avns-20210930

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, 2021

☐ 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 26, 2021, there were 48,186,573 shares of the Corporation’s common stock outstanding.

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements			3

Unaudited Condensed Consolidated Income Statements for the Three and Nine Months Ended September 30, 2021 and 2020			3

Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and 2020			4

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020			5

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020			6

Unaudited Condensed Consolidated Cash Flow Statements for the Nine Months Ended September 30, 2021 and 2020			7

Notes to the Unaudited Condensed Consolidated Financial Statements			8

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			17

Item 4. Controls and Procedures			23

PART II – OTHER INFORMATION			24

Item 6. Exhibits			24
Signatures			25


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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,
	2021		2020		2021		2020
Net Sales	$	184.1	$	185.7	$	551.2	$	529.8
Cost of products sold	93.7		89.9		283.8		245.4
Gross Profit	90.4		95.8		267.4		284.4
Research and development	8.4		8.2		24.7		25.3
Selling and general expenses	75.0		82.4		225.1		250.4
Other expense, net	3.4		5.3		33.7		10.0
Operating Income (Loss)	3.6		(0.1)		(16.1)		(1.3)
Interest income	0.2		0.2		0.2		1.1
Interest expense	(0.9)		(4.3)		(2.6)		(12.9)
Income (Loss) Before Income Taxes	2.9		(4.2)		(18.5)		(13.1)
Income tax (provision) benefit	(38.0)		23.5		13.7		33.1
Net (Loss) Income	$	(35.1)	$	19.3	$	(4.8)	$	20.0

(Loss) Earnings Per Share
Basic	$	(0.73)	$	0.40	$	(0.10)	$	0.42
Diluted	$	(0.73)	$	0.40	$	(0.10)	$	0.42

See Notes to the Condensed Consolidated Financial Statements.


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AVANOS MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net (Loss) Income	$	(35.1)	$	19.3	$	(4.8)	$	20.0
Other Comprehensive (Loss) Income, net of tax
Unrealized currency translation adjustments	(3.7)		4.9		(5.6)		(5.2)
Defined benefit plans	0.1		—		0.1		0.2
Cash flow hedges	—		—		—		(0.1)
Total Other Comprehensive (Loss) Income, net of tax	(3.6)		4.9		(5.5)		(5.1)
Comprehensive (Loss) Income	$	(38.7)	$	24.2	$	(10.3)	$	14.9

See Notes to the 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, 2021		December 31, 2020
ASSETS
Current Assets
Cash and cash equivalents	$	97.8	$	111.5
Accounts receivable, net of allowances	117.5		108.6
Income tax receivable	11.6		59.3
Inventories	158.4		168.9
Prepaid expenses and other current assets	19.7		18.9
Total Current Assets	405.0		467.2
Property, Plant and Equipment, net	169.7		175.3
Operating Lease Right-of-Use Assets	41.4		48.3
Goodwill	801.8		802.5
Other Intangible Assets, net	145.3		157.7
Deferred Tax Assets	23.6		10.0
Other Assets	11.1		11.8
TOTAL ASSETS	$	1,597.9	$	1,672.8

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Current portion of operating lease liabilities	$	14.7	$	15.5
Trade accounts payable	54.9		67.6
Accrued expenses	59.6		83.2
Total Current Liabilities	129.2		166.3
Long-Term Debt	145.0		180.0
Operating Lease Liabilities	46.1		53.3
Deferred Tax Liabilities	5.6		5.7
Other Long-Term Liabilities	10.1		11.0
Total Liabilities	336.0		416.3

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, 48,128,749 outstanding as of September 30, 2021 and 47,917,583 outstanding as of December 31, 2020	0.5		0.5
Additional paid-in capital	1,625.7		1,609.4
Accumulated deficit	(320.3)		(315.5)
Treasury stock	(10.4)		(9.8)
Accumulated other comprehensive loss	(33.6)		(28.1)
Total Stockholders’ Equity	1,261.9		1,256.5
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,597.9	$	1,672.8

See Notes to the 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,
	2021		2020		2021		2020
Common Stock	$	0.5	$	0.5	$	0.5	$	0.5
Additional Paid-in Capital, beginning of period	1,621.3		1,599.9		1,609.4		1,593.9
Exercise or redemption of share-based awards	0.9		0.8		6.1		1.3
Stock-based compensation expense	3.5		3.4		10.2		8.9
Additional Paid-in Capital, end of period	1,625.7		1,604.1		1,625.7		1,604.1
Accumulated Deficit, beginning of period	(285.2)		(287.6)		(315.5)		(288.3)
Net (loss) income	(35.1)		19.3		(4.8)		20.0
Accumulated Deficit, end of period	(320.3)		(268.3)		(320.3)		(268.3)
Treasury Stock, beginning of period	(10.3)		(9.2)		(9.8)		(8.9)
Purchases of treasury stock	(0.1)		(0.1)		(0.6)		(0.4)
Treasury Stock, end of period	(10.4)		(9.3)		(10.4)		(9.3)
Accumulated Other Comprehensive Loss, beginning of period	(30.0)		(42.0)		(28.1)		(32.0)
Other comprehensive (loss) income, net of tax	(3.6)		4.9		(5.5)		(5.1)
Accumulated Other Comprehensive Loss, end of period	(33.6)		(37.1)		(33.6)		(37.1)
Total Stockholders’ Equity, end of period	$	1,261.9	$	1,289.9	$	1,261.9	$	1,289.9

See Notes to the 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,
	2021		2020
Operating Activities
Net (loss) income	$	(4.8)	$	20.0
Depreciation and amortization	28.8		32.1
Stock-based compensation expense	10.2		8.9
Net loss on asset dispositions and impairments	4.9		1.3
Changes in operating assets and liabilities:
Accounts receivable	(10.5)		34.3
Income tax receivable	47.7		(53.1)
Inventories	9.4		(38.5)
Prepaid expenses and other assets	1.1		0.4
Accounts payable	(11.9)		(8.1)
Accrued expenses	(24.4)		30.4
Deferred income taxes and other	(15.3)		(31.3)
Cash Provided by (Used in) Operating Activities	35.2		(3.6)
Investing Activities
Capital expenditures	(16.3)		(15.1)
Acquisition of assets and investments in businesses	—		(4.0)
Cash Used in Investing Activities	(16.3)		(19.1)
Financing Activities
Revolving credit facility proceeds	20.0		—
Revolving credit facility repayments	(55.0)		—
Purchases of treasury stock	(0.6)		(0.4)
Proceeds from the exercise of stock options	6.1		1.4
Payment of contingent consideration liabilities	—		(2.7)
Cash Used in Financing Activities	(29.5)		(1.7)
Effect of Exchange Rate Changes on Cash and Cash Equivalents	(3.1)		(0.9)
Decrease in Cash and Cash Equivalents	(13.7)		(25.3)
Cash and Cash Equivalents - Beginning of Period	111.5		205.3
Cash and Cash Equivalents - End of Period	$	97.8	$	180.0

See Notes to the 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 breakthrough medical device solutions to improve patients’ quality of life. Headquartered in Alpharetta, Georgia, Avanos is committed to addressing some of today’s most important healthcare needs, such as reducing the use of opioids while helping patients move from surgery to recovery. We develop, manufacture and market clinically superior solutions around the globe. References to “Avanos,” “Company,” “we,” “our” and “us” refer to Avanos Medical, Inc. and its consolidated subsidiaries.

Interim Financial Statements

We prepared the accompanying 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 Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020. 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, 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. Our estimates are subject to uncertainties associated with the ongoing COVID-19 pandemic which has caused volatility and adverse effects in global markets. Accordingly, actual results could differ from these estimates, and the effect of the difference could be material to our financial statements. Changes in these estimates are recorded when known.

Annual Goodwill Impairment Test

We test for 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 was 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 completed our annual goodwill impairment test as of July 1, 2021, and determined that the fair value of our reporting unit exceeds the net carrying amount.

Recently Adopted Accounting Pronouncements

Effective January 1, 2021, we adopted Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU removed certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. Adoption of this ASU did not have a material effect on our financial position, results of operations or cash flows.

Recently Issued Accounting Pronouncements

In May 2021, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2021-04, Issuers Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This ASU requires accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity-classified after the modification or exchange based on the economic substance of the modification or exchange. The accounting is determined based on whether the transaction was done to issue equity, issue or modify debt or for other reasons. This ASU is to be applied


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prospectively for years beginning after December 15, 2021. Adoption of this ASU is not expected to have a material effect on our financial position, results of operations or cash flows.

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-04, Reference Rate Reform. This ASU was prompted by the planned cessation of the London Interbank Offer Rate (“LIBOR”), which is the reference rate for many debt agreements, including the credit agreement that governs our revolving credit facility that is described in Note 5, “Debt.” 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 March 12, 2020 through December 31, 2022 and 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. Adoption of this ASU is not expected to have a material effect on our financial position, results of operations or cash flows.

Note 2. Restructuring Activities

Our restructuring expenses for the three months and nine months ended September 30, 2021 and 2020 is summarized in the table below (in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Post divestiture restructuring plan	$	2.9	$	0.9	$	5.5	$	1.4
Integration and restructuring of business acquisitions	—		0.5		—		(0.2)
2020 Restructuring	1.7		—		10.4		—
Total Restructuring Costs	$	4.6	$	1.4	$	15.9	$	1.2

Post-Divestiture Restructuring Plan

In the fourth quarter of 2018, we began a three-phase restructuring plan (the “Plan”) intended to align our organizational structure, information technology platform and supply chain and distribution channels (“Cost Transformation”) to be more appropriate for the size and scale of our business. Only the final phase of the plan, Cost Transformation, remains in progress, and is expected to be completed by the end of 2021. Expenses incurred for Cost Transformation are included in “Cost of products sold.” Plan-to-date we have incurred $10.6 million of costs that were expensed as incurred and $4.7 million of costs that were capitalized.

Integration and Restructuring of Business Acquisitions

During the third quarter of 2019, we initiated activities to integrate recent asset and business acquisitions into our operations, and where appropriate, re-align our organization accordingly. Costs incurred were primarily for employee retention, severance and benefits and lease termination costs. Cumulative plan expenses were $9.6 million, included in “Selling and general expenses,” primarily for employee retention, severance, benefits and “Other expense, net” for right-of-use asset impairment. The integration of our acquisitions was substantially complete by the end of 2020.

2020 Restructuring

In the fourth quarter of 2020, we initiated activities to reduce the size of our senior leadership team, consolidate certain operations within our pain management franchise, exit unprofitable lines of business and research and development initiatives and reduce the size of our office space to align with expected requirements following the COVID-19 pandemic. Costs incurred will primarily be for operating lease right-of-use impairments or lease terminations, impairment of intangible and other assets and employee severance and benefits. Plan-to-date, we have incurred $38.0 million of expenses, which are included in “Cost of


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products sold,” “Selling and general expenses” and “Other expense, net.” We expect to substantially complete this restructuring by the end of 2021.

Restructuring Liability

We have a liability for employee retention, severance, benefits and other costs associated with our restructuring activities, which is summarized below (in millions):


	Accrual
Balance, December 31, 2020	$	7.2
Total restructuring costs, excluding non-cash charges	9.2
Payments and other	(15.9)
Balance, September 30, 2021	$	0.5

Note 3. Supplemental Balance Sheet Information

Accounts Receivable

Accounts receivable consist of the following (in millions):


	September 30, 2021		December 31, 2020
Accounts receivable	$	121.3	$	113.2
Income tax receivable	11.6		59.3
Allowances and doubtful accounts:
Doubtful accounts	(3.5)		(4.4)
Sales discounts	(0.3)		(0.2)
Accounts receivable, net of allowances	$	129.1	$	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. Our provision for doubtful accounts was a net benefit of $0.1 million and $0.5 million in the three and nine months ended September 30, 2021 compared to a net expense of $0.3 million and $1.2 million in the three and nine months ended September 30, 2020.

Inventories

Inventories at the lower of cost (determined on the LIFO/FIFO or weighted-average cost methods) or market consist of the following (in millions):


	September 30, 2021						December 31, 2020
	LIFO		Non- LIFO		Total		LIFO		Non- LIFO		Total
Raw materials	$	44.4	$	2.0	$	46.4	$	43.9	$	3.1	$	47.0
Work in process	34.8		—		34.8		32.2		0.1		32.3
Finished goods	60.7		17.2		77.9		73.5		16.9		90.4
Supplies and other	—		6.3		6.3		—		6.7		6.7
	139.9		25.5		165.4		149.6		26.8		176.4
Excess of FIFO or weighted-average cost over LIFO cost	(7.0)		—		(7.0)		(7.5)		—		(7.5)

SEC Form 10-Q filed by Avanos Medical, Inc.