avns-20240930

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 September 30, 2024

☐ 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 October 23, 2024, there were 45,956,997 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 Nine Months Ended September 30, 2024 and 2023			4

Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended Septe mber 30, 2024 and 2023			5

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023			6

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2024 and 2023			7

Unaudited Condensed Consolidated Cash Flow Statements for the N ine Months Ended September 30, 2024 and 2023			8

Notes to the Unaudited Condensed Consolidated Financial Statements			9

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			23

Item 3. Quantitative and Qualitative Disclosures About Market Risk			29

Item 4. Controls and Procedures			29

PART II – OTHER INFORMATION			30

Item 1. Legal Proceedings			30
Item 1A. Risk Factors			30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31
Item 3. Defaults Upon Senior Securities			31
Item 4. Mine Safety Disclosures			31
Item 5. Other Information			31
Item 6. Exhibits			32
Signatures			33

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, among others. 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;

•weakening of economic conditions that could adversely affect the level of demand for our products;

•pricing pressures generally, including cost-containment measures that could adversely affect the price of or demand for our products;

•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;

•a resurgence of the ongoing COVID-19 pandemic;

•the competitive environment;

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

•cybersecurity threats, including breaches of or cyberattacks on our information systems;

•the ongoing regional conflicts between Russia and Ukraine and in the Middle East;

•concentration of our manufacturing operations in Mexico;

•financial conditions affecting the banking system and the potential threats to the solvency of commercial banks

•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 restructuring initiatives or 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, 2023 (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 September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Net Sales	$	170.4	$	171.3	$	508.2	$	500.0
Cost of products sold	77.5		75.8		224.9		215.3
Gross Profit	92.9		95.5		283.3		284.7
Research and development	7.2		6.1		20.5		20.4
Selling and general expenses	74.3		78.7		238.8		260.5
Other (income) expense, net	(0.6)		9.5		1.7		10.8
Operating Income (Loss)	12.0		1.2		22.3		(7.0)
Interest income	0.7		0.9		4.3		1.9
Interest expense	(3.2)		(4.7)		(9.4)		(11.7)
Income (Loss) Before Income Taxes	9.5		(2.6)		17.2		(16.8)
Income tax provision	(3.6)		(6.2)		(6.5)		(4.1)
Income (Loss) from Continuing Operations	5.9		(8.8)		10.7		(20.9)
(Loss) Income from discontinued operations, net of tax	(1.6)		5.1		(5.5)		(51.4)
Net Income (Loss)	$	4.3	$	(3.7)	$	5.2	$	(72.3)

Basic Earnings (Loss) Per Share
Continuing operations	$	0.13	$	(0.19)	$	0.23	$	(0.45)
Discontinued operations	(0.03)		0.11		(0.12)		(1.10)
Basic Earnings (Loss) Per Share	$	0.10	$	(0.08)	$	0.11	$	(1.55)

Diluted Earnings (Loss) Per Share
Continuing operations	$	0.12	$	(0.19)	$	0.23	$	(0.45)
Discontinued operations	(0.03)		0.11		(0.12)		(1.10)
Diluted Earnings (Loss) Per Share	$	0.09	$	(0.08)	$	0.11	$	(1.55)

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 September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Net Income (Loss)	$	4.3	$	(3.7)	$	5.2	$	(72.3)
Other Comprehensive Income (Loss), Net of Tax
Unrealized currency translation adjustments	0.3		(4.6)		(8.0)		2.8
Defined benefit plans	0.1		—		(0.1)		—
Cash flow hedges	0.2		—		(1.8)		—
Total Other Comprehensive Income (Loss), Net of Tax	0.6		(4.6)		(9.9)		2.8
Comprehensive Income (Loss)	$	4.9	$	(8.3)	$	(4.7)	$	(69.5)

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)


	September 30, 2024		December 31, 2023
ASSETS
Current Assets
Cash and cash equivalents	$	89.0	$	87.7
Accounts receivable, net of allowances	131.9		142.8
Inventories	161.9		163.2
Prepaid and other current assets	15.9		28.8
Assets held for sale	73.9		64.5
Total Current Assets	472.6		487.0
Property, Plant and Equipment, net	109.5		117.2
Operating Lease Right-of-Use Assets	26.5		26.8
Goodwill	795.1		796.1
Other Intangible Assets, net	220.1		239.5
Deferred Tax Assets	6.6		6.5
Other Assets	25.8		19.3
TOTAL ASSETS	$	1,656.2	$	1,692.4
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Current portion of long-term debt	$	9.4	$	8.6
Current portion of operating lease liabilities	13.7		12.8
Trade accounts payable	54.2		56.3
Accrued expenses	82.7		93.2
Liabilities held for sale	52.9		63.7
Total Current Liabilities	212.9		234.6
Long-Term Debt	152.6		159.4
Operating Lease Liabilities	26.5		28.3
Deferred Tax Liabilities	23.9		23.8
Other Long-Term Liabilities	10.6		10.0
Total Liabilities	426.5		456.1

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, 45,954,931 outstanding as of September 30, 2024 and 46,174,337 outstanding as of December 31, 2023	0.5		0.5
Additional paid-in capital	1,674.7		1,663.6
Accumulated deficit	(309.7)		(314.9)
Treasury stock	(98.9)		(85.9)
Accumulated other comprehensive loss	(36.9)		(27.0)
Total Stockholders’ Equity	1,229.7		1,236.3
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,656.2	$	1,692.4

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 September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Common Stock	$	0.5	$	0.5	$	0.5	$	0.5
Additional Paid-in Capital, beginning of period	1,671.5		1,654.9		1,663.6		1,646.4
Exercise or redemption of share-based awards	0.6		0.9		1.1		1.5
Stock-based compensation expense	2.6		3.9		10.0		11.8
Additional Paid-in Capital, end of period	1,674.7		1,659.7		1,674.7		1,659.7
Accumulated Deficit, beginning of period	(314.0)		(321.7)		(314.9)		(253.1)
Net income (loss)	4.3		(3.7)		5.2		(72.3)
Accumulated Deficit, end of period	(309.7)		(325.4)		(309.7)		(325.4)
Treasury Stock, beginning of period	(98.5)		(70.5)		(85.9)		(66.8)
Purchases of treasury stock	(0.4)		(9.2)		(13.0)		(12.9)
Treasury Stock, end of period	(98.9)		(79.7)		(98.9)		(79.7)
Accumulated Other Comprehensive Loss, beginning of period	(37.5)		(28.4)		(27.0)		(35.8)
Other comprehensive income (loss), net of tax	0.6		(4.6)		(9.9)		2.8
Accumulated Other Comprehensive Loss, end of period	(36.9)		(33.0)		(36.9)		(33.0)
Total Stockholders’ Equity, end of period	$	1,229.7	$	1,222.1	$	1,229.7	$	1,222.1

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)


	Nine Months Ended September 30,
	2024		2023
Operating Activities
Net income (loss)	$	5.2	$	(72.3)
Depreciation and amortization	34.4		34.6
Stock-based compensation expense	10.0		11.8
Goodwill impairment	—		59.1
Net loss on asset dispositions and impairments	0.4		1.1
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable	(6.9)		30.0
Inventories	(5.9)		(6.6)
Prepaid expenses and other assets	7.7		0.2
Accounts payable	(1.2)		(16.0)
Accrued expenses	(3.7)		(19.7)
Deferred income taxes and other	2.8		(2.5)
Cash Provided by Operating Activities	42.8		19.7
Investing Activities
Capital expenditures	(13.0)		(11.9)
Proceeds from RH Divestiture post-closing settlement	2.1		—
Acquisition of assets and investments in businesses	—		(47.5)
Investment in Note Receivable	(9.0)		—
Cash Used in Investing Activities	(19.9)		(59.4)
Financing Activities

Secured debt repayments	(6.3)		(3.1)
Revolving credit facility proceeds	20.0		55.0
Revolving credit facility repayments	(20.0)		(20.0)
Purchases of treasury stock	(12.7)		(12.9)

Proceeds from the exercise of stock options	1.1		1.5
Payment of contingent consideration liabilities	(3.8)		—
Cash (Used in) Provided by Financing Activities	(21.7)		20.5
Effect of Exchange Rate Changes on Cash and Cash Equivalents	0.1		(1.4)
Increase (Decrease) in Cash and Cash Equivalents	1.3		(20.6)
Cash and Cash Equivalents - Beginning of Period	87.7		127.7
Cash and Cash Equivalents - End of Period	$	89.0	$	107.1

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 the Form 10-K. 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.

Goodwill

We test goodwill for impairment annually or more frequently whenever events or circumstances more likely than not indicate that the fair value of the reporting unit may be below its carrying value. We operate as a single reportable operating segment with one reporting unit. The fair value of our reporting unit is estimated using a combination of income (discounted cash flow analysis) and market approaches. The income approach is dependent upon several assumptions regarding future periods such as sales growth and a terminal growth rate. A weighted average cost of capital (“WACC”) was used to discount future estimated cash flows to their present values. The WACC was based on externally observable data considering market participants’ cost of equity and debt, optimal capital structure and risk factors specific to us. The market approach estimates the value of our company using a market capitalization methodology.

We determined that the fair value of our reporting unit exceeded the net carrying amount in our most recent goodwill impairment test on July 1, 2024. However, there can be no assurance that the assumptions and estimates made for purposes of the annual goodwill impairment test will prove to be accurate. Volatility in the equity and debt markets, or increases in interest rates, could result in a higher discount rate. Changes in sales volumes, selling prices and costs of goods sold, and increases in interest rates could cause changes in our forecasted cash flows. Unfavorable changes in any of the factors described above, as well as a decline in our stock price, could result in a goodwill impairment charge in the future.

Hedging and Derivatives

All derivative instruments are recorded as assets or liabilities on the balance sheet at fair value. Changes in the fair value of

derivatives are either recorded in the income statement or other comprehensive income, as appropriate. The effective portion of

the gain or loss on derivatives designated as cash flow hedges is included in other comprehensive income in the period that

changes in fair value occur, and is reclassified to income in the same period that the hedged item affects income. Our policies allow the use of derivatives for risk management purposes and prohibit their use for speculation. Our policies also prohibit the use of any leveraged derivative instrument. Consistent with our policies, foreign currency derivative instruments are entered into with major financial institutions. At inception, we formally designate certain derivatives as cash flow hedges and establish how the effectiveness of these hedges will be assessed and measured. This process links the derivatives to the transactions they are hedging. See Note 11, “Derivative Financial Instruments,” for disclosures about derivative instruments and hedging activities.


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Recently Adopted Accounting Pronouncements

Effective January 1

SEC Form 10-Q filed by Avanos Medical Inc.