, each medical device commercially distributed in the United States requires either FDA clearance of a 510(k) premarket notification, grant of a de novo application, or approval of a premarket approval (“PMA”). Under the FDCA, medical devices are classified into either Class I, Class II or Class III, depending on the degree of associated risk and the extent of manufacturer and regulatory control needed to ensure safety and effectiveness. Class I includes devices with the lowest patient risk and are those for which safety and effectiveness can be assured by adherence to the FDA’s general controls for medical devices, including compliance with applicable portions of the Quality System Regulation (“QSR”) facility registration and product listing, reporting of adverse medical events, and truthful and non-misleading labeling, advertising, and promotional materials. Class II devices are subject to the FDA’s General Controls, and special controls as deemed necessary by the FDA to ensure safety and effectiveness. Special controls can include performance standards, post-market surveillance, patient registries and FDA guidance documents.
While most Class I devices are exempt from 510(k) premarket notification, most Class II device manufacturers must submit to the FDA a premarket notification under Section 510(k) of the FDCA requesting permission for commercial distribution. Permission for commercial distribution subject to a 510(k) premarket notification is generally known as 510(k) clearance. Devices deemed by the FDA to pose the greatest risks, such as life sustaining, life supporting or some implantable devices, devices that have a new intended use, or that use advanced technology not substantially equivalent to that of a legally marketed device, are placed in Class III, requiring approval of a PMA. Some pre-amendment devices are unclassified but subject to FDA’s premarket notification and clearance process in order to be commercially distributed.
510(k) Clearance Marketing Pathway
Many of our current products are subject to premarket notification and clearance. To obtain 510(k) clearance, we must submit to the FDA a premarket notification submission demonstrating that the proposed device is “substantially equivalent” to a predicate marketed device. A predicate device is a legally marketed device not subject to PMA, i.e., that (i) was legally marketed prior to May 28, 1976 (pre-amendments device) and for which a PMA is not required, (ii) has been reclassified from Class III to Class II or I, or (iii) was found substantially equivalent through the 510(k) process. The FDA’s 510(k) clearance process usually takes from three to twelve months, but often takes longer. The FDA may require additional information, including clinical data, to make a determination regarding substantial equivalence. In addition, the FDA collects user fees for certain medical device submissions and annual fees for medical device establishments.
If the FDA agrees that the device is substantially equivalent to a predicate device currently on the market, it will grant 510(k) clearance to commercially market the device. If the FDA determines that the device is “not substantially equivalent” to a previously cleared device, the device is automatically designated as a Class III device. The device sponsor must then fulfill more rigorous PMA requirements, or a risk-based classification determination can be requested for the device in accordance with the “de novo” process, a route to market for novel medical devices that are low to moderate risk and not substantially equivalent to a predicate.
After a device receives 510(k) marketing clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change or modification in its intended use, will require either a new clearance or PMA approval. The FDA requires each manufacturer to determine whether a proposed change requires submission of a 510(k) or a PMA in the first instance, but the FDA can review any such decision and disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or request the recall of the modified device until clearance or PMA approval is obtained. The manufacturer may also be subject to significant regulatory fines or penalties.
De Novo Classification
Devices of a new type that FDA has not previously classified based on risk are automatically classified into Class III, regardless of the level of risk they pose. To avoid requiring PMA review of low- to moderate-risk devices classified in Class III by operation of law, Congress enacted a provision allowing FDA to classify a low- to moderate-risk device not previously classified into Class I or II. After de novo authorization, an authorized device may be used as a predicate for future devices going through the 510(k) process.
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PMA Approval Pathway
Class III devices require approval of a PMA before they can be marketed, although some pre-amendment Class III devices for which the FDA has not yet required a PMA are cleared through the 510(k) process. The PMA process is more demanding than the 510(k) process. In a PMA application, the manufacturer must demonstrate that the device is safe and effective, and the PMA application must be supported by extensive data, including data from preclinical studies and human clinical trials. The FDA will approve the device for commercial distribution if it determines that the data and information in the PMA application constitute valid scientific evidence and that there is reasonable assurance that the device is safe and effective for its intended use(s).
Clinical Trials
Clinical trials are almost always required to support a PMA and are sometimes required to support a 510(k) submission. All clinical investigations of devices to determine safety and effectiveness must be conducted in accordance with the FDA’s Investigational Device Exemption (“IDE”) regulations, which govern investigational device labeling, prohibit promotion of the investigational device, and specify an array of recordkeeping, reporting and monitoring responsibilities of study sponsors and study investigators. If the device presents a “significant risk” to human health, the FDA requires the device sponsor to submit an IDE application to the FDA, which must become effective prior to commencing human clinical trials. A significant risk device is one that presents a potential for serious risk to patient health, safety, or welfare and is implanted, used in supporting or sustaining human life, substantially important in diagnosing, curing, mitigating or treating disease or otherwise preventing impairment of human health, or otherwise presents a potential for serious risk to a subject. An IDE application must be supported by appropriate data, such as animal and laboratory test results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. An IDE will automatically become effective 30 days after the FDA’s receipt unless the FDA notifies the company that the investigation may not begin. If the FDA finds deficiencies or other concerns with an IDE for which it requires modification, the FDA may permit a clinical trial to proceed under a conditional approval.
During a study, the sponsor must comply with applicable FDA requirements, including, for example, trial monitoring, selecting clinical investigators and providing them with the investigational plan, ensuring Institutional Review Board (“IRB”) review, adverse event reporting, record keeping, and prohibitions on the promotion of investigational devices or on making safety or effectiveness claims for them. The clinical investigators are also subject to FDA regulations and must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of the investigational device, and comply with all reporting and recordkeeping requirements. Additionally, after a trial begins, we, the FDA, or the IRB could suspend or terminate a clinical trial at any time for various reasons, including a belief that risks outweigh anticipated benefits.
Post-market Regulation
After a device is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply. These include:
•establishment registration and device listing with the FDA;
•QSR requirements, which require manufacturers to follow stringent design, testing, control, documentation and other quality assurance procedures during the design and manufacturing process;
•labeling regulations and FDA prohibitions against the promotion of investigational products, or the promotion of “off-label” uses of cleared or approved products;
•requirements related to promotional activities;
•clearance or approval of product modifications to 510(k)-cleared devices that could significantly affect safety or effectiveness or that would constitute a major change in intended use of cleared devices, or approval of certain modifications to PMA-approved devices;
•medical device reporting regulations, which require that a manufacturer report to the FDA if a device it markets may have caused or contributed to a death or serious injury, or has malfunctioned and the device or a similar device that it markets would be likely to cause or contribute to a death or serious injury, if the malfunction were to recur;
•correction, removal and recall reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health or to remedy a violation of the FDCA that may present a risk to health;
•the FDA’s recall authority, whereby the agency can order device manufacturers to recall from the market a product that violates governing laws and regulations; and
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•post-market surveillance activities and regulations, which apply when deemed by the FDA to be necessary to protect the public health or to provide additional safety and effectiveness data for the device.
Our failure to maintain compliance with FDA regulatory requirements could result in the shut-down of, or restrictions on, our Airmanufacturing operations and Gas Handling operating segment is generally sufficiently short to allow us to manufacture to order for mostthe recall or seizure of our products, which helpswould have a material adverse effect on our business.
The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that we failed to comply with applicable regulatory requirements, it can take a variety of compliance or enforcement actions, which may result in untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties, unanticipated expenditures to address or defend such actions, customer notifications or repair, replacement, refunds, recall, detention or seizure of our products, operating restrictions, partial suspension or total shutdown of production, refusing or delaying our requests for regulatory approvals or clearances of new products or modified products, withdrawing a PMA that has already been granted, refusal to grant export approval for our products, or criminal prosecution.
Regulation of Medical Devices in the EU
In the EU, our products generally are regulated as medical devices under Regulation (EU) 2017/745 (“MDR”), which as of May 2021 repealed and replaced the Medical Devices Directive (93/42/EEC) (“MDD”). Each EU Member State enforces the MDR’s requirements against manufacturers, importers, authorized representatives and distributors, among others, that place or make medical devices available in the EU market. The MDR also includes provisions for national authorities to inform other competent authorities, the European Commission (the “EC”), and certain other bodies of certain non-compliance.
Under the MDR, a medical device placed on the EU market must meet applicable General Safety and Performance Requirements (“GSPRs”), including that the device’s risks to patient condition or safety or to the safety and health of others must not outweigh its benefits. Other GSPRs include requirements that the device must achieve the manufacturer’s intended performance and be designed, manufactured and packaged in a suitable manner, and that the manufacturer must establish, implement, document and maintain a risk management plan. To demonstrate GSPR compliance, manufacturers must undergo a conformity assessment procedure that varies by medical device type and classification. These procedures require an assessment of available clinical evidence, literature data, and post-market experience in respect of similar marketed products.
For all devices other than low risk devices, a conformity assessment procedure requires the involvement of a notified body to audit and examine technical documentation and the manufacturer’s quality management system. If satisfied that the product conforms to the relevant GSPR and the company has an MDR-compliant quality management system meeting, the notified body issues a CE Certificate of Conformity, which the manufacturer uses as a basis for its own declaration of conformity. The manufacturer may then affix the CE mark to the device, which affirms conformity with applicable requirements and allows the device to be placed on the market throughout the EU.
Once a device is placed on the market in the EU, strict post-marketing obligations apply, including requirements to maintain post-market surveillance and vigilance systems, to report serious incidents and field safety corrective actions, and to submit periodic safety update reports or post-market surveillance reports. Authorities in the EU closely monitor the marketing programs implemented by device companies. The MDR prohibits making misleading claims, including promoting the product for or suggesting a use that is not part of its intended purpose.
Although the MDR now applies in the EU, transitional provisions apply to legacy devices CE marked under the MDD. During a transitional period, certificates issued for medical devices under the MDD before May 26, 2021 remain valid until the earlier of the expiry date indicated on the Certificate of Conformity and May 27, 2024. So long as there are no significant changes in the design and intended purpose of these devices, and provided that the manufacturer comply with MDR provisions regarding vigilance, post-market surveillance and registration of economic operators and medical devices, such devices can continue to be marketed in the EU until a revised EU MDR deadline in 2026. We are actively working toward being MDR-compliant and interactions with our notified body are underway. Because of the permitted transitional periods, our medical devices will require recertification prior to the dates on which the Certificates of Conformity under the MDD become void.
Regulation of Medical Devices in the United Kingdom
In the United Kingdom, medical devices are regulated under the largely MDD-derived Medical Devices Regulations 2002 (“UK MDR 2002”). The UK route to market and UK Conformity Assessed (“UKCA”) marking requirements are thus based on
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the requirements derived from EU legislation, although the MDR does not apply in the UK. All medical devices must be registered with the UK Medicines and Healthcare Products Regulatory Agency (“MHRA”) before being placed on the UK market, and must conform to the UK MDR 2002 in order to be registered with the MHRA. In addition, devices that have been CE marked under the MDD will continue to be accepted on the UK market until June 30, 2024. Although the MDR is not directly applicable in the UK, medical devices validly CE marked in accordance with the MDR can also be marketed in the UK. From July 2024, devices that are placed on the Great Britain market will need to conform with UKCA marking requirements unless specific transitional provisions apply (this is likely to be the case for products CE marked in the EU according to the MDR). The UKCA marking is a UK product marking used for certain goods, including medical devices, being placed on the UK market. For the purposes of the UKCA marking, a UK Approved Body must be used in cases where third party conformity assessment is required.
Other Healthcare Laws
Third-party Coverage and Reimbursement
Sales of our medical device products depend largely on whether there is coverage and adequate reimbursement by government healthcare programs, such as Medicare and Medicaid, and by private payors.
Third-party payors review their coverage policies carefully and can, without notice, reduce or eliminate reimbursement. For instance, they may attempt to control costs by (i) authorizing fewer elective surgical procedures, (ii) requiring the use of the least expensive product available, (iii) reducing the reimbursement for, or limiting the number of, authorized visits for rehabilitation procedures, (iv) bundling reimbursement for all services related to an episode of care, or (v) otherwise restricting coverage or reimbursement of our medical device products or procedures using these products. Further, payors may require additional evidence, beyond the data required for FDA marketing authorization, to demonstrate that a device should be covered for a particular indication or reimbursed at a higher rate than other technologies.
Medicare payment for Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (“DMEPOS”) also can be impacted by the DMEPOS competitive bidding program, under which Medicare rates are based on bid amounts for certain products in designated geographic areas, rather than the Medicare fee schedule amount. Only those suppliers selected through the competitive bidding process within each designated competitive bidding area are eligible to have their products reimbursed by Medicare. The Centers for Medicare & Medicaid Services also has adopted regulations to adjust national DMEPOS fee schedules to take into account competitive bidding pricing.
Each payor has a unique process for determining whether to cover a device for a particular indication and how to set reimbursement rates for the device. However, because many private payors model their coverage and reimbursement policies on Medicare, other third-party payors’ coverage of, and reimbursement for, our medical device products also could be negatively impacted by legislative, regulatory or other measures that restrict Medicare coverage or reduce Medicare reimbursement.
Additionally, federal and state legislatures and regulators have periodically considered proposals to limit inventory levels. Backlog is primarilywhich orthopedic professionals can fit or sell our orthotic products or can seek reimbursement for them. Several states have adopted legislation imposing certification or licensing requirements on the measuring, fitting, and adjusting of certain orthotic devices, and additional states may do so in the future. Some of these state laws do not exempt manufacturers’ representatives. In addition, legislation has been adopted, but not yet implemented, requiring certain certification or licensing for individuals and suppliers furnishing certain custom-fabricated orthotic devices as a functioncondition of requested customer delivery datesMedicare payment. Medicare currently follows state policies in those states that require the use of an orthotist or prosthetist for furnishing of orthotics or prosthetics.
International sales of medical device products also depend in part upon the coverage and generally ranges from several dayseligibility for reimbursement through government-sponsored healthcare payment systems and third-party payors, the amount of reimbursement, and the cost allocation of payments between the patient and government-sponsored healthcare payment systems and third-party payors. Coverage and reimbursement practices vary significantly by country, with certain countries requiring products to less than 12 months; althoughundergo a lengthy regulatory review in order to be eligible for third-party coverage and reimbursement. In addition, healthcare cost containment efforts similar to those we face in the United States are prevalent in many of the countries in which our products are sold, and these efforts are expected to continue in the future, possibly resulting in the adoption of more stringent reimbursement standards. In order to obtain reimbursement in some ordersEuropean Economic Area (“EEA”), countries, we may be delivered beyond 12 months. Backlogrequired to compile additional data comparing the cost-effectiveness of airour products to other available therapies. Health Technology Assessment (“HTA”) of both medicinal products and gas handlingmedical devices is becoming an increasingly common part of
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pricing and reimbursement procedures in some EEA countries. The HTA process, which is currently governed by national laws in each EEA country, is the assessment of therapeutic, economic, and societal impact of a medical product in the country. The outcome of an HTA will often influence pricing and reimbursement status. The extent to which pricing and reimbursement decisions are influenced by the HTA currently varies between EEA countries. However, a new EU HTA regulation applicable to all EEA countries beginning in January 2025 aims to harmonize the clinical benefit assessment of HTA across the EEA and provides the basis for cooperation at the EEA level for joint clinical assessments.
Healthcare Reform
In the United States, there have been and continue to be legislative, regulatory, and other initiatives to contain healthcare costs or establish other policy that have affected and could adversely affect our business. For example, the U.S. Patient Protection and Affordable Care Act (“ACA”), enacted in 2010, was a sweeping measure generally designed to expand access to affordable health insurance, control health care spending, and improve health care quality. Several ACA provisions specifically affect the medical equipment industry. Among other things, the ACA established enhanced Medicare and Medicaid program integrity provisions, including expanded documentation requirements for Medicare DMEPOS orders, asmore stringent procedures for screening Medicare and Medicaid DMEPOS suppliers, and new disclosure requirements regarding manufacturer payments to physicians and teaching hospitals, along with broader expansion of December 31, 2017 was $0.9 billion, compared with $0.8 billion as of December 31, 2016. A substantial majorityfederal fraud and abuse authorities.
Some of the airACA’s provisions, or its implementing regulations, have been subject to judicial challenges as well as efforts to modify them or alter their interpretation or implementation. For example, the Tax Cuts and gas handlingJobs Act of 2017 eliminated the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year. Future efforts to modify or invalidate the ACA or its implementing regulations, or portions thereof, remain possible and could affect our business. We cannot predict what effect further changes related to the ACA would have on our business.
Other legislative changes have been proposed and adopted since the ACA was enacted. The Budget Control Act of 2011 among other things resulted in aggregate reductions to Medicare payments to providers of, on average, 2% per fiscal year through the first half of fiscal year 2031 (with the exception of a temporary suspension from May 2020 through March 2022, and a reduction to 1% thereafter through June 2022 due to the COVID-19 pandemic). These cuts could adversely affect payment for any products we may commercialize in the future. Many states have adopted or are considering policies to reduce Medicaid spending as a result of state budgetary shortfalls, which in some cases include reduced reimbursement for DMEPOS items and/or other Medicaid coverage restrictions.
Additionally, changes in federal laws, regulations, and guidance can affect state policy. For instance, the 21st Century Cures Act prohibits federal financial participation payments to states for certain Medicaid DME spending that exceeds what Medicare would have paid for such items. Any modification or repeal of any provisions of the ACA, or its implementing regulations, may require states to modify their own laws and regulations. As states continue to face significant financial pressures, it is possible that states will amend existing laws and regulations or enact new laws or promulgate new regulations aimed at controlling costs or otherwise changing applicable policy, any of which could adversely affect our profitability.
Fraud and Abuse Laws
We are subject to various federal, state and foreign laws and regulations pertaining to healthcare fraud and abuse, including false claims, self-referrals, anti-kickback laws, physician payment transparency laws, and other health care laws and regulations. In particular, the promotion, sales, and marketing of health care items and services is subject to extensive laws and regulations designed to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive and other business arrangements and include the following:
•The U.S. federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind to return for patient referrals or to induce or in return for purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order backlog as of December 31, 2017 is expectedany good, facility, item or service reimbursable, in whole or in part, under Medicare, Medicaid or other federal health care programs. The term “remuneration” has been broadly interpreted to include anything of value. Although a number of statutory exceptions and regulatory safe harbors protect some common activities from prosecution, they are narrow. Practices that may be alleged to be filledintended to induce purchases or recommendations, including any payments of more than fair market value, may be
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subject to scrutiny if they do not qualify for an exception or safe harbor. A person or entity does not need to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation.
•The U.S. federal civil False Claims Act prohibits, among other things, any person or entity from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment of federal funds or knowingly making or causing to be made a false statement to improperly avoid, decrease or conceal an obligation to pay money to the federal government. The government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. The False Claims Act also permits a private individual acting as a “whistleblower” to bring actions on behalf of themselves and the federal government alleging violations of the statute and to share in any monetary recovery.
•The U.S. civil monetary penalties statute prohibits, among other things, the offer or transfer of remuneration, including waivers of copayments and deductible amounts (or any part thereof), to a Medicare or state healthcare program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of services reimbursable by Medicare or a state healthcare program, subject to certain exceptions.
•The U.S. Physician Self-Referral Law, commonly referred to as the Stark law, prohibits physicians from referring patients to receive certain “designated health services” payable by Medicare or Medicaid, including DMEPOS products and supplies, from entities with which the physician or an immediate family member has a financial relationship, unless an exception applies.
•The healthcare fraud provisions under the U.S. federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) impose criminal liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors, or to obtain, by means of false or fraudulent pretenses, representations, or promises, any money or property owned by, or under the custody or control of, any health care benefit program, including private third-party payors. Similar to the federal Anti-Kickback Statute, a violation does not require actual knowledge of the statute or specific intent.
•The U.S. Physician Payments Sunshine Act imposes reporting and disclosure requirements on device manufacturers with respect to ownership and investment interests by physicians and members of their immediate family as well as certain payments or other “transfers of value” made to physicians, certain non-physician practitioners and teaching hospitals.
•State and foreign equivalents of each of the health care laws described above, among others, some of which may be broader in scope including, without limitation, state anti-kickback and false claims laws that may apply to sales or marketing arrangements and claims involving health care items or services reimbursed by non-governmental third party payors, including private insurers, or that apply regardless of payor; state laws that require device companies to comply with the industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government; state laws that require device manufacturers to report information related to payments and other transfers of value to physicians and other health care providers, marketing expenditures; and state and local laws requiring the registration of device sales and medical representatives.
Violations of these laws are punishable by criminal and/or civil sanctions, including, in some instances, fines, imprisonment and, within the current fiscal year.United States, exclusion from participation in government healthcare programs, including Medicare, Medicaid and Veterans Administration health programs. Refer to the Risk Factor captioned “Our relationships with customers, physicians and third-party payors are subject to federal and state health care fraud and abuse laws, false claims laws, physician payment transparency laws and other health care laws and regulations” for a more fulsome discussion of these laws.
Our business is subject to U.S. federal privacy and security laws and regulations. HIPAA governs the use, disclosure, and security of protected health information (“PHI”) by HIPAA “covered entities” and their “business associates.” Covered entities are health plans, health care clearinghouses and health care providers that engage in specific types of electronic transactions. A business associate is any person or entity (other than members of a covered entity’s workforce) that performs a service for or on behalf of a covered entity that involve creating, receiving, maintaining or transmitting PHI. Healthcare providers that prescribe our airproducts and gas handling customers seekfrom which we obtain patient health information are subject to fully utilize capital spending budgets beforeprivacy and security requirements under
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HIPAA, as are we in certain circumstances. Further, various states, such as California and Massachusetts, have implemented similar privacy laws and regulations that impose restrictive requirements regulating the enduse and disclosure of health information and other personally identifiable information. These laws and regulations are not necessarily preempted by HIPAA, particularly if a state affords greater protection to individuals than HIPAA. If the states in which we conduct our business are more protective, we may have to comply with the stricter provisions.
The legislative and regulatory landscape for privacy and data security continues to evolve, and there has been an increasing focus on privacy and data security issues with the potential to affect our business. For example, the California Consumer Privacy Act (“CCPA”), as amended by the California Privacy Rights Act (“CPRA”), contains disclosure obligations for businesses that collect personal information about California residents and affords those individuals new rights relating to their personal information that may affect our ability to use personal information. A November 2020 California ballot initiative introduced amendments to the CCPA and established and funded a dedicated privacy regulator, the California Privacy Protection Agency (the “CPPA”). These amendments become effective in January 2023, and we expect the CPPA to introduce implementing regulations. Failure to comply with the CCPA may result in, among other things, significant civil penalties and injunctive relief or statutory or actual damages. In addition, California residents have the right to bring a private right of action in connection with certain types of incidents. These claims may result in significant liability and potential damages. We have implemented processes to manage compliance with the CCPA and continue to assess the impact of the year, historicallyCPRA on our shipmentsbusiness. Other states have peaked duringenacted similar privacy laws that impose new obligations or limitations in areas affecting our business and we continue to assess the fourth quarter. Also,impact of these state legislation, on our European operations typically experiencebusiness as additional information and guidance becomes available. Efforts at the federal level to enact similar laws are ongoing.
The Federal Trade Commission (the “FTC”) also sets expectations for failing to take appropriate steps to keep consumers’ personal information secure, or failing to provide a slowdown duringlevel of security commensurate to promises made to individual about the July, Augustsecurity of their personal information (such as in a privacy notice) may constitute unfair or deceptive acts or practices in violation of Section 5(a) of the Federal Trade Commission Act (the “FTC Act”). The FTC expects a company’s data security measures to be reasonable and December vacation seasons. General economic conditionsappropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities. Individually identifiable health information is considered sensitive data that merits stronger safeguards. With respect to privacy, the FTC also sets expectations that companies honor the privacy promises made to individuals about how the company handles consumers’ personal information; any failure to honor promises, such as the statements made in a privacy policy or on a website, may however, impact future seasonal variations.also constitute unfair or deceptive acts or practices in violation of the FTC Act.
We maintainalso operate in a number of foreign countries with laws in some cases more stringent than U.S. requirements. EEA regulation of the processing of personal data and the free movement of such data includes the General Data Protection Regulation (“GDPR”), the E-Privacy Directive 2002/58/EC (the “E-Privacy Directive”) and national laws implementing each. The GDPR imposes strict obligations and restrictions on the ability to collect, analyze and transfer personal data, especially sensitive personal data, such as health data from clinical investigations, and safety reporting. We process employee and customer data, including health and medical information.
The GDPR was retained in the UK post-Brexit as the UK GDPR. The “Data Protection and Digital Information Bill” was introduced to Parliament in July 2022, and we continue to monitor developments to assess comparability with the GDPR. Many EEA countries have also transposed the E-Privacy Directive’s requirements and passed legislation addressing areas where the GDPR permits countries to derogate from the GDPR, leading to divergent requirements in spite of the GDPR’s stated goal of EEA-wide uniformity.
In order to process and transfer data, explicit consent to the processing (including any cross-border transfer) may be required from the person to whom the personal data relates, though in certain cases, and depending on the jurisdiction in which the data originate or are processed, such data may be processed absent explicit consent for purposes of medical diagnosis, the interest of public health (including medical device safety and efficacy) or scientific research. The same rules currently apply to us in the UK under the UK GDPR and in relation to transfers out of the UK. We continue to assess ongoing reform efforts for changes. The EC and the United States announced in March 2022 agreement in principle on a new Trans-Atlantic Data Privacy Framework with respect to data transfers to the United States, and, in October 2022, President Biden signed an Executive Order that implements the new framework. On this basis, the EC will prepare a draft adequacy decision and then launch its own adoption procedure.
We depend on third parties in relation to provision of our services, a number of which process personal data on our behalf. We have a practice of entering into contractual arrangements with such third parties to ensure that they process personal data
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only according to our instructions, and that they have instituted adequate level of working capitalsecurity measures. Where personal data is being transferred outside the EEA (or the UK), our policy is that it is done so in compliance with applicable data export requirements. Any failure by us or third parties to support our business needs. There are no unusual industryfollow these policies or practices, or requirements relatedotherwise comply with applicable data laws, could lead to working capital items.a security or privacy breach, regulatory enforcement, or regulatory or financial harm.
As of December 31, 2017,2022, we employed approximately 14,3006,800 persons, of whom approximately 2,5002,100 were employed in the United States and approximately 11,8004,700 were employed outside of the United States.
At Enovis, we believe that the best team wins. Our growth model is focused in part on acquiring good companies, empowering our talent and using EGX to make them great. Culture and associate development are critical to our success. We are a diverse team of associates around the world. We empower our associates through our culture that is centered on our corporate purpose – “Creating Better Together,” which means we are committed to attracting and developing great talent and rewarding our associates to build and sustain our company. Our internal human capital management programs center on the following processes and objectives: (i) identifying, attracting, developing and enabling talent, (ii) promoting associate engagement and an open feedback culture to foster continuous improvement, (iii) offering competitive compensation and benefit programs to motivate associates and reward performance, (iv) building and supporting inclusion, diversity, and equity initiatives, and (v) protecting the health and safety of all of our associates across the world.
Company Information and Access to SEC Reports
We were organized as a Delaware corporation in 1998. Our principal executive offices are located at 420 National Business Parkway, 5th Floor, Annapolis Junction, MD 20701,2711 Centerville Road, Suite 400, Wilmington, Delaware, 19808, and our main telephone number at that address is (301) 323-9000.(302) 252-9160. Our corporate website address is www.colfaxcorp.com.www.enovis.com.
We make available, free of charge through our website at ir.enovis.com/sec-filings, our annual and quarterly reports on Form 10-K and Form 10-Q (including related filings in XBRL format), current reports on Form 8-K and any amendments to those reports as soon as practicable after filing or furnishing the material to the SEC. You may also request a copy of these filings, at no cost, by writing or telephoning us at: Investor Relations, ColfaxEnovis Corporation, 420 National Business Parkway, 5th Floor, Annapolis Junction, MD 20701,2711 Centerville Road, Suite 400, Wilmington, Delaware, 19808, telephone (301) 323-9000.(302) 252-9160. Information contained on our website is not incorporated by reference in this report.
report and any references to our website are intended as inactive textual references only. Additionally, the SEC maintains an Internet site that contains our reports, proxy statements and other information that we electronically file with, or furnish to, the SEC at www.sec.gov.
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Item 1A. Risk Factors
An investment in our Commoncommon stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with the information included elsewhere in this Form 10-K and other documents we file with the SEC. The risks and uncertainties described below are those that we have identified as material, but may not be the only risks to which ColfaxEnovis might be exposed. Additional risks and uncertainties, which are currently unknown to us or that we do not currently consider to be material, may materially affect the business of ColfaxEnovis and could have material adverse effects on our business, financial condition and results of operations. If any of the following risks were to occur, our business, financial condition, and results of operations and liquidity could be materially adversely affected, the value of our Common stock could decline and investors could lose all or part of the value of their investment in ColfaxEnovis shares.
Risks in this section are grouped in the following categories: (1) Risks Related to Our business is also subjectBusiness and Operations; (2) Risks Related to generalGovernment Regulation and Litigation; (3) Risks Related to the Separation; and (4) General and Other Risks. Many risks affect more than one category, and uncertainties that affect many other companies, such as overall U.S. and non-U.S. economic and industry conditions, a global economic slowdown, geopolitical events, changesthe risks are not in lawsorder of significance or accounting rules, fluctuations in interest rates, terrorism, international conflicts, natural disasters or other disruptionsprobability of expected economic or business conditions. We operate in a continually changing business environment, and new risk factors emerge from time to time which we cannot predict. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may impair our business, including our results of operations, liquidity and financial condition.occurrence because they have been grouped by categories.
Risks Related to Our Business and Operations
Acquisitions have formed a significant part of our growth strategy in the past and are expected to continue to do so. If we are unable to identify suitable acquisition candidates, complete any proposed acquisitions or successfully integrate the businesses we acquire, our growth strategy may not succeed.succeed and we may not realize the anticipated benefits of our acquisitions.
We intend to seek acquisition opportunities both to expand into new markets and to enhance our position in our existing markets. However, our ability to do so will depend on a number of steps, including our ability to:
obtain debt or equity financing that we may need to complete proposed acquisitions;
identify suitable acquisition candidates;
negotiate appropriate acquisition terms;
complete the proposed acquisitions; and
integrate the acquired business into our existing operations.
If we fail to achieve any of these steps, our growth strategy may not be successful. In particular, a decline in our stock price has and may continue to make debt or equity financing more challenging to obtain. This may inhibit our ability to acquire new businesses in the future.
Acquisitions involve numerous risks, including difficulties in the assimilation of the operations, systems, controls, technologies, personnel, services and products of the acquired company, the potential loss of key employees, customers, suppliers and distributors of the acquired company, and the diversion of our management’s attention from other business concerns. This is the case particularly in the fiscal quarters immediately following the completion of an acquisition because the operations of the acquired business are integrated into the acquiring business’ operations during this period. We may not accurately anticipate all of the changing demands that any future acquisition may impose on our management, our operational and management information systems and our financial systems. The failure to successfully integrate acquired businesses in a timely manner, or at all, or the incurrence of significant unanticipated expenses associated with integration activities, including information technology integration fees, legal compliance costs, facility closure costs and other restructuring expenses, could have an adverse effect on our business, financial condition and results of operations.
In addition, the anticipated benefits of an acquisition may not be realized fully or at all, or may take longer to realize than we expect. Actual operating, technological, strategic and sales synergies, if achieved at all, may be less significant than we expect or may take longer to achieve than anticipated. If we are not able to realize the anticipated benefits and synergies expected from our acquisitions within a reasonable time, our business, financial condition and results of operations may be adversely affected.
We may require additional capital to finance our operating needs and to finance our growth.growth, including acquisitions. If the terms on which the additional capital is available are unsatisfactory, if the additional capital is not available at all or if we are not able to fully access credit under our credit agreement,Enovis Credit Agreement, we may not be able to pursue our growth strategy.
Our growth strategy will require additional capital investment to complete acquisitions, integrate the completed acquisitions into our existing operations and expand into new markets.
We intend to pay for future acquisitions using cash, capital stock, notes, assumption of indebtedness or any combination of the foregoing. To the extent that we do not generate sufficient cash internally to provide the capital we require to fund our growth strategy and future operations, we will require additional debt or equity financing. This additional financing may not be available or, if available, may not be on terms acceptable to us. Further, high volatility in the capital markets and in our stock price may make it difficult for us to access the capital markets at attractive prices, if at all. If we are unable to obtain sufficient additional capital in the future, it may limit our ability to fully implement our growth strategy. Even if future debt financing is available, it may result in (i) increased interest
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expense, (ii) increased term loan payments, (iii) increased leverage and (iv) decreased income available to fund further acquisitions and expansion. It may also limit our ability to withstand competitive pressures and make us more vulnerable to economic downturns. If future equity financing is available, issuances of our equity securities may significantly dilute our existing stockholders.
We have outstanding debt and other financial obligations and significant unused borrowing capacity, and may incur or assume more debt in the future. Our debt level and related debt service obligations could have negative consequences, including: requiring us to dedicate significant cash flow from operations to the payment of amounts payable on our debt, which would reduce the funds we have available for other purposes; making it more difficult or expensive for us to obtain any necessary future financing; increasing our leverage and reducing our flexibility in planning for or reacting to changes in our industry and market conditions; making us more vulnerable in the event of a downturn in our business; and exposing us to interest rate risk given our debt obligations at variable interest rates. In addition, our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to financial, business, legislative, regulatory, and other factors, some of which are beyond our control.
Additionally, the Enovis Credit Agreement, which governs our term loan and revolving credit facility, contains various covenants that limit our ability to engage in specified types of transactions. These covenants limit the Company’s ability to incur debt or liens, merge or consolidate with others, dispose of assets, or make investments or pay dividends. The Enovis Credit Agreement also contains financial covenants requiring the Company to satisfy and maintain compliance with a total leverage ratio and an interest coverage ratio. Upon an event of default, the lenders may, subject to various customary cure rights, require the immediate payment of all amounts outstanding. These restrictions could have a material adverse effect on our business, financial condition and results of operations.
Our restructuring activities may subject us to additional uncertainty in our operating results.
We have implemented, and plan to continue to implement, restructuring programs designed to facilitate key strategic initiatives and maintain long-term sustainable growth, such as the sale of our Fluid Handling business.growth. As such, we have incurred and expect to continue to incur expenseexpenses relating to restructuring activities. We may not achieve or sustain the anticipated benefits, including any anticipated savings, of these programs.restructuring programs or initiatives. Further, restructuring efforts are inherently risky, and we may not be able to predict the cost and timing of such actions accurately or properly estimate their impact. We also may not be able to realize
Any impairment in the anticipated savings we expect from restructuring activities.
Our Total assets reflect substantial intangible assets, primarily Goodwill. The Goodwill results from our acquisitions, representing the excess of certain subsidiaries could be different thancost over the fair value of the net assets we have estimated, whichacquired. We assess at least annually whether there has been impairment in the value of our Goodwill. If future operating performance at one or more of our business units were to fall significantly below current levels, if competing or alternative technologies emerge, or if market conditions for an acquired business decline, we could materially andincur, under current applicable accounting rules, a non-cash charge to operating earnings for Goodwill impairment. Any determination requiring the write-off of a significant portion of intangible assets would adversely affect our business, financial condition, and results of operations.
A material disruption at any of our manufacturing facilities could adversely affect our ability to generate sales and meet customer demand.
If operations at any of our manufacturing facilities were to be disrupted as a result of a significant equipment failure, natural disaster or adverse weather conditions (including events that may be caused or exacerbated by climate change), power outage, fire, explosion, terrorism, cyber-based attack, adverse weather conditions,health emergency, labor disputesdispute or shortage or other reason, our financial performance could be adversely affected as a result of our inability to meet customer demand for our products.
Interruptions in production could increase our costs and reduce our sales. Any interruption in production capability could require us to make substantial capital expenditures to remedy the situation or rely on third-party manufacturers, which could negatively affect our profitability and financial condition. Any recovery under our property damage and business
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interruption insurance policies may not offset the lost sales or increased costs that may be experienced during the disruption of operations, which could adversely affect our business, financial condition and results of operations.
Failure to comply with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Actmaintain and protect our intellectual property rights or other applicable anti-bribery laws could have an adverse effect onchallenges to these rights by third parties may affect our business.operations and financial performance.
The U.S. Foreign Corrupt Practices Act, the U.K. Bribery Actmarket for many of our products, including our medical device products, is, in part, dependent upon patent, trademark, copyright and similar anti-briberytrade secret laws, inagreements with employees, customers and other jurisdictions generally prohibit companiesthird parties, including confidentiality agreements, invention assignment agreements and their intermediaries from making improper payments for the purpose of obtaining or retaining business. Recent years have seen a substantial increase in anti-bribery law enforcement activity with more frequentproprietary information agreements, to establish and aggressive investigations and enforcement proceedings by both the Department of Justicemaintain our intellectual property rights, and the U.S. Securities and Exchange Commission, increased enforcement activity by non-U.S. regulators and increases in criminal and civil proceedings brought against companies and individuals. Our policies mandate compliance with all anti-bribery laws. However, we operate in certain countries that are recognized as having governmental and commercial corruption. Our internal control policies and procedures may not always protect us from reckless or criminal acts committedGoodwill engendered by our employees or third-party intermediaries. Violations oftrademarks and trade names. The failure to protect these anti-bribery lawsrights may result in criminal or civil sanctions, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, in the event that we believe or have reason to believe that our employees or agents have or may have violated applicable laws, including anti-corruption laws, weLitigation may be required to investigateenforce our intellectual property rights, protect our trade secrets or have outside counsel investigatedetermine the relevant factsvalidity and circumstances, which canscope of proprietary rights of others. It may be expensiveparticularly difficult to enforce our intellectual property rights in countries where such rights are not highly developed or protected. Any action we take to protect or enforce our intellectual property rights could be costly and requirecould absorb significant management time and attention from senior management.attention. As a result of any such litigation, we could lose our proprietary rights.
The effects of the COVID-19 global pandemic have adversely affected our results of operations, financial condition, and business and continue to adversely affect us effects of the COVID-19 global pandemic have adversely affected our results of operations, financial condition, and business and continue to adversely affect us.
We continue to be adversely affected by the economic and other challenges created by the COVID-19 pandemic and actions taken in response thereto. As a result of the COVID-19 pandemic, we experienced adverse impacts on sales in 2020 and 2021, as well as material delays and periodic cancellations of elective medical procedures, orthopedic clinics and physical therapy centers operating at reduced levels, and periodic cancellation of sports programs impacting our business. Although restrictions in most jurisdictions have eased and some impacts of the pandemic have abated, cost inflation, supply chain challenges such as logistics delays, and healthcare provider staffing shortages, all of which are attributable in some part to the pandemic, continue to impact us, including by reducing capacity and the number of medical procedures. It is uncertain when and to what extent lingering conditions will completely subside. The degree to which the COVID-19 situation will continue to impact our businesses, results of operations, and financial condition, including the duration and magnitude of such impacts, will depend on future developments, which are highly uncertain and cannot be predicted, including how quickly and to what extent normal economic conditions resume in full.
Significant movements in foreign currency exchange rates may harm our financial results.
We are exposed to fluctuations in currency exchange rates. During the year ended December 31, 2022, approximately 32% of our sales were derived from operations outside the United States. Large fluctuations in the rate of exchange between foreign currencies and the U.S. dollar could have a material adverse effect on our business, financial condition and results of operations. Changes in the currency exchange rates may impact our financial results positively or negatively in one period and not another, which may make it difficult to compare our operating results from different periods.
We also face exchange risk from transactions with customers in countries outside the United States and from intercompany transactions between affiliates. Although we use the U.S. dollar as our functional currency for reporting purposes, we have manufacturing sites throughout the world and a large portion of our costs are incurred and sales are generated in foreign currencies. Costs incurred and sales recorded by subsidiaries operating outside of the United States are translated into U.S. dollars using exchange rates effective during the respective period. As a result, we are exposed to movements in the exchange rates of various currencies against the U.S. dollar. Further, we may be subject to foreign currency translation losses depending upon whether foreign nations devalue their currencies.
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We are dependent on the availability of raw materials, as well as parts and components used in our products.
While we manufacture many of the parts and components used in our products, we purchase a substantial amount of raw materials, parts and components from suppliers. The availability and prices for raw materials, parts and components may be subject to curtailment or change due to, among other things, suppliers’ allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates and prevailing price levels, trade disputes and increased tariffs. Additionally, FDA regulations may require additional testing of any raw materials or components from new suppliers prior to the use of those materials or components in certain medical device products. In addition, in the case of a device that is the subject of a pre-market approval, we may also be required to obtain prior FDA permission, which may not be given and could delay or prevent access or use of such raw materials or components. Any significant change in the supply of, or price for, these raw materials, parts or components could materially affect our business, financial condition and results of operations.
Certain of our products use components obtained from single sources. For example, the microprocessor used in our OL1000 and SpinaLogic devices is from a single manufacturer. Establishment of replacement suppliers for these components cannot be accomplished quickly and the loss of a single-source supplier, the deterioration of our relationship with a single-source supplier, or any unilateral modification to the contractual terms under which we are supplied components by a single-source supplier could have a material adverse effect on our business, financial condition and results of operations. In addition, we rely on third parties to manufacture some of our medical device products. For example, we use a single source for many of the consumer devices our Prevention & Recovery segment distributes in a particular country. If our agreements with these manufacturing companies were terminated, we may not be able to find suitable replacements within a reasonable amount of time or at all. Any such cessation, interruption or delay may impair our ability to meet scheduled deliveries of our products to our customers and may cause our customers to cancel orders.
Additionally, political and economic instability and changes in government regulations in China and other parts of Asia or any health emergencies could affect our ability to continue to receive materials from suppliers in those locations or affected by those emergencies. The loss of such suppliers, any other interruption or delay in the supply of required materials or our inability to obtain these materials at acceptable prices and within a reasonable amount of time could impair our ability to meet scheduled product deliveries to our customers and could hurt our reputation and cause customers to cancel orders.
We are vulnerable to raw material, energy and labor price fluctuations and supply shortages, which have impacted and could continue to impact our results of operations, financial condition and cash flows.
In the normal course of our business, we are exposed to market risks related to the availability of and price fluctuations in the purchase of raw materials, energy and commodities used in the manufacturing of our products. The availability and prices for raw materials, energy and commodities are subject to volatility and are influenced by worldwide economic conditions, including the current rising inflationary pressure. They are also influenced by import duties and tariffs speculative action, world supply and demand balances, inventory levels, availability of substitute materials, currency exchange rates, anticipated or perceived shortages, geopolitical tensions, government trade practices and regulations and other factors. Further, the labor market for skilled manufacturing remains tight and our labor costs have increased as a result. Energy, commodity, raw material energy, labor and other cost inflation has impacted and could continue to impact our results of operations, financial condition and cash flows.
The markets we serve are highly competitive and some of our competitors may have superior resources. If we are unable to respond successfully to this competition, this could reduce our sales and operating margins.
Our business operates in highly fragmented and competitive markets. In order to maintain and enhance our competitive position, we intend to, among other things, continue investing in manufacturing quality, marketing, customer service and support, distribution networks, and research and development. We may not have sufficient resources to continue to make these investments and we may not be able to maintain our competitive position. Our competitors may develop products that are superior to our products or more widely accepted, develop methods of more efficiently and effectively providing products and services, adapt more quickly than us to new technologies or evolving customer requirements or have a larger product portfolio. Some of our competitors may also have greater financial, marketing and research and development resources than we have or stronger name recognition. As a result, those competitors may be better able to withstand the effects of periodic economic downturns. In addition, pricing pressures could cause us to adjust the prices of some of our products to stay competitive. The development of new technologies by competitors that may compete with our technologies could reduce demand for our products and affect our financial performance. For example, our present and future medical device products could be rendered obsolete or uneconomical by technological advances by one or more of our present or future competitors or by other therapies,
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including biological therapies. Should we not be able to maintain or enhance the competitive values of our products or develop and introduce new products or technologies successfully, or if new products or technologies fail to generate sufficient revenues to offset research and development costs, our business, financial condition and operating results could be materially adversely affected.
The success of our medical device products depends heavily on acceptance by healthcare professionals who prescribe and recommend these products, and our failure to maintain relationships with key healthcare professionals or maintain a high level of confidence by key healthcare professionals in our products could adversely affect our business.
We may not be able to compete successfully with our existing competitors or with new competitors. If we fail to compete successfully, the failure may have a material adverse effect on our business, financial condition and results of operations. Please see Part I, Item 1. “Business - Industry and Competition” for additional information about the competitive markets in which we operate.
Changes in our tax rates or exposure to additional income tax liabilities could adversely affect our financial results.
Our future effective income tax rates could be unfavorably affected by various factors, including, among others, changes in the tax rates, rules and regulations in jurisdictions in which we generate income. A number of countries where we do business, including the United States and many countries in the European Union, have implemented, and are considering implementing, changes in relevant tax, accounting and other laws, regulations and interpretations. Additionally, longstanding international tax norms that determine each country’s jurisdiction to tax cross-border international trade are subject to potential evolution. For example, the Organization for Economic Co-operation and Development, a global coalition of member countries, proposed a two-pillar plan to reform international taxation. The proposals aim to ensure a fairer distribution of profits among countries and to impose a floor on tax competition through the introduction of a global minimum tax. On December 12, 2022, European Union member states reached agreement in principle to implement the minimum tax component, known as Pillar 2. The directive has to be transposed into member states’ national law by the end of 2023. As these and other tax laws, regulations and norms change or evolve, our financial results could be materially impacted. Given the unpredictability of these possible changes, it is very difficult to assess whether the overall effect of such potential tax changes would be cumulatively positive or negative for our earnings and cash flow, but such changes could adversely impact our financial results.
In addition, the amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. tax authorities. If these audits result in assessments different from amounts recorded, our future financial results may include unfavorable tax adjustments.
We rely on a variety of distribution methods to market and sell our medical device products and if we fail to effectively manage the distribution of such products, our results of operations and future growth could be adversely impacted.
We use a variety of distribution methods to market and sell our medical device products, each of which has distinct risks. For example, to market and sell certain of the orthopedic rehabilitation products that are intended for use in the home and in rehabilitation clinics, we rely on our own direct sales force of representatives in the United States and in Europe. A direct sales force may subject us to higher fixed costs than those of companies that market competing products through independent third parties due to the costs associated with employee benefits, training, and managing sales personnel. As a result, we could be at a competitive disadvantage compared to certain competitors that rely predominately on independent sales agents and third-party distributors. Additionally, these fixed costs may slow our ability to reduce costs in the face of a sudden decline in demand for such products, which could have a material adverse impact on our results of operations. However, for certain orthopedic products, CMF bone growth stimulator products and surgical implant products, we rely on third-party distributors and independent commissioned sales representatives that maintain the customer relationships with the hospitals, orthopedic surgeons, physical therapists and other healthcare professionals that purchase, use and recommend the use of such products. Although our internal sales staff trains and manages these third-party distributors and independent sales representatives, we do not directly monitor the efforts that they make to sell our products. In addition, some of the independent sales representatives that we use to sell our surgical implant products also sell products that directly compete with our product offerings. These sales representatives may not dedicate the necessary time or effort to market and sell our products. If we fail to attract and maintain relationships with third-party distributors and skilled independent sales representatives or fail to adequately train and monitor the efforts of the third-party distributors and sales representatives that market and sell our products, or if our existing third-party distributors and independent sales representatives choose not to carry our products, our results of operations and future growth could be adversely affected.
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Risks Related to Government Regulation and Litigation
Our products and our operations are subject to extensive government regulation and oversight, and if we fail to maintain regulatory approvals and clearances, or are unable to obtain, or experience significant delays in obtaining, FDA clearances or approvals or their foreign equivalent for our current and future products or product enhancements, our ability to commercially distribute and market these products could suffer.
Our products are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities, as discussed under “Regulatory Environment – Medical Device Regulation” in Part I, Item 1. The process of obtaining regulatory clearances or approvals to market a medical device can be costly and time consuming, and we may not be able to obtain these clearances or approvals on a timely basis, if at all.
In the EU, our notified body issues the certificates that allow CE marking for the sale of our products. To continue to place products on the market in the EU and United Kingdom after expiry of our existing notified body certificate[s], we will need to apply for their certification under the MDR and UK MDR. We may not be able to continue to place our devices on the market in the EU and/or United Kingdom for any current use if we cannot obtain certification for their current use under the MDR or under the UK MDR 2002 when required, if we are unable to do so before the current certificates for our products expire, or if our technical documentation does not meet the new (and more stringent) requirements under the MDR.
Modifications to our products may require new regulatory clearances or approvals in the United States and EU or may require us to recall or cease marketing our products until clearances or approvals are obtained.
If the FDA requires us to obtain PMAs, PMA supplements, or pre-market clearances for any modification to a previously cleared or approved device, we may be required to cease manufacturing and marketing of the modified device or to recall such modified device until we obtain FDA clearance or approval. Any of these actions could have a material adverse effect on our business, financial condition, and results of operations.
In the EU, we must notify our EU notified body of significant changes to products or to our quality assurance systems affecting those products. For devices covered by CE Certificates of Conformity issued under the EU MDD, no significant changes in design or intended purpose are allowed. If changes are anticipated, new certificates must be obtained under the MDR.
Obtaining new clearances and approvals can be a time-consuming process, and delays in obtaining required future clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which could harm our future growth.
The discovery of serious safety issues with our products, or a recall of our products either voluntarily or at the direction of the FDA or another governmental authority, could have a negative impact on us, and failure to report adverse medical events or failures or malfunctions to the FDA as required would subject us to sanctions that could harm our reputation, business, financial condition and results of operations.
We are subject to the FDA’s medical device reporting regulations and similar foreign regulations, which require us to report to the FDA when we receive or become aware of information that reasonably suggests that one or more of our products may have caused or contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, could cause or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize awareness of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is unexpected or removed in time from the use of the product. If we fail to comply with our reporting obligations, the FDA could take action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearance or approval, seizure of our products or delay in clearance or approval of future products.
We also are required to comply with strict post-marketing obligations for our CE marked medical devices in the EU. The MDR provides various requirements relating to post-market surveillance and vigilance, including the obligation for manufacturers to implement a post-market surveillance system, in a manner proportionate to the risk class and appropriate for the type of device. Once a device is on the EEA market, manufacturers must comply with certain vigilance requirements, such
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as reporting serious incidents and fielding safety corrective actions. Noncompliance could lead to penalties and a suspension or withdrawal of our CE Certificate of Conformity.
Our products must be manufactured in accordance with federal and state regulations, and we could be forced to recall our devices or terminate production if we fail to comply with these regulations.
The methods used in, and the facilities used for, the manufacture of our products must comply with the FDA’s QSR, a complex regulatory scheme covering the procedures and documentation of design, testing, production, process controls, quality assurance, labeling, packaging, handling, storage, distribution, installation, servicing and shipping of medical devices. We must also verify that our suppliers maintain facilities, procedures, and operations that comply with our quality standards and applicable regulatory requirements. The FDA enforces the QSR through periodic announced or unannounced inspections of medical device manufacturing facilities, which may include subcontractor facilities. Our products are also subject to similar state regulations and various laws and regulations of foreign countries governing manufacturing.
Our third-party manufacturers may not take the necessary steps to comply with applicable regulations, which could cause delays in the delivery of our products. In addition, failure to comply with applicable FDA requirements or later discovery of previously unknown problems with our products or manufacturing processes could result in actions, as discussed in “Regulatory Environment – Medical Device Regulation” in Part I, Item 1. Any of these actions could significantly and negatively affect supply of our products, harm our reputation, and expose us to product liability claims, and we could lose customers and experience reduced sales and increased costs.
We may be subject to regulatory or enforcement actions if we engage in improper marketing or promotion of our products.
Our promotional activities must comply with FDA and other applicable laws, including prohibition of the promotion of a medical device for a use that has not been FDA-cleared or approved. Use of a device outside of its cleared or approved indications is known as “off-label” use. Physicians may use our products off-label in their professional medical judgment, as the FDA does not restrict or regulate a physician’s choice of treatment within the practice of medicine. However, if the FDA determines that our educational and promotional activities or training constitutes promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, as discussed in “Regulatory Environment – Medical Device Regulation” in Part I, Item 1.
Other federal, state or foreign enforcement authorities also might take action, including, but not limited to, through a whistleblower action under the FCA, if they consider our business activities constitute promotion of an off-label use, which could result in significant penalties. For example, in the EU, the MDR expressly prohibits misleading claims via off-label promotion and grants enforcement power to national competent authorities. In addition, off-label use of our products may increase the risk of product liability claims, which are expensive to defend and could divert our management’s attention, result in substantial damage awards against us, and harm our reputation.
It is also possible that other federal, state or foreign enforcement authorities might take action under other regulatory authority, such as false claims laws or consumer protection laws, if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment of our operations.
Legislative or regulatory reforms may make it more difficult and costly for us to obtain regulatory clearance or approval of any future products and to manufacture, market and distribute our products after clearance or approval is obtained.
From time to time, legislation is introduced in Congress that could significantly change the governance of the regulatory approval, manufacture and marketing of regulated products or the reimbursement thereof. In addition, the FDA may change clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions, which may prevent or delay approval or clearance of our future products under development or impact our ability to modify our currently cleared products on a timely basis. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of planned or future products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be.
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The clinical trial process is lengthy and expensive with uncertain outcomes, often requires the enrollment of large numbers of patients, suitable patients may be difficult to identify and recruit, and delays or failures will prevent us from commercializing new or modified products and will adversely affect our business, operating results and prospects.
Initiating and completing clinical trials necessary to support any future PMAs, or additional safety and efficacy data beyond that typically required for a 510(k) clearance for our possible future product candidates, will be time-consuming and expensive and the outcome uncertain. Moreover, the results of early clinical trials are not necessarily predictive of future results, and any product we advance into clinical trials may not have favorable results in later clinical trials. The results of preclinical studies and clinical trials of our products conducted to date and ongoing or future studies and trials of our current, planned, or future products may not be predictive of the results of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. In addition, the initiation and completion of any of clinical studies may be prevented, delayed, or halted for numerous reasons. We may experience delays in our ongoing clinical trials for a number of reasons, which could adversely affect the costs, timing or successful completion of our clinical trials.
Development of sufficient and appropriate clinical protocols to demonstrate safety and efficacy is required and we may not adequately develop such protocols to support clearance and approval. Further, the FDA or our notified body may require us to submit data on a greater number of patients than we originally anticipated or for a longer follow-up period or change the data collection requirements or data analysis applicable to our clinical trials. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may cause an increase in costs and delays in the approval and attempted commercialization of our products or result in the failure of the clinical trial. In addition, despite considerable time and expense invested in our clinical trials, the FDA or our notified body may not consider our data adequate to demonstrate safety and efficacy. Such increased costs and delays or failures could adversely affect our business, operating results and prospects.
The results of our clinical trials may not support our product candidate claims or may result in the discovery of adverse side effects.
The results of our future clinical trials may not support our future product claims and the FDA may not agree with our conclusions regarding them. Success in pre-clinical studies and early clinical trials does not ensure that later clinical trial success, and we cannot be sure that later trials will replicate the results of prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that our product candidates are safe and effective for the proposed indicated uses, which could cause us to abandon a product candidate and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, our ability to commercialize our product candidates and generate revenues. It is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of the future product’s profile.
Our failure to comply with U.S. federal, state and foreign governmental regulations, including in the EU, could lead to the issuance of warning letters or untitled letters, the imposition of injunctions, suspensions or loss of regulatory clearance, certificates or approvals, product recalls, termination of distribution, product seizures, civil penalties, and in extreme cases, criminal sanctions or closure of manufacturing facilities.
Any product for which we obtain clearance or approval, and the manufacturing processes, post-market surveillance, post-approval clinical data and promotional activities for such product will be subject to continued regulatory review, oversight, requirements, and periodic inspections by the FDA and other domestic and foreign regulatory bodies. In particular, we and our suppliers are required to comply with FDA’s QSR and other regulations enforced outside the United States that cover the manufacture of our products and the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of medical devices. Regulatory bodies, such as the FDA, enforce the QSR and other regulations through periodic inspections. The failure by us or one of our suppliers to comply with applicable statutes and regulations administered by the FDA and other regulatory bodies, or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result in, among other things, any of the enforcement actions discussed in “Regulatory Environment – Medical Device Regulation” in Part I, Item 1. These enforcement actions include, for the EU, the suspension or withdrawal of CE Certificate of Conformity in the EU and the refusal or delay in CE certification and CE marking or new products or modified products. If any of these actions were to occur, it would harm our reputation and cause our product sales and profitability to suffer and may prevent us from generating revenue.
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Our medical device businesses subject us to the possibility of product liability lawsuits, which could harm our business.
If coverage and adequate levels of reimbursement from third-party payors for our medical device products are not obtained, healthcare providers and patients may be reluctant to use our medical device products, our margins may suffer and revenue and profits may decline.
As manufacturers,explained in greater detail in “ Regulatory Environment” in Part I, Item 1, the sales of our medical device products depend largely on whether there is coverage and adequate reimbursement by government healthcare programs, such as Medicare and Medicaid, and by private payors. Surgeons, hospitals, physical therapists and other healthcare providers may not use, purchase or prescribe our products and patients may not purchase these products if these third-party payors do not provide satisfactory coverage of, and reimbursement for, the costs of our medical device products or the procedures involving the use of such products. Reduced reimbursement rates will also lower our margins on product sales and could adversely impact the profitability and viability of the affected products.
Medicare payment for DMEPOS also can be impacted by the DMEPOS competitive bidding program, under which Medicare rates are based on bid amounts for certain products in designated geographic areas, rather than the Medicare fee schedule amount. If any of our medical device products are included in competitive bidding and we are not selected as a contract supplier (or subcontractor) in a particular region, or if contract or fee schedule prices are significantly below current Medicare fee schedule reimbursement levels, it could have an adverse impact on our sales and profitability.
Additionally, federal and state legislation and regulation may limit the types of orthopedic professionals who can fit or sell our orthotic products or who can seek reimbursement for them or impose certification or licensing requirements on the measuring, fitting and adjusting of certain orthotic devices, and additional states may do so in the future. Although some of these state laws exempt manufacturers’ representatives, others do not. Such laws could reduce the number of potential customers by restricting our sales representatives’ activities in those jurisdictions or reduce demand for our products by reducing the number of professionals who fit and sell them.
Audits or denials of claims by government agencies could reduce our revenues or profits.
We submit claims on behalf of patients directly to, and receive payments directly from, the Medicare and Medicaid programs and private payors. Therefore, we are subject to extensive government regulation, including detailed requirements for submitting reimbursement claims under appropriate codes and maintaining certain documentation to support our claims. Medicare contractors and Medicaid agencies periodically conduct pre- and post-payment reviews and other audits of claims and are under increasing pressure to more closely scrutinize healthcare claims and supporting documentation. Such reviews or similar audits of our claims including by Recovery Audit Contractors, or private companies operating on a contingent fee basis to identify and recoup Medicare overpayments, and Zone Program Integrity Contractors, or contractors charged with investigating potential fraud and abuse, could result in material delays in payment, as well as material recoupment or denials, which would reduce our Net sales and profitability, investigations, potential liability under fraud or abuse laws or exclusion from participation in the Medicare and/or Medicaid programs. Private payors may conduct similar reviews and audits.
Additionally, we participate in the government’s Federal Supply Schedule program for medical equipment, whereby we contract with the government to supply certain of our medical products. Participation in this program requires us to follow
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certain pricing practices and other contract requirements. Failure to comply with such pricing practices and/or other contract requirements could result in delays in payment or fines or penalties, which could reduce our revenues or profits.
Federal and state health reform and cost control efforts could adversely impact our business and results of operations, and federal and state legislatures and agencies continue to consider further reforms and cost control efforts that could adversely impact our business and results of operations.
As discussed in “Regulatory Environment – Healthcare Reform” in Part I, Item 1, there have been a variety of environmentalfederal and state healthcare reform and cost control efforts that have affected and could in the future adversely affect our business. We cannot be sure whether additional legislative changes will be enacted, or whether government regulations or other policy will be changed, or what the impact of such changes would be on the marketing approvals, sales, pricing, or reimbursement of our products. We expect that any such health care reform measures that may be adopted in the future may result in more rigorous coverage criteria and safetyin additional downward pressure on the price that we receive for our products. Any reduction in reimbursement from Medicare or other government health care programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other health care reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our product candidates.
Our relationships with customers, physicians and third-party payors are subject to federal and state health care fraud and abuse laws, false claims laws, physician payment transparency laws and other health care laws and regulations. If we or our employees, independent contractors, consultants, commercial partners, or vendors violate these laws we could face substantial penalties.
Our relationships with customers, physicians and third-party payors are subject to federal and state health care fraud and abuse laws, false claims laws, physician payment transparency laws and other health care laws and regulations. The U.S. health care laws and regulations that may affect our ability to operate include, but are not limited to the federal Anti-Kickback Statute, the federal civil False Claims Act, the civil monetary penalties statute, the Physician Self-Referral Law, the healthcare fraud provisions under HIPAA, the federal Physician Payments Sunshine Act, and state and foreign equivalents of each of these laws. Refer to “Regulatory Environment – Other Healthcare Laws – Fraud and Abuse Laws” in Part I, Item 1 for a more fulsome description of these laws. Violations of these laws are punishable by criminal and/or civil sanctions, including, in some instances, fines, imprisonment and, within the United States, exclusion from participation in government healthcare programs, including Medicare, Medicaid and Veterans Administration health programs.
Greater scrutiny of marketing practices in the medical device industry has resulted in numerous government investigations, and this enforcement activity is expected to continue. For example, the Department of Justice recently entered into a settlement with a diabetic shoe company and its president and CEO to resolve allegations that the company violated the False Claims Act by selling custom diabetic shoe inserts that were not actually custom-fabricated in accordance with Medicare standards. As a DME supplier, we submit claims for reimbursement from federal health care programs, which can present increased risks under the False Claims Act if not conducted in a compliant manner. These laws and regulations, among other things, constrain our business, marketing and other promotional activities by limiting the kinds of financial arrangements we have with hospitals, physicians or other potential purchasers of our products, including marketing and consulting arrangements, payment of royalties for product development, and our OfficeCare consignment stock and bill program.
Because of the breadth of these laws and the narrowness of available statutory exceptions and regulatory safe harbors, our business, marketing and other promotional activities could be subject to challenge under one or more of such laws. It is not always possible to identify and deter employee misconduct or business noncompliance, and the precautions we take to detect and prevent inappropriate conduct may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or liabilitiesregulations. Efforts to ensure that ariseour business arrangements will comply with applicable health care laws may involve substantial costs. It is possible that governmental and enforcement authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law interpreting applicable fraud and abuse or other health care laws and regulations.
If we or our employees, agents, independent contractors, consultants, commercial partners and vendors violate these laws, we may be subject to investigations, enforcement actions and/or significant penalties, including the imposition of significant civil, criminal and administrative penalties, damages, disgorgement, monetary fines, imprisonment, possible exclusion from participation in Medicare, Medicaid and other federal health care programs, contractual damages, reputational harm, diminished profits and future earnings, additional reporting requirements and/or oversight if we become subject to a
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corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations.
The success of our surgical implant products depends on our relationships with leading surgeons who assist with the development and testing of our products, and our ability to comply with enhanced disclosure requirements regarding payments to physicians.
A key aspect of the development of our surgical implant products is the use of designing and consulting arrangements with orthopedic surgeons who are highly qualified and experienced in their field. These surgeons assist in the development and clinical testing of new surgical implant products. They also participate in symposia and seminars introducing new surgical implant products and assist in the training of healthcare professionals in using our new products. Our arrangements with orthopedic surgeons also must comply with the fraud and abuse and transparency laws discussed above, which may be an impediment for some surgeons we seek to engage. We may not be successful in maintaining or renewing our current designing and consulting arrangements with these surgeons or in developing similar arrangements with new surgeons. In that event, our ability to develop, test and market new surgical implant products could be adversely affected.
To enforce compliance with the healthcare regulatory laws, certain enforcement bodies have recently increased their scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. For example, the EU Member States closely monitor perceived unlawful marketing activity by companies, including inducement to prescribe and the encouragement of off-label use of devices. Responding to investigations can be time- and resource-consuming and can divert management’s attention from the business. Additionally, as a result of noncompliance,these investigations, healthcare providers and entities may have to agree to additional compliance and reporting requirements as part of a consent decree or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business. Even an unsuccessful challenge or investigation into our practices could cause adverse publicity and be costly to respond to. If our operations are found to be in violation of any of the healthcare laws or regulations described above or any other healthcare regulations that apply to us, we may be subject to penalties, including administrative, civil and criminal penalties, damages, fines, exclusion from participation in government healthcare programs, imprisonment, contractual damages, reputational harm, disgorgement and the curtailment or restructuring of our operations. Moreover, industry associations closely monitor the activities of their member companies. If these organizations or national authorities were to name us as having breached our obligations under their laws, regulations, rules or standards, our reputation would suffer and our business, financial condition, operating results, cash flows and prospects could be costly.adversely affected.
Actual or perceived failures to comply with applicable data protection, privacy and security laws, regulations, standards and other requirements could adversely affect our business, results of operations and financial condition.
Our businesses arebusiness is subject to international,U.S. federal stateprivacy and local environmental and safetysecurity laws and regulations, including HIPAA, as more fully described in “Regulatory Environment – Other Healthcare Laws – Data Privacy and Security Laws” in Part I, Item 1. Healthcare providers who prescribe our products and from whom we obtain patient health information are subject to privacy and security requirements under HIPAA, as are we in certain circumstances. The U.S. Department of Health and Human Services has direct enforcement authority against covered entities and business associates with regard to compliance with HIPAA regulations. We also could be subject to criminal penalties if we knowingly obtain individually identifiable health information from a covered entity in a manner that is not authorized or permitted by HIPAA or for aiding and abetting and/or conspiring to commit a violation of HIPAA. We are unable to predict whether our actions could be subject to prosecution in the event of an impermissible disclosure of health information to us. There are costs and administrative burdens associated with ongoing compliance with HIPAA regulations and similar state law requirements. Any failure to comply with current and applicable future requirements could adversely affect our profitability. As described in further detail in “Regulatory Environment – Other Healthcare Laws – Data Privacy and Security Laws” in Part I, Item 1, various states have implemented similar privacy laws and regulations governing emissions of: regulated air pollutants; discharges of wastewater and storm water; storage and handling of raw materials; generation, storage, transportation and disposal of regulated wastes; and laws and regulations governing worker safety. These requirements impose onthat are not necessarily preempted by HIPAA. If the states in which we conduct our businesses certain responsibilities, includingbusiness are more protective, we may have to comply with the obligation to obtain and maintain various environmental permits. If we were to failstricter provisions. Failure to comply with these requirements or fail to obtain or maintain a required permit, we could be subject to penaltieslaws and be required to undertake corrective action measures to achieve compliance. In addition, if our noncompliance with such regulations were to result in a release of hazardous materials into the environment, such as soil or groundwater, we could be required to remediate such contamination, which could be costly. Moreover, noncompliance could subject us to private claims for property damage or personal injury based on exposure to hazardous materials or unsafe working conditions. In addition, changes in applicable requirements or stricter interpretation of existing requirements may result in, costlyamong other things, significant civil penalties and injunctive relief, or potential statutory or actual damages. There can be no assurance that the processes we have implemented to manage compliance requirementswith these laws and regulations will be successful.
The FTC also sets expectations for failing to take appropriate steps to keep consumers’ personal information secure, or otherwise subjectfailing to provide a level of security commensurate to promises made to individual about the security of their personal information (such as in a privacy notice) may constitute unfair or deceptive acts or practices in violation of Section 5(a) of the
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FTC Act. While we do not intend to engage in unfair or deceptive acts or practices, the FTC has the power to enforce promises as it interprets them, and events that we cannot fully control, such as data breaches, may be result in FTC enforcement. Enforcement by the FTC under the FTC Act can result in civil penalties or enforcement actions.
Any actual or perceived failure by us or the third parties with whom we work to future liabilities. The occurrencecomply with data privacy or security laws, policies, legal obligations or industry standards, or any security incident that results in the unauthorized release or transfer of any of the foregoinginformation concerning individuals, may result in governmental enforcement actions and investigations, including by European data protection authorities and U.S. federal and state regulatory authorities, fines and penalties, litigation and/or adverse publicity, including by consumer advocacy groups, and could cause our customers, their patients and other healthcare professionals to lose trust in us, which could harm our reputation and have a material adverse effect on our business, financial condition and results of operations.
Our information technology infrastructure could be subject to service interruptions, data corruption, cyber-based attacks, or network security breaches, which could result in the disruption of operations or the loss of data confidentiality.
We rely on information technology networks and systems, including the Internet, cloud-based services and third partythird-party service providers, to process, transmit and store electronic information (including PHI), personally identifiable information, credit card and other financial information, and to manage or support a variety of business processes and activities, including procurement, manufacturing, distribution, invoicing, collection, communication with our employees, customers, dealers and suppliers, business acquisitions and other corporate transactions, compliance with regulatory, legal and tax requirements, and research and development. For example, in the ordinary course of business, our business collects, stores, and transmits certain sensitive data, including PHI, personally identifiable information, and patient data. These information technology networks and systems may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components, power outages, hardware failures or computer viruses. If these information technology systems suffer severe damage, disruption or shutdown and business continuity plans do not effectively resolve the issues in a timely manner, our business, financial condition, results of operations, and liquidity could be materially adversely affected.
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laws that require data to stay within their borders. All of these evolving compliance and operational requirements impose significant costs that are likely to increase over time.
We are subject to anti-bribery laws such as the U.S. Foreign Corrupt Practices Act as well as export controls, economic sanctions, and other trade laws, the violation of which could lead to serious adverse consequences.
We are subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”), the U.K. Bribery Act, and similar anti-bribery laws in other jurisdictions that generally prohibit companies and those acting on their behalf from authorizing, promising, offering or providing, directly or indirectly, improper payments or anything else of value to government officials to obtain or retain business or other commercial advantage, and the U.K. Bribery Act and other anti-bribery laws also prohibit similar conduct between private parties. The FCPA also imposes obligations on publicly traded U.S. corporations that are intended to prevent the diversion of corporate funds for improper payments and the establishment of “off the books” slush funds from which such payments can be made and to provide assurance that transactions are accurately recorded, lawful and in accordance with management’s authorization. Because of the predominance of government-sponsored health care systems around the world, many of our customer relationships outside of the United States are with government entities. As a result, interactions with those customers present compliance risk under the FCPA and other anti-bribery laws. In addition, anti-bribery laws can pose unique challenges for companies with foreign operations in countries where corruption is a recognized problem. While we believe we have implemented appropriate policies and procedures to mitigate risk of non-compliance with the FCPA and other applicable anti-bribery laws by the Company and persons or entities acting on our behalf, we cannot assure that such policies, procedures, and training will always protect us from violations by our employees, distributors or other agents. In addition, we may be exposed to liability due to pre-acquisition conduct of businesses or operations we acquire, as well as the conduct of their employees, distributors or other agents. Violations of anti-bribery laws, or allegations thereof, could disrupt our operations, distract management, and have a material adverse effect on our business, financial condition, results of operations and cash flows. We also could be subject to criminal and civil penalties, disgorgement, substantial expenditures related to remedial actions, and reputational harm.
We are also subject to U.S. export controls and economic sanctions laws, regulations and other legal requirements, including the Export Administration Regulations and economic sanctions administered and enforced by the Office of Foreign Assets Control, as well as other laws and regulations that limit our ability to market, sell, distribute or otherwise transfer our products or technology directly or indirectly to restricted persons and prohibited countries or regions. Our efforts to comply with U.S. and other applicable export controls and economic sanctions laws, regulations and other legal requirements may not prevent violations. Noncompliance with these laws could result in substantial civil and criminal penalties, including fines and the disgorgement of profits, the imposition of a court-appointed monitor, the denial of export privileges, and debarment from participation in government contracts, any of which could have a material adverse effect on our international operations or on our business, results of operations, financial condition and cash flows.
Risks Related to the Separation
We may not achieve some or all of the expected benefits of the Separation, and the Separation may adversely affect our businesses.
We may not be able to achieve the full strategic and financial benefits from the Separation that were expected, or such benefits may be delayed or not occur at all. The following benefits, among others, were expected to result from the Separation:
•the Separation is expected to allow investors to value the Company based on its distinct investment identity, and enable investors to evaluate the merits, performance and future prospects of the Company’s businesses based on their distinct characteristics;
•the Separation is expected to facilitate incentive compensation structures for employees more directly tied to the performance of the Company’s businesses, and may enhance employee hiring and retention by, among other things, improving the alignment of management and employee incentives with performance and growth objectives; and
•the Separation is expected to allow us to more effectively pursue our operating priorities and strategies, and enable management to focus on unique opportunities for long-term growth and profitability.
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We may not achieve these and other anticipated benefits for a variety of reasons, including, among others:
•certain costs and liabilities that were otherwise less significant to the Company prior to the Separation will be more significant for us as a separate company after the Separation
•we may be more susceptible to market fluctuations and other adverse events than we were prior to the Separation; and
•following the Separation, our businesses are less diversified than they were prior to the Separation.
If we fail to achieve some or all of the benefits we expected to result from the Separation, or if such benefits are delayed, our businesses, operating results and financial condition could be adversely affected.
We could incur significant liability if the separation and distribution of ESAB is determined to be a taxable transaction.
We have received (i) a private letter ruling from the IRS and (ii) an opinion from outside tax counsel regarding the qualification of the separation and distribution of ESAB as a transaction that is described in Sections 355(a) and 368(a)(1)(D) of the Internal Revenue Code. The private letter ruling and opinion each relies on certain facts, assumptions, representations and undertakings from ESAB and us regarding the past and future conduct of the companies’ respective businesses and other matters. If any of these facts, assumptions, representations or undertakings are incorrect or not satisfied, we may not be able to rely on the private letter ruling or opinion of tax counsel. In addition, the private letter ruling does not address all the requirements for determining whether the separation and distribution qualify under Sections 355(a) and 368(a)(1)(D) of the Internal Revenue Code, and the opinion, which addresses all such requirements, relies on the private letter ruling as to matters covered by the ruling and will not be binding on the IRS or the courts. Notwithstanding the private letter ruling or the opinion of tax counsel we have received, the IRS could determine on audit that the separation and distribution are taxable if it determines that any of these facts, assumptions, representations or undertakings are not correct or have been violated or if it disagrees with the conclusions not addressed in the ruling. If the separation and distribution of ESAB are determined to be taxable for U.S. federal income tax purposes, our stockholders that received the distribution and are subject to U.S. federal income tax and we could be subject to significant U.S. federal income tax liabilities.
Potential indemnification liabilities to ESAB pursuant to the separation agreement could materially and adversely affect our businesses, financial condition, results of operations and cash flows.
We entered into a separation and distribution agreement and related agreements with ESAB to govern the separation and distribution of ESAB and the relationship between the two companies going forward. These agreements provide for specific indemnity and liability obligations of each party and could lead to disputes between us. If we are required to indemnify ESAB under the circumstances set forth in these agreements, we may be subject to substantial liabilities. In addition, with respect to the liabilities for which ESAB has agreed to indemnify us under these agreements, there can be no assurance that the indemnity rights we have against ESAB will be sufficient to protect us against the full amount of the liabilities, or that ESAB will be able to fully satisfy its indemnification obligations. Each of these risks arising from changes in technology.could negatively affect our businesses, financial condition, results of operations and cash flows.
Changes in the future. Further,general economy could negatively impact the development of new technologies by competitors that may compete with our technologies could reduce demand for our products and affectservices and harm our operations and financial performance. Should we not be able to maintain or enhance
Our financial performance depends, in large part, on conditions in the competitive values of our products or develop and introduce new products or technologies successfully, or if new products or technologies fail to generate sufficient revenues to offset research and development costs, our business, financial condition and operating results could be materially adversely affected.
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Our business, financial condition and results of operations could be adversely affected by disruptions in the global economy caused by the ongoing conflict between Russia and Ukraine.
The global economy has been negatively impacted by the military conflict between Russia and Ukraine. Furthermore, governments in the United States, United Kingdom and European Union have each imposed export controls on certain products and financial and economic sanctions on certain industry sectors and parties in Russia, and Russia has imposed counter-sanctions in response. Although we have no direct operations in Russia or Ukraine or government-imposed sanctions on our taxproducts currently, we could experience the impact of sanctions in the future and/or shortages in materials, increased costs for raw material and other supply chain issues due in part to the negative impact of the Russia-Ukraine military conflict on the global economy. Further escalation of geopolitical tensions related to the military conflict, including increased trade barriers or restrictions on global trade, could result in, among other things, cyberattacks, additional supply disruptions, lower consumer demand and changes to foreign exchange rates or exposure to additional income tax liabilities couldand financial markets, any of which may adversely affect our financial results.business and supply chain.
We may be adversely affected if we lose members of our senior leadership. We are highly dependent on our senior leadership team as a result of their expertise in our industry and our business. The loss of key leadership or the inability to attract, retain and motivate sufficient numbers of qualified management personnel could have a material adverse effect on our business, financial condition and results of operations. Additionally, our continued success depends, in part, on our ability to identify and attract qualified candidates with the requisite education, background, and experience as well as our ability to develop, engage, and retain qualified employees. Failure to attract, develop, engage, and retain qualified employees, whether as a result of an insufficient number of qualified applicants, difficulty in recruiting new employees, or inadequate resources to train, integrate, and retain qualified employees, could impair our ability to execute our business strategy and could have a material adverse effect on our business, financial condition and results of operations.
The issuances of additional Common and Preferred stock or the resale of previously restricted Common stock may adversely affect the market price of Colfaxour Common stock.
Pursuant to certain registration rights agreements we have entered into with Mitchell P. Rales and Steven M. Rales BDT CF Acquisition Vehicle, LLC, and Markel Corporation (collectively, the “Investors”), the Investors and their permitted transferees have registration rights for the resale of certain shares of Colfaxour Common stock. These registration rights would facilitate the resale of such securities into the public market, and any such resale would increase the number of shares of Colfaxour Common stock available for public trading. Sales by the Investors or their permitted transferees of a substantial number of shares of Colfaxour Common stock in the public market, or the perception that such sales might occur, could have a material adverse effect on the price of Colfaxour Common stock.
Additionally, under our Amended and Restated Certificate of Incorporation, there are additional authorized shares of Colfaxour Common stock. Furthermore, we may issue a significant number of additional shares, in connection with acquisitions or otherwise. We also may issue a significant number of additional shares, either into the marketplace through an existing shelf registration statement or through other mechanisms. Additional shares issued would have a dilutive effect on our earnings per share.
Provisions in our governing documents and Delaware law and the percentage of Common stock owned by our largest stockholders, may delay or prevent an acquisition of ColfaxEnovis that may be beneficial to our stockholders.
Our Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, and Delaware law contain provisions that may make it difficult for a third partythird-party to acquire us without the consent of our Board of Directors. These include provisions prohibiting stockholders from taking action by written consent, prohibiting special meetings of stockholders called by stockholders, prohibiting stockholder nominations and approvals without complying with specific advance notice requirements, and mandating certain procedural steps for stockholders who wish to introduce business or nominate a director candidate. In addition, our Board of Directors has the right to issue Preferred stock without stockholder approval, which our Board of Directors could use to affect a rights plan or “poison pill” that could dilute the stock ownership of a potential hostile acquirer and may have the effect of delaying, discouraging or preventing an acquisition of Colfax. Delaware law also imposes some restrictions on mergers and other business combinations between Colfax and any holder of 15% or more of its outstanding voting stock.Enovis.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters are located in Annapolis Junction, MarylandWilmington, Delaware in a facility that we lease.
As of December 31, 2017,2022, our Air and Gas Handling reportable segment had 7 principal production facilities in the U.S. representing approximately 0.7 million and 0.1 million square feet of owned and leased space, and 28 principal production facilities in 17 different countries in Asia, Europe, the Americas, Australia and South Africa, representing a total of 2.6 million and 0.3 million square feet of owned and leased space, respectively. Additionally, as of December 31, 2017, our Fabrication TechnologyPrevention & Recovery segment had a total of 6eight facilities used in production, facilitiesdistribution and warehousing in the U.S., representing a total of 0.6 million115,000 and 0.9 million577,000 square feet of owned and leased space, respectively, and 33thirteen facilities used in production, facilitiesdistribution and warehousing outside the U.S., representing a total of 6.9 million784,000 square feet of leased space in ten countries in North America, Africa, Europe and 2.4 millionAsia.
As of December 31, 2022, our Reconstructive segment had a total of four facilities used in production, distribution and warehousing in the U.S., representing a total of 213,000 square feet of leased space, and four facilities used in production, distribution and warehousing outside the U.S., representing a total of 84,000 and 23,000 square feet of owned and leased space, respectively, in 16two countries in Australia, Central and Eastern Europe, Central and South America and Asia.Europe.
Item 3. Legal Proceedings
Discussion of legal matters is incorporated by reference to Part II, Item 8, Note 16,18, “Commitments and Contingencies,” in the Notes to the Consolidated Financial Statements.
Item 4. Mine Safety Disclosures
None.
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INFORMATION ABOUT OUR EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, positions and experience of our executive officers. All of our executive officers hold office at the pleasure of our Board of Directors.
| Name | Age | Position | ||||||||||||
| Matthew L. Trerotola | ||||||||||||||
| President, Chief Operating Officer and Director | ||||||||||||||
| Phillip B. Berry | 44 | Senior Vice President | ||||||||||||
| Daniel A. Pryor | Executive Vice President, Strategy and Business Development | |||||||||||||
| Senior Vice President | ||||||||||||||
| Senior Vice President | ||||||||||||||
Matthew L. Trerotola has been President and Chief Executive Officer since July 2015. Prior to joining Colfax,Enovis, Mr. Trerotola was an Executive Vice President and a member of DuPont’s Office of the Chief Executive, responsible for DuPont’s Electronics & Communications and Safety & Protection segments. Mr. Trerotola also had corporate responsibility for DuPont’s Asia-Pacific business. Many of Mr. Trerotola’s roles at DuPont involved applying innovation to improve margins and accelerate organic growth in global businesses. Prior to rejoining DuPont in 2013, Mr. Trerotola had served in leadership roles at Danaher Corporation since 2007, and was most recently Vice President and Group Executive for Life Sciences. Previously, Mr. Trerotola was Group Executive for Product Identification from 2009 to 2012, and President of the Videojet business from 2007 to 2009. While at McKinsey & Company from 1995 to 1999, Mr. Trerotola focused primarily on helping industrial companies accelerate growth. Mr. Trerotola earned his Masters of Business Administration (“M.B.A.”) from Harvard Business School and his Bachelor of Science (“B.S”) in Chemical Engineering from the University of Virginia. Mr. Trerotola is a director of AptarGroup, Inc.
Phillip B. Berry has been Chief Financial Officer since January 1, 2023. He joined the Company in 2020, initially serving as chief financial officer of the Company’s medical technology segment, and serving as chief financial officer of those business units following the Separation. Previously, he spent 18 years in the medical technologies sector with Novartis/Alcon, which included its launch of Alcon as an independent public company in 2019. During his tenure at Alcon, Mr. Berry served in finance leadership roles of increasing responsibility in strategy, operations and business process improvement. Mr. Berry holds a master’s degree in business administration from Kennesaw State University.
Daniel A. Pryor has been the Executive Vice President‚ Strategy and Business Development since July 2013. Mr. Pryor was Senior Vice President, Strategy and Business Development from January 2011 through July 2013. Prior to joining Colfax‚Enovis‚ he was a Partner and Managing Director with The Carlyle Group‚ a global alternative asset manager, where he focused on industrial leveraged buyouts and led numerous portfolio company and follow-on acquisitions. While at The Carlyle Group, he served on the boards of portfolio companies Veyance Technologies, Inc., John Maneely Co., and HD Supply Inc. Prior to The Carlyle Group, he spent 11 years at Danaher Corporation in roles of increasing responsibility‚responsibility most recently as Vice President - Strategic Development. Mr. Pryor earned his M.B.A. from Harvard Business School and his Bachelor of Arts in Economics from Williams College.
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serving as General Counsel, Mr. Tandy served as Vice President, Assistant General Counsel and Chief Compliance Officer of Biomet from 1999 through 2006. He joined Biomet as Assistant General Counsel in 1992. Prior to his employment at Biomet, Mr. Tandy was a Partner withpartner in the law firm of Hogan Lovells US LLPRasor, Harris, Lemon & Reed in Warsaw, Indiana, focusing his practice on representation of medical device and healthcare companies. He was an elected public official in Kosciusko County, Indiana, serving as a County Councilman for 22 years. He received his undergraduate degree in Political Science from 1999 to 2010. Her experience includes a broad rangeDePauw University and earned his Doctorate of corporate and transactional matters‚ including mergers and acquisitions‚ venture capital financings‚ debt and equity offerings and general corporate and securities law matters. Before entering the practice of law‚ Ms. Puckett worked for the U.S. Central Intelligence Agency and a major U.S. defense contractor. Ms. Puckett holds a J.D. from theJurisprudence at Indiana University of Maryland School of Law and a B.S. degree from James Madison University.in Bloomington, Indiana.
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PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our Common stock began trading on the New York Stock Exchange under the symbol ENOV on April 4, 2022, and previously traded under the symbol CFX onsince May 8, 2008. As of February 7, 2018,24, 2023, there were 34,3371,305 holders of record of our Common stock. The highnumber of holders of record is based upon the actual number of holders registered at such date and low sales prices per sharedoes not include holders of our Common stock, as reported on the New York Stock Exchange, for the fiscal periods presented are as follows:shares in “street name” or persons, partnerships, associates, corporations or other entities identified in security position listings maintained by depositories.
| Year Ended | ||||||||||||||||
| 2017 | 2016 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| First Quarter | $ | 41.99 | $ | 35.31 | $ | 30.18 | $ | 18.22 | ||||||||
| Second Quarter | $ | 41.96 | $ | 36.60 | $ | 33.63 | $ | 24.62 | ||||||||
| Third Quarter | $ | 42.93 | $ | 37.26 | $ | 31.66 | $ | 25.19 | ||||||||
| Fourth Quarter | $ | 43.29 | $ | 33.31 | $ | 39.84 | $ | 28.47 | ||||||||
Performance Graph
The graph below compares the cumulative total stockholder return on our Common stock with the cumulative total return of the Standard & Poor’s (“S&P”) 400 Industrial Index and the S&P Industrial Machinery Index. The graph assumes that $100 was invested on December 31, 20112017 in each of our Common stock, the S&P 400 Industrial Index and the S&P Industrial Machinery Index, and that all dividends were reinvested. Note that we have elected to add the S&P 400 Industrial Index this year because this index is used in relative total shareholder return performance share units that we have granted to employees.
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Issuer Repurchase of Equity Securities
On February 12, 2018, the Company’s Board of Directors authorized the repurchase of up to $100.0 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, and again for an additional $100 million on July 19, 2018. The timing and amount of shares repurchased is to be determined by management based on its evaluation of market conditions and other factors. The repurchase program has no expiration date and does not obligate the Company to acquire any specific number of shares. No sharesThe repurchase program was conducted pursuant to SEC Rule 10b-18.
There have been repurchased to date.no repurchases made under the repurchase program except the Company’s repurchase of shares of its Common stock under the repurchase program in open market transactions for $200.0 million in 2018. As of December 31, 2022, there are authorized Common stock repurchases of approximately $100 million remaining.
| Year Ended and As of December 31, | ||||||||||||||||||||
2017(1) | 2016(2) | 2015(3) | 2014(4) | 2013(5) | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
| Statement of Income Data: | ||||||||||||||||||||
| Net sales | $ | 3,300,184 | $ | 3,185,753 | $ | 3,434,352 | $ | 3,971,059 | $ | 3,543,890 | ||||||||||
| Operating income | 29,151 | 236,800 | 265,620 | 377,428 | 318,494 | |||||||||||||||
| Specific costs included in Operating income: | ||||||||||||||||||||
| Restructuring and other related charges | 68,351 | 58,496 | 56,822 | 51,133 | 31,861 | |||||||||||||||
| Goodwill and intangible asset impairment | 152,700 | 238 | 1,486 | — | — | |||||||||||||||
| Pension settlement loss (gain) | 46,933 | 48 | (582 | ) | 190 | (592 | ) | |||||||||||||
| Dividends on preferred stock | — | — | — | 2,348 | 20,396 | |||||||||||||||
| Preferred stock conversion inducement payment | — | — | — | 19,565 | — | |||||||||||||||
| Net (loss) income from continuing operations | (54,540 | ) | 154,752 | 176,950 | 400,381 | 160,606 | ||||||||||||||
| Net (loss) income per share from continuing operations - diluted | (0.59 | ) | 1.12 | 1.26 | 2.86 | 1.06 | ||||||||||||||
| Net income (loss) per share from discontinued operations - diluted | 1.81 | (0.08 | ) | 0.08 | 0.16 | 0.48 | ||||||||||||||
| Balance Sheet and Other Data: | ||||||||||||||||||||
| Cash and cash equivalents | 262,019 | 208,814 | 178,993 | 281,066 | 275,793 | |||||||||||||||
| Total assets | 6,709,697 | 6,338,440 | 6,732,919 | 7,211,517 | 6,593,679 | |||||||||||||||
| Total debt, including current portion | 1,061,071 | 1,292,144 | 1,417,547 | 1,536,810 | 1,479,586 | |||||||||||||||
| Net cash provided by operating activities | 218,770 | 246,974 | 303,813 | 385,758 | 362,169 | |||||||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs(1) | ||||||||||||||||||||||
| — | $ | — | — | $ | 99,997,744 | |||||||||||||||||||||
| 10/28/22 - 11/24/22 | — | — | — | 99,997,744 | ||||||||||||||||||||||
| 11/25/22 - 12/31/22 | — | — | — | 99,997,744 | ||||||||||||||||||||||
| Total | — | $ | — | — | $ | 99,997,744 | ||||||||||||||||||||
(1) Represents the repurchase program limit authorized by the Board of Directors of $300 million less the value of purchases made under the repurchase program.
Item 6. [RESERVED]
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of Company’s management. This MD&A is divided into four main sections:
•Overview
•Results of Operations
•Liquidity and Capital Resources
•Critical Accounting Policies
Overview
Enovis is a medical technology company focused on developing clinically differentiated solutions that generate measurably better patient outcomes and transform workflows by manufacturing and distributing high-quality medical devices with a broad range of products used for reconstructive surgery, rehabilitation, pain management and physical therapy. Our products address the continuum of patient care from injury prevention to rehabilitation after surgery or injury or from degenerative disease, enabling people to regain or maintain their natural motion. Please see Part I, Item 1. “Business” for a discussion of Colfax’sEnovis’s objectives and methodologies for delivering shareholder value and the sale of Colfax’s Fluid Handling business.value.
•Prevention & Recovery -a single reportable segment. Subsequent to the sale, the Company now conducts its continuing operations through the Air and Gas Handling and Fabrication Technology segments, which also represent the Company’s reportable segments.
We have a global geographic footprint, with production facilities in Europe, North America, South America, Asia, AustraliaEurope, Africa, and Africa. Through our reportable segments, weAsia. We serve a global customer base across multiple markets through a combination of direct sales and third-party distribution channels. Our customer base is highly diversified and includes commercial, industrial and government customers.in the medical markets.
Integral to our operations is CBS. CBS is our business management system, includingEGX. EGX is our culture and includes our values and behaviors, a comprehensive set of tools. It includestools, and repeatable, teachable processes that we use to drive continuous improvement and create superior value for our customers, shareholders and associates. Rooted in our core values, it is our culture. We believe that our management team’s access to, and experience in, the application of the CBSEGX methodology is one of our primary competitive strengths.
Results of Operations
The following discussion of Results of Operations addresses the comparison of the periods presented. The Company’sOur management evaluates the operating results of each of its reportable segments based upon Net sales and Segment operating income (loss), which represents Operating income before Goodwill and intangible asset impairment charge, Pension settlement loss and Restructuring and other related charges.Adjusted EBITDA as defined in the “Non-GAAP Measures” section.
Items Affecting Comparability of Reported Results
Our financial performance and growth are driven by many factors, principally our ability to serve global markets,customers with market-leading delivery and innovation; the mix of products sold in any period; the impact of competitive forces, economic and market conditions; reimbursement levels for products in certain medical sales channels; availability of capital and attractive acquisition opportunities; our ability to continuously improve our cost structure; fluctuations in the relationship of foreign currencies to the U.S. dollar, general economic market conditions, the global economydollar; and capital spending levels, the availability of capital, our estimates concerning asbestos litigation expense and liabilities and availability of insurance thereto, the impact of restructuring initiatives, our ability to pass cost increases on to customers through pricing, the impact of sales mix, our ability to continue to grow through acquisitions, and other factors.pricing. These key factors have impacted our results
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of operations in the past and are likely to affect them in the future.
The Separation
On April 4, 2022, we completed the Separation through a tax-free, pro-rata distribution of 90% of the outstanding common stock of ESAB to our stockholders. We initially retained 10% of the shares of ESAB common stock immediately following the Separation. On November 18, 2022, we completed an exchange rates since December 31, 2016 increased net assets by approximately 8%.
Once the Separation was completed in the second quarter of 2022, we recorded a charge of $2.4 million, of which $0.5 million is included in Selling, general and administrative expense and $1.9 million is included in Income (loss)began classifying the results from discontinued operations, net of taxes,the fabrication technology business for the yearcomparable periods presented as a discontinued operation in our financial statements. Accordingly, the results of our fabrication technology businesses are excluded from continuing operations in the accompanying financials for the years ended December 31, 2016. Substantially all of this amount related to accumulated foreign currency translation charges previously included in Accumulated other comprehensive loss. Due to loss of control, we have applied2022, 2021, and 2020.
We expect that the cost method of accountingSeparation allows each company to: (1) optimize capital allocation for our Venezuelan operations beginning on September 30, 2016. Prior to,internal investment, mergers and at the date of deconsolidation, our Venezuelan operations represented less than 1% of our net assets, revenuesacquisitions, and operating income.
| Year Ended December 31, | |||||||||
| 2017 | 2016 | 2015 | |||||||
| Foremarket and equipment | 40 | % | 40 | % | 43 | % | |||
| Aftermarket and consumables | 60 | % | 60 | % | 57 | % | |||
Strategic Acquisitions
We complement our organic growth plans with strategic acquisitions.acquisitions and other investments. Acquisitions can significantly affect our reported results, and we report the change in our Net sales between periods both from existing and acquired businesses. Orders and order backlog are presented only for the longer-cycle Air and Gas Handling segment, where this information is relevant. The change in Net sales due to acquisitions for the periodsyears ended December 31, 2022 and 2021 presented in this filing represents the incremental sales from acquired businesses.in comparison to the portion of the prior period during which we did not own the business.
During 2017,the year ended December 31, 2022, the Company completed two business acquisitions for aggregate net cash consideration of $50.5 million. In the second quarter of 2022, the Company acquired KICo Knee Innovation Company Pty Limited and subsidiaries, an Australian private company doing business as 360 Med Care, which is a medical device distributor that bundles certain computer-assisted surgery and patient experience enhancement programs to add value to the device supply arrangements with surgeons, hospitals, and insurers. In the third quarter of 2022, the Company acquired a controlling interest in our AirInsight Medical Systems, the flagship product of which is the ARVIS surgical navigation system.
During the year ended December 31, 2021, the Company completed five acquisitions for aggregate net cash consideration of $201.6 million and Gas Handling segmentaggregate equity consideration of $285.7 million. In the first quarter of 2021, the Company acquired Trilliant Surgical, a national provider of foot and ankle orthopedic implants. In the second quarter of 2021, the Company acquired MedShape, Inc., a provider of innovative surgical solutions for foot and ankle surgeons using its patented superelastic nickel titanium (NiTiNOL) and shape memory polymer technologies. These two acquisitions were completed for total consideration, net of cash received, of $219.6$204.1 million, subject to certain purchase price adjustments. This includesThe Trilliant and MedShape acquisitions, along with the 2020 acquisition of Siemens Turbomachinery Equipment GmbH (STE) from Siemens AGthe Scandinavian Total Ankle Replacement System and Finger Joint Arthroplasty Portfolio, created our growth product portfolio in the fourthfoot and ankle surgical market. In the third quarter of 2021, the Company acquired Mathys AG Bettlach (“Mathys”), a Switzerland-based company that develops and distributes innovative products for cashartificial joint replacement, synthetic bone graft solutions and sports medicine, for total acquisition equity consideration of $214.6 million. This$285.7 million of Colfax Common stock. The Mathys acquisition broadened the segment’s range of compressionexpanded our reconstructive product portfolio with its complementary surgical solutions and expanded its product offering into smaller steam turbines.broadened our reach outside the U.S.
During 2015,the year ended December 31, 2020, the Company completed two acquisitions for an aggregate purchase price of approximately $196 million. The acquisitions expanded our portfolio of air and gas compression products and enhanced our fan product offering with ventilation control software.
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Global Operations
During 2016,2022, approximately 32% of our sales are derived from operations outside the Company deployedU.S., the majority of which is in Europe with the remaining portion mostly in the Asia-Pacific region. Accordingly, we can be affected by market demand, economic and political factors in countries in Europe and the Asia-Pacific region, and significant movements in foreign exchange rates. Our ability to grow and our financial performance will be affected by our ability to address challenges and opportunities that are a consequence of expanding our global operations through our recent acquisitions, including efficiently utilizing our international sales channels, manufacturing and distribution capabilities, participating in the expansion of market opportunities, successfully completing global acquisitions and engineering innovative new product applications to create better patient outcomes.
The majority of our Net sales derived from operations outside the U.S. are denominated in currencies other than the U.S. dollar. Similar portions of our manufacturing and employee costs are also outside the U.S. and denominated in currencies other than the U.S. dollar. Changes in foreign exchange rates can impact our results of operations and are quantified when significant. For the year ended December 31, 2022 compared to 2021, fluctuations in foreign currencies decreased Net sales and Gross profit by approximately $26 million2.5% and decreased operating expenses by approximately 2%.
Seasonality
Although sales in our Prevention & Recovery and Reconstructive segments typically peak in the fourth quarter, these historical seasonality trends were disrupted by the commercial impacts caused by the COVID-19 pandemic. General economic conditions may, however, impact future seasonal variations.
Material Costs
Our principal raw materials and components are foam ethylene vinyl acetate, copolymer for our bracing and vascular products in our Prevention & Recovery segment and cobalt chromium alloy, stainless steel alloys, titanium alloy and ultra high molecular weight polyethylene in our Reconstructive segment. Prices for raw materials, energy and commodities are subject to acquirevolatility and are influenced by worldwide economic conditions. Input cost inflation historically has not been a business thatmaterial factor to our gross margin; however, inflation effects have increased since 2021 and are expected to continue to remain elevated for at least the segment’snear term. In response, we have been enacting tactical price increases to certain products, mainly in the Prevention & Recovery segment. Although we seek to proactively manage inflation risk, future changes in component and raw material costs may adversely impact earnings or our margins. Prices for raw materials, energy and commodities are also influenced by import duties and tariffs, world supply and demand balances, inventory levels, availability of substitute materials, currency exchange rates, anticipated or perceived shortages, geopolitical tensions, government trade practices and regulations and other factors.
Sales and Cost Mix
Gross profit margins within our operating segments vary primarily based on the type of product and technology offerings.distribution channel. Reconstructive products tend to have higher gross margins than the Prevention & Recovery products.
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Prevention & Recovery | 66 | % | 72 | % | 77 | % | |||||||||||
Reconstructive(1) | 34 | % | 28 | % | 23 | % | |||||||||||
(1) The changes from the year ended December 31, 2020 to 2022 reflects the impact from acquisitions and double-digit growth.
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Non-GAAP Measures
Adjusted EBITDA
Adjusted EBITDA and Adjusted EBITDA margin, two non-GAAP performance measures, are included in this report because they are key metrics used by our management to assess our operating performance. Adjusted EBITDA excludes from Net income (loss) from continuing operations the effect of income tax expense (benefit), Other income, non-operating (gain) loss on investments, debt extinguishment charges, interest expense, net, restructuring and other charges, Medical Device Regulation (MDR) fees and other costs, strategic transaction costs, stock-based compensation, depreciation and other amortization, acquisition-related intangible asset amortization, insurance settlement (gain) loss, and fair value charges on acquired inventory. We also present Adjusted EBITDA and Adjusted EBITDA margin by operating segment, which are subject to the same adjustments. Operating income (loss), adjusted EBITDA and adjusted EBITDA margins at the operating segment level also include allocations of certain central function expenses not directly attributable to either operating segment. Adjusted EBITDA assists our management in comparing operating performance over time because certain items may obscure underlying business trends and make comparisons of long-term performance difficult, as they are of a nature and/or size that occur with inconsistent frequency or relate to discrete restructuring plans and other initiatives that are fundamentally different from our ongoing productivity improvements. Our management also believes that presenting these measures allows investors to view our performance using the same measures that we use in evaluating our financial and business performance and trends.
Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information calculated in accordance with GAAP. Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures. The following tables set forth a reconciliation of net loss from continuing operations, the most directly comparable financial statement measure, to Adjusted EBITDA for the years ended December 31, 2022, 2021 and 2020.
| Year Ended December 31, 2022 | |||||||||||||||||
| Prevention & Recovery | Reconstructive | Total | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
Net loss from continuing operations (GAAP)(1) | $ | (38.2) | |||||||||||||||
| Income tax expense | 36.1 | ||||||||||||||||
| Other income | (2.1) | ||||||||||||||||
| Gain on cost basis investment | (8.8) | ||||||||||||||||
| Gain on investment in ESAB Corporation | (102.7) | ||||||||||||||||
| Debt extinguishment charges | 20.4 | ||||||||||||||||
| Interest expense, net | 24.1 | ||||||||||||||||
| Operating loss (GAAP) | $ | (18.2) | $ | (52.9) | (71.2) | ||||||||||||
| Operating loss margin | (1.8) | % | (9.9) | % | (4.6) | % | |||||||||||
| Adjusted to add (deduct): | |||||||||||||||||
Restructuring and other charges(2) | 9.6 | 9.4 | 19.0 | ||||||||||||||
MDR and other costs(3) | 9.8 | 6.9 | 16.7 | ||||||||||||||
Strategic transaction costs(3) | 39.9 | 21.2 | 61.0 | ||||||||||||||
Stock-based compensation(3) | 20.2 | 11.3 | 31.5 | ||||||||||||||
| Depreciation and other amortization | 24.4 | 52.3 | 76.7 | ||||||||||||||
| Amortization of acquired intangibles | 80.1 | 46.2 | 126.3 | ||||||||||||||
Insurance settlement gain(3) | (24.4) | (12.3) | (36.7) | ||||||||||||||
| Inventory step-up | — | 12.8 | 12.8 | ||||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 141.3 | $ | 94.7 | $ | 236.1 | |||||||||||
| Adjusted EBITDA margin (non-GAAP) | 13.8 | % | 17.7 | % | 15.1 | % | |||||||||||
(1) Non-operating components of Net loss from continuing operations are not allocated to the segments.
(2) Restructuring and other charges in the Prevention & Recovery segment includes $1.7 million of expense classified as Cost of sales on the Company’s Consolidated Statements of Operations.
(3) Certain amounts are allocated to the segments as a percentage of revenue as the costs or gain are not discrete to either segment.
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| Year Ended December 31, 2021 | |||||||||||||||||
| Prevention & Recovery | Reconstructive | Total | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
Net loss from continuing operations (GAAP)(1) | $ | (102.3) | |||||||||||||||
| Income tax benefit | (19.5) | ||||||||||||||||
| Debt extinguishment charges | 29.9 | ||||||||||||||||
| Interest expense, net | 29.1 | ||||||||||||||||
| Operating loss (GAAP) | $ | (14.9) | $ | (47.9) | (62.8) | ||||||||||||
| Operating loss margin | (1.5) | % | (12.0) | % | (4.4) | % | |||||||||||
| Adjusted to add: | |||||||||||||||||
Restructuring and other charges(2) | 11.5 | 2.4 | 13.9 | ||||||||||||||
MDR and other costs(3) | 5.7 | 2.2 | 7.9 | ||||||||||||||
Strategic transaction costs(3) | 14.8 | 8.6 | 23.4 | ||||||||||||||
Stock-based compensation(3) | 17.8 | 7.9 | 25.7 | ||||||||||||||
| Depreciation and other amortization | 25.3 | 44.8 | 70.1 | ||||||||||||||
| Amortization of acquired intangibles | 72.6 | 44.3 | 116.9 | ||||||||||||||
| Inventory step-up | 0.7 | 10.1 | 10.8 | ||||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 133.5 | $ | 72.5 | $ | 206.0 | |||||||||||
| Adjusted EBITDA margin (non-GAAP) | 13.0 | % | 18.1 | % | 14.4 | % | |||||||||||
(1) Non-operating components of Net loss from continuing operations are not allocated to the segments.
(2) Restructuring and other charges in the Prevention & Recovery segment includes $5.2 million of expense classified as Cost of sales on the Company’s Consolidated Statements of Operations.
(3) Certain amounts are allocated to the segments as a percentage of revenue as the costs or gain are not discrete to either segment.
| Year Ended December 31, 2020 | |||||||||||||||||
| Prevention & Recovery | Reconstructive | Total | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
Net loss from continuing operations (GAAP)(1) | $ | (74.4) | |||||||||||||||
| Income tax benefit | (44.6) | ||||||||||||||||
| Interest expense, net | 52.8 | ||||||||||||||||
| Operating loss (GAAP) | $ | (43.9) | $ | (22.3) | (66.2) | ||||||||||||
| Operating loss margin | (5.1) | % | (8.6) | % | (5.9) | % | |||||||||||
| Adjusted to add: | |||||||||||||||||
Restructuring and other charges(2) | 19.6 | 3.8 | 23.3 | ||||||||||||||
MDR and other costs(3) | 5.0 | 1.9 | 6.9 | ||||||||||||||
Strategic transaction costs(3) | 2.2 | 0.6 | 2.8 | ||||||||||||||
Stock-based compensation(3) | 17.3 | 5.2 | 22.5 | ||||||||||||||
| Depreciation and other amortization | 25.2 | 39.3 | 64.6 | ||||||||||||||
| Amortization of acquired intangibles | 82.9 | 20.4 | 103.3 | ||||||||||||||
| Inventory step-up | 4.3 | — | 4.3 | ||||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 112.6 | $ | 49.0 | $ | 161.5 | |||||||||||
| Adjusted EBITDA margin (non-GAAP) | 13.0 | % | 19.0 | % | 14.4 | % | |||||||||||
(1) Non-operating components of Net loss from continuing operations are not allocated to the segments.
(2) Restructuring and other charges in the Prevention & Recovery segment includes $6.6 million of expense classified as Cost of sales on the Company’s Consolidated Statements of Operations.
(3) Certain amounts are allocated to the segments as a percentage of revenue as the costs or gain are not discrete to either segment.
39
Total Company
Sales Orders and Backlog
Net sales from continuing operations decreased from $3.4increased to $1.6 billion in 2015 to $3.22022 from $1.4 billion in 2016, and increased to $3.3 billion in 2017.2021. The following table presents the components of changes in our consolidated Net sales from continuing operations and, for our Air and Gas Handling segment, orders and order backlog:sales.
| Net Sales | |||||||||||
| $ | % | ||||||||||
| (Dollars in millions) | |||||||||||
| For the year ended December 31, 2020 | $ | 1,120.7 | |||||||||
| Components of Change: | |||||||||||
Existing businesses(1) | 154.3 | 13.8 | % | ||||||||
Acquisitions(2) | 139.5 | 12.4 | % | ||||||||
Foreign currency translation(3) | 11.7 | 1.0 | % | ||||||||
| 305.5 | 27.2 | % | |||||||||
| For the year ended December 31, 2021 | $ | 1,426.2 | |||||||||
| Components of Change: | |||||||||||
Existing businesses(1) | 79.6 | 5.6 | % | ||||||||
Acquisitions(2) | 93.3 | 6.5 | % | ||||||||
Foreign currency translation(3) | (36.0) | (2.5) | % | ||||||||
| 136.9 | 9.6 | % | |||||||||
| For the year ended December 31, 2022 | $ | 1,563.1 | |||||||||
| Air and Gas Handling | ||||||||||||||||||||
| Net Sales | Orders(1) | Backlog at Period End | ||||||||||||||||||
| $ | % | $ | % | $ | % | |||||||||||||||
| (In millions) | ||||||||||||||||||||
| As of and for the year ended December 31, 2015 | $ | 3,434.4 | $ | 1,304.7 | $ | 904.2 | ||||||||||||||
| Components of Change: | ||||||||||||||||||||
Existing businesses(2) | (160.3 | ) | (4.7 | )% | (15.0 | ) | (1.1 | )% | (58.7 | ) | (6.5 | )% | ||||||||
Acquisitions(3) | 52.9 | 1.5 | % | 66.6 | 5.1 | % | — | — | % | |||||||||||
Foreign currency translation(4) | (141.2 | ) | (4.0 | )% | (51.3 | ) | (4.0 | )% | (49.4 | ) | (5.5 | )% | ||||||||
| (248.6 | ) | (7.2 | )% | 0.3 | — | % | (108.1 | ) | (12.0 | )% | ||||||||||
| As of and for the year ended December 31, 2016 | $ | 3,185.8 | $ | 1,305.0 | $ | 796.1 | ||||||||||||||
| Components of Change: | ||||||||||||||||||||
Existing businesses(2) | (15.7 | ) | (0.5 | )% | (44.1 | ) | (3.4 | )% | (57.0 | ) | (7.2 | )% | ||||||||
Acquisitions(3) | 85.2 | 2.7 | % | 34.7 | 2.7 | % | 105.3 | 13.2 | % | |||||||||||
Foreign currency translation(4) | 44.9 | 1.4 | % | 10.9 | �� | 0.8 | % | 49.0 | 6.2 | % | ||||||||||
| 114.4 | 3.6 | % | 1.5 | 0.1 | % | 97.3 | 12.2 | % | ||||||||||||
| As of and for the year ended December 31, 2017 | $ | 3,300.2 | $ | 1,306.5 | $ | 893.4 | ||||||||||||||
(1) Represents contracts for products or services, net of current year cancellations for orders placed in the current and prior period. Prior period amounts have been recast to conform to current year presentation.
Net sales increased during 2022 as compared to 2021 primarily due to an increase in Net sales from existing businesses across both of our segments and sales from acquired businesses in our Reconstructive segment, partially offset by foreign currency headwinds primarily in our Prevention & Recovery segment. In our Reconstructive segment, existing business sales increased $47.1 million, or 11.8%, due to significantly higher sales volumes than the prior year across all product lines driven by market outperformance, new product launches, and reduced COVID impacts. In our Prevention & Recovery segment, existing business sales increased $32.5 million, or 3.2%, due to improved sales volumes and inflation-related pricing increases. Net sales from acquisitions increased during 20172022 as compared to 2016 was attributable2021 primarily due to decreases of $74.7 millionthe Mathys, Trilliant, and Medshape acquisitions in our Air and Gas Handling, mostly offset by an increaseReconstructive segment that closed in 2021. The strengthening of $59.0the U.S. dollar relative to other currencies, most notably the Euro, caused a $36.0 million unfavorable currency translation impact.
2021 Compared to 2020
Net sales increased during 2021 as compared to 2020 due to the recovery from the COVID-related sales downturn in our Fabrication Technology segment. Air and Gas Handling orders, net of cancellations and excluding2020, inflation-related pricing increases, sales from acquisitions, new product sales, and foreign currency translation effects, decreased $44.1tailwinds. In our Reconstructive segment, existing business sales increased $36.1 million, during 2017 in comparison to 2016or 14.0%, primarily due to large project bookings duringa recovery in sales volumes from the second half of 2016 that did not repeat, delays in ordersdecline related to COVID-19 and expansion in the second half of 2017,reconstructive product group from market outperformance and lower demandnew product launches. In our Prevention & Recovery segment, existing business sales increased $117.6 million, or 13.6%, primarily due to a recovery in power generation markets. Thesales volumes from the decline was partially offset byrelated to COVID, as well as inflation-related pricing increases in general industrial and other end markets.
40
Operating Results
The following table summarizes our results from continuing operations for the comparable three yearthree-year period.
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Gross profit | $ | 869.4 | $ | 777.7 | $ | 603.6 | |||||||||||
| Gross profit margin | 55.6 | % | 54.5 | % | 53.9 | % | |||||||||||
| Selling, general and administrative expense | $ | 772.9 | $ | 665.8 | $ | 515.5 | |||||||||||
| Research and development expense | $ | 60.8 | $ | 49.1 | $ | 34.3 | |||||||||||
| Operating loss | $ | (71.2) | $ | (62.8) | $ | (66.2) | |||||||||||
| Operating loss margin | (4.6) | % | (4.4) | % | (5.9) | % | |||||||||||
| Net loss from continuing operations | $ | (38.2) | $ | (102.3) | $ | (74.4) | |||||||||||
| Net loss margin from continuing operations (GAAP) | (2.4) | % | (7.2) | % | (6.6) | % | |||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 236.1 | $ | 206.0 | $ | 161.5 | |||||||||||
| Adjusted EBITDA margin (non-GAAP) | 15.1 | % | 14.4 | % | 14.4 | % | |||||||||||
| Items excluded from Adjusted EBITDA: | |||||||||||||||||
Restructuring and other charges(1) | $ | 19.0 | $ | 13.9 | $ | 23.3 | |||||||||||
| MDR and other costs | $ | 16.7 | $ | 7.9 | $ | 6.9 | |||||||||||
| Strategic transaction costs | $ | 61.0 | $ | 23.4 | $ | 2.8 | |||||||||||
| Stock-based compensation | $ | 31.5 | $ | 25.7 | $ | 22.5 | |||||||||||
| Depreciation and other amortization | $ | 76.7 | $ | 70.1 | $ | 64.6 | |||||||||||
| Amortization of acquired intangibles | $ | 126.3 | $ | 116.9 | $ | 103.3 | |||||||||||
| Insurance settlement gain | $ | (36.7) | $ | — | $ | — | |||||||||||
| Inventory step-up | $ | 12.8 | $ | 10.8 | $ | 4.3 | |||||||||||
| Interest expense, net | $ | 24.1 | $ | 29.1 | $ | 52.8 | |||||||||||
| Debt extinguishment charges | $ | 20.4 | $ | 29.9 | $ | — | |||||||||||
| Income tax expense (benefit) | $ | 36.1 | $ | (19.5) | $ | (44.6) | |||||||||||
(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.
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (Dollars in millions) | |||||||||||
| Gross profit | $ | 1,029.5 | $ | 992.4 | $ | 1,071.7 | |||||
| Gross profit margin | 31.2 | % | 31.2 | % | 31.2 | % | |||||
| Selling, general and administrative expense | $ | 732.3 | $ | 696.8 | $ | 748.3 | |||||
| Restructuring and other related charges | 68.4 | 58.5 | 56.8 | ||||||||
| Goodwill and intangible asset impairment charge | 152.7 | 0.2 | 1.5 | ||||||||
| Pension settlement loss (gain) | 46.9 | — | (0.6 | ) | |||||||
| Operating income | 29.2 | 236.8 | 265.6 | ||||||||
| Operating income margin | 0.9 | % | 7.4 | % | 7.7 | % | |||||
| Interest expense | $ | 41.1 | $ | 30.3 | $ | 47.5 | |||||
| Provision for income taxes | 42.6 | 51.8 | 41.2 | ||||||||
Selling, general and administrative expense increased by $35.5$107.1 million during 2017primarily due to a $50.3 million increase in comparison to 2016, which was attributable to increases in both Air and Gas Handling and Fabrication Technology. The increases were mainly driven by $28.3 million increasescosts associated with acquisitions completed in 2017,and the related integration costs from the newly acquired businesses within our Reconstructive segment and a $14.2$37.6 million increase in businessstrategic transaction costs, driven by Separation-related costs incurred in the first half of 2022. Research and development related expenses, partially offset bycosts also increased compared to the incremental benefits realized fromprior year period primarily due to increased spend within recently acquired businesses in our restructuring programsReconstructive segment. Amortization of acquired intangibles and cost savings initiatives. RestructuringDepreciation and other related chargesamortization also increased during 2017 compared to 2016, driven by acceleratedthe prior year period due to acquisition-related increases.
On November 18, 2022, we completed an exchange with a lender under our Enovis Credit Agreement of 6,003,431 shares of common stock of ESAB, representing all of our retained interest in ESAB, for $230.5 million of the $450 million in term loan outstanding under the Enovis Credit Agreement. We recorded a gain of $102.7 million on the disposition of the investment representing the fair value in excess of cost reduction programs to eliminate excess cost in responsebasis.
41
During the year ended December 31, 2022, we recorded a net insurance settlement gain of $36.7 million which was related to the current market conditions.
Debt extinguishment charges of $20.4 million were recorded in the year ended December 31, 2022. Charges of $20.1 million were recorded in the second quarter of 2022, comprised of $12.7 million in redemption premiums and $7.4 million in noncash write-offs of original issue discount and deferred financing fees in conjunction with the Separation. Additionally, $0.3 million of noncash write-offs of deferred financing fees were recorded in conjunction with the aforementioned debt-for-equity exchange during the fourth quarter of 2022. Debt extinguishment charges of $29.9 million were recorded in the second quarter of 2021 due to an early redemption of certain senior notes.
Interest expense, net decreased by $5.0 million, primarily due to a reduction in debt balances as a result of the Separation-related debt redemptions at the beginning of the second quarter of 2022.
The effective tax rate for Net income from continuing operations during 2017 increased by $10.8 million compared to 2016, primarily attributable to the senior note offering of €350 million in April 2017 and higher interest rates2022 was (1,745.8)% on our senior unsecured debt.
Net loss from continuing operations decreased primarily due to the gain on the ESAB common stock, as well as the insurance settlement gain and acquisition-related sales, offset by costs associated with the Separation and acquisition-related costs. Net loss margin from continuing operations decreased by 480 basis points due to the aforementioned factors. Adjusted EBITDA increased due to organic growth and lower operating expenses in existing businesses, partially offset by inflation of supply chain, logistics, and other costs. Adjusted EBITDA margin excluding the effects of recent acquisitions and foreign currency pressures increased by approximately 150 basis points. Our recent acquisitions were dilutive to the margin by approximately 70 basis points and are expected to be accretive to margins in future years.
Selling, general and administrative expense decreased $51.5increased $150.3 million during 2016primarily due to a $103.7 million increase in comparisoncosts associated with acquisitions and the related integration costs from the newly acquired businesses, primarily within our Reconstructive segment, the cessation of prior year temporary cost reduction measures that were taken in response to 2015, which was attributableCOVID-19, and increased sales commissions from higher sales levels. A $20.6 million increase in strategic transaction costs primarily related to decreases in both Air and Gas Handling and Fabrication Technology. Execution of structural cost reductions in both segments as a result of restructuring programs and cost savings initiatives was the primary driver in reducingSeparation also increased Selling, general and administrative expense overduring 2021.
Debt extinguishment charges of $29.9 million were recorded in the prior year. Changessecond quarter of 2021 due to an early redemption of certain senior notes. Interest expense, net decreased by $23.7 million, primarily due to an overall reduction in debt balances during the current year as a result of the aforementioned redemption of senior notes.
The effective tax rate for 2021 was 16.0% on a loss from continuing operations before income taxes, which was lower than the 2021 U.S. federal statutory tax rate of 21% mainly due to the impact of additional U.S. tax on international operations and certain non-deductible expenses. These were offset by the impact of the reduction of valuation allowance on U.S federal net operating losses. The effective tax rate for 2020 was 37.5% on a loss from continuing operations before income taxes, which was higher than the 2020 U.S. federal statutory tax rate of 21% mainly due to the net impact of reduction of valuation
42
allowance on U.S. federal, state and foreign exchange ratesnet operating losses. These were offset by the impact of additional U.S. tax on international operations and certain non-deductible expenses.
Net loss from continuing operations increased in 2021 compared to 2020, largely due to the cessation of aforementioned temporary cost reductions implemented during 2016 decreased Selling, general,2020 in reaction to COVID-driven sales reductions, higher income tax expense, as well as increased supply chain and administrative expenseslogistic costs, offset by approximately $27 million. These decreases wereincreased sales from the 2021 COVID recovery. During 2021, we also incurred debt extinguishment charges, increased strategic transaction costs related to the Separation, and higher sales commissions related to greater sales. Net loss margin from continuing operations increased by 60 basis points due to the aforementioned factors. Adjusted EBITDA increased primarily due to the improved sales volumes and new product initiatives, partially offset by $13 million of acquisition-related growth in our Airthe aforementioned supply chain and Gas Handling segment.
43
Business Segments
As discussed further above, the Company reportswe report results in two reportable segments: AirPrevention & Recovery and Gas HandlingReconstructive. Operating loss, adjusted EBITDA and Fabrication Technology.adjusted EBITDA margins at the operating segment level also include allocations of certain central function expenses not directly attributable to either operating segment. See See Item 7. “Non-GAAP Measures” for a further discussion and reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures.
We design,develop, manufacture, install and maintain airdistribute rigid bracing products, orthopedic soft goods, vascular systems and gas handlingcompression garments, and hot and cold therapy products and offer robust recovery sciences products in the clinical rehabilitation and sports medicine markets such as bone growth stimulators and electrical stimulators used for use in a wide range of markets, including power generation, oil, gas and petrochemical, mining, wastewater, and general industrial and other.pain management. Our air and gas handlingPrevention & Recovery products are principally marketed under the Howdenseveral brand name. Howden’snames, most notably DJO, to orthopedic specialists, primary products are heavy-duty fans, rotary heat exchangerscare physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers, and compressors. The fansother healthcare professionals who treat patients with a variety of treatment needs including musculoskeletal conditions resulting from degenerative diseases, deformities, traumatic events and heat exchangerssports-related injuries. Many of our medical devices and related accessories are used in coal-firedby athletes and other types of power stations, both in combustionpatients for injury prevention and emissions control applications, underground mines, steel sintering plantsat-home physical therapy treatments. We reach a diverse customer base through multiple distribution channels, including independent distributors, direct salespeople, and other industrial facilities that require movement of large volumes of air in harsh applications. Howden’s compressors are mainly used in the oil, gas and petrochemical end markets.directly to patients.
The following table summarizes selected financial data for our Air and Gas HandlingPrevention & Recovery segment:
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Net sales | $ | 1,027.6 | $ | 1,026.0 | $ | 863.2 | |||||||||||
| Gross profit | $ | 518.2 | $ | 516.1 | $ | 428.8 | |||||||||||
| Gross profit margin | 50.4 | % | 50.3 | % | 49.7 | % | |||||||||||
| Selling, general and administrative expense | $ | 438.9 | $ | 421.9 | $ | 352.8 | |||||||||||
| Research and development expense | $ | 33.5 | $ | 30.2 | $ | 24.1 | |||||||||||
| Operating loss (GAAP) | $ | (18.2) | $ | (14.9) | $ | (43.9) | |||||||||||
| Operating loss margin (GAAP) | (1.8) | % | (1.5) | % | (5.1) | % | |||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 141.3 | $ | 133.5 | $ | 112.6 | |||||||||||
| Adjusted EBITDA margin (non-GAAP) | 13.8 | % | 13.0 | % | 13.0 | % | |||||||||||
2022 Compared to 2021
| Year Ended | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (Dollars in millions) | |||||||||||
| Net sales | $ | 1,362.9 | $ | 1,385.3 | $ | 1,449.1 | |||||
| Gross profit | 357.9 | 370.4 | 414.3 | ||||||||
| Gross profit margin | 26.3 | % | 26.7 | % | 28.6 | % | |||||
| Selling, general and administrative expense | $ | 231.7 | $ | 220.3 | $ | 243.2 | |||||
| Segment operating income | 126.2 | 150.1 | 171.0 | ||||||||
| Segment operating income margin | 9.3 | % | 10.8 | % | 11.8 | % | |||||
| Items not included in segment results: | |||||||||||
| Restructuring and other related items | $ | 52.2 | $ | 26.8 | $ | 27.2 | |||||
| Goodwill and intangible asset impairment charge | 152.7 | — | — | ||||||||
Net sales fromin our Prevention & Recovery segment increased $1.6 million in the year ended December 31, 2022 compared with the prior year period, driven by organic growth in existing businesses as discussed and defined under “Sales, Orders and Backlog” above, decreasedwhich was aided by $74.7pricing increases to mitigate inflation, mostly offset by $30.9 million during 2017 in comparison to 2016 primarilyof currency translation pressure. Gross profit increased $2.1 million due to declines in the oil, gas, and petrochemical and power generation end markets, partiallyimproved sales, offset by increases in mining and general industrialinflation of supply chain, logistics, and other end markets. Additionally, acquisition-related growth contributed $37.1 million,costs and changes inunfavorable foreign exchange rates had a positive impact of $15.2 million on Net sales. Gross profit andcurrency effects. Gross profit margin decreased during 2017, which was primarilyincreased 10 basis points for the result of lower volumes and project margins. These decreases were partially offset by $8.6 million of acquisition-related growth and $18.6 million incremental benefits realized from restructuring programs and cost savings initiatives.same reasons. Selling, general and administrative expense increased primarily due to increased costs related to the Separation, offset by lower central costs. Adjusted EBITDA and Adjusted EBITDA margin increased due to the reduction in central cost allocations, partially offset by inflation of supply chain, logistics, and other costs.
2021 Compared to 2020
Net sales in our Prevention & Recovery segment increased $162.9 million during 20172021 compared to 2016, which is mainly the result of acquisition-related increases of $10.4 million. The lower Segment operating income and Segment operating income margin in 2017 compared to 2016 were the result of lower Gross profit and the increase in Selling, general and administrative expense discussed above. Restructuring and other related charges increased during 2017 driven by accelerated cost reduction programs to eliminate excess cost in response2020 due to the current market conditions. In 2017, we recorded a goodwill impairment chargestrong recovery from the COVID-19 effects that impacted 2020, as well as new product initiatives, acquisition-related sales growth of $150.2$33.5 million, and a trade name impairment charge of $2.5$11.2 million favorable foreign currency translation impact. Gross profit increased $87.3 million as a result of conclusions reached from performing our annual impairment tests.
| Year Ended | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (Dollars in millions) | |||||||||||
| Net sales | $ | 1,937.3 | $ | 1,800.5 | $ | 1,985.3 | |||||
| Gross profit | 671.6 | 622.0 | 657.4 | ||||||||
| Gross profit margin | 34.7 | % | 34.5 | % | 33.1 | % | |||||
| Selling, general and administrative expense | $ | 447.2 | $ | 426.6 | $ | 457.6 | |||||
| Segment operating income | $ | 224.4 | $ | 195.4 | $ | 199.8 | |||||
| Segment operating income margin | 11.6 | % | 10.9 | % | 10.1 | % | |||||
| Items not included in segment results: | |||||||||||
| Restructuring and other related items | $ | 16.2 | $ | 31.7 | $ | 29.7 | |||||
| Intangible asset impairment charge | — | 0.2 | 1.5 | ||||||||
44
Reconstructive
We develop, manufacture, and market a wide variety of knee, hip, shoulder, elbow, foot, ankle, and finger implant products and surgical productivity solutions that serve the orthopedic reconstructive joint implant market. Our products are primarily used by surgeons for surgical procedures.
The following table summarizes the selected financial data for our Reconstructive segment:
| Year Ended December 31, | |||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Net sales | $ | 535.5 | $ | 400.2 | $ | 257.6 | |||||||||||||||||
| Gross profit | $ | 351.1 | $ | 261.6 | $ | 174.8 | |||||||||||||||||
| Gross profit margin | 65.6 | % | 65.4 | % | 67.9 | % | |||||||||||||||||
| Selling, general and administrative expense | $ | 334.0 | $ | 243.8 | $ | 162.6 | |||||||||||||||||
| Research and development expense | $ | 27.4 | $ | 18.9 | $ | 10.1 | |||||||||||||||||
| Operating loss (GAAP) | $ | (52.9) | $ | (47.9) | $ | (22.3) | |||||||||||||||||
| Operating loss margin (GAAP) | (9.9) | % | (12.0) | % | (8.6) | % | |||||||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 94.7 | $ | 72.5 | $ | 49.0 | |||||||||||||||||
| Adjusted EBITDA margin (non-GAAP) | 17.7 | % | 18.1 | % | 19.0 | % | |||||||||||||||||
2022 Compared to 2021
Net sales increased for our Reconstructive segment in the year ended December 31, 2022 compared with the prior year, primarily due to acquisition-related sales growth of $1.3$93.3 million and existing business sales growth of $47.1 million. The $102.2 million Net sales decline due to existing businesses, as discussed and defined under “Sales, Orders and Backlog” above, during 2016Sales were negatively impacted in comparison to 2015 was primarily2021, most notably the resultsecond half of decreases in equipment sales and consumable volumes in North America. The lower volumes decreased Gross profit for 2016 by approximately $40 million as compared to 2015, and changes in foreign exchange rates contributed $24 million to the decrease. Gross profit margin for the segment increased in the current year, due to favorable consumable pricingCOVID-19 surges and a related deceleration in selected marketselective surgical procedure volumes. Gross profit and materials costs savings initiatives across the segment. The decrease ingross profit margin increased primarily due to acquisition and existing business growth, partially offset by inflation of supply chain, logistics, and other costs. Selling, general and administrative expense during 2016 wasalso increased primarily due to benefits realized$50.3 million of costs from acquisitions, including integration costs for the newly-acquired businesses, as well as increased central costs, including costs associated with the Separation. Adjusted EBITDA increased primarily due to growth in existing businesses, partially offset by inflation of supply chain, logistics, and other costs. Without the impact of recent acquisition, Adjusted EBITDA margin increased 260 basis points compared to prior year. Recent acquisitions were dilutive to the margin by approximately 300 basis points, but are expected to be accretive to margins in future years.
2021 Compared to 2020
Net sales increased for our restructuring programsReconstructive segment during year ended December 31, 2021 compared with the prior year due to a recovery in sales volumes from the COVID-19-related declines during 2020, as well as continued expansion from market outperformance and cost savings initiatives, totaling approximately $29new product launches, acquisition-related sales growth of $106.0 million and a favorable foreign currency translation impact of $0.5 million. ChangesAfter a surge of COVID-19 cases in foreign exchange ratesthe fourth quarter of 2020, which negatively impacted sales volumes early in 2021, sales volumes began normalizing late in the first quarter and through the second quarter of 2021. However, as a result of the increase in cases of COVID-19 variants during the second half of 2021, recovery slowed during this period, primarily due to a deceleration in elective surgical procedure volumes. Gross profit increased due to improved sales volumes and acquisition-related growth, partially offset by increased supply chain and logistic costs. Gross profit margin decreased because of recent acquisitions, which were dilutive to the 2021 margins, but are expected to be accretive in future years. Selling, general and administrative expense by approximately $16 million in 2016. Segment operating income marginalso increased despite the lower overall volumes primarily due to our execution onthe additional costs from newly-acquired businesses and related integration costs, the cessation of temporary employee cost control. Restructuringreductions implemented during 2020, and other related charges for the Fabrication Technology segment remained relatively consistenthigher sales commissions in 2016 as the segment responds2021. Adjusted EBITDA margin decreased because of recent acquisitions, which were dilutive to the cyclical market downturn.2021 margins, but are expected to be accretive in future years.
Liquidity and Capital Resources
Overview
We have financedfinance our long-term capital and working capital requirements through a combination of cash flows from operating activities, various borrowings and the issuances of equity. We expect that our primary ongoing requirements for cash will be for working capital, funding of acquisitions, capital expenditures, asbestos-related expensesrestructuring cash outflows, and funding of pension plans. If determined appropriate for strategic acquisitions or other corporate purposes, weinterest and principal repayments on amounts drawn on our revolving credit facility. We believe we could raise additional funds in the form of debt or equity.equity if it was determined to be appropriate for strategic acquisitions or other corporate purposes.
ESAB Separation
We completed the separation of ESAB on April 4, 2022, through a tax-free, pro-rata distribution of 90% of the outstanding common stock of ESAB to our shareholders. At the time of the Separation, we retained 10% of the shares of ESAB common stock.
In connection with the Separation, ESAB issued $1.2 billion of new debt securities, the proceeds from which were used to fund a $1.2 billion cash distribution to us upon Separation. We used the distribution proceeds in conjunction with $450 million of borrowings on a term loan under our Enovis Credit Agreement and $52.3 million of cash on hand to repay $1.4 billion of outstanding debt and accrued interest on our prior credit facility, $302.8 million of outstanding debt and accrued interest on our senior notes due February 15, 2026 (“2026 Notes”), as well as a redemption premium at 103.188% of the principal amount of our 2026 Notes, and other fees and expenses due at closing. Additionally, on April 7, 2022, we completed the redemption of our senior unsecured notes due April 2025 (“Euro Senior Notes”) representing all of our outstanding €350 million principal 3.250% Senior Notes due 2025 at a redemption price of 100.813% of the principal amount and accrued interest for $391.2 million. See section Enovis Term Loan and Revolving Credit Facility in Note 13, “Debt” in the accompanying Notes to Consolidated Financial Statements for more detail on the new Enovis Credit Agreement.
In the second quarter of 2022, we recorded Debt extinguishment charges of $20.1 million, including $12.7 million of redemption premiums on the retired debt instruments and $7.4 million in noncash write-offs of original issue discount and deferred financing fees.
On November 18, 2022, we divested the retained ESAB shares to a lender under the Enovis Credit Agreement in a tax-efficient exchange for extinguishing $230.5 million of our outstanding term loan under the Enovis Credit Agreement.
Equity Capital
In connection with the Separation, we effected a one-for-three reverse stock split of all issued and outstanding shares of Enovis common stock. As a result of the reverse stock split, all share and per share figures, as applicable, contained in the accompanying Consolidated Financial Statements and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations have been retroactively restated as if the reverse stock split occurred at the beginning of the periods presented.
On May 21, 2015,March 19, 2021, we contributed 66,000completed the underwritten public offering of 5.4 million shares of newly issued Colfax Common stock to our U.S. defined benefit pension plan. No contributions of our Common stock, were madeas adjusted for the reverse stock split, resulting in 2016net proceeds of $711.3 million, after deducting offering expenses and 2017.underwriters’ discount and commissions. We used the proceeds to pay down a certain portion of our senior notes.
On October 11, 2015,July 28, 2021, the Company issued 2.2 million shares of Common stock, as adjusted for the reverse stock split, to the former shareholders of Mathys for acquisition consideration of $285.7 million.
In 2018, our Board of Directors authorized the repurchase of up to $100.0 million of our Common stock from time-to-time on the open market or in privately negotiated transactions, which were to be retired upon repurchase. The repurchase program was authorized untiltransactions. No stock repurchases have been made under this plan since the third quarter of 2018. As of December 31, 20162022, the remaining stock repurchase authorization provided by our Board of Directors was $100.0 million. The timing, amount, and did not obligate us to acquire any specific number of shares. The timing
Enovis Term Loan and 2015, we repurchased 1,000,000 shares and 986,279 shares, respectively, of our Common stock in open market transactions for $20.8 million and $27.4 million, respectively. The repurchase program expired as of December 31, 2016.Revolving Credit Facility
On June 5, 2015,April 4, 2022, we entered into a new credit agreement by and among the Company, as the borrower, certain U.S. subsidiaries of the Company identified therein, as guarantors, each of the lenders party thereto and Deutsche Bank AG New York Branch, as administrative agent, swing line lender and global coordinator (the “DB“Enovis Credit Agreement”). The proceeds of the loans under the DB Credit Agreement were used by us to repay in full balances under our preexisting credit agreement, as well as for working capital and general corporate purposes. The DB Credit Agreement consists, consisting of a term loan in the aggregate amount of $750.0$900 million (the “Term Loan”) and a revolving credit facility (the “Revolver”) with an April 4, 2027 maturity date and a commitment capacity of $1.3 billion, each of which hadterm loan with an initial aggregate principal
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amount of $450 million and an April 4, 2023 maturity term of five years.date (the “Enovis Term Loan”). The Revolver contains a $50.0$50 million swing line loan sub-facility. In conjunction with the DB Credit Agreement, we recorded a charge to Interest expense in the Consolidated Statement of Income for the year ended December 31, 2015 of $4.7 million to write-off certain deferred financing fees and original issue discount and expensed $0.4 million of costs incurred in connection with the refinancing of the DB Credit Agreement.
Certain U.S. subsidiaries of the Company have agreed to guarantee the obligations under the Enovis Credit Agreement.
On November 18, 2022, the Company completed an exchange with a lender under the Enovis Credit Agreement of 6,003,431 shares of common stock of ESAB, representing all of the Companyretained shares in ESAB following the Separation, for $230.5 million of the $450.0 million in Enovis Term Loan outstanding under the DBEnovis Credit Agreement.Agreement, net of cost to sell. The DBremaining $219.5 million outstanding balance on the Enovis Term Loan matures on April 4, 2023, and we expect to use the Revolver to pay the balance due.
The Enovis Credit Agreement contains customary covenants limiting the ability of the Company and its subsidiaries to, among other things, incur debt or liens, merge or consolidate with others, dispose of assets, make investments or pay dividends. In addition, the DBEnovis Credit Agreement contains financial covenants requiring the Company to maintain (i) a maximum total leverage ratio as defined therein, of generally not more than 3.54.00:1.00, with a step-down to 1.03.75:1.00 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 as defined therein, of 3.0 to 1.0,
As of December 31, 2022, the weighted-average interest rate of borrowings under the Enovis Credit Agreement was 5.71%, excluding accretion of original issue discount and deferred financing fees, and there was $860.0 million available on the Revolver.
Euro Notes
In 2017, we issued senior unsecured notes with an aggregate principal amount of €350 million due in May 2025, with an interest rate of 3.25% (the “Euro Notes”). The Euro Notes were redeemed on April 7, 2022 at 100.813% of the principal amount after the completion of the Separation.
Tangible Equity Unit (“TEU”) Amortizing Notes
In 2019, we issued 5.75% TEU amortizing notes due in January 2022 at an initial principal amount of $15.6099 per note with equal quarterly cash installments of $1.4375 per note representing a payment of interest and partial payment of principal. The Company paid $6.5 million, $25.0 million, and $23.4 million of principal on the TEU amortizing notes in the years ended December 31, 2022, 2021, and 2020, respectively. The final installment payment was made on January 15, 2022. Additionally, in the first quarter of 2022, all such covenantsof the remaining related TEU prepaid stock purchase contracts were converted to shares of common stock. See Note 14, “Equity” for further information.
2024 Notes and 2026 Notes
The Company had senior notes with a remaining principal amount of $300 million, which were due on February 15, 2026 and had an interest rate of 6.375%. The 2026 Notes were redeemed on April 7, 2022 at 103.188% of the principal amount after the completion of the Separation.
On April 24, 2021, the Company used the proceeds from its March 2021 equity offering to redeem all of its $600 million 6.0% senior notes due February 14, 2024 (the “2024 Notes”) and $100 million of the outstanding principal of its 2026 Notes for $724.4 million. The 2024 Notes were redeemed at a redemption price of 103.000% of their principal amount and the 2026 Notes were redeemed at a redemption price of 106.375% of their principal amount, plus, in each case, accrued and unpaid interest through the date of redemption. In the second quarter of 2021, a net loss on the early extinguishment of debt of $29.9 million was recorded and included $24.4 million of call premium on the retired debt.
Other Indebtedness
In addition, we are party to various bilateral credit facilities with a borrowing capacity of $30.0 million. As of December 31, 2022, there were no outstanding borrowings under these facilities.
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We are also party to letter of credit facilities with an aggregate capacity of $15.0 million. Total letters of credit of $7.1 million were outstanding as of December 31, 2017. 2022.
We believe that our sources of liquidity including the DB Credit Agreement, are adequate to fund our operations for the next twelve months.months and the foreseeable future.
Cash Flows
As of December 31, 2017,2022, we had $262.0$24.3 million of Cash and cash equivalents, an increasea decrease of $40.3$695.1 million from $221.7the $719.4 million of Cash and cash equivalents on hand as of December 31, 2016.2021. The Cash and cash equivalents as of December 31, 2016 includes $12.92021 include $39.1 million related to the Fluid HandlingESAB business which was reported in Current portion ofTotal current assets held for sale inassociated with discontinued operations on the Consolidated Balance Sheet. The following table summarizes the change in Cash and cash equivalents during the periods indicated:indicated and includes cash flows related to discontinued operations:
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Net cash provided by (used in) operating activities | $ | (55.9) | $ | 356.1 | $ | 301.9 | |||||||||||
| Purchases of property, plant and equipment and intangibles | (105.5) | (104.2) | (114.8) | ||||||||||||||
| Proceeds from sale of property, plant and equipment | 2.7 | 7.0 | 9.6 | ||||||||||||||
| Acquisitions, net of cash received, and investments | (73.7) | (223.3) | (69.8) | ||||||||||||||
| Net cash used in investing activities | (176.4) | (320.5) | (175.1) | ||||||||||||||
| Repayments of debt, net | (1,591.2) | (126.0) | (118.3) | ||||||||||||||
| Distribution from ESAB Corporation, net | 1,143.4 | — | — | ||||||||||||||
| Proceeds from issuance of common stock, net | 5.8 | 745.2 | 3.5 | ||||||||||||||
| Payment of debt extinguishment costs | (12.7) | (24.4) | — | ||||||||||||||
| Deferred consideration payments and other | (10.4) | (9.9) | (16.8) | ||||||||||||||
| Net cash provided by (used in) financing activities | (465.1) | 584.9 | (131.7) | ||||||||||||||
| Effect of foreign exchange rates on Cash and cash equivalents | 2.3 | (2.2) | (3.8) | ||||||||||||||
| Increase (decrease) in Cash and cash equivalents | $ | (695.1) | $ | 618.3 | $ | (8.6) | |||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (In millions) | |||||||||||
| Net cash provided by operating activities | $ | 218.8 | $ | 247.0 | $ | 303.8 | |||||
| Purchases of fixed assets, net | (68.8 | ) | (63.2 | ) | (69.9 | ) | |||||
| Acquisitions, net of cash received | (346.8 | ) | (26.0 | ) | (196.0 | ) | |||||
| Proceeds from sale of business, net | 490.3 | — | — | ||||||||
| Other, net | 15.1 | 7.2 | 18.9 | ||||||||
Net cash provided by (used in) investing activities | 89.8 | (82.0 | ) | (247.0 | ) | ||||||
| Repayments of borrowings, net | (277.3 | ) | (118.8 | ) | (88.9 | ) | |||||
| Proceeds from issuance of common stock, net | 6.9 | 2.2 | 6.1 | ||||||||
| Repurchases of common stock | — | (20.8 | ) | (27.4 | ) | ||||||
| Other | (10.0 | ) | (7.8 | ) | (21.1 | ) | |||||
| Net cash used in financing activities | (280.4 | ) | (145.2 | ) | (131.3 | ) | |||||
| Effect of foreign exchange rates on Cash and cash equivalents | 12.1 | 4.5 | (33.5 | ) | |||||||
| Increase (decrease) in Cash and cash equivalents | $ | 40.3 | $ | 24.3 | $ | (108.0 | ) | ||||
Cash (used in) provided by operating activities ofrelated to discontinued operations which is included in net cash provided by operating activities above,for the years ended December 31, 2022, 2021, and 2020 was $65.2$(27) million, $23.1$224 million, and $64.7$302 million, respectively during 2017, 2016, and 2015. Cash used in investing activities of discontinued operations, which is included in net cash provided by (used in) investing activities above, was $10.1 million, $3.9 million, and $5.1 million during 2017, 2016, and 2015, respectively.
Cash flows from operating activities can fluctuate significantly from period to period due to changes in working capital and the timing of payments for items such as pension fundingrestructuring and asbestos-relatedstrategic transaction costs such as Separation costs. Changes in significant operating cash flow items are discussed below.
•During 2022 and 2021, cash paid for asbestos-relatedstrategic transaction costs net of insurance proceeds, including the disposition of claims, defensein our continuing operations were $61.0 million and $23.4 million, respectively. These costs and legal expenseswere primarily related to litigation against our insurers, creates variabilitythe Separation.
•Cash paid for interest was $37.1 million, $85.5 million and $104.6 million for 2022, 2021 and 2020, respectively. The decrease from 2021 to 2022 is primarily a result of the change in our operating cash flows. We had net cash outflowscapital structure due to the Separation. At the time of $3.7the Separation, the Company’s total debt of $2.1 billion was repaid and replaced with a $450 million $16.0term loan. The decrease from 2020 to 2021 is primarily due to debt repaid in 2021 with the $745.2 million and $22.7 million during 2017, 2016 and 2015, respectively. Net cash outflows for 2017 and 2016 were net of $36.5 million and $23.6 million, respectively, of reimbursementsproceeds from insurance companies on our asbestos insurance receivable.
•During 2022, 2021, and other post-retirement benefit plans, can vary significantly from period to period due to changes in the fair value of plan assets and actuarial assumptions. For 2017, 2016 and 2015, cash contributions for defined benefit plans were $37.9 million, $34.5 million and $44.1 million, respectively.
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Cash flows provided byused in investing activities during 2017 included net proceeds of $490.3for 2022, 2021 and 2020 include $73.7 million, from$223.3 million and $69.8 million, respectively, for acquisitions and investments. Refer to Note 5 “Acquisitions” in the sale ofaccompanying Notes to the Fluid Handling business segment and netConsolidated Financial Statements for more information. Additionally, cash outflows of $346.8 million associated with two acquisitionsflows used in our Air and Gas Handling segments and three acquisitions in our Fabrication Technology segment. Cash flows from investing activities during 2016 were impacted by the net cash outflowsin 2022, 2021, and 2020 include $105.5 million, $104.2 million and $114.8 million, respectively, for purchases of approximately $26property, plant, equipment, and intangibles. Included in these amounts is $5.9 million, associated with an acquisition in our Fabrication Technology segment. Cash flows from investing activities during 2015 were impacted by the net cash outflows of $196$35.6 million associated with two acquisitions completed by our Air and Gas Handling segment.$40.1 million for 2022, 2021 and 2020, respectively, related to discontinued operations.
Cash flows used in financing activities in 2017, 2016 and 2015 reflect2022 includes $1.6 billion net repayments of borrowings. The outflow in 2017 is attributable to the repayment of borrowings, which included the outstanding debt on our prior credit facility, 2026 Notes and Euro Senior Notes, partially offset by borrowings on a term loan under the DBour new credit agreement and bilateral credit facilities for $651.8facility. The repayments were primarily funded by a $1.2 billion cash distribution from ESAB to us upon Separation. Cash flows provided by financing activities in 2021 include $745.2 million reduced byin proceeds from the issuance of Euro Notes, discussed under “—Borrowing Arrangements” above. The cash outflowscommon stock, partially offset by net debt repayments of $126.0 million. Cash flows used in 2016 and 2015 were attributable to repaymentfinancing activities for 2020 include net debt repayments of borrowings under the DB credit agreement and bilateral credit facilities of $118.8 million and $88.9 million, respectively. Additionally, the cash flows during 2016 and 2015 were impacted by the share repurchases discussed under “Equity Capital” above.$118.3 million.
Our Cash and cash equivalents as of December 31, 2017 included $252.12022 include $12.6 million held in jurisdictions outside the U.S. We currently do not intend nor foresee a need to repatriate these funds. If however, we elect to repatriate future earnings from foreign jurisdictions, suchCash repatriation remittancesof non-U.S. cash into the U.S. may be subject to taxes, and other local statutory restrictions.restrictions and minority owner distributions.
Contractual Obligations
As of December 31, 2017.2022, the Company’s Term Loan and Revolver had principal amounts outstanding of $219.5 million and $40.0 million, respectively. The Term Loan matures on April 4, 2023. There are no required principal payments due on the Revolver within 12 months and it matures on April 4, 2027.
Less Than One Year | 1-3 Years | 3-5 Years | More Than 5 Years | Total | ||||||||||||||||
| (In millions) | ||||||||||||||||||||
| Debt | $ | 5.8 | $ | 621.3 | $ | — | $ | 443.1 | $ | 1,070.2 | ||||||||||
Interest payments on debt(1) | 32.7 | 42.7 | 29.7 | 33.9 | 139.0 | |||||||||||||||
| Operating leases | 32.2 | 42.6 | 24.2 | 53.4 | 152.4 | |||||||||||||||
| Capital leases | 2.5 | 0.2 | 0.2 | 0.3 | 3.2 | |||||||||||||||
Purchase obligations(2) | 250.3 | 21.4 | 0.1 | — | 271.8 | |||||||||||||||
| Total | $ | 323.5 | $ | 728.2 | $ | 54.2 | $ | 530.7 | $ | 1,636.6 | ||||||||||
Based on December 31, 2022 outstanding balances and our expectation to repay the Term Loan with borrowings on the Revolver on April 4, 2023, we estimate future interest payments associated with the Term Loan and Revolver of $3.3 million and $60.3 million, respectively, with $3.3 million and $11.7 million payable within 12 months. Variable interest payments are estimated using a static rate of 5.89% for the Term Loan and 5.68% for the Revolver, respectively.
Operating Leases
The Company leases certain office spaces, warehouses, facilities, vehicles, and equipment. As of December 31, 2022, the Company had fixed lease payment obligations of $75.9 million, with $22.3 million payable within 12 months.
Purchase Obligations
As of December 31, 2022, the Company had other purchase obligations of $162.0 million, with $156.8 million payable within 12 months. Purchase obligations herein exclude open purchase orders for goods or services that are provided on demand as the timing of which is not certain.
We have funding requirements associated with our pension and other post-retirement benefit plans as of December 31, 2017,2022, which are estimated to be $40.5$3.3 million for the year ending 2018.December 31, 2023. Other long-term liabilities, such as those for asbestos and other legal claims, employee benefit plan obligations, deferred income taxes and liabilities for unrecognized income tax benefits, are excluded from the above tablethis disclosure since they are not contractually fixed as to timing and amount.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that provide liquidity, capital resources, market or credit risk support that expose us to any liability that is not reflected in our Consolidated Financial Statements at December 31, 20172022 other than outstanding letters of credit of $418.8$7.1 million and unconditional purchase obligations with suppliers of $271.8 million, and $152.4 million of future operating lease payments.$162.0 million.
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Critical Accounting Policies
The methods, estimates and judgments we use in applying our critical accounting policies have a significant impact on our results of operations and financial position. We evaluate our estimates and judgments on an ongoing basis. Our estimates are based upon our historical experience, our evaluation of business and macroeconomic trends and information from other outside sources, as appropriate. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what our management anticipates and different assumptions or estimates about the future could have a material impact on our results of operations and financial position.
We believe the following accounting policies are the most critical in that they are important to the financial statements and they require the most difficult, subjective or complex judgments in the preparation of the financial statements. For a detailed discussion on the application of these and other accounting policies, see Note 2, “Summary of Significant Accounting Policies” in the accompanying Notes to Consolidated Financial Statements in this Form 10-K.
Goodwill represents the costs in excess of the fair value of net assets acquired associated with our business acquisitions. Indefinite-livedOur business acquisitions typically result in the recognition of Goodwill, developed technology, trade name or trademark, and customer relationship intangible assets, consistwhich affect the amount of trade names.future period amortization expense and possible impairment charges that we may incur. The fair values of acquired intangibles are determined using estimates and assumptions based on information available near the acquisition date. Significant assumptions include the discount rates, projected net sales and operating income metrics, royalty rates and technology obsolescence rates. These assumptions are forward looking and could be affected by future economic and market conditions. We engage third-party valuation specialists who review the critical assumptions and calculations of the fair value of acquired intangible assets in connection with our significant acquisitions. In connection with our acquisitions of 360 Med Care and Insight during the year ended December 31, 2022, we recognized aggregate Goodwill of approximately $53 million and identifiable intangible assets of approximately $57 million. Refer to Notes 2, 5 and 9 to the Consolidated Financial Statements for a description of the Company’s policies relating to Goodwill and intangible assets.
We evaluate the recoverability of Goodwill and indefinite-lived intangible assets annually or more frequently if an event occurs or circumstances change in the interim that would more likely than not reduce the fair value of the asset below its carrying amount. Goodwill and indefinite-lived intangible assets are considered to be impaired when the carrying value of a reporting unit or asset exceeds its value.
In the evaluation of Goodwill for impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting entity is less than its carrying value. If we determine that it is more likely than not for a reporting unit’s fair value to be greater than its carrying value, a calculation of the fair value is not performed. If we determine that it is more likely than not for a reporting unit’s fair value to be less than its carrying value, a calculation of the fair value is not performed. If we determine that
Generally, we measure fair value of reporting units based on a present value of future discounted cash flows and a market valuation approach. The discounted cash flow models indicate the fair value of the reporting units based on the present value of the cash flows that the reporting units are expected to generate in the future. Significant estimates in the discounted cash flow models include:include the weighted average cost of capital;capital, revenue growth rates, long-term rate of growth, and profitability of our business;business, tax rates, and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison against certain market information. Significant estimates in the market approach model include identifying appropriate market multiples and assessing earnings before interest, income taxes, depreciation and amortization.
Upon the Separation in April 2022, Goodwill was allocated on a relative fair value basis between the Company’s new reporting units asReconstructive and Prevention & Recovery.
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For the year ended December 31, 2022, management performed a quantitative assessment of September 26, 2015,Goodwill for the Reconstructive and Prevention & Recovery reporting units, both of which indicated no impairment existed. During 2016, the Company experienced a concurrent decline in numerous end-markets and geographic markets that negatively impacted bothThe carrying amount of Goodwill of the Company’sReconstructive and Prevention & Recovery reporting units. The Company elected not to perform qualitative assessments of Goodwill and instead, proceeded directly to performing the first step of quantitative Goodwill impairment test for its 2016 annual impairment test. The quantitative impairment assessment of Goodwill for each of the Fabrication Technology, Air and Gas Handling reporting units based on the methodologies identified above, resulted in calculated fair values that exceeded the carrying values for both reporting units. As such, no impairment charges were recorded as a result of the annual Goodwill impairment analysis performed as of October 1, 2016 and September 26, 2015.
Income Taxes
We account for income taxes under the asset and liability method, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion of the deferred tax asset will not be realized. In evaluating the need for a valuation allowance, we take into accountconsider various factors, including the expected level of future taxable income and available tax planning strategies. If actual results differ from the assumptions made in the evaluation of our valuation allowance, we record a change in valuation allowance through income tax expense in the period such determination is made.
Accounting Standards Codification 740, “Income Taxes” prescribes a recognition threshold and measurement attribute for a position taken in a tax return. Under this standard, we must presume the income tax position will be examined by a relevant tax authority and determine whether it is more likely than not that the income tax position will be sustained upon examination based on its technical merits. An income tax position that meets the more-likely-than-not recognition threshold is then measured to determine the amount of the benefit to be recognized in the financial statements. Liabilities for unrecognized income tax benefits are reviewed periodically and are adjusted as events occur that affect our estimates, such as the availability of new information, the lapsing of applicable statutes of limitations, the conclusion of tax audits and, if applicable, the conclusion of any court proceedings. To the extent we prevail in matters for which liabilities for unrecognized tax benefits have been established or are required to pay amounts in excess of our liabilities for unrecognized tax benefits, our effective income tax rate in a given period could be materially affected. The Company recognizesWe recognize interest and penalties related to unrecognized tax benefits in the Provision for income taxes in the Consolidated Statements of Income.Operations as part of Income tax expense (benefit). Net liabilities for unrecognized income tax benefits, including accrued interest and penalties, were $41.0$42.1 million as of December 31, 20172022 and are included in Other liabilities or as a reduction to deferred tax assets in the accompanying Consolidated Balance Sheet.
Revenue Recognition
We account for revenue in accordance with Topic 606, “Revenue from Contracts with Customers”. We recognize revenue and costs from product sales when title passes to the buyer and allcontrol of the following criteria are met: persuasive evidence of an arrangement exists, the price is fixed or determinable, product delivery has occurredpromised goods or services have been rendered, there are no further obligations to customers, and collectibility is probable. Product delivery occurs when title and risk of loss transfertransferred to the customer. Our shipping terms varyThe amount of revenue recognized reflects the consideration to which we expect to be entitled in exchange for transferring the goods or services. The nature of our contracts gives rise to certain types of variable consideration, including rebates and other discounts. We include estimated amounts of variable consideration in the transaction price to the extent that it is probable there will not be a significant reversal of revenue. Estimates are based on historical or anticipated performance and represent our best judgment at the contract. If any significanttime. Any estimates are evaluated on a quarterly basis until the uncertainty is resolved. Additionally, related to sales of our medical device products and services, we maintain provisions for estimated contractual allowances for reimbursement amounts from certain third-party payors based on negotiated contracts, historical experience for non-contracted payors, and the impact of new contract terms or modifications of existing arrangements with these customers. We report these allowances as a reduction to Net sales.
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We provide a variety of products and services to our customers. Most of our contracts consist of a single, distinct performance obligation or promise to transfer goods or services to a customer. For contracts that include multiple performance obligations, we allocate the total transaction price to each performance obligation using our best estimate of the standalone selling price of each identified performance obligation.
A majority of the revenue we recognize relates to contracts with customers for standard or off-the-shelf products. As control typically transfers to the customer with respect to such sale remain to be fulfilled followingupon shipment typically involving obligations relating to installation and acceptance byof the buyer,product in these circumstances, revenue recognition is deferred until such obligations have been fulfilled. Any customer allowances and discounts are recorded as a reductiongenerally recognized at that point in reported revenues at the time of sale because these allowances reflect a reduction in the sales price for the products sold. These allowances and discounts are estimated based on historical experience and known trends. Revenue related totime. For service agreements is recognized ascontracts, we recognize revenue ratably over the termperiod of performance as the customer simultaneously receives and consumes the benefits of the agreement. Progress billings are generally shown as a reduction of Inventories, net unless such billings areservices provided.
Any recognized revenues in excess of accumulated costs, in which case such balances are included in Customer advances andcustomer billings in excess of costs incurred in the Consolidated Balance Sheets.
The period of benefit for our incremental costs of obtaining a contract would generally have less than a one-year duration; therefore, we apply the practical expedient available and expense costs to complete projects, must be made and used in connection with revenue recognized during each period. Current estimates may be revised as additional information becomes available. The revisions are recorded in income in the period in which they are determined using the cumulative catch-up method of accounting.obtain a contract when incurred.
Recently Issued Accounting Pronouncements
For detailed information regarding recently issued accounting pronouncements and the expected impact on our financial statements, see Note 3, “Recently Issued Accounting Pronouncements” in the accompanying Notes to Consolidated Financial Statements included in this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in short-term interest rates, foreign currency exchange rates and commodity prices that could impact our results of operations and financial condition. We address our exposure to these risks through our normal operating and financing activities. We do not enter into derivative contracts for tradingspeculative purposes.
Interest Rate Risk
We are subject to exposure from changes in short-term interest rates related to interest payments on our borrowing arrangements. The majorityAll of our borrowings as of December 31, 2017, including the DB Credit Agreement and the receivable facility,2022 are variable rate facilities based on LIBOR or EURIBOR.Secured Overnight Financing Rate (“SOFR”). In order to mitigate our interest rate risk, we may enter into interest rate swap or collar agreements. A hypothetical increase in the interest rate of 1.00% during 20172022 would have increased Interest expense on our variable-rate debt by approximately $10.2$4.6 million.
Exchange Rate Risk
We have manufacturing sites throughout the worldin Europe, Africa, and Asia and sell our products globally.internationally. As a result, we are exposed to movements in the exchange rates of various currencies against the U.S. dollar and against the currencies of other countries in which we manufacture and sell products and services. During 2017,2022, approximately 76%32% of our sales were derived from operations outside the U.S. We also have significant manufacturing operations in European countries that are not part of the Eurozone. Sales revenues are more highly weighted toward the Euro and U.S. dollar. We also have significant contractual obligations in U.S. dollars that are met with cash flows in other currencies as well as U.S. dollars. To better match revenue and expense as well as cash needs from contractual liabilities, we regularlymay enter into crossforeign currency swaps and forward contracts.
We also face exchange rate risk from our investments in subsidiaries owned and operated in foreign countries. Euro denominated borrowingsWe have the ability to borrow in Euros under the DBour Credit Agreement and Euro Notes provide a natural hedge to a portion of our European net asset position.Facility. The effect of a change in currency exchange rates on our net investment in international subsidiaries net of the translation effect of the Company’s Euro denominated borrowings, is reflected in the Accumulated other comprehensive loss component of Equity. A 10% depreciation in major currencies, relative to the U.S. dollar as of December 31, 2017 (net of the translation effect of our Euro denominated borrowings)2022 would result in a reduction in Equity of approximately $332$90 million.
We also face exchange rate risk from transactions with customers in countries outside the U.S. and from intercompany transactions between affiliates. Although we use the U.S. dollar as our functional currency for reporting purposes, we have manufacturing sites throughout the world,in Europe, Africa, and Asia, and a substantial portion of our costs are incurred and sales are generated in foreign currencies. Costs incurred and sales recorded by subsidiaries operating outside of the U.S. are translated into U.S. dollars using exchange rates effective during the respective period. As a result, we are exposed to movements in the exchange rates of various currencies against the U.S. dollar.
Commodity Price Risk
We are exposed to changes in the prices of raw materials used in our production processes. Commodity futures contracts are periodically usedIn order to manage such exposure. As of December 31, 2017, our open commodity futuresprice risk, we periodically enter into fixed price contracts were not material.directly with suppliers.
See Note 15,17, “Financial Instruments and Fair Value Measurements” in the accompanying Notes to Consolidated Financial Statements included in this Form 10-K for additional information regarding our derivative instruments.
53
Item 8. Financial Statements and Supplementary Data
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
| Page | |||||
| Report of Independent Registered Public Accounting Firm – Internal Control Over Financial Reporting (Ernst & Young LLP, Philadelphia, PA, Auditor Firm ID: 42) | |||||
| Report of Independent Registered Public Accounting Firm – Consolidated Financial Statements (Ernst & Young LLP, Philadelphia, PA, Auditor Firm ID: 42) | |||||
| Consolidated Statements of | |||||
| Consolidated Statements of Comprehensive Income (Loss) | |||||
| Consolidated Balance Sheets | |||||
| Consolidated Statements of Equity | |||||
| Consolidated Statements of Cash Flows | |||||
| Notes to Consolidated Financial Statements | |||||
| Note 1. Organization and Nature of Operations | |||||
| Note 2. Summary of Significant Accounting Policies | |||||
| Note 3. Recently Issued Accounting Pronouncements | |||||
| Note 4. Discontinued Operations | |||||
| Note 5. Acquisitions | |||||
| Note 6. Revenue | |||||
| Note 7. Net Income Per Share from Continuing Operations | |||||
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| Note | |||||
| Note | |||||
| Note | |||||
| Note | |||||
| Note 16. Defined Benefit Plans | |||||
| Note | |||||
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54
Report of Independent Registered Public Accounting Firm
Internal Control Over Financial Reporting
To the Shareholders and the Board of Directors of ColfaxEnovis Corporation
Opinion on Internal Control over Financial Reporting
We have audited Colfax Corporation’sEnovis Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2017,2022, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, ColfaxEnovis Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of ColfaxEnovis Corporation as of December 31, 20172022 and 2016,2021, the related consolidated statements of income,operations, comprehensive income (loss), equity and cash flows for each of the three years in the period ended December 31, 2017,2022, and the related notes and financial statement schedule listed in the Index at Item 15(A)(2) and our report dated February 16, 2018March 1, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, appearing in Item 9A.Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
March 1, 2023
55
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of ColfaxEnovis Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of ColfaxEnovis Corporation and subsidiaries (the Company) as of December 31, 20172022 and 2016,2021, the related consolidated statements of income,operations, comprehensive income (loss), equity and cash flows for each of the three years in the period ended December 31, 2017,2022, and the related notes and financial statement schedule listed in the Index at Item 15(A)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20172022 and 2016,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017,2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 16, 2018March 1, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
56
| Goodwill | ||||||||
| Description of the Matter | At December 31, 2022, the Company’s goodwill allocated to the Prevention & Recovery reporting unit and Reconstructive reporting unit was $1.1 billion and $0.9 billion, respectively. As discussed in Note 9 to the consolidated financial statements, goodwill is not amortized, but rather is subject to an annual impairment test, or more frequent tests if events and circumstances indicate an impairment exists. Auditing the Company's goodwill impairment test was complex and highly judgmental due to the significant estimation required by management to determine the fair value of the Prevention & Recovery and Reconstructive reporting units. In particular, the fair value estimate was sensitive to significant assumptions, such as changes in the discount rates, market multiples, projected revenues and projected operating income metrics that are forward-looking and affected by future economic and market conditions. | |||||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company's controls over its annual goodwill impairment testing process, including controls over management’s determination of the significant assumptions described above. We also tested management’s controls over the completeness and accuracy of the data used in the model. To test the estimated fair value of the Prevention & Recovery and Reconstructive reporting units, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions used in the Company’s analyses, as well as testing the completeness and accuracy of the underlying data. For example, we compared the significant assumptions to current third-party industry data, and to the historical results of the two reporting units. We performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the two reporting units that would result from changes in key assumptions. We also involved internal valuation specialists to assist in our evaluation of the methodologies and significant assumptions used by the Company. In addition, we tested management’s reconciliation of the fair value of both reporting units to the market capitalization of the Company. | |||||||
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2000.2002.
March 1, 2023
57
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
Dollars in thousands, except per share amounts
| Year Ended December 31, | |||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||
| Net sales | $ | 1,563,101 | $ | 1,426,188 | $ | 1,120,700 | |||||||||||||||||
| Cost of sales | 693,718 | 648,513 | 517,060 | ||||||||||||||||||||
| Gross profit | 869,383 | 777,675 | 603,640 | ||||||||||||||||||||
| Selling, general and administrative expense | 772,913 | 665,775 | 515,467 | ||||||||||||||||||||
| Research and development expense | 60,827 | 49,094 | 34,268 | ||||||||||||||||||||
| Amortization of acquired intangibles | 126,301 | 116,920 | 103,306 | ||||||||||||||||||||
| Insurance settlement gain | (36,705) | — | — | ||||||||||||||||||||
| Restructuring and other charges | 17,225 | 8,685 | 16,781 | ||||||||||||||||||||
| Operating loss | (71,178) | (62,799) | (66,182) | ||||||||||||||||||||
| 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) | — | — | ||||||||||||||||||||
| Loss from continuing operations before income taxes | (2,069) | (121,781) | (119,006) | ||||||||||||||||||||
| Income tax expense (benefit) | 36,120 | (19,528) | (44,579) | ||||||||||||||||||||
| Net loss from continuing operations | (38,189) | (102,253) | (74,427) | ||||||||||||||||||||
| Income from discontinued operations, net of taxes | 26,430 | 178,531 | 120,198 | ||||||||||||||||||||
| Net income (loss) | (11,759) | 76,278 | 45,771 | ||||||||||||||||||||
| Less: net income attributable to noncontrolling interest from continuing operations - net of taxes | 567 | 1,052 | 692 | ||||||||||||||||||||
| Less: net income attributable to noncontrolling interest from discontinued operations - net of taxes | 966 | 3,569 | 2,454 | ||||||||||||||||||||
| Net income (loss) attributable to Enovis Corporation | $ | (13,292) | $ | 71,657 | $ | 42,625 | |||||||||||||||||
| Net income (loss) per share - basic and diluted | |||||||||||||||||||||||
| Continuing operations | $ | (0.72) | $ | (2.02) | $ | (1.65) | |||||||||||||||||
| Discontinued operations | $ | 0.47 | $ | 3.42 | $ | 2.58 | |||||||||||||||||
| Consolidated operations | $ | (0.25) | $ | 1.40 | $ | 0.93 | |||||||||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Net sales | $ | 3,300,184 | $ | 3,185,753 | $ | 3,434,352 | |||||
| Cost of sales | 2,270,709 | 2,193,371 | 2,362,666 | ||||||||
| Gross profit | 1,029,475 | 992,382 | 1,071,686 | ||||||||
| Selling, general and administrative expense | 732,340 | 696,800 | 748,340 | ||||||||
| Restructuring and other related charges | 68,351 | 58,496 | 56,822 | ||||||||
| Goodwill and intangible asset impairment charge | 152,700 | 238 | 1,486 | ||||||||
| Pension settlement loss (gain) | 46,933 | 48 | (582 | ) | |||||||
| Operating income | 29,151 | 236,800 | 265,620 | ||||||||
| Interest expense | 41,137 | 30,276 | 47,502 | ||||||||
| (Loss) income from continuing operations before income taxes | (11,986 | ) | 206,524 | 218,118 | |||||||
| Provision for income taxes | 42,554 | 51,772 | 41,168 | ||||||||
| Net (loss) income from continuing operations | (54,540 | ) | 154,752 | 176,950 | |||||||
| Income (loss) from discontinued operations, net of taxes | 224,047 | (9,561 | ) | 10,228 | |||||||
| Net income | 169,507 | 145,191 | 187,178 | ||||||||
| Less: income attributable to noncontrolling interest, net of taxes | 18,417 | 17,080 | 19,439 | ||||||||
| Net income attributable to Colfax Corporation | $ | 151,090 | $ | 128,111 | $ | 167,739 | |||||
| Net (loss) income per share - basic | |||||||||||
| Continuing operations | $ | (0.59 | ) | $ | 1.12 | $ | 1.27 | ||||
| Discontinued operations | $ | 1.82 | $ | (0.08 | ) | $ | 0.08 | ||||
| Consolidated operations | $ | 1.23 | $ | 1.04 | $ | 1.35 | |||||
| Net (loss) income per share - diluted | |||||||||||
| Continuing operations | $ | (0.59 | ) | $ | 1.12 | $ | 1.26 | ||||
| Discontinued operations | $ | 1.81 | $ | (0.08 | ) | $ | 0.08 | ||||
| Consolidated operations | $ | 1.22 | $ | 1.04 | $ | 1.34 | |||||
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Dollars in thousands
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Net income (loss) | $ | (11,759) | $ | 76,278 | $ | 45,771 | |||||||||||
| Other comprehensive income (loss): | |||||||||||||||||
| Foreign currency translation, net of tax expense (benefit) of $338, $3,449 and $(25) | (61,378) | (114,389) | 59,880 | ||||||||||||||
| Unrealized gain (loss) on hedging activities, net of tax expense (benefit) of $2,711, $6,980 and $(9,120) | 9,028 | 23,247 | (26,268) | ||||||||||||||
| Changes in unrecognized pension and other post-retirement benefit (cost), net of tax expense (benefit) of $2,333, $3,368 and $(1,502) | 12,207 | 20,870 | (8,169) | ||||||||||||||
| Amounts reclassified from Accumulated other comprehensive loss: | |||||||||||||||||
| Amortization of pension and other post-retirement net actuarial gain, net of tax expense of $199, $1,148 and $883 | 629 | 5,025 | 3,735 | ||||||||||||||
| Other comprehensive income (loss) | (39,514) | (65,247) | 29,178 | ||||||||||||||
| Comprehensive income (loss) | (51,273) | 11,031 | 74,949 | ||||||||||||||
| Less: comprehensive income (loss) attributable to noncontrolling interest | (583) | 3,281 | 585 | ||||||||||||||
| Comprehensive income (loss) attributable to Enovis Corporation | $ | (50,690) | $ | 7,750 | $ | 74,364 | |||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Net income | $ | 169,507 | $ | 145,191 | $ | 187,178 | |||||
| Other comprehensive income (loss): | |||||||||||
| Foreign currency translation, net of tax of $(2,433), $0, and $751 | 269,432 | (330,488 | ) | (317,909 | ) | ||||||
| Unrealized (loss) gain on hedging activities, net of tax of $(19,569), $(8,989), and $19,349 | (23,593 | ) | 17,692 | 11,659 | |||||||
| Unrealized gain on available-for-sale securities, net of tax of $2,808, $0, and $0 | 5,152 | — | — | ||||||||
| Changes in unrecognized pension and other post-retirement benefit cost, net of tax of $4,882, $9,247, and $6,373 | 4,167 | 4,810 | 29,323 | ||||||||
| Changes in deferred tax related to pension and other post-retirement benefit cost | — | — | 3,817 | ||||||||
| Amounts reclassified from Accumulated other comprehensive loss: | |||||||||||
| Amortization of pension and other post-retirement net actuarial loss, net of tax of $2,463, $3,049, and $3,744 | 6,875 | 4,465 | 7,167 | ||||||||
| Amortization of pension and other post-retirement prior service cost, net of tax of $37, $93, and $115 | 93 | 155 | 133 | ||||||||
| Divestiture-related recognition of pension and other post-retirement cost and foreign currency translation, net of tax of $27,518, $0, and $0 | 167,857 | — | — | ||||||||
| Foreign currency translation adjustment resulting from Venezuela deconsolidation | — | 2,378 | — | ||||||||
| Other comprehensive income (loss) | 429,983 | (300,988 | ) | (265,810 | ) | ||||||
| Comprehensive income (loss) | 599,490 | (155,797 | ) | (78,632 | ) | ||||||
| Less: comprehensive income (loss) attributable to noncontrolling interest | 34,427 | 17,722 | (3,347 | ) | |||||||
| Comprehensive income (loss) attributable to Colfax Corporation | $ | 565,063 | $ | (173,519 | ) | $ | (75,285 | ) | |||
See Notes to Consolidated Financial Statements.
59
CONSOLIDATED BALANCE SHEETS
Dollars in thousands, except share amounts
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| ASSETS | |||||||||||
| CURRENT ASSETS: | |||||||||||
| Cash and cash equivalents | $ | 24,295 | $ | 680,252 | |||||||
| 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 | |||||||
| 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: | |||||||||||
| 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 | |||||||
| December 31, | |||||||
| 2017 | 2016 | ||||||
| ASSETS | |||||||
| CURRENT ASSETS: | |||||||
| Cash and cash equivalents | $ | 262,019 | $ | 208,814 | |||
| Short term investments | 149,608 | — | |||||
| Trade receivables, less allowance for doubtful accounts of $31,488 and $29,005 | 970,199 | 838,796 | |||||
| Inventories, net | 429,627 | 364,972 | |||||
| Other current assets | 258,379 | 175,721 | |||||
| Current portion of assets held for sale | — | 150,275 | |||||
| Total current assets | 2,069,832 | 1,738,578 | |||||
| Property, plant and equipment, net | 552,802 | 505,431 | |||||
| Goodwill | 2,538,544 | 2,350,996 | |||||
| Intangible assets, net | 1,017,203 | 916,347 | |||||
| Other assets | 531,316 | 520,031 | |||||
| Assets held for sale, less current portion | — | 307,057 | |||||
| Total assets | $ | 6,709,697 | $ | 6,338,440 | |||
| LIABILITIES AND EQUITY | |||||||
| CURRENT LIABILITIES: | |||||||
| Current portion of long-term debt | $ | 5,766 | $ | 5,406 | |||
| Accounts payable | 587,129 | 515,520 | |||||
| Customer advances and billings in excess of costs incurred | 145,853 | 140,220 | |||||
| Accrued liabilities | 358,632 | 311,326 | |||||
| Current portion of liabilities held for sale | — | 87,183 | |||||
| Total current liabilities | 1,097,380 | 1,059,655 | |||||
| Long-term debt, less current portion | 1,055,305 | 1,286,738 | |||||
| Other liabilities | 829,748 | 732,729 | |||||
| Liabilities held for sale, less current portion | — | 165,974 | |||||
| Total liabilities | 2,982,433 | 3,245,096 | |||||
| Equity: | |||||||
| Common stock, $0.001 par value; 400,000,000 shares authorized; 123,245,827 and 122,780,261 issued and outstanding | 123 | 123 | |||||
| Additional paid-in capital | 3,228,174 | 3,199,682 | |||||
| Retained earnings | 846,490 | 685,411 | |||||
| Accumulated other comprehensive loss | (574,372 | ) | (988,345 | ) | |||
| Total Colfax Corporation equity | 3,500,415 | 2,896,871 | |||||
| Noncontrolling interest | 226,849 | 196,473 | |||||
| Total equity | 3,727,264 | 3,093,344 | |||||
| Total liabilities and equity | $ | 6,709,697 | $ | 6,338,440 | |||
See Notes to Consolidated Financial Statements.
60
CONSOLIDATED STATEMENTS OF EQUITY
Dollars in thousands, except share amounts and as noted
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interest | Total | ||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||
| 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 | ||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interest | Total | |||||||||||||||
| Shares | $ Amount | |||||||||||||||||||
| Balance at January 1, 2015 | 123,730,578 | $ | 124 | $ | 3,200,832 | $ | 389,561 | $ | (443,691 | ) | $ | 205,618 | $ | 3,352,444 | ||||||
| Net income | — | — | — | 167,739 | — | 19,439 | 187,178 | |||||||||||||
| Distributions to noncontrolling owners | — | — | — | — | — | (15,690 | ) | (15,690 | ) | |||||||||||
| Other comprehensive loss, net of tax of $26.2 million and $0.4 million | — | — | — | — | (243,024 | ) | (22,786 | ) | (265,810 | ) | ||||||||||
| Stock repurchase | (986,279 | ) | (1 | ) | (27,366 | ) | — | — | — | (27,367 | ) | |||||||||
| Common stock-based award activity | 676,126 | — | 22,373 | — | — | — | 22,373 | |||||||||||||
| Contribution to defined benefit pension plan | 66,000 | — | 3,428 | — | — | — | 3,428 | |||||||||||||
| Balance at December 31, 2015 | 123,486,425 | 123 | 3,199,267 | 557,300 | (686,715 | ) | 186,581 | 3,256,556 | ||||||||||||
| Net income | — | — | — | 128,111 | — | 17,080 | 145,191 | |||||||||||||
| Distributions to noncontrolling owners | — | — | — | — | — | (7,830 | ) | (7,830 | ) | |||||||||||
| Other comprehensive (loss) income, net of tax of $3.4 million | — | — | — | — | (301,630 | ) | 642 | (300,988 | ) | |||||||||||
| Stock repurchase | (1,000,000 | ) | (1 | ) | (20,811 | ) | — | — | — | (20,812 | ) | |||||||||
| Common stock-based award activity | 293,836 | 1 | 21,226 | — | — | — | 21,227 | |||||||||||||
| Balance at December 31, 2016 | 122,780,261 | 123 | 3,199,682 | 685,411 | (988,345 | ) | 196,473 | 3,093,344 | ||||||||||||
| Cumulative effect of accounting change | — | — | — | 9,989 | — | — | 9,989 | |||||||||||||
| Net income | — | — | — | 151,090 | — | 18,417 | 169,507 | |||||||||||||
| Distributions to noncontrolling owners | — | — | — | — | — | (4,051 | ) | (4,051 | ) | |||||||||||
| Other comprehensive income, net of tax of $15.7 million | — | — | — | — | 413,973 | 16,010 | 429,983 | |||||||||||||
| Common stock-based award activity | 465,566 | — | 28,492 | — | — | — | 28,492 | |||||||||||||
| Balance at December 31, 2017 | 123,245,827 | $ | 123 | $ | 3,228,174 | $ | 846,490 | $ | (574,372 | ) | $ | 226,849 | $ | 3,727,264 | ||||||
See Notes to Consolidated Financial Statements.
61
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 169,507 | $ | 145,191 | $ | 187,178 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Impairment of goodwill, intangibles and property, plant and equipment | 183,751 | 6,082 | 12,505 | ||||||||
| Depreciation and amortization | 132,203 | 137,176 | 142,037 | ||||||||
| Stock-based compensation expense | 21,548 | 19,020 | 16,321 | ||||||||
| Non-cash interest expense | 4,519 | 4,176 | 10,101 | ||||||||
| Deferred income tax expense (benefit) | 12,066 | (1,682 | ) | (22,717 | ) | ||||||
| Gain on sale of facility | (11,243 | ) | — | — | |||||||
| Gain on sale of business | (308,388 | ) | — | — | |||||||
| Pension settlement loss | 46,933 | — | — | ||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Trade receivables, net | (44,345 | ) | (50,958 | ) | 64,048 | ||||||
| Inventories, net | (34,023 | ) | 19,665 | (390 | ) | ||||||
| Accounts payable | 10,266 | 37,083 | 965 | ||||||||
| Customer advances and billings in excess of costs incurred | (24,388 | ) | (37,210 | ) | (21,094 | ) | |||||
| Changes in other operating assets and liabilities | 60,364 | (31,569 | ) | (85,141 | ) | ||||||
| Net cash provided by operating activities | 218,770 | 246,974 | 303,813 | ||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of fixed assets | (68,765 | ) | (63,251 | ) | (69,877 | ) | |||||
| Acquisitions, net of cash received | (346,764 | ) | (25,992 | ) | (196,007 | ) | |||||
| Proceeds from sale of business, net | 490,308 | — | — | ||||||||
| Other, net | 15,097 | 7,249 | 18,927 | ||||||||
| Net cash provided by (used in) investing activities | 89,876 | (81,994 | ) | (246,957 | ) | ||||||
| Cash flows from financing activities: | |||||||||||
| Borrowings under term credit facility | — | — | 750,000 | ||||||||
| Payments under term credit facility | (65,628 | ) | (37,500 | ) | (1,232,872 | ) | |||||
| Proceeds from borrowings on revolving credit facilities and other | 1,046,457 | 896,742 | 1,498,039 | ||||||||
| Repayments of borrowings on revolving credit facilities and other | (1,632,658 | ) | (978,024 | ) | (1,104,055 | ) | |||||
| Proceeds from borrowings on senior unsecured notes | 374,450 | — | — | ||||||||
| Proceeds from issuance of common stock, net | 6,944 | 2,206 | 6,052 | ||||||||
| Repurchases of common stock | — | (20,812 | ) | (27,367 | ) | ||||||
| Other | (10,012 | ) | (7,830 | ) | (21,066 | ) | |||||
| Net cash used in financing activities | (280,447 | ) | (145,218 | ) | (131,269 | ) | |||||
| Effect of foreign exchange rates on Cash and cash equivalents | 12,090 | 4,499 | (33,566 | ) | |||||||
| Increase (decrease) in Cash and cash equivalents | 40,289 | 24,261 | (107,979 | ) | |||||||
| Cash and cash equivalents, beginning of period | 221,730 | 197,469 | 305,448 | ||||||||
| Cash and cash equivalents, end of period | $ | 262,019 | $ | 221,730 | $ | 197,469 | |||||
| Supplemental Disclosure of Cash Flow Information: | |||||||||||
| Non-cash consideration received from sale of business | $ | 206,415 | $ | — | $ | — | |||||
| Year Ended December 31, | |||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||
| 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: | |||||||||||||||||||||||
| 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) | ||||||||||||||||||||
| 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) | ||||||||||||||||||||
| 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) | ||||||||||||||||||||
| Proceeds from issuance of common stock, net | 5,814 | 745,179 | 3,500 | ||||||||||||||||||||
| Payment of debt extinguishment costs | (12,704) | (24,375) | — | ||||||||||||||||||||
| 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 | |||||||||||||||||
| Supplemental disclosures: | |||||||||||||||||||||||
| 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.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Operations
On December 11, 2017,April 4, 2022, the Company completed the saleseparation of its Fluidfabrication 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 (“Fluid Handling”Air & Gas”) to CIRCOR International, Inc.,that was sold in 2019 as a Delaware corporation (“CIRCOR” or the “Buyer”), pursuant to a definitive purchase agreement (the “Purchase Agreement”) signed on September 24, 2017.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.
63
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 the accounts ofall majority-owned subsidiaries over which the Company exercises control and, its subsidiaries. Less than wholly owned subsidiaries, includingwhen applicable, entities or joint ventures are consolidated when it is determined thatfor which the Company has a controlling financial interest whichor is generally determined when the Company holds a majority voting interest.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 in joint ventures, 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 temporaryother-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,other-than-temporary, an impairment loss is recorded and the investment is written down to a new carrying value. Investments
As of December 31, 2022, the Company held investments of $16.5 million in joint ventures acquiredprivately 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 business combination are recognized in the opening balance sheet at fair value.company that has developed a non-invasive cancer scanning technology for veterinarians.
Revenue Recognition
The Company generally recognizes revenues and costs from product salesprovides 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 allwe transfer control of our off-the-shelf products to the following criteria are met: persuasive evidence of an arrangement exists, the price is fixed or determinable, product delivery has occurred or services have been rendered, there are no further obligations to customers, and collectibility is reasonably assured. Product deliverycustomer, 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, risktherefore, 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 loss transfercustomer 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 customer. The Company’s shipping terms varyextent that it is probable there will not be a significant reversal of revenue. Estimates are based on historical or anticipated performance and represent the contract. If any significant obligations toCompany’s best judgment at the customer with respect to such sale remain to be fulfilled following shipments, typically involving obligations relating to installation and acceptance bytime. Any estimates are evaluated on a quarterly basis until the buyer, revenue recognitionuncertainty is deferred until such obligations have been fulfilled. Any customerresolved. 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
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
payors, and discountsthe impact of new contract terms or modifications of existing arrangements with these customers. These allowances are recorded as a reduction in reported revenues at the time of sale because these allowances reflect a reductionto sales in the same period that the sales priceare recognized.
The period of benefit for the products sold. These allowancesCompany’s incremental costs of obtaining a contract generally have less than a one-year duration; therefore, the Company applies the practical expedient available and discounts are estimated based on historical experience and known trends. Revenue related to service agreements is recognized as revenue over the term of the agreement. Progress billings are generally shown as a reduction of Inventories, net unless such billings are in excess of accumulated costs, in which case such balances are included in Customer advances and billings in excess of costs incurred in the Consolidated Balance Sheets.
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 IncomeOperations 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 $42.9facilities 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, $39.3$0.2 million and $38.0$0.3 million for the years ended December 31, 2017, 20162022, 2021 and 2015, respectively, are expensed as incurred and are included in Selling, general and administrative expense in the Consolidated Statements of Income. These amounts do not include development and application engineering costs incurred in conjunction with fulfilling customer orders and executing customer projects.
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 doubtful accounts.credit losses. The Company records an allowanceadopted 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 doubtful accounts based upon estimates of amounts deemed uncollectiblecurrent conditions and a specific review of significant delinquent accounts, factoring in currentreasonable and expected economic conditions.supportable forecasts. Estimated credit losses are based on historical collection experience, and are reviewed periodically by management.
Inventories
Inventories, net include the cost of material, labor and overhead and are stated at the lower of cost (determinedor net realizable value. Cost is determined under various methods including average cost last-in, first-out and first-in, first-out, but predominantly first-in, first-out) or net realizable value. For air and gas handling long-term contracts, cost is primarily determined based upon actual cost.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 as 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 areis stated at historical cost, which includes the fair values of such assets acquired. Depreciation of property, plantacquired through acquisitions, and equipment is recorded on adepreciated by the straight-line basismethod over estimated useful lives. Assets recorded under capital leases are amortized over the shorter of their estimated useful lives orof the lease terms, which range from three to 15 years.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.
65
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 associated withthrough acquisitions by the Company. Indefinite-lived intangible assets consist of trade names.
The Company evaluates the recoverability of Goodwill and indefinite-lived intangible assets annually or more frequently if an event occurs or circumstances change in the interim that would more likely than not reduce the fair value of the asset below its carrying amount. The annual impairment test date elected by the Company is the first day of its fourth quarter. Goodwill and indefinite-lived intangible assets areis 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: AirPrevention & Recovery and Gas Handling and Fabrication Technology.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 not more likely than not for a reporting unit’s fair value to be lessgreater 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. In this case, pursuant to ASU 2017-04, which the Company elected to early adopt during the three months ended December 31, 2017,impaired and an impairment loss is recorded equal to the excess of the reporting unit’s carrying value over its fair value.
Upon the Separation and the revision of the dateCompany’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. The calculated fair valuetest of the asset was $2.8 million and is included in Level Three of the fair value hierarchy.
Impairment of Long-Lived Assets Other than Goodwill and Indefinite-Lived Intangible Assets
Intangible assets primarily represent acquired trade names, customer relationships, acquired order backlog, acquired technology and software license agreements. Acquired order backlog is amortized in the same period the corresponding revenue is recognized. A portion of the Company’s acquired customer relationships is being amortized on an accelerated basis over periods ranging from seven to 30 years based on the present value of the future cash flows expected to be generated from the acquired customers. All other intangibleIntangible assets are being amortized on a straight-line basis over their estimated useful lives, generally ranging which approximates the period of benefit, and ranges from twothree to 20twenty years.
The Company assesses its long-lived assets other than Goodwill and indefinite-livedfinite-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
66
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. The impairment loss is measured based upon the difference between the carrying amounts and the fair values of the assets. Assets to be disposed ofheld 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 recordeddid not record any asset impairment losses related to facility closures totaling $31.0 million, $2.6 million and $9.3 millioncharges during the years ended December 31, 2017, 20162022 and 2015, respectively,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 related charges in the Consolidated Statements of Income. The aggregate carrying value of these assets subsequent to impairment was $53.7 million, $2.7 million and $21.1 million for the years ended December 31, 2017, 2016 and 2015, respectively.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. The Company issued senior unsecured notes with an aggregate principal amount of €350 million (as defined and further discussed in Note 11, “Debt”) during the year ended December 31, 2017, which has been designated as a net investment hedge in order to mitigate a portion of this risk.
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. The Company designates a portion of its foreign exchange contracts as cash flow hedges and fair value hedges. For all instruments designated as hedges, including net investment hedges and cash flow hedges and fair value 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 IncomeOperations consistent with the underlying hedged instrument. Gains and losses related to fair value hedges are recorded as an offset to the fair value of the underlying asset or liability, primarily Trade receivables and Accounts payable in the Consolidated Balance Sheets.
The Company does not enter into derivative contracts for tradingspeculative purposes.
See Note 15,17, “Financial Instruments and Fair Value Measurements” for additional information regarding the Company’s derivative instruments.
| Year Ended | |||||||
| 2017 | 2016 | ||||||
| (In thousands) | |||||||
| Warranty liability, beginning of period | $ | 30,222 | $ | 35,634 | |||
| Accrued warranty expense | 17,760 | 17,368 | |||||
| Changes in estimates related to pre-existing warranties | 1,453 | 4,701 | |||||
| Cost of warranty service work performed | (22,600 | ) | (27,429 | ) | |||
| Acquisitions | 5,277 | 304 | |||||
| Foreign exchange translation effect | 2,065 | (356 | ) | ||||
| Warranty liability, end of period | $ | 34,177 | $ | 30,222 | |||
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 Provision for income taxesIncome 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 takes into accountconsiders 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 Provision for income taxesIncome 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 the Provision for income taxesIncome tax expense (benefit) in the Consolidated Statements of Income.Operations.
67
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 Foreignforeign 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 IncomeOperations for that period.
During the year ended December 31, 2017, the Company recognized net foreign currency transaction gains of $0.04 million and $3.4 million in Interest expense and Selling, general and administrative expense, respectively, in the Consolidated Statement of Income. During the year ended December 31, 2016,2022, the Company recognized net foreign currency transaction gain of $2.6 million and $5.0$0.7 million in Interest expense, net and net foreign currency transaction loss of $0.6 million in Selling, general and administrative expense respectively, in the Consolidated StatementStatements of Income.Operations. During the year ended December 31, 2015,2021, the Company recognized net foreign currency transaction lossesloss of $3.7$0.5 million and a gain of $3.3 million were recognized in Interest expense, net and net foreign currency transaction loss of $2.0 million in Selling, general and administrative expense respectively, in the Consolidated StatementStatements of Income.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. Net deferred issuance costsFurther, the carrying value of $9.2 million and $5.9 million, respectively, were included indebt is reduced by an original issue discount, which is accreted to Interest expense, net using the Consolidated Balance Sheets aseffective interest method over the term of December 31, 2017 and 2016, which includes $12.3 million and $15.6 million, respectively, of accumulated amortization.the related obligation. As of December 31, 2017, $3.82022, $4.5 million and $5.4$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, 2016, $5.32021, $5.2 million and $0.6$7.1 million of deferred issuance costs were included in Other assets and as a reduction of Long-term debt, respectively. Further, the carrying value of Long-term debt is reduced by an original issue discount, which is accreted to Interest expense using the effective interest method over the term of the related obligation. See Note 11,13, “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
Company.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. Discontinued Operations
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
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, as a discontinued operation.
operations.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The key componentscarrying value of income (loss) fromthe assets and liabilities of the Company’s former fabrication technology business and asbestos contingencies amounts presented as discontinued operations wereas of December 31, 2021 was as follows:
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
(In thousands) | |||||||||||
| Net sales | $ | 436,682 | $ | 461,294 | $ | 532,701 | |||||
| Cost of sales | 294,946 | 308,025 | 352,613 | ||||||||
Selling, general and administrative expense(1) | 118,740 | 136,380 | 156,708 | ||||||||
Divestiture-related expense, net(2) | 5,257 | — | — | ||||||||
Restructuring and other related items(3) | (6,768 | ) | 15,674 | 4,355 | |||||||
| Operating income (loss) | 24,507 | 1,215 | 19,025 | ||||||||
Interest income (loss)(4) | 473 | 260 | (241 | ) | |||||||
Gain on disposal(5) | 308,388 | — | — | ||||||||
| Income (loss) from discontinued operations before income taxes | 333,368 | 1,475 | 18,784 | ||||||||
| Income taxes | 109,321 | 11,036 | 8,556 | ||||||||
| Income (loss) from discontinued operations, net of taxes | $ | 224,047 | $ | (9,561 | ) | $ | 10,228 | ||||
| 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) Pursuant to the Purchase Agreement, the Company retained itsTotal assets and liabilities include asbestos-related contingencies and insurance coverages. However, as the Company did not retain an interestcoverages in the ongoing operations of the business subjectconnection to the contingencies, the Company has classified asbestos-related activity in its Consolidated Statementssales of Income as part of Income (loss) from discontinuing operations. See Note 16, “Commitments and Contingencies” for further information.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizespresents the major classesfinancial results of assetsthe former fabrication technology business including all divestiture-related expenses incurred by the company and liabilities heldallocated interest expense; asbestos charges; divestiture-related expenses related to Air & Gas; and the combined income tax effect of those items for sale that were included in the Company’s Consolidated Balance Sheets as ofyears ended December 31, 2016:2022, 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.
| December 31, 2016 | |||
| (In thousands) | |||
| ASSETS HELD FOR SALE | |||
| Cash and cash equivalents | $ | 12,916 | |
| Trade receivables, less allowance for doubtful accounts of $12,506 | 74,818 | ||
| Inventories, net | 38,885 | ||
| Other current assets | 23,656 | ||
| Property, plant, and equipment, net | 66,474 | ||
| Goodwill | 212,330 | ||
| Intangible assets, net | 15,302 | ||
| Other assets | 12,951 | ||
| Total assets held for sale | 457,332 | ||
| Less: current portion | 150,275 | ||
| Total assets held for sale, less current portion | 307,057 | ||
| LIABILITIES HELD FOR SALE | |||
| Accounts payable | $ | 43,356 | |
| Customer advances and billings in excess of costs incurred | 10,795 | ||
| Accrued liabilities | 33,032 | ||
| Other Liabilities | 165,974 | ||
| Total liabilities held for sale | 253,157 | ||
| Less: current portion | 87,183 | ||
| Total liabilities held for sale, less current portion | 165,974 | ||
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 ofrelated to discontinued operations for the years ended December 31, 2017, 2016,2022, 2021 and 2015 was $65.22020 was approximately $(27) million, $23.1$224 million, and $64.7$302 million, respectively. Cash used in investing activities ofrelated to discontinued operations was $10.1 million, $3.9 million, and $5.1 million for the years ended December 31, 2017, 2016,2022, 2021 and 2015, respectively.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 followingCompany 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.
72
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 werein 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 usingunder the acquisition method of accounting, and accordingly, the Consolidated Financial Statements include the financial position and results of operations from the respective dateacquisition date. The Consolidated Balance Sheet as of acquisition:
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 in our Air and Gas Handling segmentwere completed for total consideration, net of cash received, of $219.6$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 price adjustments. Theseaccounting related to the Trilliant and MedShape acquisitions will broadenhas been completed.
On July 28, 2021, the segment’s rangeReconstructive segment acquired Mathys AG Bettlach (“Mathys”) for total acquisition equity consideration of compression$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 expandsports medicine. The acquisition expands the Reconstructive segment’s reconstructive product portfolio with Mathys’ complimentary surgical solutions and broadens its product offering into smaller steam turbines.international customer base.
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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 year ended December 31, 2016,Mathys acquisition, excluding Goodwill, as of the Companyacquisition 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 an acquisitionfive acquisitions in 2020 for total consideration, net of cash received, of approximately $26$67.5 million. ThisTotal 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 expanded our automation welding equipment portfolio.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.
74
ENOVIS CORPORATION
6. Revenue
The Company provides orthopedic solutions, including products and services spanning the years ended December 31, 2017, 2016, and 2015,full continuum of patient care, from injury prevention to rehabilitation. While the Company’s Consolidated Statements of Income included $58.5 million, $1.3 million,sales are primarily derived from three sales channels including dealers and $47.9 million of Net sales associated with acquisitions consummated duringdistributors, 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 respective period. Net Income attributable to Colfax Corporation common shareholders associated with acquisitions consummated during the years ended December 31, 2017, 2016, and 2015 was not material.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, 2017 are accounted2022 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 underCredit 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 acquisition methodindividual lines of accounting. business and market. Pooling was further disaggregated based on either geography or product type.
The assets acquiredCompany 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 liabilities assumed reportedreasonable 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 represent the Company’s best estimate. These amounts are based upon certain valuations and studies that have yet to be finalized and are subject to adjustment once the detailed analyses are completed.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 | |||||||||||||||||||
75
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
7. Net (Loss) 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) | |||||||||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (In thousands, except share data) | |||||||||||
| Computation of Net income (loss) per share from continuing operations - basic: | |||||||||||
Net (loss) income from continuing operations attributable to Colfax Corporation (1) | $ | (72,957 | ) | $ | 137,672 | $ | 157,511 | ||||
| Weighted-average shares of Common stock outstanding - basic | 123,229,806 | 122,911,581 | 124,101,033 | ||||||||
| Net (loss) income per share from continuing operations - basic | $ | (0.59 | ) | $ | 1.12 | $ | 1.27 | ||||
| Computation of Net income (loss) per share from continuing operations - diluted: | |||||||||||
Net (loss) income from continuing operations attributable to Colfax Corporation (1) | $ | (72,957 | ) | $ | 137,672 | $ | 157,511 | ||||
| Weighted-average shares of Common stock outstanding - basic | 123,229,806 | 122,911,581 | 124,101,033 | ||||||||
| Net effect of potentially dilutive securities - stock options and restricted stock units | — | 287,145 | 768,616 | ||||||||
| Weighted-average shares of Common stock outstanding - diluted | 123,229,806 | 123,198,726 | 124,869,649 | ||||||||
Net (loss) income per share from continuing operations - diluted | $ | (0.59 | ) | $ | 1.12 | $ | 1.26 | ||||
(1) Net (loss) income from continuing operations attributable to ColfaxEnovis Corporation for the respective periods is calculated using Net (loss) income from continuing operations less the income attributable to noncontrolling interest from continuing operations, net of taxes.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, 2017, 20162022, 2021 and 20152020 excludes approximately 5.01.1 million, 4.50.3 million and 3.01.4 million outstanding stock-based compensation awards, respectively, as their inclusion would be anti-dilutive.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2022 | 2021 | 2020 | |||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||
| Income (loss) from continuing operations before income taxes: | Income (loss) from continuing operations before income taxes: | |||||||||||||||||||||||||||
| Domestic operations | $ | (29,470 | ) | $ | (34,015 | ) | $ | (35,048 | ) | Domestic operations | $ | 8,826 | $ | (129,903) | $ | (136,455) | ||||||||||||
| Foreign operations | 17,484 | 240,539 | 253,166 | Foreign operations | (10,895) | 8,122 | 17,449 | |||||||||||||||||||||
| $ | (11,986 | ) | $ | 206,524 | $ | 218,118 | $ | (2,069) | $ | (121,781) | $ | (119,006) | ||||||||||||||||
| Provision for (benefit from) income taxes: | ||||||||||||||||||||||||||||
| Income tax expense (benefit): | Income tax expense (benefit): | |||||||||||||||||||||||||||
| Current: | Current: | |||||||||||||||||||||||||||
| Federal | $ | 49,259 | $ | 621 | $ | 471 | Federal | $ | 3,780 | $ | — | $ | — | |||||||||||||||
| State | (439 | ) | (592 | ) | 941 | State | 4,957 | 829 | 928 | |||||||||||||||||||
| Foreign | 53,274 | 60,651 | 67,740 | Foreign | 3,405 | 9,862 | 6,521 | |||||||||||||||||||||
| $ | 102,094 | $ | 60,680 | $ | 69,152 | 12,142 | 10,691 | 7,449 | ||||||||||||||||||||
| Deferred: | Deferred: | |||||||||||||||||||||||||||
| Domestic operations | $ | (54,226 | ) | $ | (2,924 | ) | $ | (6,134 | ) | Domestic operations | 73,370 | (29,801) | (37,705) | |||||||||||||||
| Foreign operations | (5,314 | ) | (5,984 | ) | (21,850 | ) | Foreign operations | (49,392) | (418) | (14,323) | ||||||||||||||||||
| (59,540 | ) | (8,908 | ) | (27,984 | ) | 23,978 | (30,219) | (52,028) | ||||||||||||||||||||
| $ | 42,554 | $ | 51,772 | $ | 41,168 | $ | 36,120 | $ | (19,528) | $ | (44,579) | |||||||||||||||||
See Note 4, “Discontinued Operations” for the income (loss)loss from discontinued operations before income taxes and related income taxes.
The Company’s Provision for income taxesIncome 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) | |||||||||||
77
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (In thousands) | |||||||||||
| Taxes calculated at the U.S. federal statutory rate | $ | (4,195 | ) | $ | 72,283 | $ | 76,365 | ||||
| State taxes | 86 | 228 | 768 | ||||||||
| Effect of tax rates on international operations | (13,916 | ) | (27,831 | ) | (36,305 | ) | |||||
| Change in enacted international tax rates | 536 | (2,419 | ) | (4,415 | ) | ||||||
| Changes in valuation allowance and tax reserves | 5,859 | 2,675 | (55 | ) | |||||||
| Tax Act - re-measurement of U.S. deferred taxes | (54,988 | ) | — | — | |||||||
| Tax Act - mandatory repatriation taxes | 52,381 | — | — | ||||||||
| Non-deductible impairment expenses | 52,570 | — | — | ||||||||
| Other | 4,221 | 6,836 | 4,810 | ||||||||
| Provision for income taxes | $ | 42,554 | $ | 51,772 | $ | 41,168 | |||||
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. As a result of the Tax Act becoming law on December 22, 2017 and the reduction in the U.S. corporate income tax rate from 35% to 21%, the Company revalued its ending net U.S. deferred tax liabilities at December 31, 2017 and recognized a provisional $55 million tax benefit in the Company’s Consolidated Statement of Income for the year ended December 31, 2017. The significant components of deferred tax assets and liabilities included in addition to the reconciliation of the beginning and ending amount of gross unrecognized tax benefits,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) | |||||||
| December 31, | |||||||
| 2017 | 2016 | ||||||
| (In thousands) | |||||||
| Deferred tax assets: | |||||||
| Post-retirement benefit obligation | $ | 23,297 | $ | 66,911 | |||
| Expenses currently not deductible | 69,039 | 105,780 | |||||
| Net operating loss carryforward | 142,700 | 211,205 | |||||
| Tax credit carryforward | 4,148 | 10,882 | |||||
| Depreciation and amortization | 10,001 | 7,879 | |||||
| Other | 36,733 | 14,956 | |||||
| Valuation allowance | (155,179 | ) | (153,740 | ) | |||
| Deferred tax assets, net | $ | 130,739 | $ | 263,873 | |||
| Deferred tax liabilities: | |||||||
| Depreciation and amortization | $ | (271,359 | ) | $ | (292,906 | ) | |
| UK and other foreign benefit obligation | (11,317 | ) | (14,990 | ) | |||
| Inventory | (12,109 | ) | (18,309 | ) | |||
| Outside basis differences and other | (118,974 | ) | (178,166 | ) | |||
| Total deferred tax liabilities | $ | (413,759 | ) | $ | (504,371 | ) | |
| Total deferred tax liabilities, net | $ | (283,020 | ) | $ | (240,498 | ) | |
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 likelylikely 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, 2017,2022, the valuation allowance increaseddecreased from $153.7$111.8 million to $155.2$93.5 million with a net increasedecrease of $17.3$12.1 million recognized in Provision for income
The Company has U.S. net operating loss carryforwards of $16.3$31.2 million expiring in years 20222023 through 2033.2037 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. AtAs of December 31, 20172022, the Company also has $577.9had $16.6 million foreign net operating loss carryforwards primarily in Brazil, Czech Republic, Germany, India, Sweden,France, and the United Kingdom that may be subject to local tax restrictive limitations including changes in ownership. Generally, theThe foreign net operating losses can be carried forward indefinitely, except in applicable jurisdictions that make up less than five percent of the Czech Republicavailable 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 India where they will expire between 2019R&D tax credits that may be used to offset U.S. tax in previous or future tax periods subject to Section 382 and 2026. 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, 2017, after accounting for the Tax Act provisional amounts, all2022, undistributed earnings of the Company’s foreign subsidiaries which are indefinitely reinvested outside the U.S., are provisionally estimated to be $950 million. The amount$50.9 million, all of which is permanently reinvested; accordingly, the Company has assessed no deferred tax liability that would have been recognized hadas of December 31, 2022 on such earnings not been indefinitely reinvestedearnings. This is not reasonably determinable.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.
78
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 that a tax position will notto 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 (inclusive of associated interest and penalties):follows:
| (In thousands) | |||
| Balance, December 31, 2014 | $ | 77,525 | |
| Addition for tax positions taken in prior periods | 3,924 | ||
| Addition for tax positions taken in the current period | 924 | ||
| Reductions related to settlements with taxing authorities | (22,473 | ) | |
| Reductions resulting from a lapse of applicable statute of limitations | (1,143 | ) | |
| Other, including the impact of foreign currency translation | (5,879 | ) | |
| Balance, December 31, 2015 | $ | 52,878 | |
| Addition for tax positions taken in prior periods | 6,552 | ||
| Addition for tax positions taken in the current period | 1,418 | ||
| Reductions related to settlements with taxing authorities | (53 | ) | |
| Reductions resulting from a lapse of applicable statute of limitations | (2,195 | ) | |
| Other, including the impact of foreign currency translation | 608 | ||
| Balance, December 31, 2016 | $ | 59,208 | |
| Addition for tax positions taken in prior periods | 1,521 | ||
| Addition for tax positions taken in the current period | 424 | ||
| Reductions related to settlements with taxing authorities | (10,708 | ) | |
| Reductions resulting from a lapse of applicable statute of limitations | (3,677 | ) | |
| Other, including the impact of foreign currency translation and U.S. tax rate changes | (5,750 | ) | |
| Balance, December 31, 2017 | $ | 41,018 | |
| (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 Sweden, Germany, Indonesia, France,China, the Netherlands, Mexico, BrazilUnited 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 20032009 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 2011.2016.
penalties on uncertain tax positions as a component of Provision for income taxes,Income tax expense (benefit), which was $1.3$1.1 million, $2.7$0.6 million and $1.8$0.7 million for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, 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 $1.8$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, 20172022 and 2016:2021:
| 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 | |||||||||||
| Air and Gas Handling | Fabrication Technology | Total | |||||||||
| (In thousands) | |||||||||||
| Balance, January 1, 2016 | $ | 1,206,715 | $ | 1,391,421 | $ | 2,598,136 | |||||
| Goodwill attributable to acquisitions | 1,317 | 15,242 | 16,559 | ||||||||
| Impact of foreign currency translation and other | (154,489 | ) | (109,210 | ) | (263,699 | ) | |||||
| Balance, December 31, 2016 | 1,053,543 | 1,297,453 | 2,350,996 | ||||||||
Goodwill attributable to acquisitions(1) | 107,024 | 74,180 | 181,204 | ||||||||
| Goodwill impairment | (150,200 | ) | — | (150,200 | ) | ||||||
| Impact of foreign currency translation and other | 97,805 | 58,739 | 156,544 | ||||||||
| Balance, December 31, 2017 | $ | 1,108,172 | $ | 1,430,372 | $ | 2,538,544 | |||||
| Accumulated goodwill impairment as of December 31, 2017 | $ | (150,200 | ) | $ | — | $ | (150,200 | ) | |||
(1) Includes purchase accounting adjustments associated with the two air and gas handling acquisitions and three fabrication technology acquisitions completed during the year ended December 31, 2017. Seediscussed in Note 5, “Acquisitions” for further discussion..
The following table summarizes the Company’s Intangible assets, excluding Goodwill:
| December 31, | ||||||||||||||||||||||||||||||||||||||
| December 31, | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | (In thousands) | ||||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||
| Trade names – indefinite life | $ | 407,167 | $ | — | $ | 363,132 | $ | — | ||||||||||||||||||||||||||||||
| Definite-Lived Intangible Assets | Definite-Lived Intangible Assets | |||||||||||||||||||||||||||||||||||||
| Acquired customer relationships | 622,893 | (184,100 | ) | 541,419 | (137,567 | ) | Acquired customer relationships | $ | 528,489 | $ | (215,962) | $ | 531,838 | $ | (158,229) | |||||||||||||||||||||||
| Acquired technology | 170,453 | (62,491 | ) | 137,902 | (44,906 | ) | Acquired technology | 553,284 | (134,967) | 504,226 | (91,322) | |||||||||||||||||||||||||||
| Acquired trade names | Acquired trade names | 414,801 | (74,644) | 405,087 | (53,932) | |||||||||||||||||||||||||||||||||
| Software | 100,098 | (71,010 | ) | 82,235 | (49,926 | ) | Software | 72,371 | (39,202) | 43,378 | (27,442) | |||||||||||||||||||||||||||
| Acquired backlog | 10,398 | (2,600 | ) | — | — | |||||||||||||||||||||||||||||||||
| Other intangible assets | 48,695 | (22,300 | ) | 40,398 | (16,340 | ) | Other intangible assets | 9,917 | (3,360) | 1,699 | (1,275) | |||||||||||||||||||||||||||
| $ | 1,359,704 | $ | (342,501 | ) | $ | 1,165,086 | $ | (248,739 | ) | $ | 1,578,862 | $ | (468,135) | $ | 1,486,228 | $ | (332,200) | |||||||||||||||||||||
Amortization expense related to acquired intangible assets, was includedincluding 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 Income as follows: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.
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (In thousands) | |||||||||||
| Selling, general and administrative expense | $ | 71,119 | $ | 57,365 | $ | 56,758 | |||||
See Note 2, “Summary of Significant Accounting Policies” for discussion regarding impairment of Intangible assets.
80
| December 31, | |||||||||
| Depreciable Life | 2017 | 2016 | |||||||
| (In years) | (In thousands) | ||||||||
| Land | n/a | $ | 47,584 | $ | 31,855 | ||||
| Buildings and improvements | 5-40 | 322,431 | 292,448 | ||||||
| Machinery and equipment | 3-15 | 495,366 | 406,270 | ||||||
| 865,381 | 730,573 | ||||||||
| Accumulated depreciation | (312,579 | ) | (225,142 | ) | |||||
| Property, plant and equipment, net | $ | 552,802 | $ | 505,431 | |||||
| December 31, | |||||||
| 2017 | 2016 | ||||||
| (In thousands) | |||||||
| Raw materials | $ | 141,827 | $ | 121,886 | |||
| Work in process | 74,704 | 55,845 | |||||
| Finished goods | 250,364 | 221,866 | |||||
| 466,895 | 399,597 | ||||||
| Less: customer progress payments | (2,308 | ) | — | ||||
| Less: allowance for excess, slow-moving and obsolete inventory | (34,960 | ) | (34,625 | ) | |||
| Inventories, net | $ | 429,627 | $ | 364,972 | |||
| December 31, | |||||||
| 2017 | 2016 | ||||||
| (In thousands) | |||||||
| Senior unsecured notes | $ | 414,862 | $ | — | |||
| Term loans | 615,095 | 678,286 | |||||
| Trade receivables financing arrangement | — | 63,399 | |||||
| Revolving credit facilities and other | 31,114 | 550,459 | |||||
| Total Debt | 1,061,071 | 1,292,144 | |||||
| Less: current portion | (5,766 | ) | (5,406 | ) | |||
| Long-term debt | $ | 1,055,305 | $ | 1,286,738 | |||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Expected Amortization Expense
The proceeds of the loans under the DB Credit Agreement were used by the Company to repay in full balances under its preexisting credit agreement, as well asCompany’s expected annual amortization expense for working capital and general corporate purposes. The DB Credit Agreement consists of an initial term loan in the aggregate amount of $750.0 million (the “Term Loan”) and a revolving credit facility (the “Revolver”) with a commitment capacity of $1.3 billion, each of which had an initial maturity term of five years. The Revolver contains a $50.0 million swing line loan sub-facility. In conjunction with the DB Credit Agreement, the Company recorded a charge to Interest expense in the Consolidated Statement of Incomeintangible assets for the yearnext 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, 2015 of $4.72022, 2021 and 2020, was $69.2 million, to write-off certain deferred financing fees$62.0 million and original issue discount and expensed $0.4$52.0 million, of costs incurred in connection with the refinancingrespectively.
11. Inventories, Net
Inventories, net consisted of the DB Credit Agreement.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 | ||||||||
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12. Leases
The contractual maturitiesCompany 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 debt as ofleases 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, 2017 are as follows(1):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
82
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| (In thousands) | |||
| 2018 | $ | 5,766 | |
| 2019 | 2,532 | ||
| 2020 | 618,750 | ||
| Thereafter | 443,111 | ||
| Total contractual maturities | 1,070,159 | ||
| Debt discount | (9,088 | ) | |
| Total debt | $ | 1,061,071 | |
The Enovis Credit Agreement through June 5, 2020 and the Euro Notes through April 15, 2025, as well as the contractual maturitiesconsists of other debt outstanding as of December 31, 2017, and reflects management’s intention to repay scheduled maturities of the term loans outstanding under the DB Credit Agreement (if not extended) with proceeds from thea $900 million revolving credit facility.
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 have agreed to 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 Companyretained shares in ESAB following the Separation, for $230.5 million of the $450.0 million in term loan outstanding under the DB Credit Agreement. Agreement, net of cost to sell.
The DBEnovis 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 DBEnovis Credit Agreement contains financial covenants requiring the Company to maintain (i) a maximum total leverage ratio as defined therein, of generally not more than 3.54.00:1.00, with a step-down to 1.03.75:1.00 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 as defined therein, of 3.0 to 1.0, measured at the end of each quarter.3.00:1.00. The DBEnovis Credit Agreement contains various events of default (including failure to comply with the covenants under the DBEnovis 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, 2017,2022, the Company iswas in compliance with the covenants under the DBEnovis 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
83
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 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 $100.0$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 amountmethod of shares repurchased is to be determined by management based on its evaluation of market conditions and other factors. The repurchase program has no expiration date and does not obligate
During the year ended December 31, 2018, the Company to acquire any specific numberrepurchased 2,149,808 shares, as adjusted for the reverse stock split, of shares. No sharesour Common stock in open market transactions for $200 million. Since 2018, there have been repurchased to date.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.
84
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, 2017, 20162022, 2021 and 2015.2020. All amounts are net of tax and noncontrolling interest.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) | |||||||||||||||
| Accumulated Other Comprehensive Loss Components | |||||||||||||||||||
| Net Unrecognized Pension And Other Post-Retirement Benefit Cost | Foreign Currency Translation Adjustment | Unrealized (Loss) Gain On Hedging Activities | Changes in Fair Value of Available-for-Sale Securities | Total | |||||||||||||||
| (In thousands) | |||||||||||||||||||
| Balance at January 1, 2015 | $ | (240,513 | ) | $ | (227,059 | ) | $ | 23,881 | $ | — | $ | (443,691 | ) | ||||||
| Other comprehensive income (loss) before reclassifications: | |||||||||||||||||||
| Net actuarial gain | 28,349 | — | — | — | 28,349 | ||||||||||||||
| Foreign currency translation adjustment | 7,747 | (301,011 | ) | (382 | ) | — | (293,646 | ) | |||||||||||
| Loss on long-term intra-entity foreign currency transactions | — | (550 | ) | — | — | (550 | ) | ||||||||||||
| Gain on net investment hedges | — | — | 14,537 | — | 14,537 | ||||||||||||||
| Unrealized loss on cash flow hedges | — | — | (2,873 | ) | — | (2,873 | ) | ||||||||||||
| Other | 3,817 | — | — | — | 3,817 | ||||||||||||||
| Other comprehensive income (loss) before reclassifications | 39,913 | (301,561 | ) | 11,282 | — | (250,366 | ) | ||||||||||||
Amounts reclassified from Accumulated other comprehensive loss(1) | 7,342 | — | — | — | 7,342 | ||||||||||||||
| Net current period Other comprehensive income (loss) | 47,255 | (301,561 | ) | 11,282 | — | (243,024 | ) | ||||||||||||
| Balance at December 31, 2015 | $ | (193,258 | ) | $ | (528,620 | ) | $ | 35,163 | $ | — | $ | (686,715 | ) | ||||||
| Other comprehensive income (loss) before reclassifications: | |||||||||||||||||||
| Net actuarial gain | 4,815 | — | — | — | 4,815 | ||||||||||||||
| Foreign currency translation adjustment | 2,620 | (312,017 | ) | 722 | — | (308,675 | ) | ||||||||||||
| Loss on long-term intra-entity foreign currency transactions | — | (22,530 | ) | — | — | (22,530 | ) | ||||||||||||
| Gain on net investment hedges | — | — | 18,537 | — | 18,537 | ||||||||||||||
| Unrealized loss on cash flow hedges | — | — | (789 | ) | — | (789 | ) | ||||||||||||
| Other comprehensive income (loss) before reclassifications | 7,435 | (334,547 | ) | 18,470 | — | (308,642 | ) | ||||||||||||
Amounts reclassified from Accumulated other comprehensive loss(1)(2) | 4,634 | 2,378 | — | — | 7,012 | ||||||||||||||
| Net current period Other comprehensive income (loss) | 12,069 | (332,169 | ) | 18,470 | — | (301,630 | ) | ||||||||||||
| Balance at December 31, 2016 | $ | (181,189 | ) | $ | (860,789 | ) | $ | 53,633 | $ | — | $ | (988,345 | ) | ||||||
| Other comprehensive (loss) income before reclassifications: | |||||||||||||||||||
| Net actuarial gain | 4,185 | — | — | — | 4,185 | ||||||||||||||
| Foreign currency translation adjustment | (5,689 | ) | 288,354 | 18 | — | 282,683 | |||||||||||||
| Unrealized gain on available-for-sale securities | — | — | — | 5,152 | 5,152 | ||||||||||||||
| Loss on long-term intra-entity foreign currency transactions | — | (29,372 | ) | — | — | (29,372 | ) | ||||||||||||
| Loss on net investment hedges | — | — | (32,388 | ) | — | (32,388 | ) | ||||||||||||
| Unrealized gain on cash flow hedges | — | — | 8,875 | — | 8,875 | ||||||||||||||
| Other comprehensive (loss) income before reclassifications | (1,504 | ) | 258,982 | (23,495 | ) | 5,152 | 239,135 | ||||||||||||
Amounts reclassified from Accumulated other comprehensive loss(1) | 6,981 | — | — | — | 6,981 | ||||||||||||||
| Divestiture-related recognition of pension and other post-retirement cost and foreign currency translation | 91,374 | 76,483 | — | — | 167,857 | ||||||||||||||
| Net current period Other comprehensive income (loss) | 96,851 | 335,465 | (23,495 | ) | 5,152 | 413,973 | |||||||||||||
| Balance at December 31, 2017 | $ | (84,338 | ) | $ | (525,324 | ) | $ | 30,138 | $ | 5,152 | $ | (574,372 | ) | ||||||
(1) Included in the computation of net periodic benefit cost. See Note 14,16, “Defined Benefit Plans” for additional details.
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During the yearyears ended December 31, 2017,2022, 2021 and 2020, Noncontrolling interest increaseddecreased by $16.0$2.1 million, $1.3 million, and $2.6 million, respectively, as a result of Other comprehensive income, primarily due to foreign currency translation adjustments. During the years ended December 31, 2016 and 2015, Noncontrolling interest increased by $0.6 million and decreased by $22.8 million, respectively, as a result of Other comprehensive loss, primarily due to foreign currency translation adjustment.
Share-Based Payments
On May 13, 2016,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 Colfax Corporationshareholders 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 (the “2016 Plan”) which replaceddated May 13, 2016. All awards previously granted and outstanding under the Colfax Corporation 2008 Omnibus Incentive Plan dated April 21, 2008, as amended and restated on April 2, 2012.prior plans remain subject to the terms of those prior plans. The 20162020 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 20162020 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 equivalent rights, performance shares, performance units,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.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 Income,Operations, as payroll costs of the employees receiving the awards are recorded in the same line item.
The Company’s Consolidated Statements of IncomeOperations 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.
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (In thousands) | |||||||||||
| Stock-based compensation expense | $ | 21,548 | $ | 19,020 | $ | 16,321 | |||||
| Deferred tax benefit | 7,079 | 6,271 | 5,342 | ||||||||
As of December 31, 2017,2022, the Company had $36.2$29.7 million of unrecognized compensation expense related to stock-based awards that will be recognized over a weighted-average period of approximately 1.1 years. The intrinsic value of awards exercised or issued upon vesting was $12.3$37.2 million, $6.5$48.6 million, and $21.8$11.5 million during the years ended December 31, 2017, 20162022, 2021 and 2015,2020, respectively.
Stock Options
Under the 20162020 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. In the case of an incentive stock option granted to a holder of 10% of the Company’s outstanding Common stock, the Company may grant options to purchase Common stock with a maximum term of 5 years, at a purchase price equal to 110% of 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:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2022 | 2021 | 2020 | |||||||||||||||||||||||
| Expected period that options will be outstanding (in years) | 4.78 | 4.95 | 5.02 | 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) | 1.92 | % | 1.41 | % | 1.62 | % | Interest rate (based on U.S. Treasury yields at the time of grant) | 2.10 | % | 0.61 | % | 1.09 | % | |||||||||||||||
| Volatility | 32.15 | % | 42.50 | % | 28.75 | % | Volatility | 42.90 | % | 43.10 | % | 37.76 | % | |||||||||||||||
| Dividend yield | — | — | — | Dividend yield | — | — | — | |||||||||||||||||||||
| Weighted-average fair value of options granted | $ | 12.16 | $ | 9.47 | $ | 11.87 | ||||||||||||||||||||||
Weighted-average fair value of options granted(1) | Weighted-average fair value of options granted(1) | $ | 27.48 | $ | 27.64 | $ | 20.22 | |||||||||||||||||||||
.
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; during the year ended December 31, 2015, expected volatility was estimated based on the historical
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Number of Options | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (In years) | Aggregate Intrinsic Value(1) (In thousands) | |||||||||
| Outstanding at January 1, 2017 | 4,327,827 | $ | 37.49 | |||||||||
| Granted | 872,146 | 40.28 | ||||||||||
| Exercised | (319,902 | ) | 21.70 | |||||||||
| Forfeited and expired | (440,486 | ) | 42.48 | |||||||||
| Outstanding at December 31, 2017 | 4,439,585 | $ | 38.68 | 4.40 | $ | 24,715 | ||||||
| Vested or expected to vest at December 31, 2017 | 4,304,963 | $ | 38.47 | 4.38 | $ | 24,589 | ||||||
| Exercisable at December 31, 2017 | 1,576,311 | $ | 42.61 | 3.26 | $ | 8,230 | ||||||
Restricted Stock Units
Under the 20162020 Plan, the Compensation Committee of the Board of Directors may award performance-based restricted stock units (“PRSUs”), the vesting of which is contingent upon meeting service conditions and various performance goals. The
During the years ended December 31, 2022, 2021 and 2020, the Company granted certain employees PRSUs, the vesting of the stock unitswhich is determinedfully based on whether the Company achievesCompany’s total shareholder return (“TSR”) ranking among a peer group over athree-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 performance criteria established by the Compensation CommitteeCommittee. While the achievement factor of the Boardoutstanding awards has been determined, they remain subject to the awards’ service period requirements and will therefore continue to vest over the original term of Directors. Ifthe 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 criteria are satisfied,periods regardless of the units are subject to additional timeperformance 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 requirements as determined at the time of grant. period.
Under the 20162020 Plan, the Compensation Committee of the Board of Directors may also award non-performance-based restricted stock units (“RSUs”) to select executives, employees and outside directors.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, includingincluding 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 fair value of PRSUs and RSUs is equal to the market value of a share of Common stock on the date of grant and the related compensation expense is recognized ratably over the requisite service period and, for PRSUs, when it is expected that any of the performance criterion will be achieved.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| PRSUs | RSUs | ||||||||||||
| Number of Units | Weighted- Average Grant Date Fair Value | Number of Units | Weighted- Average Grant Date Fair Value | ||||||||||
| Nonvested at January 1, 2017 | 627,316 | $ | 36.25 | 583,898 | $ | 34.54 | |||||||
| Granted | 100,811 | 40.42 | 251,949 | 40.04 | |||||||||
| Vested | (53,498 | ) | 41.06 | (146,794 | ) | 39.94 | |||||||
| Forfeited and expired | (25,956 | ) | 68.30 | (173,254 | ) | 36.50 | |||||||
| Nonvested at December 31, 2017 | 648,673 | $ | 35.22 | 515,799 | $ | 35.03 | |||||||
The fair value of shares vested during the years ended December 31, 2017, 20162022, 2021 and 20152020 was $7.3$32.1 million $6.5, $18.3 million and $8.9$9.7 million, respectively.
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 | ||||||||
| December 31, | |||||||
| 2017 | 2016 | ||||||
| (In thousands) | |||||||
| Accrued payroll | $ | 98,132 | $ | 87,045 | |||
| Accrued taxes | 53,939 | 35,429 | |||||
| Accrued asbestos-related liability | 50,311 | 51,166 | |||||
| Warranty liability - current portion | 32,428 | 29,233 | |||||
| Accrued restructuring liability - current portion | 12,509 | 10,783 | |||||
| Accrued third-party commissions | 14,014 | 10,432 | |||||
| Other | 97,299 | 87,238 | |||||
| Accrued liabilities | $ | 358,632 | $ | 311,326 | |||
Accrued Restructuring Liability
The Company’s restructuring programs include a series of restructuring 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:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Year Ended December 31, 2017 | |||||||||||||||||||
| Balance at Beginning of Period | Provisions | Payments | Foreign Currency Translation | Balance at End of Period(3) | |||||||||||||||
| (In thousands) | |||||||||||||||||||
| Restructuring and other related charges: | |||||||||||||||||||
| Air and Gas Handling: | |||||||||||||||||||
Termination benefits(1) | $ | 4,855 | $ | 21,605 | $ | (14,929 | ) | $ | 507 | $ | 12,038 | ||||||||
Facility closure costs(2) | 1,234 | 3,961 | (5,397 | ) | (15 | ) | (217 | ) | |||||||||||
| 6,089 | 25,566 | (20,326 | ) | 492 | 11,821 | ||||||||||||||
Non-cash charges(2) | 26,628 | ||||||||||||||||||
| 52,194 | |||||||||||||||||||
| Fabrication Technology: | |||||||||||||||||||
Termination benefits(1) | 3,712 | 5,590 | (8,732 | ) | 90 | 660 | |||||||||||||
Facility closure costs(2) | 981 | 6,198 | (7,150 | ) | 13 | 42 | |||||||||||||
| 4,693 | 11,788 | (15,882 | ) | 103 | 702 | ||||||||||||||
Non-cash charges(2) | 4,369 | ||||||||||||||||||
| 16,157 | |||||||||||||||||||
| Corporate and Other: | |||||||||||||||||||
Facility closure costs(2) | 203 | — | (133 | ) | 14 | 84 | |||||||||||||
| 203 | — | (133 | ) | 14 | 84 | ||||||||||||||
| Total | $ | 10,985 | 37,354 | $ | (36,341 | ) | $ | 609 | $ | 12,607 | |||||||||
Non-cash charges(2) | 30,997 | ||||||||||||||||||
| $ | 68,351 | ||||||||||||||||||
| 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. The Company recognizes
(2) Includes the cost of involuntaryrelocating 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, at the communication date or ratably over any remaining expected future service period. Voluntary termination benefits are recognized as a liability and an expense when employees accept the offer and the amount can be reasonably estimated.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. Duringfacilities 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, 2017, the Company recorded a $4.42021.The remaining $8.7 million non-cash impairment charge for a facility in our Fabrication Technology segment, that was previously closed as part of restructuring activities. The Companyexpense is recorded a $26.6 million non-cash impairment chargeas Restructuring and other charges on the Company’s Consolidated statements of Operations for a facility in our Air and Gas Handling segment as part of the Corporate approved restructuring activities.year ended December 31, 2021.
| Year Ended December 31, 2016 | |||||||||||||||||||
| Balance at Beginning of Period | Provisions | Payments | Foreign Currency Translation | Balance at End of Period(3) | |||||||||||||||
| (In thousands) | |||||||||||||||||||
| Restructuring and other related charges: | |||||||||||||||||||
| Air and Gas Handling: | |||||||||||||||||||
Termination benefits(1) | $ | 5,656 | $ | 13,599 | $ | (14,502 | ) | $ | 102 | $ | 4,855 | ||||||||
Facility closure costs(2) | 894 | 9,159 | (8,702 | ) | (117 | ) | 1,234 | ||||||||||||
| 6,550 | 22,758 | (23,204 | ) | (15 | ) | 6,089 | |||||||||||||
| Non-cash charges | 3,668 | ||||||||||||||||||
| 26,426 | |||||||||||||||||||
| Fabrication Technology: | |||||||||||||||||||
Termination benefits(1) | 6,031 | 23,104 | (25,263 | ) | (160 | ) | 3,712 | ||||||||||||
Facility closure costs(2) | 426 | 7,261 | (6,611 | ) | (95 | ) | 981 | ||||||||||||
| 6,457 | 30,365 | (31,874 | ) | (255 | ) | 4,693 | |||||||||||||
| Non-cash charges | 1,323 | ||||||||||||||||||
| 31,688 | |||||||||||||||||||
| Corporate and Other: | |||||||||||||||||||
Facility closure costs(2) | 625 | — | (344 | ) | (78 | ) | 203 | ||||||||||||
| 625 | — | (344 | ) | (78 | ) | 203 | |||||||||||||
| Total | $ | 13,632 | 53,123 | $ | (55,422 | ) | $ | (348 | ) | $ | 10,985 | ||||||||
Non-cash charges(2) | 4,991 | ||||||||||||||||||
| $ | 58,114 | ||||||||||||||||||
The Company sponsors various defined benefit plans and defined contribution plans and other post-retirement benefits plans, including health and life insurance, 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.
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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: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.
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Pension Benefits | Other Post-Retirement Benefits | ||||||||||||||
| Year Ended December 31, | Year Ended December 31, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| (In thousands) | |||||||||||||||
| Change in benefit obligation: | |||||||||||||||
| Projected benefit obligation, beginning of year | $ | 1,475,276 | $ | 1,550,643 | $ | 26,295 | $ | 33,093 | |||||||
| Acquisitions | 42,830 | — | 310 | — | |||||||||||
| Service cost | 4,951 | 4,059 | 11 | 39 | |||||||||||
| Interest cost | 42,177 | 51,638 | 951 | 1,038 | |||||||||||
| Plan amendment | 19,389 | — | 35 | — | |||||||||||
| Actuarial loss (gain) | 78,124 | 126,505 | 1,307 | (5,689 | ) | ||||||||||
| Foreign exchange effect | 82,425 | (158,453 | ) | 6 | — | ||||||||||
| Benefits paid | (93,009 | ) | (97,488 | ) | (1,875 | ) | (2,186 | ) | |||||||
| Divestitures | (340,614 | ) | — | (11,751 | ) | — | |||||||||
| Settlements | (354,647 | ) | (1,591 | ) | — | — | |||||||||
| Other | 367 | (37 | ) | — | — | ||||||||||
| Projected benefit obligation, end of year | $ | 957,269 | $ | 1,475,276 | $ | 15,289 | $ | 26,295 | |||||||
| Accumulated benefit obligation, end of year | $ | 947,803 | $ | 1,452,000 | $ | 15,289 | $ | 26,295 | |||||||
| Change in plan assets: | |||||||||||||||
| Fair value of plan assets, beginning of year | $ | 1,297,900 | $ | 1,337,405 | $ | — | $ | — | |||||||
| Acquisitions | 36,538 | — | — | — | |||||||||||
| Actual return on plan assets | 111,630 | 191,562 | — | — | |||||||||||
| Employer contribution | 35,996 | 32,347 | 1,875 | 2,186 | |||||||||||
| Foreign exchange effect | 74,565 | (164,316 | ) | — | — | ||||||||||
| Benefits paid | (93,009 | ) | (97,488 | ) | (1,875 | ) | (2,186 | ) | |||||||
| Divestitures | (204,673 | ) | — | — | — | ||||||||||
| Settlements | (354,647 | ) | (1,591 | ) | — | — | |||||||||
| Other | 46 | (19 | ) | — | — | ||||||||||
| Fair value of plan assets, end of year | $ | 904,346 | $ | 1,297,900 | $ | — | $ | — | |||||||
| Funded status, end of year | $ | (52,923 | ) | $ | (177,376 | ) | $ | (15,289 | ) | $ | (26,295 | ) | |||
| Amounts recognized on the Consolidated Balance Sheet at December 31: | |||||||||||||||
| Non-current assets | $ | 65,060 | $ | 85,347 | $ | — | $ | — | |||||||
| Assets held for sale, less current portion | — | 481 | — | — | |||||||||||
| Current liabilities | (4,171 | ) | (4,026 | ) | (1,507 | ) | (961 | ) | |||||||
| Non-current liabilities | (113,812 | ) | (111,736 | ) | (13,782 | ) | (14,294 | ) | |||||||
| Current portion of liabilities held for sale | — | (1,047 | ) | — | (1,213 | ) | |||||||||
| Liabilities held for sale, less current portion | — | (146,395 | ) | — | (9,827 | ) | |||||||||
| Total | $ | (52,923 | ) | $ | (177,376 | ) | $ | (15,289 | ) | $ | (26,295 | ) | |||
The projected benefit obligation decreased by $360.0 million in the Consolidated Balance Sheets as ofyear ended December 31, 2016.2022 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: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.
| Foreign Pension Benefits | |||||||
| Year Ended December 31, | |||||||
| 2017 | 2016 | ||||||
| (In thousands) | |||||||
| Change in benefit obligation: | |||||||
| Projected benefit obligation, beginning of year | $ | 1,033,193 | $ | 1,075,223 | |||
| Acquisitions | 42,830 | — | |||||
| Service cost | 4,804 | 3,881 | |||||
| Interest cost | 27,133 | 34,298 | |||||
| Plan amendments | 19,389 | — | |||||
| Actuarial loss (gain) | 70,849 | 132,898 | |||||
| Foreign exchange effect | 82,425 | (158,453 | ) | ||||
| Benefits paid | (60,510 | ) | (53,028 | ) | |||
| Divestitures | (136,114 | ) | — | ||||
| Settlements | (354,647 | ) | (1,591 | ) | |||
| Other | 41 | (35 | ) | ||||
| Projected benefit obligation, end of year | $ | 729,393 | $ | 1,033,193 | |||
| Accumulated benefit obligation, end of year | $ | 719,927 | $ | 1,009,916 | |||
| Change in plan assets: | |||||||
| Fair value of plan assets, beginning of year | $ | 953,455 | $ | 981,249 | |||
| Acquisitions | 36,538 | — | |||||
| Actual return on plan assets | 59,924 | 158,992 | |||||
| Employer contribution | 35,815 | 32,168 | |||||
| Foreign exchange effect | 74,565 | (164,316 | ) | ||||
| Benefits paid | (60,510 | ) | (53,028 | ) | |||
| Divestitures | (28,102 | ) | — | ||||
| Settlements | (354,647 | ) | (1,591 | ) | |||
| Other | 47 | (19 | ) | ||||
| Fair value of plan assets, end of year | $ | 717,085 | $ | 953,455 | |||
| Funded status, end of year | $ | (12,308 | ) | $ | (79,738 | ) | |
(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.
92
ENOVIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Expected contributions to the Company’s pension and other post-employment benefit plans for the year ending December 31, 2018, related to plans as of December 31, 2017,2023 are $40.5$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 | ||||||||||||||||
| Pension Benefits | Other Post-Retirement Benefits | ||||||||||
| All Plans | Foreign Plans | ||||||||||
| (In thousands) | |||||||||||
| 2018 | $ | 54,204 | $ | 37,715 | $ | 1,507 | |||||
| 2019 | 54,784 | 38,495 | 1,354 | ||||||||
| 2020 | 55,179 | 39,024 | 1,205 | ||||||||
| 2021 | 56,779 | 40,866 | 1,079 | ||||||||
| 2022 | 56,773 | 41,150 | 1,008 | ||||||||
| 2023- 2027 | 292,410 | 200,091 | 4,232 | ||||||||
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.
93
| Actual Asset Allocation December 31, | Target | ||||||
| 2017 | 2016 | Allocation | |||||
| U.S. Plans: | |||||||
| Equity securities: | |||||||
| U.S. | 44 | % | 44 | % | 30% - 45% | ||
| International | 16 | % | 15 | % | 10% - 20% | ||
| Fixed income | 39 | % | 36 | % | 30% - 50% | ||
| Other | — | % | 1 | % | 0% - 20% | ||
| Cash and cash equivalents | 1 | % | 4 | % | 0% - 5% | ||
| Foreign Plans: | |||||||
| Equity securities | 31 | % | 32 | % | 25%-40% | ||
| Fixed income securities | 60 | % | 65 | % | 60%-75% | ||
| Cash and cash equivalents | 1 | % | 1 | % | 0% - 25% | ||
| Other | 8 | % | 2 | % | 0% - 10% | ||
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 15,17, “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, 2017 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
Measured at Net Asset Value(1) | Level One | Level Two | Level Three | Total | Measured at Net Asset Value(1) | Level One | Level Two | Level Three | Total | |||||||||||||||||||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Plans: | U.S. Plans: | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | — | $ | 1,591 | $ | — | $ | — | $ | 1,591 | ||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents(2) | Cash and cash equivalents(2) | $ | — | $ | 1,699 | $ | — | $ | — | $ | 1,699 | |||||||||||||||||||||||||||||||||||||
| Equity securities: | Equity securities: | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. large cap | 49,351 | — | — | — | 49,351 | U.S. large cap | 52,810 | — | — | — | 52,810 | |||||||||||||||||||||||||||||||||||||
| U.S. small/mid cap | 20,396 | 13,360 | — | — | 33,756 | U.S. small/mid cap | 21,983 | 15,501 | — | — | 37,484 | |||||||||||||||||||||||||||||||||||||
| International | 29,236 | — | — | — | 29,236 | International | 31,094 | — | — | — | 31,094 | |||||||||||||||||||||||||||||||||||||
| Fixed income mutual funds: | Fixed income mutual funds: | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. government and corporate | 72,313 | — | — | — | 72,313 | U.S. government and corporate | 77,084 | — | — | — | 77,084 | |||||||||||||||||||||||||||||||||||||
Other(2) | — | 1,015 | — | — | 1,015 | |||||||||||||||||||||||||||||||||||||||||||
Other(3) | Other(3) | — | 1,088 | — | — | 1,088 | ||||||||||||||||||||||||||||||||||||||||||
| Foreign Plans: | Foreign Plans: | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | — | 3,636 | — | — | 3,636 | Cash and cash equivalents | — | 3,029 | — | — | 3,029 | |||||||||||||||||||||||||||||||||||||
| Equity securities | 78,681 | 142,152 | — | — | 220,833 | Equity securities | — | 46,475 | — | — | 46,475 | |||||||||||||||||||||||||||||||||||||
| Non-U.S. government and corporate bonds | — | 430,546 | 2,077 | — | 432,623 | Non-U.S. government and corporate bonds | — | 45,480 | — | — | 45,480 | |||||||||||||||||||||||||||||||||||||
Other(2) | — | 573 | 59,419 | — | 59,992 | |||||||||||||||||||||||||||||||||||||||||||
Other(3) | Other(3) | — | — | 70,577 | — | 70,577 | ||||||||||||||||||||||||||||||||||||||||||
| $ | 249,977 | $ | 592,873 | $ | 61,496 | $ | — | $ | 904,346 | $ | 182,971 | $ | 113,272 | $ | 70,577 | $ | — | $ | 366,820 | |||||||||||||||||||||||||||||