AVANOS MEDICAL, INC. - Quarter Report: 2023 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission file number 001-36440

AVANOS MEDICAL, INC.

(Exact name of registrant as specified in its charter)

Delaware

46-4987888

(State or other jurisdiction of incorporation)

(I.R.S. Employer Identification No.)

5405 Windward Parkway

Suite 100 South

Alpharetta,

Georgia

30004

(Address of principal executive offices)

(Zip code)

Registrant’s telephone number, including area code: (844) 428-2667

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of exchange on which registered
Common Stock - $0.01 Par Value	AVNS	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Emerging growth company

☐

Smaller reporting company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

As of July 31, 2023, there were 46,872,936 shares of the registrant’s common stock outstanding.

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements			4

Unaudited Condensed Consolidated Income Statements for the Three and Six Months Ended June 30, 2023 and 2022			4

Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2023 and 2022			5

Unaudited Condensed Consolidated Balance Sheets as of June 3 0 , 2023 and December 31, 2022			6

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 3 0 , 2023 and 2022			7

Unaudited Condensed Consolidated Cash Flow Statements for the Six Months Ended J u ne 3 0 , 2023 and 2022			8

Notes to the Unaudited Condensed Consolidated Financial Statements			9

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			20

Item 3. Quantitative and Qualitative Disclosures About Market Risk			25

Item 4. Controls and Procedures			25

PART II – OTHER INFORMATION			26

Item 1. Legal Proceedings			26
Item 1A. Risk Factors			26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			26
Item 3. Defaults Upon Senior Securities			26
Item 4. Mine Safety Disclosures			26
Item 5. Other Information			26
Item 6. Exhibits			27
Signatures			28

Information Concerning Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are included throughout this Form 10-Q, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “will,” “expect,” “intend,” “predict,” “potential,” “project,” “estimate,” “anticipate,” “plan,” or “continue” and similar expressions. The matters discussed in these forward-looking statements are based on the current plans and expectations of our management and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. These factors include, but are not limited to:

•general economic conditions, particularly in the United States;

•fluctuations in global equity and fixed-income markets;

•our ability to successfully execute on or achieve the expected benefits of our restructuring initiative;

•supply chain issues and inflationary pressures;

•the competitive environment;

•the loss of current customers or the inability to obtain new customers;

•litigation and enforcement actions;

•disruption in the supply of raw materials or the distribution of finished goods;

•price fluctuations in key commodities;

•fluctuations in currency exchange rates;

•changes in governmental regulations that are applicable to our business;

•our ability to realize the intended benefits of our divestiture, acquisition or merger transactions;

•changes in asset valuations, including write-downs of assets such as inventory, accounts receivable or other assets for impairment or other reasons; and

•any other matters described in Item 1A - “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “Form 10-K”) and Part II, Item 1A - “Risk Factors” in this Form 10-Q.

You are cautioned not to unduly rely on such forward-looking statements when evaluating the information in this Form 10-Q. Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of our management and expressed in good faith, and is believed to have a reasonable basis. There can be no assurance that any such expectation or belief will be achieved or accomplished.

Any forward-looking statement made in this Form 10-Q speaks only as of the date of this report. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws.


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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

AVANOS MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS

(in millions, except per share amounts)

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net Sales	$	169.4	$	170.9	$	328.7	$	330.2
Cost of products sold	71.6		69.3		139.5		139.1
Gross Profit	97.8		101.6		189.2		191.1
Research and development	6.8		7.6		14.3		14.9
Selling and general expenses	93.0		83.2		181.8		169.5
Other expense, net	0.1		0.7		1.3		0.6
Operating (Loss) Income	(2.1)		10.1		(8.2)		6.1
Interest income	0.5		0.2		1.0		0.2
Interest expense	(3.5)		(2.7)		(7.0)		(4.0)
(Loss) Income Before Income Taxes	(5.1)		7.6		(14.2)		2.3
Income tax benefit (provision)	0.8		(2.8)		2.1		(1.5)
(Loss) Income from Continuing Operations	(4.3)		4.8		(12.1)		0.8
(Loss) income from discontinued operations, net of tax	(63.8)		7.7		(56.5)		17.1
Net (Loss) Income	$	(68.1)	$	12.5	$	(68.6)	$	17.9

(Loss) Earnings Per Share
Basic
Continuing operations	$	(0.09)	$	0.10	$	(0.26)	$	0.02
Discontinued operations	(1.37)		0.17		$	(1.21)	0.36
Basic (Loss) Earnings Per Share	$	(1.46)	$	0.27	$	(1.47)	$	0.38

Diluted
Continuing operations	$	(0.09)	$	0.10	$	(0.26)	$	0.01
Discontinued operations	(1.37)		0.16		$	(1.21)	0.36
Diluted (Loss) Earnings Per Share	$	(1.46)	$	0.26	$	(1.47)	$	0.37

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


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AVANOS MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions)

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net (Loss) Income	$	(68.1)	$	12.5	$	(68.6)	$	17.9
Other Comprehensive Income (Loss), Net of Tax
Unrealized currency translation adjustments	2.9		(5.7)		7.4		(4.0)


Total Other Comprehensive Income (Loss), Net of Tax	2.9		(5.7)		7.4		(4.0)
Comprehensive (Loss) Income	$	(65.2)	$	6.8	$	(61.2)	$	13.9

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


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AVANOS MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

(Unaudited)


	June 30, 2023		December 31, 2022
ASSETS
Current Assets
Cash and cash equivalents	$	81.8	$	127.7
Accounts receivable, net of allowances	152.3		167.9
Inventories	148.3		132.3
Prepaid and other current assets	15.8		13.9
Assets held for sale	108.7		58.0
Total Current Assets	506.9		499.8
Property, Plant and Equipment, net	122.6		118.6
Operating Lease Right-of-Use Assets	29.1		27.5
Goodwill	762.6		760.3
Other Intangible Assets, net	222.6		234.2
Deferred Tax Assets	4.4		4.6
Other Assets	18.5		17.6
Assets Held for Sale	—		124.3
TOTAL ASSETS	$	1,666.7	$	1,786.9
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Current portion of long-term debt	$	6.2	$	6.2
Current portion of operating lease liabilities	13.5		12.0
Trade accounts payable	65.4		67.9
Accrued expenses	72.7		98.9
Liabilities held for sale	2.7		0.8
Total Current Liabilities	160.5		185.8
Long-Term Debt	203.3		226.3
Operating Lease Liabilities	30.9		32.5
Deferred Tax Liabilities	21.8		25.4
Other Long-Term Liabilities	15.4		23.5
Liabilities Held for Sale	—		2.2
Total Liabilities	431.9		495.7

Commitments and Contingencies

Stockholders’ Equity
Preferred stock - $0.01 par value - authorized 20,000,000 shares, none issued	—		—
Common stock - $0.01 par value - authorized 300,000,000 shares, 46,832,847 outstanding as of June 30, 2023 and 46,528,907 outstanding as of December 31, 2022	0.5		0.5
Additional paid-in capital	1,654.9		1,646.4
Accumulated deficit	(321.7)		(253.1)
Treasury stock	(70.5)		(66.8)
Accumulated other comprehensive loss	(28.4)		(35.8)
Total Stockholders’ Equity	1,234.8		1,291.2
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,666.7	$	1,786.9

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


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AVANOS MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in millions)

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Common Stock	$	0.5	$	0.5	$	0.5	$	0.5
Additional Paid-in Capital, beginning of period	1,651.0		1,633.3		1,646.4		1,628.8
Exercise or redemption of share-based awards	—		0.1		0.6		0.8
Stock-based compensation expense	3.9		4.0		7.9		7.8
Additional Paid-in Capital, end of period	1,654.9		1,637.4		1,654.9		1,637.4
Accumulated Deficit, beginning of period	(253.6)		(298.2)		(253.1)		(303.6)
Net (loss) income	(68.1)		12.5		(68.6)		17.9
Accumulated Deficit, end of period	(321.7)		(285.7)		(321.7)		(285.7)
Treasury Stock, beginning of period	(67.9)		(40.7)		(66.8)		(21.3)
Purchases of treasury stock	(2.6)		(14.7)		(3.7)		(34.1)
Treasury Stock, end of period	(70.5)		(55.4)		(70.5)		(55.4)
Accumulated Other Comprehensive Loss, beginning of period	(31.3)		(32.1)		(35.8)		(33.8)
Other comprehensive income (loss), net of tax	2.9		(5.7)		7.4		(4.0)
Accumulated Other Comprehensive Loss, end of period	(28.4)		(37.8)		(28.4)		(37.8)
Total Stockholders’ Equity, end of period	$	1,234.8	$	1,259.0	$	1,234.8	$	1,259.0

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


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AVANOS MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED CASH FLOW STATEMENTS

(in millions)

(Unaudited)


	Six Months Ended June 30,
	2023		2022
Operating Activities
Net (loss) income	$	(68.6)	$	17.9
Depreciation and amortization	23.6		22.7
Stock-based compensation expense	7.9		7.8
Goodwill Impairment	59.1		—

Changes in operating assets and liabilities, net of acquisition:
Accounts receivable	18.9		(6.9)
Inventories	(13.1)		(18.0)
Prepaid expenses and other assets	0.4		0.6
Accounts payable	(1.8)		33.5
Accrued expenses	(37.1)		(28.5)
Deferred income taxes and other	1.3		(0.3)
Cash (Used in) Provided by Operating Activities	(9.4)		28.8
Investing Activities
Capital expenditures	(8.0)		(9.1)
Acquisition of assets and investments in businesses	(2.5)		(116.7)
Cash Used in Investing Activities	(10.5)		(125.8)
Financing Activities
Proceeds from issuance of secured debt	—		250.0
Secured debt repayments	(3.1)		(125.0)
Revolving credit facility proceeds	—		150.0
Revolving credit facility repayments	(20.0)		(150.0)
Purchases of treasury stock	(3.7)		(34.1)
Payments of debt issuance costs	—		(2.9)
Proceeds from the exercise of stock options	0.6		0.8

Cash (Used in) Provided by Financing Activities	(26.2)		88.8
Effect of Exchange Rate Changes on Cash and Cash Equivalents	0.2		(3.8)
Decrease in Cash and Cash Equivalents	(45.9)		(12.0)
Cash and Cash Equivalents - Beginning of Period	127.7		118.5
Cash and Cash Equivalents - End of Period	$	81.8	$	106.5

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


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AVANOS MEDICAL, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Accounting Policies

Background and Basis of Presentation

Avanos Medical, Inc. is a medical technology company focused on delivering clinically superior medical device solutions that will help patients get back to the things that matter. Headquartered in Alpharetta, Georgia, we are committed to addressing some of today’s most important healthcare needs, including providing a vital lifeline for nutrition to patients from hospital to home, and reducing the use of opioids while helping patients move from surgery to recovery. We develop, manufacture and market our recognized brands globally and hold leading market positions in multiple categories across our portfolio. References herein to “Avanos,” “the Company,” “we,” “our” and “us” refer to Avanos Medical, Inc. and its consolidated subsidiaries.

Interim Financial Statements

We prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements, and the condensed consolidated financial statements in this Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022. Our unaudited interim condensed consolidated financial statements contain all necessary material adjustments, which are of a normal and recurring nature, to fairly state our financial condition, results of operations and cash flows for the periods presented.

Use of Estimates

Preparation of our condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting periods. Estimates are used in accounting for, among other things, certain amounts included in discontinued operations, certain amounts included in assets and liabilities held for sale, distributor rebate accruals, future cash flows associated with impairment testing for goodwill and long-lived assets, loss contingencies, and deferred tax assets and potential income tax assessments. Actual results could differ from these estimates, and the effect of any change could be material to our financial statements. Changes in these estimates are recorded when known.

Recently Adopted Accounting Pronouncements

In December 2022, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2022-06, Reference Rate Reform. This ASU was prompted by the planned cessation of the London Interbank Offer Rate (“LIBOR”). This ASU applies to contract modifications that replace a reference rate and contemporaneous modifications of other contract terms related to the replacement of the reference rate. Under this ASU, modifications to debt agreements may be accounted for by prospectively adjusting the effective interest rate. This ASU is effective as of issuance on December 21, 2022 and defers the sunset date of Topic 848, Reference Rate Reform from December 31, 2022 to December 31, 2024. This ASU may be applied as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. We adopted this guidance in the fourth quarter of 2021. Adoption of this ASU did not have a material effect on our financial position, results of operations or cash flows.

Effective January 1, 2023, we adopted ASU No. 2021-08, Business Combinations: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU pertains to acquired revenue contracts with customers in a business combination and addresses diversity in practice and inconsistency related to recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. Adoption of this ASU did not have a material effect on our financial position, results of operations or cash flows.

Note 2. Discontinued Operations

On June 7, 2023, we entered into a Purchase Agreement (“Purchase Agreement”) by and among us and certain of our affiliates and SunMed Group Holdings, LLC (“Buyer”). The Purchase Agreement provides for the sale to Buyer, subject to the terms and conditions of the Purchase Agreement, of substantially all of the assets primarily relating to or primarily used in our Respiratory Health (“RH”) business (the “Divestiture”). The total purchase price payable by Buyer in the Divestiture is $110 million in cash, subject to certain adjustments as provided in the Purchase Agreement based on the indebtedness and inventory transferred to Buyer at the closing. We expect the transaction to close in the fourth quarter of 2023.


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The Divestiture represents a key component of Avanos’ ongoing three-year transformation process, and is aimed at accelerating the Company’s efforts to focus its portfolio on markets where it is well positioned to succeed.

At or before the closing of the Divestiture, we and Buyer will enter into various transition services agreements pursuant to which we, Buyer and each company’s respective affiliates will provide to each other various transitional services, including, but not limited to, product manufacturing and distribution, facilities, order fulfillment, invoicing, quality assurance, regulatory support, audit support and other services. The services generally will commence on the closing date of the Divestiture and terminate no later than one to three years thereafter.

As a result of the Divestiture, the results of operations from our RH business are reported as “(Loss) income from discontinued operations, net of tax” and the related assets and liabilities are classified as “held for sale” in the condensed consolidated financial statements. The following table summarizes the financial results of our discontinued operations for all periods presented herein (in millions):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net Sales	$	30.4	$	32.1	$	62.8	$	70.2
Cost of products sold	18.6		17.3		37.9		38.3
Gross Profit	11.8		14.8		24.9		31.9
Research and development	0.2		0.4		0.6		0.9
Selling and general expenses	3.8		3.9		7.7		7.7
Other expense, net	0.1		0.1		0.2		0.3
Operating Income	7.7		10.4		16.4		23.0


Pretax loss on classification as discontinued operations	72.3		—		72.3		—
(Loss) Income from discontinued operations before income taxes	(64.6)		10.4		(55.9)		23.0
Income tax benefit (provision) from discontinued operations	0.8		(2.7)		(0.6)		(5.9)
Net (Loss) Income from discontinued operations, net of tax	$	(63.8)	$	7.7	$	(56.5)	$	17.1

(Loss) Earnings Per Share
Basic	$	(1.37)	$	0.17	$	(1.21)	$	0.36
Diluted	$	(1.37)	$	0.16	$	(1.21)	$	0.36

We estimated the “Pretax loss on classification of discontinued operations” to be $72.3 million, which includes goodwill impairment of $59.1 million, inventory impairment of $5.0 million and impairment on the remaining disposal group of $8.1 million.

Details on assets and liabilities classified as held for sale in the accompanying consolidated balance sheets are presented in the following table (in millions):


	June 30, 2023		December 31, 2022
Assets held for sale - discontinued operations

Inventories	$	56.4	$	58.0


Property, Plant and Equipment, net	41.6		45.3
Operating Lease Right-of-Use Assets	2.8		3.1
Goodwill	—		59.1
Other Intangible Assets, net	16.0		16.8

Reserve for valuation allowance	(8.1)		—


Total assets classified as held for sale	$	108.7	$	182.3
Liabilities held for sale - discontinued operations

Current portion of operating lease liabilities	$	0.8	$	0.8


Non-Current Operating Lease Liability	1.9		2.2

Total liabilities held for sale - discontinued operations	$	2.7	$	3.0


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Assets and liabilities held for sale as of June 30, 2023 were classified as current since we expect the Divestiture to be completed within one year of that date.

The following table provides operating and investing cash flow information for our discontinued operations (in millions):


	As of June 30, 2023		As of June 30, 2022
Operating Activities:
Depreciation and amortization	$	2.6	$	3.1
Stock-based compensation expense	0.1		0.1
Investing Activities:
Capital expenditures	0.6		2.7

Note 3. Restructuring Activities

Transformation Process

In January 2023, we initiated a three-year restructuring initiative intended to align the Company under a single commercial organization, rationalize our product portfolio, undertake additional cost management activities to enhance the Company’s operating profitability and pursue efficient capital allocation strategies (the “Transformation Process”). The Divestiture represents a key component of our three-year transformation process. We expect the Transformation Process will be substantially complete by the end of 2025.

In the three and six months ended June 30, 2023, we incurred $9.8 million and $18.7 million, respectively, primarily related to program management consulting and employee retention expenses and employee severance and benefits costs in connection with the Transformation Process. These costs were included in “Cost of products sold,” “Research and development,” and “Selling and general expenses” in the accompanying condensed consolidated income statements.

Restructuring Liability

Our liability for costs associated with the Transformation Process as of June 30, 2023 is summarized below (in millions):


	As of June 30, 2023
Beginning balance	$	—
Restructuring and transformation costs, excluding non-cash charges	18.7
Payments and adjustments, net	(15.7)
Ending balance	$	3.0

Note 4. Business Acquisition

On January 20, 2022, we acquired all of the equity voting interests and completed the acquisition of OrthogenRx, Inc. (“OrthogenRx”), which is focused on the development and commercialization of hyaluronic acid (“HA”) treatments for knee pain caused by osteoarthritis and has been added to our interventional pain portfolio. The total purchase price was $130.0 million at closing less working capital adjustments. The agreement allowed for up to an additional $30.0 million payable in contingent cash consideration based on OrthogenRx’s growth in net sales during 2022 and 2023, of which we paid $10.6 million based on OrthogenRx’s 2022 net sales.


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We accounted for the OrthogenRx acquisition under the acquisition method of accounting for business combinations. Accordingly, the purchase price paid was allocated to the underlying net assets in proportion to their respective fair values. Any excess of the purchase price over the estimated fair values was recorded as goodwill. The final purchase price allocation, net of cash acquired, is shown in the table below (in millions):


Accounts receivable, net	$	11.6
Inventory	2.8
Other current assets	0.4
Accounts payable	(5.4)
Other current liabilities	(13.0)
Contingent consideration	(9.2)
Other non-current assets (liabilities)	(5.7)
Deferred tax liability	(22.1)
Identifiable intangible assets	135.6
Goodwill	21.1
Total	$	116.1

The identifiable intangible assets relating to the OrthogenRx acquisition include the following (in millions, except years):


	Identifiable Intangible Asset Amount		Weighted Average Useful Lives (Years)
Trademarks	$	1.3	10
Other	134.3		14
Total	$	135.6

Other intangible assets includes $126.0 million related to the OrthogenRx products that we currently market and distribute, combined into one composite intangible asset that includes customer relationships and exclusive distribution rights and $8.3 million related to OrthogenRx non-compete agreements.

Note 5. Supplemental Balance Sheet Information

Accounts Receivable

Accounts receivable consist of the following (in millions):


	June 30, 2023		December 31, 2022
Accounts receivable	$	146.1	$	162.1
Income tax receivable	12.9		12.2
Allowances and doubtful accounts:
Doubtful accounts	(6.3)		(6.1)
Sales discounts	(0.4)		(0.3)
Accounts receivable, net	$	152.3	$	167.9

Losses on receivables are estimated based on known troubled accounts and historical experience. Receivables are considered impaired and written off when it is probable that payments due will not be collected. The expense associated with doubtful accounts was $0.4 million and $0.6 million for the three and six months ended June 30, 2023, respectively, compared to $0.3 million and $0.6 million for the three and six months ended June 30, 2022, respectively.


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Inventories

Inventories at the lower of cost (determined on the FIFO method) or net realizable value consists of the following (in millions):


	June 30, 2023		December 31, 2022
Raw materials	$	43.5	$	36.7
Work in process	23.7		23.8
Finished goods	77.8		69.8
Supplies and other	3.3		2.0

Total Inventory	$	148.3	$	132.3

We incurred $2.4 million and $4.3 million of expense for inventory write-offs and obsolescence in the three and six months ended June 30, 2023, respectively, compared to $1.7 million and $6.2 million in the three and six months ended June 30, 2022, respectively.

We may distribute products bearing the Halyard brand through 2023 under a royalty agreement we have with Owens & Minor, Inc. As of June 30, 2023, our $1.5 million balance of Halyard-branded inventory was fully reserved.

Property, Plant and Equipment

Property, plant and equipment consists of the following (in millions):


	June 30, 2023		December 31, 2022
Land	$	1.4	$	1.1
Buildings and leasehold improvements	41.1		37.2
Machinery and equipment	178.4		168.7
Construction in progress	17.3		16.4

	238.2		223.4
Less accumulated depreciation	(115.6)		(104.8)

Total	$	122.6	$	118.6

Depreciation expense was $4.5 million and $9.4 million for the three and six months ended June 30, 2023, respectively, compared to $4.4 million and $8.8 million for the three and six months ended June 30, 2022, respectively.

Goodwill and Intangible Assets

The changes in the carrying amount of goodwill are as follows (in millions):


	Goodwill
Balance, December 31, 2022	$	760.3
Purchase accounting adjustment(a)	1.8
Currency translation adjustment	0.5
Balance, June 30, 2023	$	762.6

_____________________________________________

(a)Purchase accounting adjustment related to the acquisition of OrthogenRx in the first quarter of 2023.

Intangible assets subject to amortization consist of the following (in millions):


	June 30, 2023						December 31, 2022
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Trademarks	$	38.8	$	(28.1)	$	10.7	$	38.8	$	(27.5)	$	11.3
Patents and acquired technologies	244.4		(167.0)		77.4		244.4		(162.3)		82.1
Other	185.7		(51.2)		134.5		185.7		(44.9)		140.8
Total	$	468.9	$	(246.3)	$	222.6	$	468.9	$	(234.7)	$	234.2

Amortization expense for intangible assets is included in “Cost of products sold” and “Selling and general expenses” and was $5.8 million and $11.6 million for the three and six months ended June 30, 2023, respectively, compared to $5.7 million and


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$10.9 million for the three and six months ended June 30, 2022, respectively.

Amortization expense for the remainder of 2023, the following four years and thereafter is estimated as follows (in millions):


	Amount
Remainder of 2023	$	11.8
2024	23.2
2025	22.7
2026	22.2
2027	22.0
Thereafter	120.7
Total	$	222.6

Accrued Expenses

Accrued expenses consist of the following (in millions):


	June 30, 2023		December 31, 2022
Accrued rebates and customer incentives	$	20.7	$	26.9
Accrued salaries and wages	28.2		34.6
Accrued taxes and other	5.8		21.2
Other	18.0		16.2
Total	$	72.7	$	98.9

Other Long-Term Liabilities

Other long-term liabilities consist of the following (in millions):


	June 30, 2023		December 31, 2022

Accrued compensation and benefits	$	5.8	$	4.8
Other	9.6		18.7
Total	$	15.4	$	23.5

Note 6. Fair Value Information

The following fair value information is based on a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels in the hierarchy used to measure fair value are:

Level 1: Unadjusted quoted prices in active markets accessible at the reporting date for identical assets and liabilities.

Level 2: Quoted prices for similar assets or liabilities in active markets. Quoted prices for identical or similar assets and liabilities in markets that are not considered active or financial instruments for which all significant inputs are observable, either directly or indirectly.

Level 3: Prices or valuations that require inputs that are significant to the valuation and are unobservable.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The following table includes the fair value of our financial instruments for which disclosure of fair


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value is required (in millions):


		June 30, 2023				December 31, 2022
	Fair Value Hierarchy Level	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets
Cash and cash equivalents	1	$	81.8	$	81.8	$	127.7	$	127.7
Liabilities
Revolving Credit Facility	2	$	90.0	$	90.0	$	110.0	$	110.0
Term Loan Facility	2	119.5		119.5		122.5		122.5
Contingent consideration related to acquisition	3	—		—		9.2		9.2

Cash equivalents are recorded at cost, which approximates fair value due to their short-term nature. The fair value of amounts borrowed under our Revolving Credit Facility and Term Loan Facility approximates carrying value because borrowings are subject to a variable rate as described in Note 7, “Debt”.

Note 7. Debt

As of June 30, 2023 and December 31, 2022, our respective debt balances were as follows (in millions):


	Weighted-Average Interest Rate		Maturity	June 30, 2023		December 31, 2022
Revolving Credit Facility	6.33	%	2027	$	90.0	$	110.0
Term Loan Facility	6.33	%	2027	120.3		123.4
				210.3		233.4
Unamortized debt issuance costs				(0.8)		(0.9)
Current portion of long-term debt				(6.2)		(6.2)
Total Long-Term Debt, net				$	203.3	$	226.3

On June 24, 2022, we entered into a credit agreement (the “Credit Agreement”) with certain lenders which established credit facilities in an aggregate principal amount of $500.0 million, consisting of a five-year senior secured term loan of $125.0 million (the “Term Loan Facility”) and a five-year senior secured revolving credit facility allowing borrowings of up to $375.0 million, with a letter of credit sub-facility in an amount of $75.0 million (the “Revolving Credit Facility”). All obligations under the Credit Agreement and certain hedging agreements and cash management arrangements thereunder are: (i) guaranteed by each of the Company’s direct and indirect, existing and future, material wholly owned domestic subsidiaries (“Guarantors”) and (ii) secured by a first priority lien on substantially all the assets of the Company and the Guarantors. The Credit Agreement contains an accordion feature that allows us to incur incremental term loans under the Term Loan Facility or under new term loan facilities or to increase the amount of the commitments under the Revolving Credit Facility, including through the establishment of one or more tranches under the Revolving Credit Facility. The Credit Agreement will mature on June 24, 2027.

Borrowings under the Term Loan Facility and Revolving Credit Facility bear interest at our option at either: (i) an adjusted term secured overnight financing rate (“SOFR”), plus a margin ranging between 1.50% to 2.00% per annum, depending on our consolidated total leverage ratio; (ii) an adjusted daily simple SOFR rate, plus a margin ranging between 1.50% to 2.00% per annum, depending on our consolidated total leverage ratio; or (iii) a base rate (calculated as the greatest of (a) the prime rate, (b) the NYFRB rate (being the greater of the federal funds effective rate or the overnight bank funding rate) plus 0.50%, and (c) the one month adjusted term SOFR rate plus 1.00%), plus a margin ranging between 0.50% to 1.00% per annum, depending on our consolidated total leverage ratio. The unused portion of the Revolving Credit Facility will be subject to a commitment fee ranging between 0.20% to 0.25% per annum, depending on our consolidated total leverage ratio. Unamortized debt discount and issuance costs are being amortized to interest expense over the life of the Term Loan Facility using the interest method, resulting in an effective interest rate of 7.1% as of June 30, 2023.

The Credit Agreement requires compliance with certain customary operational and financial covenants. As of June 30, 2023, we were in compliance with these covenants. In addition, the Credit Agreement contains certain other customary limitations on our ability to, among other things: incur additional indebtedness; pay dividends on or repurchase or redeem our capital stock; make loans, investments and acquisitions; sell, transfer or otherwise dispose of assets; guarantee other obligations; create or grant liens; and enter into certain types of transactions with affiliates. Notwithstanding such limitations, the Credit Agreement allows us to pay dividends, repurchase stock and make investments up to an “Available Amount,” as defined in the Credit


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Agreement, provided no event of default has occurred and certain financial ratios have been achieved on a pro forma basis. We are permitted to prepay all or a portion of the Term Loan Facility and the Revolving Credit Facility at any time without premium or penalty.

Debt Payments

The Credit Agreement requires quarterly principal installment payments on the Term Loan Facility of 10% of the total principal borrowed for the first eight quarters following funding and then quarterly installment payments of 20% of the total principal borrowed, at which time the remaining unpaid principal amount of the Term Loan Facility is due and payable by the Company upon the maturity date of June 24, 2027. The current portion of the Term Loan Facility is $6.2 million. Interest is payable quarterly. We have the right to voluntarily prepay the Term Loan Facility in accordance with the terms of the Credit Agreement. Interest is payable at the same rates set forth above for the Revolving Credit Facility.

During the six months ended June 30, 2023, we repaid $3.1 million of the Term Loan Facility. During the six months ended June 30, 2023, we repaid $20.0 million of the Revolving Credit Facility. As of June 30, 2023, we had letters of credit outstanding of $6.2 million.

As of June 30, 2023, the aggregate amounts of long-term debt that will mature during each of the next four years are as follows (in millions):


	Amount
Remainder of 2023	$	3.1
2024	7.0
2025	9.4
2026	10.2
2027	180.6
Total	$	210.3

Note 8. Accumulated Other Comprehensive Income

The changes in the components of Accumulated Other Comprehensive Income (“AOCI”), net of tax, are as follows (in millions):


	Unrealized Currency Translation		Defined Benefit Plans		Accumulated Other Comprehensive Loss
Balance, December 31, 2022	$	(36.1)	$	0.3	$	(35.8)
Other comprehensive income	7.4		—		7.4
Balance, June 30, 2023	$	(28.7)	$	0.3	$	(28.4)

The net changes in the components of AOCI, including the tax effect, are as follows (in millions):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Unrealized currency translation	$	2.9	$	(5.7)	$	7.4	$	(4.0)






Change in AOCI	$	2.9	$	(5.7)	$	7.4	$	(4.0)


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Note 9. Stock-Based Compensation

Stock-based compensation expense is included in “Cost of products sold,” “Research and development,” and “Sales and general expenses.” Stock-based compensation expense for the three and six months ended June 30, 2023 and 2022 is shown in the table below (in millions):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Stock options	$	0.1	$	0.2	$	0.3	$	0.6
Time-based restricted share units	2.5		2.9		5.4		5.5
Performance-based restricted share units	1.3		0.8		2.1		1.5
Employee stock purchase plan	—		0.1		0.1		0.2
Total stock-based compensation	$	3.9	$	4.0	$	7.9	$	7.8

Note 10. Commitments and Contingencies

Legal Matters

We are subject to various legal proceedings, claims and governmental inspections, audits or investigations pertaining to issues such as contract disputes, product liability, tax matters, patents and trademarks, advertising, governmental regulations, employment and other matters. Under the terms of the distribution agreement we entered into with Kimberly-Clark Corporation (“Kimberly-Clark”) prior to our 2014 spin-off from Kimberly-Clark, legal proceedings, claims and other liabilities that are primarily related to our business are our responsibility and we are obligated to indemnify and hold Kimberly-Clark harmless for such matters.

Government Investigation

In June 2015, we were served with a subpoena from the Department of Veterans Affairs Office of the Inspector General (“VA OIG”) seeking information related to the design, manufacture, testing, sale and promotion of MicroCool and other surgical gowns produced by the Company. In July 2015, we became aware that the VA OIG subpoena and an earlier VA OIG subpoena served on Kimberly-Clark requesting information about gown sales to the federal government were related to a United States Department of Justice (“DOJ”) investigation. In May 2016, April 2017 and September 2018, we received additional subpoenas from the DOJ seeking further information related to the Company’s surgical gowns.

On July 6, 2021, we entered into a Deferred Prosecution Agreement (“DPA”) with the DOJ that resolved their criminal investigation related to our MicroCool surgical gowns. Pursuant to the terms of the DPA, in July 2021 the Company made a payment of $22.2 million. We continue to comply with the terms of the DPA.

Patent Litigation

We operate in an industry characterized by extensive patent litigation. Competitors may claim that our products infringe upon their intellectual property. Resolution of patent litigation or other intellectual property claims is typically time consuming and costly and can result in significant damage awards and injunctions that could prevent the manufacture and sale of the affected products or require us to make significant royalty payments in order to continue selling the affected products.

At any given time, we may be involved as either a plaintiff or a defendant in a number of patent infringement actions, the outcomes of which may not be known for prolonged periods of time.

General

While we maintain general and professional liability, product liability and other insurance, our insurance policies may not cover all of these matters and may not fully cover liabilities arising out of these matters. In addition, we may be obligated to indemnify our directors and officers against these matters.

We record provisions in the consolidated financial statements for pending litigation when we determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. For any matters that are reasonably possible to result in loss and for which no possible loss or range of loss is disclosed in this Form 10-Q, management has determined that it is unable to estimate the possible loss or range of loss because, in each case, at least the following facts applied: (a) the matter is at an early stage of the proceedings; (b) the damages are indeterminate, unspecified or determined to be immaterial; and (c) significant factual issues have yet to be resolved. At present, although the results of litigation and claims cannot be predicted with certainty, we believe that the ultimate resolution of any pending legal proceeding to which we are a party will not have a material adverse effect on our business, financial condition, results of operations or liquidity.


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Environmental Compliance

We are subject to federal, state and local environmental protection laws and regulations with respect to our business operations. We believe we are operating in compliance with, or are taking action aimed at ensuring compliance with, these laws and regulations. None of our compliance obligations with environmental protection laws and regulations, individually or in the aggregate, is expected to have a material adverse effect on our business, financial condition, results of operations or liquidity.

Note 11. Earnings Per Share (“EPS”)

Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during each period. Diluted earnings per share is calculated by dividing net income by the number of common shares outstanding and the effect of all dilutive common stock equivalents outstanding during each period, as determined using the treasury stock method.

The calculation of basic and diluted earnings (loss) per share for the three and six months ended June 30, 2023 and 2022 is set forth in the following table (in millions, except per share amounts):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net (loss) income from continuing operations	$	(4.3)	$	4.8	$	(12.1)	$	0.8
Net (loss) income from discontinued operations	$	(63.8)	$	7.7	$	(56.5)	$	17.1
Net (loss) income	$	(68.1)	$	12.5	$	(68.6)	$	17.9

Weighted Average Shares Outstanding:
Basic weighted average shares outstanding	46.8		47.2		46.7		47.3
Dilutive effect of stock options and restricted share unit awards	—		0.4		—		0.4
Diluted weighted average shares outstanding	46.8		47.6		46.7		47.7
(Loss) Earnings Per Share
Basic:
Continuing Operations	$	(0.09)	$	0.10	$	(0.26)	$	0.02
Discontinued Operations	$	(1.37)	$	0.17	$	(1.21)	$	0.36
Basic (Loss) Earnings Per Share	$	(1.46)	$	0.27	$	(1.47)	$	0.38

Diluted:
Continuing Operations	$	(0.09)	$	0.10	$	(0.26)	$	0.01
Discontinued Operations	$	(1.37)	$	0.16	$	(1.21)	$	0.36
Diluted (Loss) Earnings Per Share	$	(1.46)	$	0.26	$	(1.47)	$	0.37

Restricted share units (“RSUs”) contain provisions allowing for the equivalent of any dividends paid on common stock during the restricted period to be reinvested into additional RSUs at the then fair market value of the common stock on the date the dividends are paid. Such awards are to be included in the EPS calculation under the two-class method. Currently, we do not anticipate any cash dividends for the foreseeable future and our outstanding RSU awards are not material in comparison to our weighted average shares outstanding. Accordingly, all EPS amounts reflect shares as if they were fully vested and the disclosures associated with the two-class method are not presented herein.

For the three and six months ended June 30, 2023, 1.9 million and 1.3 million of potentially dilutive stock options and RSU awards were excluded from the computation of earnings per share as their effect would have been anti-dilutive.

Note 12. Business and Products Information

We conduct our business in one operating and reportable segment that provides our medical device products to healthcare providers and patients globally with manufacturing facilities in the United States and Mexico.


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Avanos develops, manufactures and markets its recognized brands globally and holds leading market positions in multiple categories across its portfolio. Our management evaluates net sales by product category within our single reportable segment as follows (in millions):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Digestive Health	$	93.0	$	80.2	$	181.8	$	161.6
Pain Management and Recovery:
Surgical pain and recovery	34.8		41.2		69.5		79.9
Interventional pain	41.6		49.5		77.4		88.7
Total Pain Management and Recovery	76.4		90.7		146.9		168.6
Total Net Sales	$	169.4	$	170.9	$	328.7	$	330.2

Digestive Health is a portfolio of products such as our MIC-KEY enteral feeding tubes, Corpak patient feeding solutions and NeoMed neonatal and pediatric feeding solutions.

Pain Management and Recovery is a portfolio of products including:

•Surgical pain and recovery products such as ON-Q and ambIT surgical pain pumps and Game Ready cold and compression therapy systems; and

•Interventional pain solutions, which provide minimally invasive pain relief therapies, such as our Coolief pain therapy and OrthogenRx’s knee osteoarthritis HA pain relief injection products.

Liabilities for estimated returns, rebates and incentives are presented in the table below (in millions):


	June 30, 2023		December 31, 2022
Accrued rebates	$	10.6	$	14.5
Accrued customer incentives	10.1		12.4
Accrued rebates and customer incentives	20.7		26.9
Accrued sales returns(a)	0.1		0.1
Total estimated liabilities	$	20.8	$	27.0

__________________________________________________

(a)Accrued sales returns are included in “Other” in the accrued expenses table in Note 5, “Supplemental Balance Sheet Information”.

Due to the nature of our business, we receive purchase orders for products under supply agreements which are normally fulfilled within three to four weeks. Our performance obligations under purchase orders are satisfied and revenue is recognized at a point in time, which is upon shipment or upon delivery of our products, depending on shipping terms. Accordingly, we normally do not have transactions that give rise to material unfulfilled performance obligations.

Note 13. Subsequent Events

On June 17, 2023 we entered into a definitive agreement to acquire Diros Technology Inc., (“Diros”) a leading manufacturer of innovative radiofrequency (RF) products used to treat chronic pain conditions. On July 24, 2023, we closed the acquisition of Diros for approximately $53 million, consisting of $2.5 million cash paid upon entry into the definitive agreement, $50.5 million in cash at closing less working capital and other adjustments, with an additional $7.0 million payable in contingent cash consideration based on achievement of certain performance objectives defined in the purchase agreement (the “Acquisition”). The purchase price was funded by available cash on hand and proceeds from our Revolving Credit Facility.

We will account for the Acquisition under the acquisition method of accounting for business combinations and expect to complete a preliminary purchase price allocation of the Acquisition based on the fair value of assets acquired and liabilities assumed during the quarter ending September 30, 2023.


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide investors with an understanding of our recent performance, and should be read in conjunction with the condensed consolidated financial statements contained in Item 1, “Financial Statements” in this Form 10-Q and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2022. This MD&A contains forward-looking statements. Refer to “Information Concerning Forward-Looking Statements” at the beginning of this Form 10-Q for an explanation of these types of statements.

The following will be discussed and analyzed:

•Restructuring Activities;

•Divestiture of the Respiratory Health Business

•Discontinued Operations

•Business Acquisition

•Results of Operations and Related Information;

•Liquidity and Capital Resources; and

•Critical Accounting Policies and Use of Estimates.

Restructuring Activities

In January 2023, we initiated a three-year restructuring initiative pursuant to which we plan to: (i) combine our Chronic Care and Pain Management franchises into a single commercial organization focused on the Digestive Health and Orthopedic Pain & Recovery product categories; (ii) rationalize our product portfolio including certain low-margin, low-growth product categories, through targeted divestitures; (iii) undertake additional cost management activities to enhance the Company’s operating profitability; and (iv) pursue efficient capital allocation strategies, including through acquisitions that meet the Company’s strategic and financial criteria (the “Transformation Process”).

By 2025, we expect total gross savings of between $45.0 million and $55.0 million compared to 2022, most of which will be achieved in 2024. We expect the Transformation Process will be substantially complete by the end of 2025.

We expect to incur between $20.0 million and $25.0 million of cash expenses in connection with the Transformation Process, consisting of between $9.0 million and $12.0 million of program management consulting and employee retention expenses, between $8.0 million and $11.0 million of expenses associated with manufacturing and supply chain improvements and portfolio rationalization; and the remainder for expenses associated with organization design and alignment and other related activities. These amounts include between $6.0 million and $8.0 million of employee severance and benefits costs. The accompanying condensed consolidated income statements for the three and six months ended June 30, 2023 include $9.8 million and $18.7 million, respectively of costs incurred in connection with the Transformation Process in “Selling and general expenses.”

Divestiture

The Divestiture represents a key component of the Transformation Process, and is aimed at accelerating the Company’s efforts to focus its portfolio on markets where it is well positioned to succeed.


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Discontinued Operations

Net sales from discontinued operations were $30.4 million and $62.8 million in the three and six months ended June 30, 2023, respectively, compared to $32.1 million and $70.2 million in the three and six months ended June 30, 2022, respectively. The decrease in net sales was primarily driven by lower volume along with unfavorable pricing and currency effects. We expect a loss on disposal of the RH business; accordingly, we recorded impairment of $72.3 million against assets in the disposal group, which is included in “(Loss) income from discontinued operations, net of tax.”

Business Acquisition

Results of Operations and Related Information

Use of Non-GAAP Measures

In this section, we present “Adjusted operating profit (loss),” which is a profitability measure that is not calculated in accordance with accounting principles generally accepted in the United States (“GAAP”) and is therefore referred to as non-GAAP financial measure. We provide this non-GAAP measure because we use it to measure our operational performance and provide greater insight into our ongoing business operations. This measure is not intended to be, and should not be, considered separately from, or an alternative to, the most directly comparable GAAP financial measures. A reconciliation of the non-GAAP measure to the most directly comparable GAAP financial measures is provided below under “Adjusted operating profit.”

Net Sales

Our net sales are summarized in the following table for the three and six months ended June 30, 2023 and 2022 (in millions):


	Three Months Ended June 30,							Six Months Ended June 30,
	2023		2022			Change		2023			2022			Change
Digestive Health	$	93.0	$	80.2		16.0	%	$	181.8		$	161.6		12.5	%
Pain Management and Recovery:
Surgical pain and recovery	34.8		41.2			(15.5)	%	69.5			79.9			(13.0)	%
Interventional pain	41.6		49.5			(16.0)	%	77.4			88.7			(12.7)	%
Total Pain Management and Recovery	76.4		90.7			(15.8)	%	146.9			168.6			(12.9)	%
Total Net Sales	$	169.4	$	170.9		(0.9)	%	$	328.7		$	330.2		(0.5)	%

			Total			Volume		Pricing/Mix			Currency			Other
Net sales - percentage change	QTD		(0.9)		%	(1.1)	%	0.9		%	(0.6)		%	(0.1)	%
Net sales - percentage change	YTD		(0.5)		%	(0.5)	%	1.1		%	(0.8)		%	(0.3)	%

Product Category Descriptions

Digestive Health is a portfolio of products such as our MIC-KEY enteral feeding tubes, Corpak patient feeding solutions and NeoMed neonatal and pediatric feeding solutions.

Pain Management and Recovery is a portfolio of products including:

•Surgical pain and recovery products such as ON-Q and ambIT surgical pain pumps and Game Ready cold and compression therapy systems; and

•Interventional pain solutions, which provide minimally invasive pain relief therapies, such as our Coolief pain therapy and OrthogenRx’s knee osteoarthritis hyaluronic acid (“HA”) pain relief injection products.


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Net Sales

Second Quarter of 2023 Compared to Second Quarter of 2022

For the three months ended June 30, 2023, net sales were $169.4 million, a decrease of 0.9% compared to the prior year period, primarily due to lower volume in the Pain Management and Recovery portfolio, primarily from lower HA sales, partially offset by higher volume in the Digestive Health portfolio. Favorable pricing was mostly offset by unfavorable foreign currency translation effects.

First Six Months of 2023 Compared to the First Six Months of 2022

For the six months ended June 30, 2023, net sales were $328.7 million, a decrease of 0.5% compared to the prior year period, primarily due to lower volume in the Pain Management and Recovery portfolio, primarily from lower HA sales, partially offset by continued strong demand for Digestive Health products. Favorable pricing was mostly offset by unfavorable foreign currency translation effects.

Net Sales by Geographic Region

Net sales by region is presented in the table below (in millions):


	Three Months Ended June 30,						Six Months Ended June 30,
	2023		2022		Change		2023		2022		Change
North America	$	134.2	$	137.1	(2.1)	%	$	264.6	$	266.4	(0.7)	%
Europe, Middle East and Africa	22.8		20.4		11.8		40.2		39.2		2.6
Asia Pacific and Latin America	12.4		13.4		(7.5)		23.9		24.6		(2.8)
Total net sales	$	169.4	$	170.9	(0.9)	%	$	328.7	$	330.2	(0.5)	%

Gross Profit (in millions)


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Net sales	$	169.4		$	170.9		$	328.7		$	330.2
Cost of products sold	71.6			69.3			139.5			139.1
Gross profit	97.8			101.6			189.2			191.1
Gross profit margin	57.7		%	59.4		%	57.6		%	57.9		%

Second Quarter of 2023 Compared to Second Quarter of 2022

For the three months ended June 30, 2023 compared to the prior year period, gross profit margin decreased primarily due to product mix, partially offset by manufacturing efficiencies.

First Six Months of 2023 Compared to the First Six Months of 2022

For the six months ended June 30, 2023 compared to the prior year period, gross profit margin was slightly lower as unfavorable mix was offset by improved manufacturing efficiencies.

Research and Development (in millions)


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Research and development	$	6.8		$	7.6		$	14.3		$	14.9
Percentage of net sales	4.0		%	4.4		%	4.4		%	4.5		%

Research and development consists primarily of compensation for personnel and expenses for product trial costs, outside laboratory and license fees, the cost of laboratory equipment and facilities and asset write-offs for equipment associated with unsuccessful product launches. Research and development has historically ranged between 4% and 6% of net sales.


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Selling and General Expenses (in millions)


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Selling and general expenses	$	93.0		$	83.2		$	181.8		$	169.5
Percentage of net sales	54.9		%	48.7		%	55.3		%	51.3		%

Selling and general expenses increased to $93.0 million and $181.8 million for the three and six months ended June 30, 2023, respectively, as compared to the prior year periods, driven by expenses associated with our ongoing Transformation Process and the pending divestiture of our RH business.

Other Expense, net (in millions)


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Other expense, net	$	0.1		$	0.7		$	1.3		$	0.6
Percentage of net sales	0.1		%	0.4		%	0.4		%	0.2		%

Other expense, net was $0.1 million and $1.3 million for the three and six months ended June 30, 2023, respectively, compared to $0.7 million and $0.6 million in the prior year periods, respectively, driven by acquisition and integration costs.

Operating Profit (in millions)


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Operating profit (loss)	$	(2.1)		$	10.1		$	(8.2)		$	6.1
Operating profit margin	(1.2)		%	5.9		%	(2.5)		%	1.8		%

The items previously described drove operating loss to $2.1 million and $8.2 million for the three and six months ended June 30, 2023, respectively, compared to operating profit of $10.1 million and $6.1 million for the three and six months ended June 30, 2022, respectively.

Adjusted Operating Profit

A reconciliation of adjusted operating profit (loss), a non-GAAP measure, to operating profit (loss) is provided in the table below (in millions):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Operating (loss) profit, as reported (GAAP)	$	(2.1)	$	10.1	$	(8.2)	$	6.1
Acquisition and integration-related charges	0.3		1.0		1.8		2.8
Restructuring and transformation charges	9.8		—		18.7		—
Divestiture-related charges	3.7		—		3.7		—
EU MDR Compliance	0.9		1.7		2.0		3.2
Intangibles amortization	5.8		5.7		11.6		10.9
Adjusted operating profit (non-GAAP)	$	18.4	$	18.5	$	29.6	$	23.0

The items noted in the table above are described below:

Acquisition and integration-related charges: Acquisition and integration-related charges were $0.3 million and $1.0 million for the three months ended June 30, 2023 and 2022, respectively, and $1.8 million and $2.8 million for the six months ended June 30, 2023 and 2022, respectively. Expenses in both the three and six months ended June 30, 2023 and 2022 were related to the acquisition of OrthogenRx.

Restructuring and transformation charges: In January 2023, we initiated the Transformation Process, a three-year restructuring initiative intended to align the Company under a single commercial organization, rationalize our product portfolio, undertake additional cost management activities to enhance the Company’s operating profitability and pursue efficient capital allocation strategies. In the three and six months ended June 30, 2023, we incurred $9.8 million and $18.7 million, respectively, of


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expenses related to the Transformation Process which consisted of costs associated with program management consulting and employee retention expenses and employee severance and benefits costs.

EU MDR Compliance: The European Union Medical Device Regulation (the “EU MDR”) brings significant new requirements for many of our medical devices. Incremental costs associated with EU MDR compliance are primarily related to re-certification of our products under the enhanced standards. We incurred $0.9 million and $2.0 million of costs related to EU MDR compliance for the three and six months ended June 30, 2023, respectively, and $1.7 million and $3.2 million for the three and six months ended June 30, 2022, respectively. We expect the activities resulting in incremental costs associated with our initial compliance with the EU MDR will continue into 2024.

Intangibles amortization: Intangibles amortization is related primarily to intangibles acquired in business acquisitions and was $5.8 million and $11.6 million for the three and six months ended June 30, 2023, respectively and $5.7 million and $10.9 million for the three and six months ended June 30, 2022, respectively.

Divestiture-Related Charges: In conjunction with the pending divestiture of our RH business, we have incurred accounting, legal and other professional fees of approximately $3.7 million. for the three and six months ended June 30, 2023.

Interest Expense

Interest expense consists of interest accrued and amortization of debt issuance costs on our revolving credit facility net of interest capitalized on long-term capital projects. See Note 7, “Debt” in Item 1 of this Form 10-Q. Interest expense was $3.5 million and $7.0 million for the three and six months ended June 30, 2023, respectively, compared to $2.7 million and $4.0 million, respectively, in the comparable period last year. Our outstanding debt balances, net of unamortized discounts, were $209.5 million and $232.5 million as of June 30, 2023 and December 31, 2022, respectively.

Income Taxes

The income tax benefit and provision was $0.8 million and $2.1 million in the three and six months ended June 30, 2023, respectively, compared to an income tax benefit and provision of $2.8 million and $1.5 million in the three and six months ended June 30, 2022, respectively. Our effective tax rate was 15.7% and 14.8% in the three and six months ended June 30, 2023, respectively. For the three and six months ended June 30, 2022, our effective rate was 36.8% and 65.2%, respectively.

Liquidity and Capital Resources

General

Our primary sources of liquidity are cash on hand provided by operating activities and amounts available with our Revolving Credit Facility under our Credit Agreement. We expect our operating cash flow will be sufficient to meet our working capital requirements and fund capital expenditures in the next twelve months. In addition, with our borrowing capacity, we expect to have the ability to fund capital expenditures and other investments necessary to grow our business for the foreseeable future for both our domestic and international operations.

As of June 30, 2023, $48.9 million of our $81.8 million of cash and cash equivalents was held by foreign subsidiaries. We consider the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested overseas and currently do not have plans to repatriate such earnings. We do not expect restrictions on repatriation of cash held outside of the United States to have a material effect on our overall liquidity, financial condition or results of operations for the foreseeable future.

Cash and cash equivalents decreased by $45.9 million to $81.8 million as of June 30, 2023, compared to $127.7 million as of December 31, 2022. The decrease was primarily driven by $9.4 million of cash used in operating activities, payments of $20.0 million on our Revolving Credit Facility and $3.1 million on our Term Loan Facility, and $8.0 million of capital expenditures.

In the prior year, cash and cash equivalents decreased by $12.0 million to $106.5 million as of June 30, 2022. The decrease was primarily driven by $116.7 million used to purchase OrthogenRx and $34.1 million used to repurchase shares of our common stock, partially offset by $28.8 million provided by operating activities and $125.0 million in proceeds received from the issuance of incremental long-term debt.

Long-Term Debt


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contains an accordion feature that allows us to incur incremental term loans under the Term Loan Facility or under new term loan facilities or to increase the amount of the commitments under the Revolving Credit Facility, including through the establishment of one or more tranches under the Revolving Credit Facility. The Credit Agreement will mature on June 24, 2027.

See Note 7, “Debt” in Item 1 of this Form 10-Q for further details regarding our debt agreements.

Critical Accounting Policies and Use of Estimates

Our financial statements are prepared by applying certain accounting policies. See Note 1, “Accounting Policies” in Item 8, “Financial Statements and Supplementary Data” in the Form 10-K, which describes our most significant accounting policies. In addition, our critical accounting policies and estimates are presented under the caption “Critical Accounting Policies and Use of Estimates” in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operation” in the Form 10-K. Certain of these policies require management to make estimates or assumptions that may prove inaccurate or be subject to variations that may significantly affect our reported results and financial position for the period or in future periods. Management views these policies as critical accounting policies. See Note 1, “Accounting Policies” in Item 1 of this Form 10-Q for updates to our critical accounting policies and a discussion of recent accounting pronouncements. In the six months ended June 30, 2023, there were no significant changes to our critical accounting estimates from those disclosed in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operation” in the Form 10-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes regarding our market risk position from the information provided under Item 7A – “Quantitative and Qualitative Disclosures About Market Risk” in the Form 10-K.

Item 4. Controls and Procedures

With the participation of management, our Chief Executive Officer (principal executive officer) and our Senior Vice President, and Chief Financial Officer (principal financial officer) carried out an evaluation, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and our Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively as of June 30, 2023.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to various legal proceedings, claims and governmental inspections, audits or investigations pertaining to issues such as contract disputes, product liability, tax matters, patents and trademarks, advertising, governmental regulations, employment and other matters. At present, although the results of litigation and claims cannot be predicted with certainty, we believe that the ultimate resolution of any pending legal proceeding to which we are a party will not have a material adverse effect on our business, financial condition, results of operations or liquidity.

Item 1A. Risk Factors

There have been no material changes to the risk factors described in Part I, Item 1A, “Risk Factors,” of the Form 10-K, except as follows:

Recent events in the banking industry and the associated macroeconomic impacts may have a material adverse effect on our business operations, financial condition, results of operations and cash flows.

The recent financial conditions affecting the banking system and financial markets and the potential threats to the solvency of commercial banks, investment banks and other financial institutions may have an adverse effect on our operations and the operations of companies with which we do business or in which we hold a minority stake. There can be no assurance that the actions taken by the Federal Reserve, the Treasury Department and the Federal Deposit Insurance Corporation in response to recent bank solvency concerns will achieve the purpose of stabilizing the financial markets, restoring consumer confidence, or have other intended effects. Concerns about the stability of financial markets and the solvency of lenders may cause further negative effects across the banking system and may cause the costs of obtaining financing from the credit markets to increase, which may limit our ability to secure adequate financing in the future or have other negative effects on our business operations, financial condition, results of operations and cash flows.

We may not achieve the expected benefits of our divestiture activities.

One of the objectives of the Transformation Process is the rationalization of our product portfolio through targeted divestitures such as the Divestiture. The Divestiture represents a key component of the Transformation Process, and is aimed at accelerating the Company’s efforts to focus its portfolio on markets where it is well positioned to succeed. Any divestiture we undertake is subject to a variety of known and unknown risks and uncertainties, including the potential that we may not be able to achieve the anticipated benefits of such divestiture. In addition, the expected benefits related to any divestiture may take longer to realize than expected. Further, any divestiture could be disruptive to our operations and result in reduced employee morale. Failure to fully realize the anticipated benefits of any divestiture could have a material adverse impact on our business, results of operations, financial condition and cash flows.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None


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Item 6. Exhibits

(a)Exhibits


Exhibit Number						Description
2.1						Purchase Agreement dated as of June 7, 2023 by and among Avanos Medical, Inc., the other Sellers party thereto and SunMed Group Holdings, LLC
3.1						Second Amended and Restated Certificate of Incorporation of the Company, incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed on May 6, 2020
3.2						Sixth Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.2 of our Current Report on Form 8-K filed on May 6, 2020
*10.24						Avanos Medical, Inc 2021 Long Term Incentive Plan, as amended, incorporated by reference to Exhibit 99.1 to ou r Registration Statement on Form S-8 (File No. 333-273234) filed on July 13, 2023

31(a)						Section 302 CEO Certification, filed herewith
31(b)						Section 302 CFO Certification, filed herewith
32(a)**						Section 906 CEO Certification, furnished herewith
32(b)**						Section 906 CFO Certification, furnished herewith
101.INS						XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
101.SCH						XBRL Taxonomy Extension Schema Document
101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF						XBRL Taxonomy Extension Definition Linkbase Document
101.LAB						XBRL Taxonomy Extension Label Linkbase Document
101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document
104						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

* Management contracts, compensatory plans or arrangements.

** The certifications attached as Exhibit 32(a) and 32(b) that accompany this Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Avanos Medical, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	AVANOS MEDICAL, INC.
	(Registrant)

August 9, 2023	By:	/s/ Michael C. Greiner
		Michael C. Greiner
		Senior Vice President,
		Chief Financial Officer and Chief Transformation Officer
		(Principal Financial Officer)

August 9, 2023	By:	/s/ John J. Hurley
		John J. Hurley
		Controller
		(Principal Accounting Officer)