MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations ofEnovis Corporation ("Enovis ," "the Company," "we," "our," and "us") should be read in conjunction with the Condensed Consolidated Financial Statements and related footnotes included in Part I. Item 1. "Financial Statements" of this Quarterly Report on Form 10-Q for the quarterly period endedJuly 1, 2022 (this "Form 10-Q") and the Consolidated Financial Statements and related footnotes included in Part II. Item 8. "Financial Statements and Supplementary Data" of our Annual Report on Form 10-K for the year endedDecember 31, 2021 (the "2021 Form 10-K") filed with theSecurities and Exchange Commission (the "SEC") onFebruary 22, 2022 .
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Form 10-Q is filed with theSecurities and Exchange Commission (the "SEC"). All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements regarding: the separation of our fabrication and medical technology businesses into two differentiated, independent publicly traded companies (the "Separation"); the anticipated benefits of the Separation; the expected financial and operating performance of, and future opportunities for, each company following the Separation; the impact of the COVID-19 global pandemic, including the rise, prevalence and severity of variants of the virus, the actions by governments, businesses and individuals in response to the situation, on the global and regional economies, financial markets, and overall demand for our products; projections of revenue, profit margins, expenses, tax provisions and tax rates, earnings or losses from operations, impact of foreign exchange rates, cash flows, synergies or other financial items; plans, strategies and objectives of management for future operations including statements relating to potential acquisitions, compensation plans or purchase commitments; developments, performance, industry or market rankings relating to products or services; future economic conditions or performance, including the impact of increasing inflationary pressures; the outcome of outstanding claims or legal proceedings; potential gains and recoveries of costs; assumptions underlying any of the foregoing; and any other statements that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future. Forward-looking statements may be characterized by terminology such as "believe," "anticipate," "should," "would," "intend," "plan," "will," "expect," "estimate," "project," "positioned," "strategy," "targets," "aims," "seeks," "sees," and similar expressions. These statements are based on assumptions and assessments made by our management as of the filing of this Form 10-Q in light of their experience and perception of historical trends, current conditions, expected future developments and other factors we believe to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties and actual results could differ materially due to numerous factors, including but not limited to the following: •risks related to the impact of the COVID-19 global pandemic, including the rise, prevalence and severity of variants of the virus, actions by governments, businesses and individuals in response to the situation, such as the scope and duration of the outbreak, the nature and effectiveness of government actions and restrictive measures implemented in response, delays and cancellations of medical procedures, supply chain disruptions, the impact on creditworthiness and financial viability of customers, and other impacts on the Company's business and ability to execute business continuity plans; •risks related to the Separation, including our ability to realize the anticipated benefits of the Separation; the potential to incur significant liability if the separation and distribution of ESAB is determined to be a taxable transaction; potential indemnification liabilities to ESAB pursuant to the separation and distribution agreement and related agreements entered into in connection with the Separation and the financial and operating performance of each company following the Separation;
•volatility in the commodity markets and certain commodity prices due to
economic disruptions from the COVID-19 pandemic and various geopolitical events,
including the ongoing conflict between
•changes in the general economy, including as a result of inflationary
pressures, a general economic slowdown or a recession, increased interest rates
or changes in monetary policy, as well as the cyclical nature of the markets we
serve;
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•supply chain constraints and backlogs, including risks affecting raw material,
part and component availability, labor shortages and inefficiencies, freight and
logistical challenges, and inflation in raw material, part, component, freight
and delivery costs;
•significant movements in foreign currency exchange rates;
•our ability to identify, finance, acquire and successfully integrate attractive
acquisition targets;
•our exposure to unanticipated liabilities resulting from acquisitions;
•our ability and the ability of our customers to access required capital at a
reasonable cost;
•our ability to accurately estimate the cost of or realize savings from our
restructuring programs;
•disruptions in the global economy caused by the ongoing conflict between
and
counter-responses);
•material disruptions at any of our manufacturing facilities;
•noncompliance with various laws and regulations associated with our
international operations, including anti-bribery laws, export control
regulations and sanctions and embargoes;
•risks associated with our international operations, including risks from trade
protection measures and other changes in trade relations;
•risks associated with the representation of our employees by trade unions and
work councils;
•our exposure to product liability claims;
•potential costs and liabilities associated with environmental, health and
safety laws and regulations;
•failure to maintain, protect and defend our intellectual property rights;
•the loss of key members of our leadership team, or the inability to attract,
develop, engage, and retain qualified employees;
•restrictions in our principal credit facility that may limit our flexibility in
operating our business;
•impairment in the value of intangible assets;
•new regulations and customer preferences reflecting an increased focus on environmental, social and governance issues, including new regulations related to the use of conflict minerals;
•service interruptions, data corruption, cyber-based attacks or network security
breaches affecting our information technology infrastructure;
•risks arising from changes in technology;
•the competitive environment in our industry;
•changes in our tax rates, realizability of deferred tax assets, or exposure to
additional income tax liabilities;
•our ability to manage and grow our business and execution of our business and
growth strategies;
•our financial performance;
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•difficulties and delays in integrating or fully realizing projected cost
savings and benefits of our acquisitions; and
•other risks and factors, listed in Item 1A. "Risk Factors" in Part I of our 2021 Form 10-K and Part II. Item 1A. "Risk Factors" in our Form 10-Q for the quarter endedApril 1, 2022 . The effects of the COVID-19 pandemic, including the rise, prevalence and severity of variants of the virus and actions by governments, businesses and individuals in response to the situation, as well as inflationary pressures and the ongoing conflict betweenRussia andUkraine , may give rise or contribute to or amplify the risks associated with many of these factors. Any such forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ materially from those envisaged by such forward-looking statements. These forward-looking statements speak only as of the date this Form 10-Q is filed with theSEC . We do not assume any obligation and do not intend to update any forward-looking statement except as required by law. See Part I. Item 1A. "Risk Factors" in our 2021 Form 10-K and Part II. Item 1A. "Risk Factors" in our Form 10-Q for the quarter endedApril 1, 2022 for a further discussion regarding some of the reasons that actual results may be materially different from those that we anticipate. 24
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Overview
Please see Part I, Item 1. “Business” in our 2021 Form 10-K for a discussion of
the Company’s objectives and methodologies for delivering shareholder value.
We previously reported our operations through our Fabrication Technology and Medical Technology segments. These businesses operated in distinct markets, with unique business opportunities and investment requirements. Following the spin-off, the Company holds only the medical technology business reported through our Prevention and Recovery and Reconstructive segments. OnApril 4, 2022 , the Company changed its name from "Colfax Corporation " to "Enovis Corporation ", began operating its business as "Enovis" and, as ofApril 5, 2022 , the Company's common stock began trading under the new ticker symbol "ENOV." See the Results of Operations section below for further information on the Separation.
As mentioned above, beginning in the second quarter of 2022,
operations through two operating segments: Prevention and Recovery and
Reconstructive. We have reflected this change in all historical periods
presented.
•Prevention and Recovery - a leader in orthopedic solutions, providing devices, software and services across the patient care continuum from injury prevention to rehabilitation after surgery, injury, or from degenerative disease. •Reconstructive - an innovation-driven leader offering a comprehensive suite of reconstructive joint products for the hip, knee, shoulder, elbow, foot, ankle, and finger. We have a global footprint, with production facilities inNorth America ,Europe ,North Africa andAsia . We serve a global customer base across multiple markets through a combination of direct sales and third-party distribution channels. Our customer base is highly diversified in the medical market. Integral to our operations is our business management system, Enovis Growth Excellence (EGX). EGX is our culture and includes our values and behaviors, a comprehensive set of tools, and repeatable, teachable processes that we use to drive continuous improvement and create superior value for our customers, shareholders and associates. We believe that our management team's access to, and experience in, the application of the EGX methodology is one of our primary competitive strengths. 25
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Results of Operations
The following discussion of Results of Operations addresses the comparison of the periods presented. Our management evaluates the operating results of each of its reportable segments based upon Net sales and Adjusted EBITDA, as defined in the "Non-GAAP Measures" section.
Items Affecting Comparability of Reported Results
The comparability of our operating results for the three and six months ended
significant items:
The Separation
OnApril 4, 2022 (the "Distribution Date"), we completed the Separation through a tax-free, pro-rata distribution of 90% of the outstanding common stock of ESAB to our stockholders. We retained 10% of the shares of ESAB common stock immediately following the Separation. We intend to divest the retained shares in ESAB in a tax-efficient exchange for outstanding debt no later than 12 months after the Distribution Date. Since the disposition occurred in the second quarter of 2022, we began classifying our fabrication technology business as a discontinued operation in our financial statements beginning in the second quarter of 2022. Accordingly, the results of our fabrication technology businesses are excluded from continuing operations in the accompanying financials for the three and six months endedJuly 1, 2022 andJuly 2, 2021 . We expect that the Separation will allow each company to: (1) optimize capital allocation for internal investment, mergers and acquisitions, and return of capital to shareholders; (2) tailor investment to its specific business profile and strategic priorities in the most efficient manner possible; (3) increase operating flexibility and resources to capitalize on growth opportunities in its respective markets; and (4) improve both investor alignment with its clear value proposition and the ability for investors to value it based on its distinct strategic, operational and financial characteristics. The Separation also provides each company with an appropriately valued acquisition currency that could be used for larger, transformational transactions.
Refer to the accompanying Notes to the Condensed Consolidated Financial
Statements for more information regarding the Separation.
The COVID-19 Pandemic
The COVID-19 pandemic has cause economic disruptions since its emergence in
2020. Despite increased access to vaccines, the emergence of variants and
outbreaks have caused some volatility, including spikes in the second half of
2021 and second quarter of 2022, which slowed the pace of recovery in 2022.
As reflected in the discussions that follow, the pandemic and actions taken in response to it have had a variety of impacts on our results of operations during 2021 and 2022, including sales levels, inflation and supply chain challenges. 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 virus, we cannot reasonably estimate the full impacts of COVID-19 on our financial condition, results of operations or cash flows in the future. COVID-19 and other market dynamics have caused widespread supply chain challenges due to labor, raw material, and component shortages. As a result, we continue to experience supply constraints in our businesses, which have led to cost inflation and logistics delays. 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.
Please see Part I. Item 1A. “Risk Factors” in our 2021 Form 10-K for a further
discussion of some of the risks related to the COVID-19 pandemic.
Strategic Acquisitions
We complement our organic growth plans with strategic acquisitions. Acquisitions
can significantly affect our reported results, and we report the change in our
Net sales between periods both from existing and acquired businesses. The change
in
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Net sales due to acquisitions for the six months ended July 1, 2022 presented in
this filing represents the incremental sales subsequent to the beginning of the
prior year periods. During this period the Reconstructive segment completed one
business combination for aggregate consideration of $27.1 million and the
Prevention & Recovery segment completed three asset acquisitions for aggregate
consideration of $18.2 million . The acquired business, 360 Med Care, is an
Australian 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.
During 2021, we completed five acquisitions in our Reconstructive segment for
net cash consideration of $201.6 million and equity consideration of
$285.7 million . The largest of these acquisitions include Trilliant Surgical, a
provider of foot and ankle orthopedic implants; MedShape, Inc. , a provider of
innovative surgical solutions for foot and ankle surgeons; and Mathys AG
Bettlach , a Switzerland -based company that develops and distributes innovative
products for artificial joint replacement, synthetic bone graft solutions and
sports medicine.
Foreign Currency Fluctuations
Approximately 31% and 25% of our Net sales from continuing operations for the six months endedJuly 1, 2022 andJuly 2, 2021 , respectively, were derived from sales denominated in currencies other than theU.S. dollar. Our costs are also exposed to currencies other than theU.S. dollar. Changes in foreign exchange rates can impact our results of operations and are quantified when significant. For the six months endedJuly 1, 2022 compared to the six months endedJuly 2, 2021 , fluctuations in foreign currencies reduced Net sales and Gross profit by approximately 2% and reduced Selling, general and administrative expenses by 1%. The changes in foreign exchange rates sinceDecember 31, 2021 also decreased net assets by approximately 1% as ofJuly 1, 2022 .
Seasonality
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.
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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 and Adjusted EBITDA margin exclude from Operating income (loss) the effect of restructuring and other related charges, MDR and related costs, strategic transaction costs, stock-based compensation, depreciation and other amortization charges, amortization of acquired intangibles, insurance settlement gains, and inventory step-up. 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 assistsEnovis management in comparing its 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.Enovis management also believes that presenting these measures allows investors to view its 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 Operating income (loss), the most directly comparable GAAP financial measure, to Adjusted EBITDA. Three Months Ended Six Months Ended July 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021 (Dollars in millions) Operating income (loss) (GAAP)$ 5.6 $ (10.4) $ (25.1) $ (28.5) Adjusted to add (deduct): Restructuring and other related charges(1) 2.6 2.0 5.5 3.0 MDR and other costs(2) 4.4 1.9 7.0 3.7 Strategic transaction costs(3) 12.7 4.0 24.4 4.4 Stock-based compensation 7.8 6.8 14.5 12.7 Depreciation and other amortization 19.5 16.4 38.0 33.2 Amortization of acquired intangibles 31.8 29.5 62.6 57.0 Insurance settlement gain(4) (33.0) - (33.0) - Inventory step-up 4.9 0.4 10.0 2.3 Adjusted EBITDA (non-GAAP)$ 56.2 $ 50.6 $ 103.9 $ 87.9 Adjusted EBITDA margin (non-GAAP) 14.2 % 14.2 % 13.5 % 13.2 % (1) Restructuring and other related charges includes$0.3 million and$0.8 million of expense classified as Cost of sales on our Condensed Consolidated Statements of Operations for the three and six months endedJuly 1, 2022 , respectively. (2) Primarily related to costs specific to compliance with medical device reporting regulations and other requirements of the European Union MDR. These costs are classified as Selling, general and administrative expense on our Condensed Consolidated Statements of Operations. (3) Strategic transaction costs includes costs related to the Separation and certain transaction and integration costs related to recent acquisitions. (4) Insurance settlement gain related to the Company's 2019 acquisition of DJO. 28
-------------------------------------------------------------------------------- The following tables set forth a reconciliation of operating income (loss), the most directly comparable financial statement measure, to Adjusted EBITDA by segment for the three and six months endedJuly 1, 2022 andJuly 2, 2021 , respectively. Three Months Ended July 1, 2022 Six Months Ended July 1, 2022 Prevention and Prevention and Recovery Reconstructive Total Recovery Reconstructive Total (Dollars in millions) Operating income (loss) (GAAP)$ 13.4 $ (7.9) $ 5.6 $ (1.0) $ (24.1) $ (25.1) Adjusted to add (deduct): Restructuring and other related charges(1) 1.3 1.3 2.6 3.4 2.1 5.5 MDR and other costs(2) 3.0 1.5 4.4 4.7 2.4 7.0 Strategic transaction costs(2) 8.5 4.2 12.7 16.1 8.3 24.4 Stock-based compensation(2) 5.2 2.6 7.8 9.6 4.9 14.5 Depreciation and other amortization 6.3 13.1 19.5 12.2 25.8 38.0 Amortization of acquired intangibles 19.5 12.3 31.8 38.6 24.1 62.6 Insurance settlement gain(2) (22.1) (11.0) (33.0) (22.1) (11.0) (33.0) Inventory step-up - 4.9 4.9 - 10.0 10.0 Adjusted EBITDA (non-GAAP)$ 35.1 $ 21.0 $ 56.2 $ 61.5 $ 42.4 $ 103.9 Adjusted EBITDA margin (non-GAAP) 13.3 % 16.0 % 14.2 % 12.1 % 16.2 % 13.5 % (1) Restructuring and other related charges includes$0.3 million and$0.8 million of expense classified as Cost of sales on our Condensed Consolidated Statements of Operations for the three and six months endedJuly 1, 2022 , respectively. (2) Amounts are allocated to the segments as a percentage of revenue as the costs or gain are not discrete to either segment. Three Months Ended July 2, 2021 Six Months Ended July 2, 2021 Prevention and Prevention and Recovery Reconstructive Total Recovery Reconstructive Total (Dollars in millions) Operating loss (GAAP)$ (1.8) $ (8.5) $ (10.4) $ (13.5) $ (14.9) $
(28.5)
Adjusted to add (deduct): Restructuring and other related charges 1.3 0.7 2.0 2.0 0.9 3.0 MDR and other costs(1) 1.4 0.5 1.9 2.8 0.9 3.7 Strategic transaction costs(1) 3.0 1.0 4.0 3.3 1.1 4.4 Stock-based compensation(1) 5.1 1.7 6.8 9.6 3.2 12.7 Depreciation and other amortization 6.1 10.2 16.4 12.2 21.0 33.2 Amortization of acquired intangibles 18.7 10.8 29.5 37.5 19.6 57.0 Inventory step-up (0.5) 0.9 0.4 0.7 1.6 2.3 Adjusted EBITDA (non-GAAP)$ 33.3 $ 17.4 $ 50.6 $ 54.6 $ 33.3 $ 87.9 Adjusted EBITDA margin (non-GAAP) 12.5 % 19.4 % 14.2 % 10.9 % 20.1 % 13.2 %
(1) 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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Sales
Net sales for the three and six months ended
the three and six months ended
components of changes in our consolidated Net sales.
Three Months Ended Six Months Ended
Net Sales Change % Net Sales Change %
(Dollars in millions)
For the three and six months ended July 2,
2021 $ 356.1 $ 667.2
Components of Change:
Existing Businesses(1) 10.5 2.9 % 33.7 5.1 %
Acquisitions(2) 37.4 10.5 % 83.0 12.4 %
Foreign Currency Translation(3) (8.8) (2.5) % (13.4) (2.0) %
39.0 10.9 % 103.4 15.5 %
For the three and six months ended July 1,
2022 $ 395.1 $ 770.6
(1) Excludes the impact of foreign exchange rate fluctuations and acquisitions,
thus providing a measure of change due to factors such as price, product mix and
volume.
(2) Represents the incremental sales as a result of acquisitions closed
subsequent to the beginning of the prior year period.
(3) Represents the difference between prior year sales valued at the actual
prior year foreign exchange rates and prior year sales valued at current year
foreign exchange rates.
The increase in Net sales during the three and six months ended July 1, 2022
compared to the prior year periods was primarily attributable to sales from
acquired businesses and increases from our existing businesses. Existing
business sales in our Reconstructive segment increased $5.1 million and
$13.8 million , during the three and six months ended July 1, 2022 respectively,
due to higher surgical sales volumes compared to the prior year period despite
some delays in elective surgeries in the second quarter of 2022 due to a rise in
COVID-19 cases. Existing business sales in our Prevention and Recovery segment
increased $5.4 million and $19.9 million during the three and six months ended
July 1, 2022 , respectively, and included inflation-related pricing increases and
improved sales volumes. Net sales from acquisitions increased in the three and
six months ended July 1, 2022 due to acquisitions in our Reconstructive segment
that closed since the beginning of the prior year period in 2021. The
strengthening of the U.S. dollar relative to other currencies resulted in $8.8
million and $13.4 million unfavorable foreign currency translation impacts
during the three and six months ended July 1, 2022 , respectively.
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Operating Results
The following table summarizes our results of continuing operations for the
comparable periods.
Three Months Ended Six Months Ended
July 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021
(Dollars in millions)
Gross profit $ 215.9 $ 200.6 $ 421.8 $ 371.9
Gross profit margin 54.6 % 56.3 % 54.7 % 55.7 %
Selling, general and administrative
expense $ 225.5 $ 197.9 $ 444.7 $ 376.0
Research and development expense $ 15.7 $ 11.0 $ 30.5 $ 21.4
Operating income (loss) $ 5.6 $ (10.4) $ (25.1) $ (28.5)
Operating income (loss) margin 1.4 % (2.9) % (3.3) % (4.3) %
Net income (loss) from continuing
operations $ 120.7 $ (42.1) $ 82.6 $ (74.0)
Net income (loss) margin from continuing
operations (GAAP) 30.5 % (11.8) % 10.7 % (11.1) %
Adjusted EBITDA (non-GAAP) $ 56.2 $ 50.6 $ 103.9 $ 87.9
Adjusted EBITDA margin (non-GAAP) 14.2 % 14.2 % 13.5 % 13.2 %
Items excluded from Adjusted EBITDA:
Restructuring and other related charges(1) $ 2.6 $ 2.0 $ 5.5 $ 3.0
MDR and other costs $ 4.4 $ 1.9 $ 7.0 $ 3.7
Strategic transaction costs $ 12.7 $ 4.0 $ 24.4 $ 4.4
Stock-based compensation $ 7.8 $ 6.8 $ 14.5 $ 12.7
Depreciation and other amortization $ 19.5 $ 16.4 $ 38.0 $ 33.2
Amortization of acquired intangibles $ 31.8 $ 29.5 $ 62.6 $ 57.0
Insurance settlement gain $ (33.0) $ - $ (33.0) $ -
Inventory step-up $ 4.9 $ 0.4 $ 10.0 $ 2.3
Unrealized gain on investment in ESAB
Corporation $ (135.5) $ - $ (135.5) $ -
Interest expense, net $ 4.5 $ 5.7 $ 11.6 $ 18.6
Debt extinguishment charges $ 20.1 $ 29.9 $ 20.1 $ 29.9
Income tax expense (benefit) $ (4.2) $
(3.8)
(1) Restructuring and other related charges includes
Consolidated Statements of Operations for the three and six months ended
2022
Second Quarter of 2022 Compared to Second Quarter of 2021
Gross profit increased in the second quarter of 2022 compared with the prior year period due to a$19.9 million increase in our Reconstructive segment, partially offset by a$4.7 million decrease in our Prevention and Recovery segment. The Gross profit increase was primarily attributable to acquisitions and increased sales from existing businesses, partially offset by increased supply chain and logistic costs and$4.5 million of higher inventory step-up charges related to recent acquisitions. Gross profit margin decreased slightly due to supply chain, logistics and other cost inflation that exceeded pricing and other benefits. Selling, general and administrative expense increased$27.6 million in the second quarter of 2022 compared to the prior year period due to$17.4 million from acquired businesses and$8.7 million increase in strategic transaction costs driven by higher Separation-related costs. Research and development costs also increased compared to the prior year period primarily due to recent acquisitions. Amortization of acquired intangibles and Depreciation and other amortization also increased compared to the prior year period due to acquisition-related increases. 31
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During the second quarter of 2022, we recorded an insurance settlement gain of
Following the Separation, the Company retained 10% of the shares of ESAB common stock, which is recorded at fair value. During the second quarter of 2022, we recorded a$135.5 million gain related to this investment. Debt extinguishment charges of$20.1 million were recorded in the second quarter of 2022 due to debt redemptions in conjunction with the Separation and recapitalization, while 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 in the second quarter of 2022 due to a reduction in debt balances due to 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 the second quarter of 2022 was (3.6)%, which was lower than the 2022 U.S. federal statutory tax rate of 21%, mainly due to non-taxable unrealized gains on the investment in ESAB offset by non-deductible costs related to the tax-free separation transaction. The effective tax rate for the second quarter of 2021 was 8.2%, which was lower than the 2021 U.S. federal statutory tax rate of 21% mainly due toU.S. taxation on international operations and other non-deductible expenses. Net income from continuing operations increased in the second quarter of 2022 compared with the prior year period primarily due to the gain on the retained ESAB common stock, as well as the insurance settlement gain and acquisition-related sales, offset by costs associated with the Separation, debt extinguishment charges and acquisition-related costs. Net income margin from continuing operations increased due to the aforementioned factors. Adjusted EBITDA increased primarily due to increased sales and lower operating expenses in existing businesses, partially offset by higher supply chain and logistic costs. Adjusted EBITDA margin stayed even period-over-period, and positive impacts were partially offset by recent acquisitions in our Reconstructive segment which were dilutive to the margin by approximately 70 basis points and are expected to be accretive to margins in future years.
Six months ended
Gross profit increased in the six months endedJuly 1, 2022 compared with the prior year period due to a$49.6 million increase in our Reconstructive segment and a$0.2 million increase in our Prevention and Recovery segment. The Gross profit increase was attributable to the benefit from business acquisitions and growth in our existing businesses, partially offset by higher inventory step-up charges of$7.7 million and increased supply chain and logistic costs. Gross profit margin decreased slightly due to supply chain, logistics and other cost inflation that exceeded pricing and other benefits. Selling, general and administrative expense increased$68.7 million in the six months endedJuly 1, 2022 compared to the prior year period due to$39.7 million of costs included in acquired businesses and a$20.0 million increase in strategic transaction costs driven by higher Separation-related costs. Research and development costs also increased compared to the prior year period primarily due to increased spend within recently acquired businesses in our Reconstructive segment. Amortization of acquired intangibles and Depreciation and other amortization also increased compared to the prior year period due to business acquisition-related increases. As discussed above, during the second quarter of 2022, we recorded an insurance settlement gain of$33.0 million and a$135.5 million gain on our retained investment in ESAB, which significantly impacted our results for the six months endedJuly 1, 2022 . Interest expense, net decreased in the six months endedJuly 1, 2022 compared to the prior year period due to a reduction in debt balances as a result of the Separation-related debt redemptions at the beginning of the second quarter of 2022. The effective tax rate for Net income from continuing operations during the six months endedJuly 1, 2022 was (4.9)%, which was lower than the 2022 U.S. federal statutory tax rate of 21%, mainly due to non-taxable unrealized gains on the investment in ESAB offset by non-deductible costs related to the tax-free separation transaction. The effective tax rate for the six months endedJuly 2, 2021 was 3.9%, which was lower than the 2021 U.S. federal statutory tax rate of 21% mainly due toU.S. taxation on international operations and other non-deductible expenses. 32 -------------------------------------------------------------------------------- Net income from continuing operations increased in the six months endedJuly 1, 2022 compared with the prior year period, primarily due to the gain on the retained ESAB common stock, as well as the insurance settlement gain and acquisition-related sales, offset by costs associated with the Separation, debt extinguishment charges and acquisition-related costs. Net income margin from continuing operations increased by over 20 points due to the aforementioned factors. Adjusted EBITDA increased due to organic growth and lower operating expenses in existing businesses, partially offset by higher supply chain and logistic costs. Adjusted EBITDA margin increased 30 basis points for the same reasons; excluding acquisitions, margins increased by 70 basis points.
Business Segments
Following the completion of the Separation, we revised our reporting structure and conduct our business through two operating segments, "Prevention and Recovery", which consists of our orthopedic and rehabilitation business, and "Reconstructive", which includes our surgical business.
Prevention and Recovery
We develop, manufacture, and distribute rigid bracing products, orthopedic soft goods, vascular systems and compression garments, and hot and cold therapy products, and offer robust recovery sciences products in the clinical rehabilitation and sports medicine markets such as bone growth stimulators and electrical stimulators used for pain management. Our Prevention and Recovery products are marketed under several brand names, most notably DJO and Don-Joy, to orthopedic specialists, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers, and other healthcare professionals who treat patients with a variety of treatment needs including musculoskeletal conditions resulting from degenerative diseases, deformities, traumatic events and sports-related injuries. Many of our medical devices and related accessories are used by athletes and other patients for injury prevention and at-home physical therapy treatments. We reach a diverse customer base through multiple distribution channels, including independent distributors, direct salespeople, and directly to patients.
The following table summarizes selected financial results for our Prevention and
Recovery segment:
Three Months Ended Six Months Ended
July 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021
(Dollars in millions)
Net sales $ 263.8 $ 266.9 $ 508.6 $ 501.6
Gross profit $ 133.7 $ 138.4 $ 256.2 $ 256.0
Gross profit margin 50.7 % 51.9 % 50.4 % 51.0 %
Selling, general and administrative
expenses $ 124.0 $ 128.8 $ 243.4 $ 250.0
Research and development expense $ 8.8 $ 7.2 $ 17.1 $ 14.2
Operating income (loss) (GAAP) $ 13.4 $ (1.8) $ (1.0) $ (13.5)
Adjusted EBITDA (non-GAAP) $ 35.1 $ 33.3 $ 61.5 $ 54.6
Adjusted EBITDA margin (non-GAAP) 13.3 % 12.5 % 12.1 % 10.9 %
Items excluded from Adjusted EBITDA:
Restructuring and other related charges $ 1.3 $ 1.3 $ 3.4 $ 2.0
MDR and other costs $ 3.0 $ 1.4 $ 4.7 $ 2.8
Strategic transaction costs $ 8.5 $ 3.0 $ 16.1 $ 3.3
Stock-based compensation $ 5.2 $ 5.1 $ 9.6 $ 9.6
Depreciation and other amortization $ 6.3 $ 6.1 $ 12.2 $ 12.2
Amortization of acquired intangibles $ 19.5 $ 18.7 $ 38.6 $ 37.5
Insurance settlement gain $ (22.1) $ - $ (22.1) $ -
Inventory step up $ - $ (0.5) $ - $ 0.7
(1) Restructuring and other related charges includes
Consolidated Statements of Operations for the three and six months ended
2022
33
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Second Quarter of 2022 Compared to Second Quarter of 2021
Net sales in our Prevention and Recovery segment decreased$3.1 million , or 1%, in the second quarter of 2022 compared with the prior year period driven primarily by$8.5 million foreign currency translation headwinds and fewer selling days, partially offset by inflation-related pricing increases. Gross profit decreased$4.7 million , and Gross profit margin decreased 120 basis points, due to inflation-driven supply chain and logistics cost increases, partially offset by pricing increases. Selling, general and administrative expense decreased primarily due to decreased central cost allocations, partially offset by costs incurred related to the Separation. Operating income (loss) improved due to an insurance settlement gain recorded in the second quarter of 2022 and lower Selling, general and administrative expenses, partially offset by increases in supply chain costs and strategic transaction costs related to the Separation. Adjusted EBITDA and Adjusted EBITDA margin increased primarily due to the reduced Selling, general and administrative expenses compared to the prior period, partially offset by increased inflation and supply chain costs.
Six months ended
Net sales in our Prevention and Recovery segment increased$7.0 million , or 1%, in the six months endedJuly 1, 2022 compared with the prior year period driven primarily by organic growth in existing businesses which was aided by pricing increases to mitigate inflation, partially offset by unfavorable foreign currency translation of$12.9 million . Gross profit increased$0.2 million due to the improved sales, offset by inflation-driven supply chain cost increases. Gross profit margin decreased 60 basis points due to inflation-related customer pricing and cost increases, which compressed the margin. Selling, general and administrative expense decreased primarily due to a decreased central cost allocation, partially offset by increased costs related to the Separation. Operating income (loss) improved due to an insurance settlement gain recorded in the second quarter of 2022 and lower Selling, general and administrative expenses, partially offset by increases in supply chain costs and strategic transaction costs related to the Separation. Adjusted EBITDA and Adjusted EBITDA margin increased due to the reduction in central cost allocations, partially offset by increased inflation and supply chain costs during the six months endedJuly 1, 2022 compared to the prior year period. 34
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Reconstructive
We develop, manufacture, and market a wide variety of knee, hip, shoulder,
elbow, foot, ankle, and finger implant products that serve the orthopedic
reconstructive joint implant market. Our products are primarily used by surgeons
for surgical procedures, including in hospitals and ambulatory surgery centers.
The following table summarizes the selected financial results for our
Reconstructive segment:
Three Months Ended Six Months Ended
July 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021
(Dollars in millions)
Net sales $ 131.3 $ 89.2 $ 262.0 $ 165.6
Gross profit $ 82.1 $ 62.2 $ 165.5 $ 115.9
Gross profit margin 62.5 % 69.8 % 63.2 % 70.0 %
Selling, general and administrative
expenses $ 88.7 $ 65.2 $ 176.8 $ 121.6
Research and development expense $ 6.9 $ 3.8 $ 13.5 $ 7.2
Operating loss (GAAP) $ (7.9) $ (8.5) $ (24.1) $ (14.9)
Adjusted EBITDA (non-GAAP) $ 21.0 $ 17.4 $ 42.4 $ 33.3
Adjusted EBITDA margin (non-GAAP) 16.0 % 19.5 % 16.2 % 20.1 %
Items excluded from Adjusted EBITDA:
Restructuring and other related charges $ 1.3 $ 0.7 $ 2.1 $ 0.9
MDR and other costs $ 1.5 $ 0.5 $ 2.4 $ 0.9
Strategic transaction costs $ 4.2 $ 1.0 $ 8.3 $ 1.1
Stock-based compensation $ 2.6 $ 1.7 $ 4.9 $ 3.2
Depreciation and other amortization $ 13.1 $ 10.2 $ 25.8 $ 21.0
Amortization of acquired intangibles $ 12.3 $ 10.8 $ 24.1 $ 19.6
Insurance settlement gain $ (11.0) $ - $ (11.0) $ -
Inventory step up $ 4.9 $ 0.9 $ 10.0 $ 1.6
Second Quarter of 2022 Compared to Second Quarter of 2021
Net sales increased in our Reconstructive segment in the second quarter of 2022 compared with the prior year period primarily due to acquisition-related sales growth of$37.4 million and organic growth in existing businesses in the current year period, partially offset by fewer selling days in comparison to the prior year. Gross profit increased due to acquisitions and existing business-related growth, partially offset by increased supply chain and logistic costs. Gross profit margin decreased due to increased supply chain and logistics costs. Selling, general and administrative expense increased over the same period primarily due to$17.4 million from acquired businesses including integration costs for the newly-acquired businesses and, to a lesser extent, costs associated with the Separation. Adjusted EBITDA increased primarily due to existing business-related growth. Recent acquisitions drove a reduction in the Adjusted EBITDA margin, as the recent acquisitions were dilutive to the margin by approximately 320 basis points and are expected to be accretive to margins in future years.
Six months ended
Net sales increased in our Reconstructive segment in the six months endedJuly 1, 2022 compared with the prior year period primarily due to acquisition-related sales growth of$83.0 million and organic growth in existing businesses of$13.8 million . Gross profit increased in the six months endedJuly 1, 2022 compared to the six months endedJuly 2, 2021 primarily due to acquisition and existing business growth, partially offset by increased supply chain and logistic costs and acquisition-related inventory valuation step-up charges of$8.4 million , which also led to a decrease in Gross profit margin. Selling, general and administrative expense increased over the same period primarily due to$39.7 million of costs from acquisitions including integration costs for the newly-acquired businesses, as well as increased central cost allocations and costs associated with the Separation. Operating income decreased in the six months endedJuly 1, 2022 compared to the six months endedJuly 2, 2021 primarily due to the increases in Selling, general and administrative expenses from acquisitions. Adjusted EBITDA increased primarily due to growth in existing businesses, partially offset by increased supply chain and logistic costs. 35 -------------------------------------------------------------------------------- Recent acquisitions drove a reduction in the Adjusted EBITDA margin, as they were dilutive to the margin by approximately 250 basis points and are expected to be accretive to margins in future years. 36 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Overview
We finance our long-term capital and working capital requirements through a combination of cash flows from operating activities, various borrowings and the issuances of equity. We expect that our primary ongoing requirements for cash after the Separation will be for working capital, funding of acquisitions, near-term Separation costs, capital expenditures, restructuring, and debt service and principal repayments. We believe we could raise additional funds in the form of debt or equity if it were determined to be appropriate for strategic acquisitions or other corporate purposes.
ESAB Separation
As discussed in Note 1, "General", the Company completed the separation of its fabrication technology business onApril 4, 2022 through a tax-free, pro-rata distribution of 90% of the outstanding common stock of ESAB to the Company's stockholders. We retained 10% of the shares of ESAB common stock immediately following the Separation. We intend to divest the retained ESAB shares in a tax-efficient exchange for our outstanding debt no later than 12 months after the Separation date. 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 the new credit facility, and$52.3 million of cash on hand to repay$1.4 billion of outstanding debt and accrued interest on our existing credit facility,$302.8 million of outstanding debt and accrued interest on our senior notes dueFebruary 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, onApril 7, 2022 , we completed the redemption of our senior unsecured notes dueApril 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 for more detail on the new Enovis Credit Agreement. In the second quarter of 2022, the Company 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.
Equity Capital
OnMarch 19, 2021 , we completed an underwritten public offering of 5.4 million shares of our Common stock, as adjusted for the reverse split, resulting in net proceeds of$711.3 million , after deducting offering expenses and underwriters' discount and commissions. We used the proceeds to pay down certain of our senior notes.
On
adjusted for the reverse split, to the former shareholders of Mathys for
acquisition consideration of
In 2018, our Board of Directors authorized the repurchase of our Common stock from time-to-time on the open market or in privately negotiated transactions. No stock repurchases have been made under this plan since the third quarter of 2018. As ofJuly 1, 2022 , the remaining stock repurchase authorization provided by our Board of Directors was$100.0 million . The timing, amount, and method of shares repurchased is determined by management based on its evaluation of market conditions and other factors. There is no term associated with the remaining repurchase authorization.
Term Loan and Revolving Credit Facility
Our previous credit agreement datedDecember 17, 2018 , as amended (the "Colfax Credit Facility") consisted of a$975 million revolving credit facility (the "Revolver") and a Term A-1 loan in an initial aggregate principal amount of$825 million , each with a maturity date ofDecember 6, 2024 . The Revolver contained a$50 million swing line loan sub-facility. 37 -------------------------------------------------------------------------------- OnApril 4, 2022 , the Company entered into a new credit agreement (the "Enovis Credit Agreement") which replaces the Colfax Credit Facility and concurrently terminated all indebtedness of the Company outstanding thereunder being repaid on such date with proceeds of the Enovis Credit Agreement and other funds of the Company. The Enovis Credit Agreement consists of a revolving credit facility that totals$900 million in commitments (the "Revolver") and a term loan in an aggregate amount of$450 million (the "Enovis Term Loan", and together with the Revolver, the "Enovis Credit Facility"). The Revolver includes a$50 million swing line loan sub-facility. The Revolver will be used to provide funds for the Company's ongoing working capital requirements and for general corporate purposes. As ofJuly 1, 2022 , there was$900 million available on the Revolver. The Term Loan bears interest, at the election of the Company, at either the base rate (as defined in the Enovis Credit Agreement) or at the term SOFR rate plus an adjustment (as defined in the Enovis Credit Agreement), in each case, plus the applicable interest rate margin. The Revolver bears interest, at the election of the Company, at either the base rate or, in the case of loans denominated in dollars, the term SOFR rate plus an adjustment or the daily simple SOFR plus an adjustment, in the case of loans denominated in euros, the adjusted EURIBOR rate and, in the case of loans denominated in sterling, SONIA plus an adjustment (as all such rates are defined in the Enovis Credit Agreement), in each case, plus the applicable interest rate margin. Initially, the applicable interest rate margin will be 1.5% or, in the case of base rate loans, 0.5%, and in future quarters it may change based upon the Company's total leverage ratio (ranging from 1.125% to 1.750% or in the case of the base rate margin, 0.125% to 0.750%). Each swing line loan denominated in dollars bears interest at the base rate plus the applicable interest rate margin.
Certain
obligations of the Company under the Enovis Credit
Agreement.
The Enovis Credit Agreement contains customary covenants limiting the ability of the Company and its subsidiaries to, among other things, incur debt or liens, merge or consolidate with others, dispose of assets, make investments or pay dividends. In addition, the Enovis Credit Agreement contains financial covenants requiring the Company to maintain (i) a maximum total leverage ratio of not more than 4.50:1.00, with a step-down to, on the date on which the Company and its subsidiaries have transferred any retained shares of ESAB common stock to one or more unaffiliated third parties, 4.00:1.00, commencing with the fiscal quarter endingJune 30, 2023 , 3.75:1.00 and commencing with the fiscal quarter endingJune 30, 2024 , 3.50:1.00, and (ii) a minimum interest coverage ratio of 3.00:1:00. The Enovis Credit Agreement contains various events of default (including failure to comply with the covenants under the Enovis Credit Agreement and related agreements) and upon an event of default the lenders may, subject to various customary cure rights, require the immediate payment of all amounts outstanding under the Enovis Term Loan and the Enovis Revolver.
Euro Senior Notes
Our senior unsecured notes with an aggregate principal amount of €350 million were due inMay 2025 and had an interest rate of 3.25%. Upon the completion of the Separation, the Euro Senior Notes were redeemed onApril 7, 2022 at a redemption premium of 100.813% of the principal amount.
TEU Amortizing Notes
OnJanuary 15, 2022 , we made the final installment payment on our TEU amortizing notes, which had an initial principal amount of$15.6099 per unit and an interest rate of 6.50% per annum. We paid$6.5 million and$12.3 million of principal on the TEU amortizing notes in the six months endedJuly 1, 2022 andJuly 2, 2021 , respectively. 2026 Notes We had senior notes with an aggregate principal amount of$300 million , which were due onFebruary 15, 2026 and had an interest rate of 6.375%. Upon the completion of the Separation, the 2026 Notes were redeemed onApril 7, 2022 at a redemption premium at 103.188% of the principal amount.
Other Indebtedness
In addition, we are party to bilateral credit facilities with a borrowing
capacity of
outstanding borrowings under these facilities.
38 -------------------------------------------------------------------------------- We are also party to a letter of credit facility with an aggregate capacity of$30.0 million . Total letters of credit of$2.3 million were outstanding as ofJuly 1, 2022 .
We believe that our sources of liquidity are adequate to fund our operations for
the next twelve months.
Cash Flows As ofJuly 1, 2022 , we had$95.6 million of Cash and cash equivalents, a decrease of$623.8 million from the balance as ofDecember 31, 2021 of$719.4 million . The Cash and cash equivalents as ofDecember 31, 2021 include$39.1 million related to ESAB which was part of the Separation and are reported in Total current assets associated with discontinued operations in the Condensed Consolidated Balance Sheets. The following table summarizes the change in Cash and cash equivalents during the periods indicated: Six Months Ended July 1, 2022 July 2, 2021 (Dollars in millions) Net cash provided by (used in) operating activities $ (39.3) $ 162.8 Purchases of property, plant and equipment (47.8) (44.6) Proceeds from sale of property, plant and equipment 2.7 3.2 Acquisitions, net of cash received, and investments (35.1) (230.7) Net cash used in investing activities (80.2) (272.1) Repayments of borrowings, net (1,628.9) (627.7) Distribution from ESAB Corporation, net 1,143.4 - Proceeds from issuance of common stock, net 1.7 730.0 Payment of debt extinguishment costs (12.7) (24.4) Deferred consideration payments and other (9.8) (6.2) Net cash provided by (used in) financing activities (506.3) 71.7 Effect of foreign exchange rates on Cash and cash equivalents 2.0 (1.1)
Increase (decrease) in Cash and cash equivalents $ (623.8)
$ (38.8)
Cash flows from operating activities can fluctuate significantly from period-to-period due to changes in working capital and the timing of payments for items such as restructuring and strategic transaction costs such as Separation costs. Changes in significant operating cash flow items are discussed below. •Year-to-date 2022 cash used in operating activities of$39.3 million includes$107.5 million of outflows from working capital, primarily due to business growth and increases in inventory to insulate for supply chain volatility. Results in the comparable prior year period include$47.6 million of outflows for working capital increases. •Year-to-date 2022 cash used in operating activities also reflects$29.6 million of outflows for discontinued operations, which includes$41.2 million of net outflows related to the Separation. Cash provided by operating activities related to discontinued operations for the six months endedJuly 2, 2021 was$122.6 million , which included no net outflows related to the Separation.
•During the six months ended
made related to the Separation, of which
discontinued operations. The comparable amounts for the 2021 period were
immaterial.
•Year-to-date 2022 cash used in operating activities also include$27.0 million of outflows relating to the Company's former capital structure before giving effect to the completion of the refinancing transactions in connection with the Separation. The first six months of 2021 included$55.6 million of comparable outflows.
•Prior year net cash provided by operating activities included a one-time cash
inflow from a
quarter of 2021.
39 --------------------------------------------------------------------------------
•During the six months ended
restructuring initiatives within our continuing operations.
Cash flows used in investing activities during the six months endedJuly 1, 2022 of$80.2 million decreased compared with the$272.1 million in the prior year period due to lower outlays for acquisitions and investments. The amounts included in Purchases of property, plant and equipment related to discontinued operations for the six-month periods endedJuly 1, 2022 andJuly 2, 2021 were$5.9 million and$10.9 million , respectively. The amounts included in Proceeds from sale of property, plant and equipment related to discontinued operations for the six-month periods endedJuly 1, 2022 andJuly 2, 2021 were$2.7 million and$1.4 million , respectively. The amount included in Acquisitions, net of cash received, and investments related to discontinued operations for the six-month period endedJuly 2, 2021 was$4.9 million . Cash flows used in financing activities during the six months endedJuly 1, 2022 included$1.6 billion repayment of borrowings, which included the outstanding debt on our existing credit facility, 2026 Notes and Euro Senior Notes, partially offset by borrowings on a term loan under the new credit facility. The repayments were primarily funded by a$1.2 billion cash distribution from ESAB to us upon Separation. Cash flows provided by financing activities for the six months endedJuly 2, 2021 included the$711.3 million net proceeds from the public offering of our Common stock onMarch 19, 2021 . The net proceeds were used for the$600 million full redemption of our 2024 Notes and the$100 million partial redemption of our 2026 Notes in the second quarter of 2021.
Critical Accounting Policies
The methods, estimates and judgments that we use in applying our critical accounting policies have a significant impact on our results of operations and financial position. We evaluate our estimates and judgments on an ongoing basis. Our estimates are based upon our historical experience, our evaluation of business and macroeconomic trends and information from other outside sources, as appropriate. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what our management anticipates, and different assumptions or estimates about the future could have a material impact on our results of operations and financial position. There have been no significant additions or changes to the methods, estimates and judgments included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" in our 2021 Form 10-K.
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