Enovis Corporation — Form 10-Q Summary
Business context and reporting period
This quarterly report covers the three and nine months ended September 30, 2022. Enovis, formerly Colfax Corporation, completed the tax-free separation of its fabrication technology business into ESAB Corporation on April 4, 2022. Historical fabrication technology results are presented as discontinued operations. Continuing operations comprise the Prevention and Recovery and Reconstructive segments.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $383.8 million | $359.9 million | $1,154.4 million | $1,027.1 million |
| Gross profit | $215.8 million | $197.9 million | $637.6 million | $569.8 million |
| Gross margin | 56.2% | 55.0% | 55.2% | 55.5% |
| Operating loss | $(17.9) million | $(16.1) million | $(43.0) million | $(44.6) million |
| Adjusted EBITDA | $57.2 million | $56.5 million | $161.1 million | $144.4 million |
| Adjusted EBITDA margin | 14.9% | 15.7% | 14.0% | 14.1% |
| Net income attributable to Enovis | $(66.6) million | $25.8 million | $25.3 million | $73.6 million |
| EPS from consolidated operations | $(1.23) | $0.49 | $0.47 | $1.46 |
Q3 continuing-operations revenue increased 6.6%, comprising 7.0% growth from existing businesses, 2.5% from acquisitions and a 2.9% foreign-exchange headwind. Nine-month revenue increased 12.4%, including 5.7% existing-business growth, 9.0% acquisition contribution and a 2.3% currency headwind.
- Prevention and Recovery: Q3 sales were $256.5 million, broadly flat year over year; nine-month sales were $765.1 million, up 1.0%. Nine-month Adjusted EBITDA increased to $101.1 million from $95.0 million, although margin declined to 13.2% from 12.5% as reported.
- Reconstructive: Q3 sales were $127.3 million, up 22.8%; nine-month sales were $389.3 million, up 44.5%, primarily from acquisitions and organic growth. Nine-month Adjusted EBITDA increased to $60.1 million from $49.4 million, while margin declined to 15.4% from 18.3% due to acquisition-related dilution and cost pressures.
- Q3 net loss from continuing operations was $65.9 million, compared with a $13.6 million loss in the prior-year quarter. The result included a $63.1 million unrealized loss on the retained ESAB investment and a $1.0 million insurance settlement loss.
- Nine-month net income from continuing operations was $16.6 million versus an $87.6 million loss in the prior-year period, aided by a $72.4 million unrealized gain on ESAB shares, a $32.1 million insurance settlement gain and lower interest expense.
Cash flow, balance sheet, debt and liquidity
- Cash used in operating activities was $19.9 million for the nine months ended September 30, 2022, compared with $259.9 million of cash provided in the prior-year period. Working-capital outflows were significant, including increased inventory to mitigate supply-chain volatility.
- Cash used in investing activities was $139.3 million, including $68.7 million for capital expenditures and intangibles and $73.4 million for acquisitions and investments.
- Cash and cash equivalents were $55.0 million at September 30, 2022, down from $680.3 million at December 31, 2021. The prior-year balance included assets associated with the separated ESAB business.
- Total debt was $449.2 million, consisting of the Enovis Term Loan, all classified as current because it matures April 4, 2023. The $900 million revolving facility had no borrowings and was fully available at quarter-end.
- The weighted-average borrowing rate under the Enovis Credit Agreement was 3.98%. The company was in compliance with its credit covenants, including a maximum total leverage ratio of 4.50:1.00 and minimum interest coverage ratio of 3.00:1.00.
- Management stated that available liquidity was adequate to fund operations for the next twelve months. The company also held $200.3 million of ESAB shares at fair value and intends to divest them in a tax-efficient exchange for outstanding debt no later than twelve months after the separation.
Material changes, outlook and risks
The principal comparability event was the ESAB separation, which materially changed the company’s portfolio, capital structure, reported segments and historical presentation. Enovis also completed acquisitions including 360 Med Care and a controlling-interest acquisition of Insight Medical Systems, whose ARVIS platform provides augmented-reality surgical guidance. Acquisition accounting remains preliminary for certain transactions and may be revised.
Management did not provide a specific quantitative revenue or earnings guidance figure in the filing. Management expects recent acquisitions, particularly in Reconstructive, to become margin-accretive over time, but reported that they were dilutive to margins in 2022. Sales typically peak in the fourth quarter, although COVID-19 disrupted historical seasonality.
- Ongoing risks include COVID-19 effects, supply-chain constraints, labor shortages, freight and raw-material inflation, higher interest rates, foreign-exchange volatility and the Russia-Ukraine conflict.
- The company faces execution and integration risks from acquisitions, including contingent consideration liabilities of $29.4 million at September 30, 2022.
- The retained ESAB investment creates earnings volatility through mark-to-market gains and losses and exposes Enovis to ESAB share-price movements and potential tax or indemnification matters related to the separation.
- Legal proceedings are considered ordinary-course matters and are not expected by management to have a material adverse effect, although adverse outcomes could still be material.
- The company identified no material changes to previously disclosed risk factors, and management concluded that disclosure controls and procedures were effective.
Facts investors should verify
- Verify the April 2023 maturity and refinancing or repayment plan for the $449.2 million term loan.
- Monitor the timing, tax consequences and debt-reduction impact of monetizing the $200.3 million ESAB investment.
- Assess whether acquisition-related revenue growth converts into sustainable operating-margin improvement.
- Track operating cash flow, inventory levels and working-capital normalization amid supply-chain pressures.
- Reconcile GAAP results with Adjusted EBITDA, particularly the effects of ESAB mark-to-market gains and losses, separation costs, restructuring, amortization and acquisition-related charges.