Avanos Medical(AVNS) - 2024 Q2 - Quarterly Report

Information Concerning Forward-Looking Statements This section highlights that the Form 10-Q contains forward-looking statements subject to various risks and uncertainties that could cause actual results to differ materially - This Form 10-Q contains forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially from projections[4] - Key risk factors include general economic conditions, pricing pressures, supply chain issues, competitive environment, cybersecurity threats, ongoing regional conflicts, manufacturing concentration in Mexico, financial conditions affecting banking, litigation, and changes in governmental regulations[4] PART I – FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's operational analysis Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including income statements, balance sheets, cash flows, and related notes Unaudited Condensed Consolidated Income Statements This section provides the unaudited condensed consolidated income statements for the three and six months ended June 30, 2024 and 2023 Condensed Consolidated Income Statement Highlights (in millions) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---|:---|:---| | Net Sales | $171.7 | $169.4 | $337.8 | $328.7 | | Gross Profit | $95.6 | $97.8 | $190.4 | $189.2 | | Operating Income (Loss) | $6.3 | $(2.1) | $10.3 | $(8.2) | | Income (Loss) Before Income Taxes | $6.2 | $(5.1) | $7.7 | $(14.2) | | Net Income (Loss) | $1.8 | $(68.1) | $0.9 | $(68.6) | | Basic EPS (Continuing Operations) | $0.09 | $(0.09) | $0.10 | $(0.26) | | Basic EPS (Discontinued Operations) | $(0.05) | $(1.37) | $(0.08) | $(1.21) | | Basic EPS | $0.04 | $(1.46) | $0.02 | $(1.47) | | Diluted EPS (Continuing Operations) | $0.09 | $(0.09) | $0.10 | $(0.26) | | Diluted EPS (Discontinued Operations) | $(0.05) | $(1.37) | $(0.08) | $(1.21) | | Diluted EPS | $0.04 | $(1.46) | $0.02 | $(1.47) | Unaudited Condensed Consolidated Statements of Comprehensive Income This section presents the unaudited condensed consolidated statements of comprehensive income, detailing net income and other comprehensive income components Condensed Consolidated Statements of Comprehensive Income (in millions) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---|:---|:---|\n| Net Income (Loss) | $1.8 | $(68.1) | $0.9 | $(68.6) | | Unrealized currency translation adjustments | $(6.1) | $2.9 | $(8.3) | $7.4 | | Defined benefit plans | $0.1 | — | $(0.2) | — | | Cash flow hedges | $(2.0) | — | $(2.0) | — | | Total Other Comprehensive Loss, Net of Tax | $(8.0) | $2.9 | $(10.5) | $7.4 | | Comprehensive Loss | $(6.2) | $(65.2) | $(9.6) | $(61.2) | Unaudited Condensed Consolidated Balance Sheets This section provides the unaudited condensed consolidated balance sheets, outlining assets, liabilities, and stockholders' equity as of June 30, 2024, and December 31, 2023 Condensed Consolidated Balance Sheets (in millions) | Asset/Liability | June 30, 2024 | December 31, 2023 | |:---|:---|:---|\n| Cash and cash equivalents | $92.2 | $87.7 | | Accounts receivable, net | $123.0 | $142.8 | | Inventories | $163.9 | $163.2 | | Assets held for sale | $72.7 | $64.5 | | Total Current Assets | $474.1 | $487.0 | | Property, Plant and Equipment, net | $110.7 | $117.2 | | Goodwill | $794.4 | $796.1 | | Other Intangible Assets, net | $226.2 | $239.5 | | TOTAL ASSETS | $1,657.8 | $1,692.4 | | Current portion of long-term debt | $10.2 | $8.6 | | Liabilities held for sale | $52.7 | $63.7 | | Total Current Liabilities | $208.2 | $234.6 | | Long-Term Debt | $164.9 | $159.4 | | Total Liabilities | $435.8 | $456.1 | | Total Stockholders' Equity | $1,222.0 | $1,236.3 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $1,657.8 | $1,692.4 | Unaudited Condensed Consolidated Statements of Stockholders' Equity This section details the unaudited condensed consolidated statements of stockholders' equity, showing changes in capital, deficit, and other comprehensive loss Condensed Consolidated Statements of Stockholders' Equity (in millions) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---|:---|:---|\n| Additional Paid-in Capital, end of period | $1,671.5 | $1,654.9 | $1,671.5 | $1,654.9 | | Accumulated Deficit, end of period | $(314.0) | $(321.7) | $(314.0) | $(321.7) | | Treasury Stock, end of period | $(98.5) | $(70.5) | $(98.5) | $(70.5) | | Accumulated Other Comprehensive Loss, end of period | $(37.5) | $(28.4) | $(37.5) | $(28.4) | | Total Stockholders' Equity, end of period | $1,222.0 | $1,234.8 | $1,222.0 | $1,234.8 | Unaudited Condensed Consolidated Cash Flow Statements This section presents the unaudited condensed consolidated cash flow statements, categorizing cash flows from operating, investing, and financing activities Condensed Consolidated Cash Flow Statements (in millions) | Activity | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---|\n| Cash Provided by (Used in) Operating Activities | $19.8 | $(9.4) | | Cash Used in Investing Activities | $(7.9) | $(10.5) | | Cash Used in Financing Activities | $(5.7) | $(26.2) | | Effect of Exchange Rate Changes on Cash and Cash Equivalents | $(1.7) | $0.2 | | Increase (Decrease) in Cash and Cash Equivalents | $4.5 | $(45.9) | | Cash and Cash Equivalents - End of Period | $92.2 | $81.8 | Notes to the Unaudited Condensed Consolidated Financial Statements This section provides detailed notes explaining the accounting policies, significant transactions, and financial instrument disclosures supporting the condensed consolidated financial statements Note 1. Accounting Policies This note outlines accounting policies for medical device solutions, interim statements, estimates, goodwill impairment, and hedging - Avanos Medical, Inc. is a medical technology company focused on delivering clinically superior medical device solutions for nutrition and pain management, holding leading market positions globally[17] - Goodwill is tested for impairment annually using a combination of income (discounted cash flow) and market approaches, with the fair value exceeding the net carrying amount in the most recent test on July 1, 2023[20] - Derivative instruments are used for risk management (e.g., foreign currency hedges) and are recorded at fair value, with changes in fair value included in other comprehensive income for cash flow hedges[21] - The adoption of ASU No. 2021-08 (Business Combinations) did not have a material effect on financial position, results of operations, or cash flows[22] - Upcoming ASUs include 2023-09 (Income Tax Disclosures), 2023-07 (Segment Reporting), and 2023-05 (Joint Venture Formations), with ASU 2023-07 requiring expanded disclosures for the single operating segment[22] Note 2. Discontinued Operations This note details the $110 million divestiture of the RH business, with results reported as discontinued operations and assets held for sale - The RH Divestiture closed on October 2, 2023, for $110 million in cash, representing a key component of Avanos' three-year transformation process to focus its portfolio[23] - The company entered into transition services agreements and distribution agreements with the buyer, with services generally terminating within one to three years[23][24] Financial Results of Discontinued Operations (in millions) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---|:---|:---|\n| Net Sales | $13.6 | $30.4 | $30.5 | $62.8 | | Gross Profit | $(2.0) | $11.8 | $(1.0) | $24.9 | | Net Loss from discontinued operations, net of tax | $(2.5) | $(63.8) | $(3.9) | $(56.5) | Assets and Liabilities Classified as Held for Sale (in millions) | Category | June 30, 2024 | December 31, 2023 | |:---|:---|:---|\n| Inventories | $25.7 | $17.5 | | Property, Plant and Equipment, net | $44.0 | $43.9 | | Total assets classified as held for sale | $72.7 | $64.5 | | Accrued expenses | $50.8 | $61.3 | | Total liabilities held for sale | $52.7 | $63.7 | Note 3. Restructuring Activities This note details the Post-RH Divestiture Restructuring Plan and the Transformation Process, outlining expected cash expenses and gross savings - A Post-RH Divestiture restructuring plan was initiated in 2024 to align organizational structure and operational footprint, with expected cash expenses up to $7.5 million by the end of 2025[29] - The three-year Transformation Process, initiated in January 2023, aims for total gross savings of $45.0 million to $55.0 million by 2025 and expects to incur up to $30.0 million in cash expenses[30] Restructuring and Transformation Costs Incurred (in millions) | Metric | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2024 | |:---|:---|:---|\n| Post-RH Divestiture Restructuring Plan costs | $3.4 | $4.1 | | Transformation Process costs | $1.6 | $4.5 | Restructuring Liability (in millions) | Metric | As of June 30, 2024 | |:---|:---|\n| Beginning balance | $2.3 | | Restructuring and transformation costs, excluding non-cash charges | $7.0 | | Payments and adjustments, net | $(6.7) | | Ending balance | $2.6 | Note 4. Business Acquisition This note details the acquisition of Diros Technology Inc. for $53.0 million, its sales contribution, and the purchase price allocation - Avanos acquired Diros Technology Inc. on July 24, 2023, for $53.0 million in cash, with up to an additional $7.0 million in contingent cash consideration[33] Diros Technology Net Sales Contribution (in millions) | Period | Net Sales | |:---|:---|\n| Three months ended June 30, 2024 | $5.1 | | Six months ended June 30, 2024 | $9.8 | Diros Acquisition Purchase Price Allocation (in millions) | Category | Amount | |:---|:---|\n| Current assets, net of cash acquired | $7.5 | | Current liabilities, excluding contingent consideration | $(7.0) | | Contingent consideration | $(5.3) | | Deferred tax liabilities | $(8.1) | | Identifiable intangible assets | $29.6 | | Goodwill | $33.4 | | Total | $49.6 | Identifiable Intangible Assets from Diros Acquisition (in millions, except years) | Asset | Amount | Weighted Average Useful Lives (Years) | |:---|:---|:---|\n| Trade names and trademarks | $2.9 | 15 | | Customer relationships | $21.2 | 14 | | Developed technology and other | $5.5 | 13 | | Total | $29.6 | | Note 5. Supplemental Balance Sheet Information This note provides detailed breakdowns of key balance sheet accounts, including accounts receivable, inventories, property, goodwill, and intangible assets Accounts Receivable (in millions) | Category | June 30, 2024 | December 31, 2023 | |:---|:---|:---|\n| Accounts receivable | $128.1 | $134.0 | | Income tax receivable | $0.1 | $14.1 | | Allowances and doubtful accounts | $(5.2) | $(5.3) | | Accounts receivable, net | $123.0 | $142.8 | Inventories (in millions) | Category | June 30, 2024 | December 31, 2023 | |:---|:---|:---|\n| Raw materials | $49.6 | $50.3 | | Work in process | $24.2 | $19.8 | | Finished goods | $86.2 | $88.5 | | Supplies and other | $3.9 | $4.6 | | Total Inventory | $163.9 | $163.2 | Goodwill and Intangible Assets (in millions) | Category | June 30, 2024 | December 31, 2023 | |:---|:---|:---|\n| Goodwill | $794.4 | $796.1 | | Total Intangible Assets, net | $226.2 | $239.5 | Estimated Amortization Expense for Intangible Assets (in millions) | Year | Amount | |:---|:---|\n| Remainder of 2024 | $13.1 | | 2025 | $25.0 | | 2026 | $24.5 | | 2027 | $22.8 | | 2028 | $22.6 | | Thereafter | $118.2 | | Total | $226.2 | Note 6. Fair Value Information This note provides fair value measurements for financial instruments using a three-level hierarchy, with debt valued using Level 1/2 and contingent consideration using Level 3 Fair Value of Financial Instruments (in millions) | Financial Instrument | Fair Value Hierarchy Level | June 30, 2024 Carrying Amount | June 30, 2024 Estimated Fair Value | December 31, 2023 Carrying Amount | December 31, 2023 Estimated Fair Value | |:---|:---|:---|:---|:---|:---|\n| Cash and cash equivalents | 1 | $92.2 | $92.2 | $87.7 | $87.7 | | Revolving Credit Facility | 2 | $60.0 | $60.0 | $50.0 | $50.0 | | Term Loan Facility | 2 | $115.1 | $115.1 | $118.0 | $118.0 | | Contingent consideration related to acquisition | 3 | $3.3 | $3.3 | $5.3 | $5.3 | Note 7. Debt This note details the company's Term Loan and Revolving Credit Facility, both maturing in 2027, and confirms compliance with all debt covenants Debt Balances (in millions) | Debt Type | Weighted-Average Interest Rate | Maturity | June 30, 2024 | December 31, 2023 | |:---|:---|:---|:---|:---|\n| Revolving Credit Facility | 6.86% | 2027 | $60.0 | $50.0 | | Term Loan Facility | 6.79% | 2027 | $115.6 | $118.8 | | Total Long-Term Debt, net | | | $164.9 | $159.4 | - The Credit Agreement, established June 24, 2022, provides $500.0 million in credit facilities, including a $125.0 million Term Loan Facility and a $375.0 million Revolving Credit Facility, maturing on June 24, 2027[51] - Borrowings bear interest at variable rates tied to SOFR or a base rate, and the company was in compliance with all customary operational and financial covenants as of June 30, 2024[51] Long-Term Debt Maturity Schedule (in millions) | Year | Amount | |:---|:---|\n| Remainder of 2024 | $5.5 | | 2025 | $9.4 | | 2026 | $10.2 | | 2027 | $150.5 | | Total | $175.6 | Note 8. Accumulated Other Comprehensive Income This note details changes in Accumulated Other Comprehensive Income (AOCI), primarily from currency translation, cash flow hedges, and defined benefit plans Changes in Accumulated Other Comprehensive Income (AOCI) (in millions) | Component | Balance, December 31, 2023 | Other comprehensive (loss) income | Balance, June 30, 2024 | |:---|:---|:---|:---|\n| Unrealized Currency Translation | $(27.0) | $(8.3) | $(35.3) | | Cash Flow Hedges | — | $(2.0) | $(2.0) | | Defined Benefit Plans | — | $(0.2) | $(0.2) | | Total AOCI | $(27.0) | $(10.5) | $(37.5) | Note 9. Stock-Based Compensation Stock-based compensation expense for the three and six months ended June 30, 2024, totaled $3.8 million and $7.4 million, driven by restricted share units Stock-Based Compensation Expense (in millions) | Type | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---|:---|:---|\n| Stock options | — | $0.1 | — | $0.1 | | Time-based restricted share units | $2.4 | $2.5 | $4.9 | $5.5 | | Performance-based restricted share units | $1.4 | $1.3 | $2.4 | $2.3 | | Employee stock purchase plan | — | — | $0.1 | — | | Total stock-based compensation | $3.8 | $3.9 | $7.4 | $7.9 | Note 10. Commitments and Contingencies The company is involved in various legal proceedings and subject to environmental regulations, with management expecting no material adverse effect on its financial condition - Avanos is subject to various legal proceedings, claims, and governmental investigations, including patent litigation and a resolved DOJ criminal investigation related to MicroCool surgical gowns (Deferred Prosecution Agreement expired July 7, 2024)[59][61][62] - Management believes the ultimate resolution of any pending legal proceeding will not have a material adverse effect on the company's business, financial condition, results of operations, or liquidity[62] - The company believes it is operating in compliance with federal, state, and local environmental protection laws and regulations[63] Note 11. Derivative Financial Instruments In Q2 2024, Avanos began using foreign currency swap contracts to hedge Mexican peso cash flows, with a derivative liability of $2.3 million and $39.0 million notional value - During Q2 2024, Avanos began entering into derivative instruments to hedge a portion of forecasted cash flows denominated in Mexican pesos, designated as cash flow hedges[64] - As of June 30, 2024, the derivative liability for foreign exchange contracts was $2.3 million, and the aggregate notional value of outstanding foreign currency swap contracts was $39.0 million[64] Note 12. Earnings Per Share ("EPS") This note provides the calculation of basic and diluted earnings per share (EPS) for continuing and discontinued operations for the periods ended June 30, 2024 and 2023 Earnings Per Share Calculation (in millions, except per share amounts) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---|:---|:---|\n| Net income (loss) from continuing operations | $4.3 | $(4.3) | $4.8 | $(12.1) | | Net loss from discontinued operations | $(2.5) | $(63.8) | $(3.9) | $(56.5) | | Net income (loss) | $1.8 | $(68.1) | $0.9 | $(68.6) | | Basic weighted average shares outstanding | 45.9 | 46.8 | 46.1 | 46.7 | | Basic EPS (Continuing Operations) | $0.09 | $(0.09) | $0.10 | $(0.26) | | Basic EPS (Discontinued Operations) | $(0.05) | $(1.37) | $(0.08) | $(1.21) | | Diluted EPS (Continuing Operations) | $0.09 | $(0.09) | $0.10 | $(0.26) | | Diluted EPS (Discontinued Operations) | $(0.05) | $(1.37) | $(0.08) | $(1.21) | - For both the three and six months ended June 30, 2024, 1.3 million potentially dilutive stock options and RSU awards were excluded from EPS computation due to their anti-dilutive effect[67] Note 13. Business and Products Information Avanos operates as a single segment, providing medical device products globally across Digestive Health and Pain Management and Recovery categories - Avanos conducts its business in one operating and reportable segment, providing medical device products to healthcare providers and patients globally[68] Net Sales by Product Category (in millions) | Product Category | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---|:---|:---|\n| Digestive Health | $97.7 | $93.0 | $192.4 | $181.8 | | Surgical pain and recovery | $32.3 | $34.8 | $63.5 | $69.5 | | Interventional pain | $41.7 | $41.6 | $81.9 | $77.4 | | Total Net Sales | $171.7 | $169.4 | $337.8 | $328.7 | - Product categories include Digestive Health (e.g., MIC-KEY, Corpak, NeoMed) and Pain Management and Recovery (e.g., ON-Q, ambIT, Game Ready, COOLIEF, OrthogenRx, Diros RFA products)[70] Note 14. Share Repurchase Program The Board approved a one-year share repurchase program for up to $25.0 million, which was completed in Q2 2024 with 512,251 shares repurchased for $10.0 million - On July 28, 2023, the Board approved a new one-year program to repurchase up to $25.0 million of common stock[72] Share Repurchases for Six Months Ended June 30, 2024 | Period | of Shares Repurchased | Aggregate Purchase Price (in millions) | Average Price per Share | Amount Remaining in Program (in millions) | |:---|:---|:---|:---|:---|\n| First quarter of 2024 | 342,680 | $6.7 | $19.45 | $3.3 | | Second quarter of 2024 | 169,571 | $3.3 | $19.67 | $0 | | Total | 512,251 | $10.0 | | | - The share repurchase program was completed in the second quarter of 2024, with no remaining amount for purchase[73] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial condition and operational results, including restructuring, divestiture, acquisition, performance, liquidity, and accounting policies Introduction Avanos is a medical technology company focused on delivering superior medical device solutions for patient care - Avanos is a medical technology company focused on delivering clinically superior medical device solutions to help patients, particularly in nutrition and pain management[77] Restructuring Activities This section details the Post-RH Divestiture Restructuring Plan and the Transformation Process, outlining expected cash expenses and gross savings for operational improvements - The Post-RH Divestiture Restructuring Plan, initiated in 2024, aims to align the organizational structure and operational footprint, with expected cash expenses up to $7.5 million by the end of 2025[79] - The three-year Transformation Process, started in January 2023, targets $45.0 million to $55.0 million in gross savings by 2025 and expects to incur up to $30.0 million in cash expenses for organizational and operational improvements[80] Divestiture This section discusses the sale of the Respiratory Health (RH) business for $110 million cash, a key component of the company's transformation process - The sale of the Respiratory Health (RH) business to SunMed Group Holdings, LLC closed on October 2, 2023, for $110 million in cash, as a key component of the company's transformation process[81][82] Discontinued Operations This section presents the net sales results from the Respiratory Health (RH) business, which has been classified as discontinued operations Net Sales from Discontinued Operations (in millions) | Period | Net Sales | |:---|:---| | Three months ended June 30, 2024 | $13.6 | | Three months ended June 30, 2023 | $30.4 | | Six months ended June 30, 2024 | $30.5 | | Six months ended June 30, 2023 | $62.8 | Business Acquisition This section describes the acquisition of Diros Technology Inc. for $53.0 million cash plus contingent consideration - The acquisition of Diros Technology Inc., a manufacturer of radiofrequency ablation (RFA) products, closed on July 24, 2023, for approximately $53.0 million in cash, plus contingent consideration[84] Results of Operations and Related Information This section provides a detailed analysis of the company's financial performance, including net sales, gross profit, and various expenses Use of Non-GAAP Measures This section explains the company's use of "Adjusted operating profit" as a non-GAAP financial measure to provide additional insight into operational performance - The company presents 'Adjusted operating profit' as a non-GAAP financial measure to provide greater insight into ongoing business operations and operational performance[85] Net Sales This section analyzes net sales performance by product category and geographic region for the current and prior periods Net Sales by Product Category (in millions) | Product Category | Three Months Ended June 30, 2024 | Change (%) | Six Months Ended June 30, 2024 | Change (%) | |:---|:---|:---|:---|:---|\n| Digestive Health | $97.7 | 5.1% | $192.4 | 5.8% | | Surgical pain and recovery | $32.3 | (7.2)% | $63.5 | (8.6)% | | Interventional pain | $41.7 | 0.2% | $81.9 | 5.8% | | Total Net Sales | $171.7 | 1.4% | $337.8 | 2.8% | - Q2 2024 net sales increased 1.4% to $171.7 million, driven by strong demand in Digestive Health (NeoMed) and Game Ready, partially offset by lower HA product demand and pricing[90] - YTD 2024 net sales increased 2.8% to $337.8 million, primarily due to strong demand in Digestive Health and Game Ready products, partially offset by lower HA product demand and pricing[91] Net Sales by Geographic Region (in millions) | Region | Three Months Ended June 30, 2024 | Change (%) | Six Months Ended June 30, 2024 | Change (%) | |:---|:---|:---|:---|:---|\n| North America | $136.6 | 1.8% | $268.7 | 1.5% | | Europe, Middle East and Africa | $23.5 | 3.1% | $46.5 | 15.7% | | Asia Pacific and Latin America | $11.6 | (6.5)% | $22.6 | (5.4)% | | Total net sales | $171.7 | 1.4% | $337.8 | 2.8% | Gross Profit This section examines the company's gross profit and gross profit margin, highlighting factors influencing changes in profitability Gross Profit and Margin (in millions) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---|:---|:---|\n| Gross profit | $95.6 | $97.8 | $190.4 | $189.2 | | Gross profit margin | 55.7% | 57.7% | 56.4% | 57.6% | - Q2 2024 gross profit margin decreased due to costs related to the Transformation Process and plant separation costs from the RH Divestiture, partially offset by favorable volume and product mix[96] - YTD 2024 gross profit margin decreased primarily due to unfavorable pricing for HA products, slightly offset by overall favorable product mix[96] Research and Development This section details the company's research and development expenses and their proportion to net sales Research and Development Expenses (in millions) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---|:---|:---|\n| Research and development | $6.3 | $6.8 | $13.3 | $14.3 | | Percentage of net sales | 3.7% | 4.0% | 3.9% | 4.4% | Selling and General Expenses This section analyzes selling and general expenses, noting reductions due to transformation initiatives and disciplined spending Selling and General Expenses (in millions) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---|:---|:---|\n| Selling and general expenses | $80.9 | $93.0 | $164.5 | $181.8 | | Percentage of net sales | 47.1% | 54.9% | 48.7% | 55.3% | - Selling and general expenses decreased in both the three and six months ended June 30, 2024, compared to prior year periods, due to savings from the Transformation Process and disciplined spending[98] Other Expense, net This section reports the company's other expense, net, and its percentage of net sales for the periods presented Other Expense, net (in millions) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---|:---|:---|\n| Other expense, net | $2.1 | $0.1 | $2.3 | $1.3 | | Percentage of net sales | 1.2% | 0.1% | 0.7% | 0.4% | Operating Profit This section presents the company's operating profit and operating profit margin, highlighting significant improvements compared to prior periods Operating Profit (Loss) and Margin (in millions) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---|:---|:---|\n| Operating profit (loss) | $6.3 | $(2.1) | $10.3 | $(8.2) | | Operating profit margin | 3.7% | (1.2)% | 3.0% | (2.5)% | - Operating profit significantly improved to $6.3 million in Q2 2024 and $10.3 million in YTD 2024, compared to operating losses in the prior year periods[101] Adjusted Operating Profit This section provides a reconciliation of GAAP operating profit to non-GAAP adjusted operating profit, detailing various adjustments Reconciliation of Operating Profit (Loss) to Adjusted Operating Profit (in millions) | Adjustment | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---|:---|:---|\n| Operating profit (loss), as reported (GAAP) | $6.3 | $(2.1) | $10.3 | $(8.2) | | Acquisition and integration-related charges | $2.2 | $0.3 | $2.5 | $1.8 | | Restructuring and transformation charges | $1.6 | $9.8 | $4.5 | $18.7 | | Post-RH Divestiture transition charges | $0.5 | — | $1.5 | — | | Post-RH Divestiture restructuring | $3.4 | — | $4.1 | — | | Divestiture related | — | $3.7 | — | $3.7 | | EU MDR Compliance | $1.5 | $0.9 | $2.8 | $2.0 | | Intangibles amortization | $6.3 | $5.8 | $12.4 | $11.6 | | Adjusted operating profit (non-GAAP) | $21.8 | $18.4 | $38.1 | $29.6 | Liquidity and Capital Resources This section discusses the company's primary sources of liquidity, cash position, and long-term debt, and their sufficiency for future operations General This section outlines the company's primary liquidity sources, cash position, and the expected sufficiency of funds for operational needs - Primary liquidity sources are cash on hand from operating activities and the Revolving Credit Facility, expected to be sufficient for working capital and capital expenditures[105] - Cash and cash equivalents increased by $4.5 million to $92.2 million as of June 30, 2024, driven by operating cash flow and revolving credit facility proceeds, partially offset by capital expenditures, debt repayments, and share repurchases[105] - $42.6 million of cash was held by foreign subsidiaries, considered indefinitely reinvested overseas, with no material effect on overall liquidity expected from repatriation restrictions[105] Long-Term Debt This section details the company's credit facilities, including the Term Loan and Revolving Credit Facility, their maturity, interest rates, and covenant compliance - The Credit Agreement, established June 24, 2022, includes a $125.0 million Term Loan Facility and a $375.0 million Revolving Credit Facility, both maturing on June 24, 2027[106] - Borrowings bear variable interest rates based on SOFR or a base rate, and the company was in compliance with all customary operational and financial covenants as of June 30, 2024[106][108] Critical Accounting Policies and Use of Estimates This section confirms that there were no significant changes to the company's critical accounting estimates during the reporting period - There were no significant changes to the company's critical accounting estimates in the three and six months ended June 30, 2024, from those disclosed in the Form 10-K[109] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there have been no material changes to the company's market risk position since the last annual report - There have been no material changes regarding the company's market risk position from the information provided in Item 7A of the Form 10-K[110] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2024, and reported no material changes in internal control over financial reporting during the quarter Effectiveness of Disclosure Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as assessed by management - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were operating effectively as of June 30, 2024[111] Changes in Internal Control Over Financial Reporting This section reports that no material changes occurred in internal control over financial reporting during the three months ended June 30, 2024 - There have been no changes in internal control over financial reporting during the three months ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[112] PART II – OTHER INFORMATION This part covers legal proceedings, risk factors, equity sales, defaults, mine safety, and other required disclosures Item 1. Legal Proceedings The company is involved in various legal proceedings, claims, and governmental investigations, but management believes their ultimate resolution will not have a material adverse effect on its business, financial condition, results of operations, or liquidity - Avanos is subject to various legal proceedings, claims, and governmental inspections, audits, or investigations[114] - Management believes that the ultimate resolution of any pending legal proceeding will not have a material adverse effect on the company's business, financial condition, results of operations, or liquidity[114] Item 1A. Risk Factors This section indicates that there have been no material changes to the risk factors previously described in the company's Annual Report on Form 10-K - There have been no material changes to the risk factors described in Part I, Item 1A, 'Risk Factors,' of the Form 10-K[115] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable to the current report - Not applicable[115] Item 3. Defaults Upon Senior Securities This item is not applicable to the current report - Not applicable[115] Item 4. Mine Safety Disclosures This item is not applicable to the current report - Not applicable[115] Item 5. Other Information This section states that there is no other information to report under this item - None[115] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including amendments to agreements, corporate governance documents, employment letters, and certifications List of Exhibits | Exhibit Number | Description | |:---|:---|\n| 2.2 | First Amendment to Purchase Agreement dated as of October 2, 2023 | | 3.1 | Second Amended and Restated Certificate of Incorporation | | 3.2 | Sixth Amended and Restated Bylaws | | 10.23* | Employment Offer Letter dated March 30, 2024 for Sigfrido Delgado | | 10.24* | Second Amendment to Employment Offer Letter dated June 21, 2024 for Mojirade James | | 31(a) | Section 302 CEO Certification | | 31(b) | Section 302 CFO Certification | | 32(a)** | Section 906 CEO Certification | | 32(b)** | Section 906 CFO Certification | | 101.INS | XBRL Instance 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 | Signatures This section contains the official signatures of the company's authorized officers, Michael C. Greiner and John J. Hurley, certifying the report on July 31, 2024 - The report was signed on July 31, 2024, by Michael C. Greiner, Senior Vice President, Chief Financial Officer and Chief Transformation Officer, and John J. Hurley, Controller[120]