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What changed in AVANOS MEDICAL, INC.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of AVANOS MEDICAL, INC.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+215 added−182 removedSource: 10-K (2024-02-21) vs 10-K (2023-02-21)

Top changes in AVANOS MEDICAL, INC.'s 2023 10-K

215 paragraphs added · 182 removed · 155 edited across 8 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeIn the years ended December 31, 2022, 2021 and 2020, our closed airway suction systems accounted for more than 10% of our consolidated net sales. Pain management is a portfolio of non-opioid pain solutions including: • Acute pain products such as ON-Q and ambIT surgical pain pumps and Game Ready cold and compression therapy systems.
Biggest changePain Management and Recovery is a portfolio of non-opioid pain solutions including: • Surgical pain and recovery products such as ON-Q and ambIT surgical pain pumps and Game Ready cold and compression therapy systems. In the years ended December 31, 2023 and 2022, our ON-Q surgical pain pump individually accounted for more than 10% of our consolidated net sales.
ITEM 1. BUSINESS Overview 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.
ITEM 1. BUSINESS Overview Avanos Medical, Inc. is a medical technology company focused on delivering clinically superior medical device solutions that help patients get back to the things that matter.
The address of our principal executive offices is 5405 Windward Parkway, Suite 100 South, Alpharetta, Georgia 30004, and our telephone number is (844) 428-2667. 1 Table of Contents We conduct our business in one operating and reportable segment that provides our medical device products to healthcare providers and patients. We have manufacturing facilities in the United States and Mexico.
The address of our principal executive offices is 5405 Windward Parkway, Suite 100 South, Alpharetta, Georgia 30004, and our telephone number is (844) 428-2667. We conduct our business in one operating and reportable segment that provides our medical device products to healthcare providers and patients. We have manufacturing facilities in the United States and Mexico.
In some cases, these studies have resulted, and may in the future result, in the discontinuance of, or limitations on, marketing of 4 Table of Contents products domestically or worldwide, and may give rise to claims for damages from persons who believe they have been injured as a result of their use.
In some cases, these studies have resulted, and may in the future result, in the discontinuance of, or limitations on, marketing of products domestically or worldwide, and may give rise to claims for damages from persons who believe they have been injured as a result of their use.
From time to time, legislative changes are made to government healthcare programs that impact our business, and the federal and/or state governments may continue to enact measures in the future aimed at containing or reducing reimbursement levels for medical expenses paid for in whole or in part with government funds.
From time to time, legislative changes are made to government healthcare programs that impact our business, and the federal and/or state governments may continue to enact measures in the 5 Table of Contents future aimed at containing or reducing reimbursement levels for medical expenses paid for in whole or in part with government funds.
Compensation for salaried employees is strongly tied to performance objectives. Salaried employees above a certain pay grade have a substantial portion of their total compensation subject to performance objectives. More about the compensation paid to our executive officers can be found in the proxy statement relating to our 2023 Annual Meeting of Stockholders (the “2023 Proxy Statement”).
Compensation for salaried employees is strongly tied to performance objectives. Salaried employees above a certain pay grade have a substantial portion of their total compensation subject to performance objectives. More about the compensation paid to our executive officers can be found in the proxy statement relating to our 2024 Annual Meeting of Stockholders (the “2024 Proxy Statement”).
We consider the patents and trademarks which we own and the trademarks under which we sell certain of our products, as a whole, to be material to our business. However, we do not consider our business to be materially dependent upon any individual patent or trademark.
None of the patents we license from third parties are material to our business. We consider the patents and trademarks which we own and the trademarks under which we sell certain of our products, as a whole, to be material to our business. However, we do not consider our business to be materially dependent upon any individual patent or trademark.
The initial purchase price was $130.0 million at closing less working capital adjustments, with up to an additional $30.0 million payable in contingent cash consideration based on OrthogenRx’s growth in net sales during 2022 and 2023.
The purchase price was $130.0 million at closing less working capital adjustments, with up to an additional $30.0 million payable in contingent cash consideration based on OrthogenRx’s growth in net sales during 2022 and 2023. $10.6 million of contingent cash consideration has been paid based on OrthogenRx’s 2022 net sales.
We believe that our key product characteristics, such as proven efficacy, reliability and safety, including our ability to launch innovative new products, our efficient manufacturing processes, and our established distribution network, field sales organization and customer service group, are important factors that distinguish us from our competitors.
We believe that our key product characteristics, such as proven efficacy, reliability and safety, along with our product launch capability, efficient manufacturing processes, and our established distribution network, field sales organization and customer service group, are important factors that distinguish us from our competitors.
We provide a portfolio of innovative product offerings focused on chronic care and pain management to improve patient outcomes and reduce the cost of care. Chronic care is a portfolio of products that include the following: • Digestive health products such as our MIC-KEY enteral feeding tubes, Corpak patient feeding solutions and NeoMed neonatal and pediatric feeding solutions.
Within our single reportable segment, we provide a portfolio of innovative product offerings focused on Digestive Health and Pain Management and Recovery to improve patient outcomes and reduce the cost of care. Digestive Health is a portfolio of products that includes our MIC-KEY enteral feeding tubes, Corpak patient feeding solutions and NeoMed neonatal and pediatric feeding solutions.
Research and Development We continuously engage in research and development to commercialize new products and enhance the effectiveness, reliability and safety of our existing products. We incurred research and development costs of $30.6 million in 2022, $32.3 million in 2021 and $34.9 million in 2020.
Research and Development We continuously engage in research and development to commercialize new products and enhance the effectiveness, reliability and safety of our existing products. We incurred research and development costs of $27.2 million in 2023, $29.2 million in 2022 and $30.6 million in 2021.
In the years ended December 31, 2021 and 2020, our surgical pain products, which includes both On-Q and ambIT pumps, accounted for more than 10% of our consolidated net sales. • Interventional pain solutions, which provide minimally invasive pain relieving therapies, such as our COOLIEF pain therapy and OrthogenRx’s knee osteoarthritis pain relief injection products.
In the year ended December 31, 2021, our surgical pain products, which includes both On-Q and ambIT pumps, accounted for more than 10% of our consolidated net sales. • Interventional pain solutions, which provide minimally invasive pain relieving therapies, such as our COOLIEF pain therapy, OrthogenRx’s knee osteoarthritis hyaluronic acid (“HA”) pain relief injection products and Trident radiofrequency ablation (“RFA”) products used to treat chronic pain conditions.
In the year ended December 31, 2022, our legacy enteral feeding tubes, which includes our MIC-KEY enteral feeding tubes accounted for more than 10% of our consolidated net sales.
In the year ended December 31, 2023, our legacy enteral feeding tubes, which includes our MIC-KEY enteral feeding tubes, our Corpak feeding solutions and our NeoMed neonatal and pediatric feeding solutions each accounted for more than 10% of our consolidated net sales.
Employee Diversity 2022 Women - global director and above (a) 30.2% Ethnically diverse - U.S. director and above (a) 16.7% Women - global salaried employees 44.0% Ethnically diverse - U.S. salaried employees 29.6% __________________________________________________ (a) Leaders in director-level position or higher. Available Information We make financial information, news releases and other information available on our corporate website at www.avanos.com .
Employee Diversity 2023 Women - global director and above (a) 31.4% Ethnically diverse - U.S. director and above (a) 17.4% Women - global salaried employees 46.3% Ethnically diverse - U.S. salaried employees 31.6% __________________________________________________ (a) Leaders in director-level position or higher. Available Information We make financial information, news releases and other information available on our corporate website at www.avanos.com .
In the year ended December 31, 2021, sales to Medline Industries, McKesson Corporation, and Owens & Minor, Inc. accounted for approximately 15%, 11%, and 10% of consolidated net sales, respectively. In the year ended December 31, 2020, sales to Medline Industries, McKesson Corporation, and Owens & Minor, Inc. accounted for approximately 12%, 12%, and 9% of consolidated net sales, respectively.
In the year ended December 31, 2023, sales to Medline Industries, McKesson Corporation, and Owens & Minor, Inc. accounted for approximately 15%, 13%, and 6% of consolidated net sales, respectively. In the year ended December 31, 2022, sales to Medline Industries, McKesson Corporation, and Owens & Minor, Inc. accounted for approximately 12%, 12%, and 5% of consolidated net sales, respectively.
Compliance with these laws and regulations is costly and materially affects our business. Among other effects, healthcare regulations substantially increase the time, difficulty and costs incurred in obtaining and maintaining approval to market newly developed and existing products.
Among other effects, healthcare regulations substantially increase the time, difficulty and costs incurred in obtaining and maintaining approval to market newly developed and existing products.
We review third-party proprietary rights, including patents and patent applications, as they become available, in an effort to develop an effective intellectual property strategy, avoid infringement of third-party proprietary rights, identify licensing opportunities and monitor the intellectual property owned by others. 3 Table of Contents We hold numerous patents and have numerous patent applications pending in the United States and other countries that relate to the technology used in many of our products.
We review third-party proprietary rights, including patents and patent applications, as they become available, in an effort to develop an effective intellectual property strategy, avoid infringement of third-party proprietary rights, identify licensing opportunities and monitor the intellectual property owned by others.
Employees at our administrative offices generally follow a hybrid model that combines working in the office and working from home. 6 Table of Contents Diversity and Inclusion We are an equal opportunity employer committed to providing a workplace free of harassment or discrimination based on race, color, religion, sex, sexual orientation, gender identity, national origin, disability, veteran status or other legally protected characteristic.
Diversity and Inclusion We are an equal opportunity employer committed to providing a workplace free of harassment or discrimination based on race, color, religion, sex, sexual orientation, gender identity, national origin, disability, veteran status or other legally protected characteristic.
We engage with physicians and other healthcare providers to highlight the unique benefits and competitive differentiation of our branded products. We work directly with physicians, nurses, professional societies, hospital administrators and healthcare group purchasing organizations (“GPOs”) to collaborate and educate on emerging practices and clinical techniques. These marketing programs are delivered directly to healthcare providers.
We work directly with physicians, nurses, professional societies, hospital administrators and healthcare group purchasing organizations (“GPOs”) to collaborate and educate on emerging practices and clinical techniques. These marketing programs are delivered directly to healthcare providers. Additionally, we provide marketing programs to our strategic distribution partners throughout the world.
We continue to defend our market positions and launched four new products in 2022.
We continue to defend our market positions and launched two new products in the U.S. market in 2023.
The purchase price was funded by available cash on hand and the proceeds of borrowings, including from the incurrence of a new incremental tranche of term loans of $125.0 million, under the Company’s prior senior secured revolving credit facility.
The purchase price for the OrthogenRx Acquisition was funded by available cash on hand and the proceeds of borrowings, including from the incurrence of a new incremental tranche of term loans of $125.0 million, under the Company’s prior senior secured revolving credit facility. 2 Table of Contents During 2019, we completed the acquisition of substantially all the assets of Endoclear, LLC (“Endoclear”) and Summit Medical Products, Inc.
Founded in 2021, the DE&I Council is comprised of employees from various salary levels, functional departments and geographic regions throughout Avanos. The DE&I Council includes representatives from all the global regions in which the Company operates. The following table shows various diversity metrics for the Company as of December 31, 2022.
The DE&I Council includes representatives from all the global regions in which the Company operates. The following table shows various diversity metrics for the Company as of December 31, 2023.
Our global teams work together in a spirit of cooperation to improve health and healthcare every day. 5 Table of Contents Employee demographics presented in the table below represent the number of employees as of December 31, 2022: Global Employees 2022 % of Total United States 964 23.8% Mexico 2,850 70.5% Latin America 11 0.3% Europe, Middle East and Africa 101 2.5% Asia Pacific 118 2.9% Total 4,044 Compensation We strive to compensate employees competitively and fairly in markets throughout the world.
Employee demographics presented in the table below represent the number of employees as of December 31, 2023: Global Employees 2023 % of Total United States 881 23.3% Mexico 2,665 70.7% Latin America 10 0.3% Europe, Middle East and Africa 108 2.9% Asia Pacific 107 2.8% Total 3,771 Compensation We strive to compensate employees competitively and fairly in markets throughout the world.
(“OrthogenRx”), which is focused on the development and commercialization of treatments for knee pain caused by osteoarthritis. We expect the acquisition of OrthogenRx will enhance our interventional pain portfolio.
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 treatments for knee pain caused by osteoarthritis (the “OrthogenRx Acquisition”). The OrthogenRx Acquisition enhanced our interventional pain portfolio.
Additionally, we provide marketing programs to our strategic distribution partners throughout the world. Distribution While our products are generally marketed directly to hospitals and other healthcare providers, they are generally sold through third-party wholesale distributors, with some sales directly to healthcare facilities and other end-user customers.
Distribution While our products are generally marketed directly to hospitals and other healthcare providers, they are generally sold through third-party wholesale distributors, with some sales directly to healthcare facilities and other end-user customers. In 2023, approximately 43% of our net sales in North America were made through distributors.
In the year ended December 31, 2022, none of our acute pain products individually accounted for more than 10% of our consolidated net sales.
In the year ended December 31, 2023, products associated with our COOLIEF pain therapy accounted for more than 10% of our consolidated net sales. In the year ended December 31, 2022, COOLIEF pain therapy products and our OrthogenRx pain relief injection products (GenVisc and TriVisc), each accounted for more than 10% of our consolidated net sales.
Foreign Corrupt Practices Act and the United Kingdom Bribery Act, which provide guidance on corporate interactions with government officials) and require safeguards for the protection of personal data. In addition, we are subject to laws and regulations pertaining to healthcare fraud and abuse, including state and federal anti-kickback and false claims laws in the United States.
Foreign Corrupt Practices Act and the United Kingdom Bribery Act, which provide guidance on corporate interactions with government officials) and require safeguards for the protection of personal data.
In the years ended December 31, 2021 and 2020, our legacy enteral feeding tubes and our Corpak feeding solutions each accounted for more than 10% of our consolidated net sales. • Respiratory health products such as our closed airway suction systems and other airway management devices marketed under the Ballard, Microcuff and Endoclear brands.
In the year ended December 31, 2021, our legacy enteral feeding tubes and our Corpak feeding solutions each accounted for more than 10% of our consolidated net sales.
Braun Medical Inc., Pacira Pharmaceuticals, Inc., Teleflex Incorporated, Medtronic plc, Ambu A/S, Baxter International, Inc., Pajunk Medical Systems and Leventon • Interventional Pain: Boston Scientific Corporation, Abbott Laboratories, Medtronic plc and Stryker Corporation In developing and emerging markets, alternative clinical practices and different standards of care are our primary competition.
Major competitors include, among others: • Digestive Health: Boston Scientific Corporation, Cook Medical and Applied Medical Technology, Inc. • Pain Management and Recovery: Boston Scientific Corporation, Pacira Pharmaceuticals, Inc., Stryker Corporation, Medtronic plc, Pajunk Medical Systems, Nice Recovery Systems and Bioventus, Inc. In developing and emerging markets, alternative clinical practices and different standards of care are our primary competition.
Our goal is to ensure that each of our more than 4,000 employees understands how they contribute to the Company’s innovation and growth. This is accomplished through an employee recognition program and ongoing, two-way communications, including videos and podcasts, that allow employees to engage with and hear directly from members of the executive team.
This is accomplished through an employee recognition program and ongoing, two-way communications, including videos and podcasts, that allow employees to engage with and hear directly from members of the executive team. 6 Table of Contents Employee Retention In 2021, we implemented a multi-tiered employee retention strategy.
In 2022, 2 Table of Contents approximately 44% of our net sales in North America were made through distributors. In the year ended December 31, 2022, sales to Medline Industries, McKesson Corporation, and Owens & Minor, Inc. accounted for approximately 16%, 12%, and 8% of consolidated net sales, respectively.
In the year ended December 31, 2021, sales to Medline Industries, McKesson Corporation, and Owens & Minor, Inc. accounted for approximately 13%, 11%, and 6% of consolidated net sales, respectively. Outside North America, sales are made either directly to end-user customers or through distributors, depending on the market served.
No material portion of our business is subject to renegotiation of profits or termination of contracts at the election of the government. Group Purchasing Organizations Our agreements with GPOs enables us to sell our products to their members, whether sold directly by us or through independent wholesale distributors. Agreements with GPOs are generally renewed every three years.
Group Purchasing Organizations Our agreements with GPOs enables us to sell our products to their members, whether sold directly by us or through independent wholesale distributors. Agreements with GPOs are generally renewed every three years. GPOs negotiate pricing and volume purchasing discounts for hospitals, physician practices and other health care providers and institutions.
There are a variety of treatment means and alternative clinical practices to address surgical and interventional pain management and respiratory and digestive health. We face competition from these alternative treatments, as well as improvements and innovations in products and technologies by our competitors.
We face competition from these alternative treatments, as well as improvements and innovations in products and technologies by our competitors.
Outside North America, sales are made either directly to end-user customers or through distributors, depending on the market served. In 2022, approximately 80% of our net sales outside North America were made through wholesalers or distributors. We utilize distribution centers in North America, Europe, Australia and Japan.
In 2023, approximately 71% of our net sales outside North America were made through wholesalers or distributors. We utilize distribution centers in North America, Europe, Australia and Japan. No material portion of our business is subject to renegotiation of profits or termination of contracts at the election of the government.
GPOs negotiate pricing and volume purchasing discounts for hospitals, physician practices and other health care providers and institutions. Under our agreements with GPOs, we pay a fee based on sales of our products to GPO members, which is recorded as a reduction of net sales.
Under our agreements with GPOs, we pay a fee based on sales of our products to GPO members, which is recorded as a reduction of net sales. Approximately 28% of our 2023 global net sales, including sales to wholesale distributors, were contracted through GPOs.
Approximately 32% of our 2022 global net sales, including sales to wholesale distributors, were contracted through GPOs. Competition While no single company competes with us across the full breadth of our offerings, we face significant competition in U.S. and international markets.
Competition While no single company competes with us across the full breadth of our offerings, we face significant competition in U.S. and international markets. 3 Table of Contents There are a variety of treatment means and alternative clinical practices to address pain management and recovery and digestive health.
The aggregate purchase price for the Acquisitions was $57.5 million, net of cash acquired, plus future contingent payments of $7.2 million. During 2018, we acquired Cool Systems, Inc. (“Game Ready”) for $65.7 million, net of cash acquired, which was based on a purchase price of $65.0 million plus certain adjustments as provided in the purchase agreement.
(“Summit”), and we completed the acquisition of NeoMed, Inc. (“NeoMed”) (collectively, the “2019 Acquisitions”). The aggregate purchase price for the 2019 Acquisitions was $57.5 million, net of cash acquired, plus future contingent payments of $7.2 million.
In the years ended December 31, 2022, 2021 and 2020, products associated with our COOLIEF pain therapy accounted for more than 10% of our consolidated net sales. Business Acquisitions On January 20, 2022, we acquired all of the equity voting interests and completed the acquisition of OrthogenRx, Inc.
In the year ended December 31, 2021, products associated with our COOLIEF pain therapy accounted for more than 10% of our consolidated net sales. Acquisitions 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.
We took additional measures during the COVID-19 pandemic, including implementing new safety protocols and guidelines as recommended by federal, state, local and foreign governments. When they reopened, our offices did so with strict safety and hygiene guidelines.
In addition to offering a comprehensive health and benefits package, we sponsor a variety of wellness initiatives, including an Employee Assistance Program, health assessments, and Company-sponsored challenges that foster healthy habits. We took additional measures during the COVID-19 pandemic, including implementing new safety protocols and guidelines as recommended by federal, state, local and foreign governments.
We utilize patents in our acute pain management, interventional pain management, respiratory health and digestive health products. These patents generally expire between 2023 and 2042. None of the patents we license from third parties are material to our business.
We hold numerous patents and have numerous patent applications pending in the United States and other countries that relate to the technology used in many of our products. We utilize patents in our Pain Management and Recovery and Digestive Health products. These patents generally expire between 2024 and 2042.
For further information regarding the acquisition of OrthogenRx, see “Business Acquisition” in Note 5 to the Consolidated financial statements in Item 8 of this Form 10-K. During 2019, we completed the acquisition of substantially all the assets of Endoclear, LLC (“Endoclear”) and Summit Medical Products, Inc. (“Summit”), and we completed the acquisition of NeoMed, Inc. (“NeoMed”) (collectively, the “Acquisitions”).
The purchase price for the Diros Acquisition was funded by available cash on hand and proceeds from our Revolving Credit Facility. For further information regarding the acquisition of Diros, see “Business Acquisition” in Note 6 to the Consolidated financial statements in Item 8 of this Form 10-K.
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Divestiture During 2018, we closed the sale of our Surgical and Infection Prevention (“S&IP”) business (the “Divestiture”) for $710.0 million plus certain adjustments as provided in the purchase agreement. Sales and Marketing We direct our primary sales and marketing efforts toward hospitals, ambulatory care centers, and other sites of care.
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In the year ended December 31, 2022, our legacy enteral feeding tubes and our NeoMed neonatal and pediatric feeding solutions feeding solutions each accounted for more than 10% of our consolidated net sales.
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Major competitors include, among others: • Digestive Health: Boston Scientific Corporation, Cook Medical and Applied Medical Technology, Inc. • Respiratory Health: Stryker Corporation, Medline Industries, Inc. and Smiths Medical • Acute Pain: B.
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On July 24, 2023, we closed the acquisition of Diros for approximately $53.0 million, consisting of $2.5 million cash paid upon entry into the definitive agreement and $50.5 million in cash at closing less working capital and other adjustments, with an up to additional $7.0 million payable in contingent cash consideration based on achievement of certain performance objectives defined in the purchase agreement (the “Diros Acquisition”).
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Employee Retention In 2021, we implemented a multi-tiered employee retention strategy.
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Divestiture 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”), pursuant to which the Buyer agreed to purchase substantially all of the assets primarily relating to or primarily used in our Respiratory Health (“RH”) business (the “RH Divestiture”).
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On October 2, 2023, we closed the sale of our RH business for $110.0 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 and the chargebacks assumed by Buyer but that would otherwise have been payable by the Company and its subsidiaries on or after October 2, 2023 to distributors of the Company’s RH products located in the United States.
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The RH Divestiture represents a key component of Avanos’ ongoing three-year transformation process, which was initiated in January 2023 and is aimed at accelerating the Company’s efforts to focus its portfolio on markets where it is well positioned to succeed (the “Transformation Process”).
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In conjunction with the RH Divestiture, we and Buyer entered into various transition services agreements pursuant to which we, Buyer and each company’s respective affiliates 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.
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The services generally commenced on the closing date of the RH Divestiture and will terminate in no later than one to three years. For further information regarding the RH Divestiture, see “Discontinued Operations” in Note 2 to the Consolidated financial statements in Item 8 of this Form 10-K.
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Sales and Marketing We direct our primary sales and marketing efforts toward hospitals, ambulatory care centers, and other sites of care. We engage with physicians and other healthcare providers to highlight the unique benefits and competitive differentiation of our branded products.
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In addition, we are subject to laws and regulations pertaining to healthcare fraud and abuse, including state and federal anti-kickback and false claims laws in the United States. 4 Table of Contents Compliance with these laws and regulations is costly and materially affects our business.
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Our global teams work together in a spirit of cooperation to improve health and healthcare every day.
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Our goal is to ensure that each of our more than 3,700 employees understands how they contribute to the Company’s innovation and growth.
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When they reopened, our offices did so with strict safety and hygiene guidelines. Employees at our administrative offices generally follow a hybrid model that combines working in the office and working from home.
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Founded in 2021, the DE&I Council is comprised of employees from various salary levels, functional departments and geographic regions throughout Avanos. In 2023, we took the next significant step forward in our DE&I journey by transitioning the DE&I Council leadership from a volunteer organization to an official responsibility of our Human Resources (HR) organization.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeIf we experience any one of these risks or uncertainties, it may have a material adverse impact to our business, financial condition, results of operations and cash flows. The duration of any such impacts cannot be predicted because of the unprecedented nature of the COVID-19 pandemic.
Biggest changeA resurgence of the COVID-19 pandemic could result in delays in payments on outstanding accounts receivable, manufacturing, distribution and supply chain disruptions, decreased customer demand for our products, and other adverse effects. If we experience any one of these risks or uncertainties, it may have a material adverse impact to our business, financial condition, results of operations and cash flows.
The market price, or fluctuations in price, for Avanos common stock may be negatively influenced by many factors, including: • actual or unanticipated fluctuations in our quarterly and annual operating results, • the outcome of litigation and enforcement actions, • developments generally affecting the healthcare industry, • changes in market valuations of comparable companies, 14 Table of Contents • the amount of our indebtedness, • general economic, industry and market conditions, • the depth and liquidity of the market for Avanos common stock, • price fluctuations in key commodities, • announcements by us or our competitors regarding performance, strategy, significant acquisitions, divestitures, strategic partnerships, joint ventures or capital commitments, • fluctuations in interest and currency exchange rates, and • perceptions of or speculations by the press or investment community.
The market price, or fluctuations in price, for Avanos common stock may be negatively influenced by many factors, including: • actual or unanticipated fluctuations in our quarterly and annual operating results, • the outcome of litigation and enforcement actions, • developments generally affecting the healthcare industry, • changes in market valuations of comparable companies, • the amount of our indebtedness, • general economic, industry and market conditions, • the depth and liquidity of the market for Avanos common stock, • price fluctuations in key commodities, • announcements by us or our competitors regarding performance, strategy, significant acquisitions, divestitures, strategic partnerships, joint ventures or capital commitments, • fluctuations in interest and currency exchange rates, and • perceptions of or speculations by the press or investment community.
These provisions include, among other things, the following: • the ability of our Board of Directors to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval, • the inability of our stockholders to call a special meeting of stockholders, • stockholder action may be taken only at a special or regular meeting of stockholders, • advance notice procedures for nominating candidates to our Board of Directors or presenting matters at stockholder meetings, • stockholder removal of directors only for cause and only by a supermajority vote, • the ability of our Board of Directors, and not our stockholders, to fill vacancies on our Board of Directors, and 15 Table of Contents • supermajority voting requirements to amend our by-laws and certain provisions of our certificate of incorporation and to engage in certain types of business combinations.
These provisions include, among other things, the following: • the ability of our Board of Directors to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval, • the inability of our stockholders to call a special meeting of stockholders, • stockholder action may be taken only at a special or regular meeting of stockholders, • advance notice procedures for nominating candidates to our Board of Directors or presenting matters at stockholder meetings, • stockholder removal of directors only for cause and only by a supermajority vote, • the ability of our Board of Directors, and not our stockholders, to fill vacancies on our Board of Directors, and • supermajority voting requirements to amend our by-laws and certain provisions of our certificate of incorporation and to engage in certain types of business combinations.
While we will continue to implement additional protective measures to reduce the risk of and detect future cyber incidents, cyber-attacks are becoming more sophisticated and frequent, and the techniques used in such attacks change rapidly. There can be no assurances that our protective measures will prevent future attacks that could have a material adverse effect on our business.
While we will continue to implement additional protective measures to reduce the risk of and detect future cyber incidents, cyber-attacks are becoming more sophisticated and frequent, and the techniques used in such attacks change rapidly. There can be no assurance that our protective measures will prevent future attacks that could have a material adverse effect on our business.
Any one or more of these events could have a material adverse effect on our business, results of operations, financial condition and cash flows. 11 Table of Contents We are subject to healthcare fraud and abuse laws and regulations that could result in significant liability, require us to change our business practices or restrict our operations in the future.
Any one or more of these events could have a material adverse effect on our business, results of operations, financial condition and cash flows. We are subject to healthcare fraud and abuse laws and regulations that could result in significant liability, require us to change our business practices or restrict our operations in the future.
Furthermore, since many of our customers rely on reimbursement from Medicare, Medicaid and other governmental programs to cover a substantial portion of their expenditures, our exclusion from such programs as a result of a violation of these laws could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Furthermore, since many of our customers rely on reimbursement from Medicare, Medicaid and other governmental programs to cover a substantial portion of their expenditures, our exclusion from 12 Table of Contents such programs as a result of a violation of these laws could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our failure to successfully develop, acquire or market competitive 7 Table of Contents new products or enhance existing products could have a material adverse effect on our business, results of operations, financial condition and cash flows. We cannot guarantee that any of our strategic acquisitions, investments or alliances will be successful.
Our failure to successfully develop, acquire or market competitive new products or enhance existing products could have a material adverse effect on our business, results of operations, financial condition and cash flows. We cannot guarantee that any of our strategic acquisitions, investments or alliances will be successful.
In addition, as a result of economic conditions, our customers inside and outside the United States, including foreign governmental entities or other entities that rely on government healthcare systems or government funding, may be unable to pay 12 Table of Contents their obligations on a timely basis or to make payment in full.
In addition, as a result of economic conditions, our customers inside and outside the United States, including foreign governmental entities or other entities that rely on government healthcare systems or government funding, may be unable to pay their obligations on a timely basis or to make payment in full.
Demand for many of our existing and new medical products is, and will continue to be, affected by the extent to which government healthcare programs and private health insurers reimburse our customers for patients’ medical expenses in 8 Table of Contents the countries where we do business.
Demand for many of our existing and new medical products is, and will continue to be, affected by the extent to which government healthcare programs and private health insurers reimburse our customers for patients’ medical expenses in the countries where we do business.
A reduction or interruption in any of these manufacturing processes could have a material adverse effect on our business, results of operations, financial condition and cash flows. 9 Table of Contents We may not successfully execute on or achieve the expected benefits of our restructuring initiative.
A reduction or interruption in any of these manufacturing processes could have a material adverse effect on our business, results of operations, financial condition and cash flows. We may not successfully execute on or achieve the expected benefits of our restructuring initiative.
They may keep us from successfully implementing our business strategy and could materially harm our business, results of operations, financial condition and cash flows. Our business, operating results, and cash flows have been affected and may continue to be adversely affected by the rising rate of inflation.
They may keep us from successfully implementing our business strategy and could materially harm our business, results of operations, financial condition and cash flows. 11 Table of Contents Our business, operating results, and cash flows have been affected and may continue to be adversely affected by the rising rate of inflation.
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 our operating profitability; and (iv) pursue efficient capital allocation strategies, including through acquisitions that meet our strategic and financial criteria.
In January 2023, we initiated a three-year restructuring initiative pursuant to which we: (i) have combined our Chronic Care and Pain Management franchises into a single commercial organization focused on the Digestive Health and Pain Management and Recovery product categories; (ii) plan to rationalize our product portfolio including certain low-margin, low-growth product categories, through targeted divestitures; (iii) have undertaken additional cost management activities to enhance our operating profitability; and (iv) plan to pursue efficient capital allocation strategies, including through acquisitions that meet our strategic and financial criteria.
If our Board of Directors were to approve the issuance of preferred stock in the future, the terms of one or more classes or series of such preferred stock could dilute the voting power or reduce the value of Avanos common stock.
If our Board of Directors were to approve the issuance of preferred stock in the future, the terms of one or more classes or series of such preferred stock could dilute the voting power or reduce the value of Avanos 16 Table of Contents common stock.
Further, the conflict could exacerbate supply chain challenges, lead to an increase in cyberattacks from Russia, affect the global price and availability of key commodities, reduce our sales and earnings or otherwise have an adverse effect on our business and results of operations.
Further, these conflicts could exacerbate supply chain challenges, lead to an increase in cyberattacks from Russia and elsewhere, affect the global price and availability of key commodities, reduce our sales and earnings or otherwise have an adverse effect on our business and results of operations.
Furthermore, due to competitive dynamics, the cost containment efforts of our customers and third-party payors, and contractual limitations, particularly with respect to products we sell under group purchasing agreements, which generally set pricing for a three-year term, we may be unable to pass along commodity-driven cost increases through higher prices.
Our ability to hedge commodity price volatility is limited. Furthermore, due to competitive dynamics, the cost containment efforts of our customers and third-party payors, and contractual limitations, particularly with respect to products we sell under group purchasing agreements, which generally set pricing for a three-year term, we may be unable to pass along commodity-driven cost increases through higher prices.
Inflationary pressures have increased due to general macroeconomic factors as well as the global supply chain disruptions, labor shortages and other impacts of the ongoing COVID-19 pandemic. We expect those inflationary trends to continue for the foreseeable future. These inflationary pressures have affected our manufacturing costs, operating expenses (including wages) and other expenses.
Inflationary pressures have increased due to general macroeconomic factors as well as the global supply chain disruptions, labor shortages and other factors. We expect those inflationary trends to continue for the foreseeable future. These inflationary pressures have affected our manufacturing costs, operating expenses (including wages) and other expenses.
These trends could compel us to reduce prices for our existing products and potential new products and could cause a decrease in the size of the market or a potential increase in competition that could have a material adverse effect on our business, results of operations, financial condition and cash flows.
These trends could compel us to reduce prices for our existing products and potential new products and could cause a decrease in the size of the market or a potential increase in competition that could have a material adverse effect on our business, results of operations, financial condition and cash flows. 9 Table of Contents A resurgence of the COVID-19 pandemic could adversely impact our business operations, financial condition, results of operations and cash flows.
Our ability to recruit such talent will depend on a number of factors, including compensation and benefits, work location and work environment. If we cannot effectively recruit and retain qualified executives and employees, our business could be materially adversely affected. Breaches of our information technology systems could have a material adverse effect on our business.
Our ability to recruit such talent will depend on a number of factors, including compensation and benefits, work location and work environment. If we cannot effectively recruit and retain qualified executives and employees, our business could be materially adversely affected.
From time to time we may be negatively impacted by supply chain disruptions, including the following: • Suppliers extending lead times, experiencing capacity constraints, limiting or canceling supply, allocating supply to other customers (including our competitors), delaying or canceling deliveries, going out of business or increasing prices; • Supplier quality issues; • The ongoing COVID-19 pandemic and other pandemics, epidemics or infectious disease outbreaks; • Cybersecurity events, manmade or natural disasters, operational failures or other events that disrupt us or our suppliers; • Long lead times to qualify alternate or additional suppliers, or the unavailability of qualified alternate suppliers; and • Other events or occurrences that are beyond our control, including transportation delays, inflationary pricing pressures, work stoppages, labor shortages and governmental regulatory actions. 10 Table of Contents These and other supply chain issues can increase our costs, disrupt or reduce our production, delay our product shipments, prevent us from meeting customer demand and damage our customer relationships.
From time to time we may be negatively impacted by supply chain disruptions, including the following: • Suppliers extending lead times, experiencing capacity constraints, limiting or canceling supply, allocating supply to other customers (including our competitors), delaying or canceling deliveries, going out of business or increasing prices; • Supplier quality issues; • A resurgence of the COVID-19 pandemic or other pandemics, epidemics or infectious disease outbreaks; • Cybersecurity events, manmade or natural disasters, operational failures or other events that disrupt us or our suppliers; • Long lead times to qualify alternate or additional suppliers, or the unavailability of qualified alternate suppliers; and • Other events or occurrences that are beyond our control, including transportation delays, inflationary pricing pressures, work stoppages, labor shortages and governmental regulatory actions.
All of the foregoing types of legal proceedings and regulatory actions are inherently unpredictable and, regardless of the outcome, could disrupt our business, result in substantial costs or the diversion of management attention and could have a material adverse effect on our business, results of operations, financial condition and cash flows.
All of the foregoing types of legal proceedings and regulatory actions are inherently unpredictable and, regardless of the outcome, could disrupt our business, result in substantial costs or the diversion of management attention and could have a material adverse effect on our business, results of operations, financial condition and cash flows. 13 Table of Contents Economic conditions have affected and may continue to adversely affect our business, results of operations, financial condition and cash flows.
The ongoing impact of the pandemic depends on a number of factors which are uncertain and unpredictable, including the severity, extent and duration of the pandemic and the potential severe adverse financial impact the pandemic could have on our customers.
The impact of such a resurgence would depend on a number of factors which are uncertain and unpredictable, including the severity, extent and duration of the new outbreak and the potential severe adverse financial impact the outbreak could have on our customers.
An interruption in our ability to manufacture products may have a material adverse effect on our business. Many of our key products are manufactured at single locations, with limited alternate facilities.
An interruption in our ability to manufacture products may have a material adverse effect on our business. Many of our key products are manufactured at single locations, with limited alternate facilities. In addition, the majority of our manufacturing output is concentrated at the two manufacturing facilities that we operate in Mexico.
We are subject to political, economic and regulatory risks associated with doing business outside of the United States. Most of our manufacturing facilities are located outside the United States in Mexico. We also may use contract manufacturers outside the United States from time to time and may source many of our raw materials and components from foreign suppliers.
Most of our manufacturing facilities are located outside the United States in Mexico. We also may use contract manufacturers outside the United States from time to time and may source many of our raw materials and components from foreign suppliers. We distribute and sell our products globally.
The increasing leverage of organized buying groups and consolidated customers and pricing pressure from third-party payors may reduce market prices for our products, thereby reducing our profitability and have a material adverse effect on our business, results of operations, financial condition and cash flows.
The increasing leverage of organized buying groups and consolidated customers and pricing pressure from third-party payors may reduce market prices for our products, thereby reducing our profitability and have a material adverse effect on our business, results of operations, financial condition and cash flows. 14 Table of Contents We are subject to political, economic and regulatory risks associated with doing business outside of the United States.
Prices of oil and gas affect our distribution and transportation costs. Prices of these commodities are volatile and have fluctuated significantly in recent years, which has contributed to, and in the future may continue to contribute to, fluctuations in our results of operations. Our ability to hedge commodity price volatility is limited.
We rely on product inputs in the manufacture of our products. Prices of oil and gas affect our distribution and transportation costs. Prices of these commodities are volatile and have fluctuated significantly in recent years, which has contributed to, and in the future may continue to contribute to, fluctuations in our results of operations.
In addition, these items could cause our future results to differ from our recent results, from our anticipated future results and from those in any of our forward-looking statements. These risks are not the only ones we face. Other risks that we do not presently know about or that we presently believe are not material could also adversely affect us.
In addition, these items could cause our future results to differ from our recent results, from our anticipated future results and from those in any of our forward-looking statements. These risks are not the only ones we face.
In addition, the conflict between Russia and Ukraine may have the effect of heightening other risks disclosed in this Form 10-K, any of which could materially and adversely affect our business and results of operations.
In addition, these regional conflicts may have the effect of heightening other risks disclosed in this Item 1A, any of which could materially and adversely affect our business and results of operations.
If adequate funds are not available on acceptable terms, we may be unable to fund our expansion, successfully develop or enhance products or respond to competitive pressures, any of which could negatively affect our business. Any non-cash impairment of our long-lived assets, including intangible assets and goodwill, could have a material adverse impact on our results of operations.
If adequate funds are not available on acceptable terms, we may be unable to fund our expansion, successfully develop or enhance products or respond to competitive pressures, any of which could negatively affect our business.
Failure to fully realize or maintain the anticipated benefits of the restructuring initiative could have a material adverse impact on our business, results of operations, financial condition and cash flows. The ongoing conflict between Russia and Ukraine and the related implications could have a material adverse effect on our business and results of operations.
Failure to fully realize or maintain the anticipated benefits of the restructuring initiative could have a material adverse impact on our business, results of operations, financial condition and cash flows. We may not achieve the expected benefits of our divestiture activities.
In addition, o ur information technology systems may be subjected to damage or interruption from power outages, computer and telecommunication failures, usage errors by our employees, security breaches, computer viruses or other malicious codes, unauthorized access attempts and cyber- or phishing-attacks. We also store certain information with third parties that could be subject to these types of attacks.
Lastly, our information technology systems may be subjected to damage or interruption from power outages, computer and telecommunication failures, usage errors by our employees, security breaches, computer viruses or other malicious codes, unauthorized access attempts and cyber, phishing- or ransomware attacks.
We can expect to face additional claims of patent infringement in the future. Our customers depend on third-party coverage and reimbursements. The failure of healthcare programs to provide coverage and reimbursement, or reductions in levels of reimbursement, could have a material adverse effect on our business.
Such developments could have a material adverse effect on our business, results of operations, financial condition and cash flows. Our customers depend on third-party coverage and reimbursements. The failure of healthcare programs to provide coverage and reimbursement, or reductions in levels of reimbursement, could have a material adverse effect on our business.
Our operations outside of the United States are subject to risks that are inherent in conducting business internationally, including compliance with both United States and foreign laws and regulations that apply to our international operations.
In 2023, approximately 20% of our net sales were generated outside of North America and we expect this percentage will grow over time. Our operations outside of the United States are subject to risks that are inherent in conducting business internationally, including compliance with both United States and foreign laws and regulations that apply to our international operations.
The evaluation of long-lived assets and goodwill requires us to form estimates and assumptions with respect to a number of factors, including future sales growth, cash flows, our weighted average cost of capital (WACC) and a terminal value. Our evaluation of goodwill also includes consideration of our current market capitalization.
Goodwill is tested for impairment annually and whenever events and circumstances indicate that, more likely than not, impairment may have occurred. The evaluation of long-lived assets and goodwill requires us to form estimates and assumptions with respect to a number of factors, including future sales growth, cash flows, our weighted average cost of capital (WACC) and a terminal value.
We review long-lived assets, such as property, equipment and intangible assets for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable. Goodwill is tested for impairment annually and whenever events and circumstances indicate that, more likely than not, impairment may have occurred.
Any non-cash impairment of our long-lived assets, including intangible assets and goodwill, could have a material adverse impact on our results of operations. We review long-lived assets, such as property, equipment and intangible assets for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable.
Risks Related to our Business and Industry We face strong competition. Our failure to compete effectively could have a material adverse effect on our business. Our industry is highly competitive.
Other risks that we do not presently know about or that we presently believe are not material could also adversely affect us. 7 Table of Contents Risks Related to our Business and Industry We face strong competition. Our failure to compete effectively could have a material adverse effect on our business. Our industry is highly competitive.
We cannot predict the broader or longer-term consequences of the conflict or of the sanctions imposed to date or in the future, which could include embargoes, regional instability, geopolitical shifts, exchange rate fluctuations, financial market disruptions and economic recession.
These military conflicts and related sanctions or embargoes could damage or disrupt international commerce, shipping, supply chains and the global economy. We cannot predict the broader or longer-term consequences of these conflicts, which could include further sanctions and embargoes, regional instability, geopolitical shifts, exchange rate fluctuations, inflation, financial market disruptions and economic recession.
Violations of the laws and regulations governing our international operations could result in fines or criminal sanctions against 13 Table of Contents us, our officers or our employees, and prohibitions on the conduct of our business.
In addition, these laws are subject to changes, which may require additional resources or make it more difficult for us to comply with these laws. Violations of the laws and regulations governing our international operations could result in fines or criminal sanctions against us, our officers or our employees, and prohibitions on the conduct of our business.
Unanticipated changes in any of the factors used in our evaluation could result in a non-cash charge for impairment in a future period, which may significantly affect our results of operations in the period of such charge. Risks Related to Ownership of Avanos Common Stock We cannot guarantee that our stock price will not decline or fluctuate significantly.
Our evaluation of goodwill also includes consideration of our current market capitalization. Unanticipated changes in any of the factors used in our evaluation could result in a non-cash charge for impairment in a future period, which may significantly affect our results of operations in the period of such charge.
As a result of the ongoing military conflict between Russia and Ukraine, the United States and other countries have imposed significant sanctions on Russia and could impose even wider sanctions. The military conflict and related sanctions could damage or disrupt international commerce and the global economy.
As a result of the ongoing military conflict between Russia and Ukraine, the United States and other countries have imposed significant sanctions on Russia and could impose even wider sanctions. Conflict in the Middle East could negatively affect sales of our products in that region and could give rise to embargoes on, or disruptions to, the supply of petroleum.
The price at which Avanos common stock trades has and may continue to fluctuate significantly.
Risks Related to Ownership of Avanos Common Stock We cannot guarantee that our stock price will not decline or fluctuate significantly. The price at which Avanos common stock trades has fluctuated and may continue to fluctuate significantly.
Changes in the relative values of currencies occur regularly and could have an adverse effect on our business, results of operations, financial condition and cash flows. We are exposed to price fluctuations of key commodities, which may negatively impact our results of operations. We rely on product inputs in the manufacture of our products.
Changes in the relative values of currencies occur regularly and could have an adverse effect on our business, results of operations, financial condition and cash flows. Our exposure to currency exchange rate fluctuations is heightened due to the concentration of our manufacturing operations in Mexico.
Economic conditions have affected and may continue to adversely affect our business, results of operations, financial condition and cash flows.
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 ongoing COVID-19 pandemic could adversely impact our business operations, financial condition, results of operations and cash flows. The COVID-19 pandemic has caused significant volatility in the global financial markets, caused disruption in global supply and distribution channels, dramatically changed the way companies do business and may adversely impact our financial position, results of operations and cash flows.
The COVID-19 pandemic caused significant volatility in the global financial markets, caused disruption in global supply and distribution channels and caused us to modify certain of our business practices (including with respect to remote work policies and physical participation in meetings and other events).
Removed
While we continue to closely monitor the economic impact of the COVID-19 pandemic on our business, we currently cannot quantify the impact it will have on our future results of operations.
Added
We rely on the proper function, security and availability of our information technology systems and data, as well as those of third parties, to operate our business, and a breach of our information technology systems, or our failure to effectively integrate AI into our information technology systems and operations, could have a material adverse effect on our business.
Removed
Our future results of operations and cash flows may suffer material adverse effects from delays in payments on outstanding accounts receivable, potential manufacturing, distribution and supply chain disruptions and uncertain demand, and the effects of any actions we may take to address the financial and operational challenges our customers may face.
Added
Our information technology systems require an ongoing commitment of significant resources to maintain, protect, and enhance existing systems and develop new systems. This enables us to keep pace with continuing changes in information processing technology, evolving legal and regulatory standards and changes in the techniques used to prevent unauthorized access to our data and information systems.
Removed
Other pandemic-related risks and uncertainties include, but are not limited to: • postponement or cancellation of elective medical procedures and uncertainty as to whether or when they will resume; • potential temporary or prolonged office, production facility or distribution center closures; • the health of our employees and our ability to meet our staffing needs; • potential new or continued governmental actions that may limit our employees’ ability to work; • civil unrest relating to government, corporate and societal responses to the pandemic; • volatility in economic conditions and the financial markets; • risks associated with vaccine distribution; and • other unanticipated effects that remain unknown.
Added
There can be no assurance that these efforts will be successful or that systems issues will not arise in the future. In addition, the development, adoption and use of generative artificial intelligence, or AI, technology presents opportunities and risks.
Removed
We distribute and sell our products globally. In 2022, approximately 21% of our net sales were generated outside of North America and we expect this percentage will grow over time.
Added
AI technology is still in an early stage of development, and we are still assessing how to incorporate AI technology into our information technology systems and operations. We are developing a policy with guardrails to address AI-related risks associated with data privacy, cybersecurity and copyright and intellectual property protections.
Removed
In addition, these laws are subject to changes, which may require additional resources or make it more difficult for us to comply with these laws.
Added
Our failure to effectively integrate AI into our information technology systems and operations could therefore have a material adverse effect on our business. 8 Table of Contents Furthermore, from time to time we consummate new business acquisitions.
Added
We face risks associated with defects and vulnerabilities in acquired businesses’ systems and difficulties or disruptions in connection with the integration of such acquisitions into our own information technology systems.
Added
Furthermore, we rely on third-party vendors to support certain aspects of our information technology systems and to store certain information. These third parties could also be subject to these types of attacks.
Added
We can expect to face additional claims of patent infringement in the future. Our business and operations are subject to risks related to global climate change. Global climate change presents risks to our business.
Added
Shifts in weather patterns caused by climate change are expected to increase the frequency, severity and duration of certain adverse weather conditions and natural disasters, such as hurricanes, tornadoes, wildfires, droughts, extreme temperatures and flooding.
Added
Such extreme weather conditions and the other conditions caused by or related to climate change could increase our operational costs; pose physical risks to our facilities and those of our customers and suppliers; and adversely impact various aspects of our business, including our supply chain, our manufacturing and distribution networks, the availability and cost of raw materials and components, the energy supply, transportation, and other inputs necessary for the operation of our business.
Added
In addition, more stringent environmental laws and regulations that are designed to mitigate the effects of climate change may result in increased costs to operate our business, increased compliance costs and adverse impacts on raw material sourcing, our manufacturing operations and the distribution of our products.
Added
While the COVID-19 pandemic has subsided, new mutations to the virus could lead to a resurgence of the pandemic.
Added
One of the objectives of the Transformation Process is the rationalization of our product portfolio through targeted divestitures such as the RH Divestiture. The RH 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.
Added
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 10 Table of Contents longer to realize than expected.
Added
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.
Added
Ongoing regional conflicts and the related implications could have a material adverse effect on our business and results of operations. We are subject to risks as a result of regional conflicts in different parts of the world, including the conflict between Russia and Ukraine and conflict in the Middle East.
Added
These and other supply chain issues can increase our costs, disrupt or reduce our production, delay our product shipments, prevent us from meeting customer demand and damage our customer relationships.
Added
We are subject to risks related to our manufacturing operations in Mexico. Our manufacturing facilities in Mexico are authorized to operate as Maquiladoras by the Ministry of Economy of Mexico. Maquiladora status allows us to import certain items from the United States into Mexico duty-free, provided that such items, after processing, are exported from Mexico within a stipulated time frame.
Added
Maquiladora status, which is renewed periodically, is subject to various restrictions and requirements, including compliance with the terms of the Maquiladora program and other local regulations.
Added
Failure to comply with these regulations, ceasing to qualify for Maquiladora status or other disruptions within the program would cause our manufacturing costs in Mexico to increase and could adversely affect our business, results of operations, financial condition and cash flows.
Added
In addition, Mexico periodically experiences heightened civil unrest, and certain areas of the country suffer from persistent criminal activity, both of which could interfere with our manufacturing operations, cause transportation delays or stoppages and otherwise disrupt the supply of products to and from our facilities. Further, we have experienced inflationary pressure on our labor and other costs in Mexico.
Added
Continued increases in such costs could adversely affect our business, results of operations, financial condition and cash flows. These pressures may be exacerbated by exchange rate fluctuations in the Mexican peso.
Added
These risks, as well as certain other risks described generally in this Item 1A as they relate specifically to Mexico (including, without limitation, the risk of currency rate fluctuations, the risk of manufacturing interruptions and the risk of doing business outside the United States), could adversely affect our business, results of operations, financial condition and cash flows.
Added
For example, a hypothetical appreciation of 10% in the value of the Mexican peso in relation to the U.S. dollar would have negatively impacted operating profit for the year ended December 31, 2023 by approximately $0.7 million. We are exposed to price fluctuations of key commodities, which may negatively impact our results of operations.
Added
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.
Added
There can be no assurance that the actions taken by the Federal Reserve, the Treasury Department and the Federal Deposit Insurance Corporation since early 2023 in response to bank solvency concerns will achieve the purpose of stabilizing the financial markets, restoring consumer confidence, or have 15 Table of Contents other intended effects.
Added
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.

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeThe locations of our principal medical device production facilities owned or leased by us around the world are as follows: Location Country Owned/Leased Nogales Mexico Owned Nogales Mexico Leased Tucson, Arizona USA Leased Magdalena Mexico Leased Tijuana Mexico Leased
Biggest changeThe locations of our principal medical device production facilities owned or leased by us around the world are as follows: Location Country Owned/Leased Nogales Mexico Owned Nogales* Mexico Leased Tucson, Arizona USA Leased Magdalena* Mexico Leased Tijuana Mexico Leased Markham Canada Leased __________________________________________ * Pursuant to the RH Divestiture, these leases, along with substantially all the assets located at these facilities that relate to our RH business, will be transferred to Buyer on a delayed basis pursuant to the term of the Purchase Agreement.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeSee “Commitments and Contingencies” in Note 13 to the consolidated financial statements in Item 8 of this Form 10-K for a description of current legal matters. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. PART II
Biggest changeSee “Commitments and Contingencies” in Note 14 to the consolidated financial statements in Item 8 of this Form 10-K for a description of current legal matters. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. PART II

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeItem 4. Mine Safety Disclosures 16 Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 16 Item 6. [Reserved] 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26 Item 8.
Biggest changeItem 4. Mine Safety Disclosures 19 Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 19 Item 6. [Reserved] 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 29 Item 8.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

5 edited+0 added−0 removed3 unchanged
Biggest changeThe preceding chart is based on the following data: AVNS S&P MidCap 400 S&P 500 Health Care Equipment and Services December 31, 2017 $ 100.00 $ 100.00 $ 100.00 December 31, 2018 96.99 93.36 113.34 December 31, 2019 72.98 123.57 145.98 December 31, 2020 99.35 147.80 174.51 December 31, 2021 75.08 193.51 230.55 December 31, 2022 58.60 177.16 222.78
Biggest changeThe preceding chart is based on the following data: AVNS S&P MidCap 400 S&P 500 Health Care Equipment and Services December 31, 2018 $ 100.00 $ 100.00 $ 100.00 December 31, 2019 72.98 123.57 145.98 December 31, 2020 99.35 147.80 174.51 December 31, 2021 75.08 193.51 230.55 December 31, 2022 58.60 177.16 222.78 December 31, 2023 48.57 216.46 240.90
No unregistered securities were sold by the Company within the past three years, and neither the Company nor any affiliated purchaser purchased any equity securities of the Company, other than repurchases described under “Share Repurchase Program” in Note 16 to the consolidated financial statements in Item 8 of this Form 10-K.
No unregistered securities were sold by the Company within the past three years, and neither the Company nor any affiliated purchaser purchased any equity securities of the Company, other than repurchases described under “Share Repurchase Program” in Note 17 to the consolidated financial statements in Item 8 of this Form 10-K.
We have not paid any cash 16 Table of Contents dividends, and therefore, the cumulative total return calculation for us is based solely upon stock price appreciation and not upon reinvestment of cash dividends. The stock price performance shown on the graph is not necessarily indicative of future price performance.
We have not paid any cash dividends, and therefore, the cumulative total return calculation for us is based solely upon stock price appreciation and not upon reinvestment of cash dividends. The stock price performance shown on the graph is not necessarily indicative of future 19 Table of Contents price performance.
Performance The following graph compares the cumulative total return of our common stock from December 31, 2017 through December 31, 2022 with the cumulative return of companies comprising the Standard and Poor’s S&P MidCap 400 Index and the S&P 500 Health Care Equipment and Services Index.
Performance The following graph compares the cumulative total return of our common stock from December 31, 2018 through December 31, 2023 with the cumulative return of companies comprising the Standard and Poor’s S&P MidCap 400 Index and the S&P 500 Health Care Equipment and Services Index.
We did not pay any dividends on our common stock in the years ended December 31, 2022 and 2021 and we do not expect to pay any cash dividends on our common stock in the foreseeable future. As of February 14, 2023, we had 10,135 holders of record of our common stock.
We did not pay any dividends on our common stock in the years ended December 31, 2023 and 2022 and we do not expect to pay any cash dividends on our common stock in the foreseeable future. As of February 13, 2024, we had 9,469 holders of record of our common stock.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

53 edited+20 added−19 removed32 unchanged
Biggest changeNet Sales Our net sales are summarized in the following table for the years ended December 31, 2022, 2021 and 2020 (in millions): Year Ended December 31, 2022 2021 Change 2020 Change Chronic Care: Digestive health $ 340.4 $ 322.2 5.6 % $ 294.1 9.6 % Respiratory health 135.9 157.6 (13.8) % 177.1 (11.0) % Total Chronic Care 476.3 479.8 (0.7) % $ 471.2 1.8 % Pain Management: Acute pain 160.1 162.7 (1.6) % 157.4 3.4 % Interventional pain 183.6 102.1 79.8 % 86.2 18.4 % Total Pain Management 343.7 264.8 29.8 % 243.6 8.7 % Total Net Sales $ 820.0 $ 744.6 10.1 % $ 714.8 4.2 % Total Volume (a) Pricing/Mix Currency Other (b) Net Sales - percentage change 2022 vs. 2021 10.1 % 11.3 % 0.7 % (1.9) % — % Net Sales - percentage change 2021 vs. 2020 4.2 % 4.3 % (0.8) % 0.6 % — % ______________________________ (a) Volume includes incremental sales from acquisitions.
Biggest changeA reconciliation of the non-GAAP measure to the most directly comparable GAAP financial measures is provided under “Adjusted Operating (Loss) Profit.” Net Sales Our net sales are summarized in the following table for the years ended December 31, 2023, 2022 and 2021 (in millions): Year Ended December 31, 2023 2022 Change 2021 Change Digestive Health $ 371.6 $ 340.4 9.2 % $ 322.2 5.6 % Pain Management and Recovery: Surgical pain and recovery 139.2 160.1 (13.1) % 162.7 (1.6) % Interventional pain 162.5 183.6 (11.5) % 102.1 79.8 % Total Pain Management and Recovery 301.7 343.7 (12.2) % 264.8 29.8 % Total Net Sales $ 673.3 $ 684.1 (1.6) % $ 587.0 16.5 % Total Volume (a) Pricing/Mix Currency Other (b) Net Sales - percentage change 2023 vs. 2022 (1.6) % (1.7) % 0.3 % (0.2) % — % Net Sales - percentage change 2022 vs. 2021 16.5 % 17.5 % 0.7 % (1.6) % (0.1) % ______________________________ (a) Volume includes incremental sales from acquisitions.
The increase was driven by $90.9 million of cash provided by operating activities, $250.0 million of proceeds from our secured debt and $150.0 million of proceeds from our revolving credit facility partially offset by payments on our prior credit agreement including $126.6 million on our secured term loan and $170.0 million on our revolving credit facility, $116.1 million of cash used for the acquisition of OrthogenRx, $45.5 million used to repurchase shares of our common stock and $19.3 million of capital expenditures.
The increase was driven by $90.9 million of cash provided by operating activities, $250.0 of proceeds from our secured debt and $150.0 million of proceeds from our revolving credit facility partially offset by payments on our prior credit agreement including $126.6 million on our secured term loan and $170.0 million on our revolving credit facility, $116.1 million of cash used for the acquisition of OrthogenRx, $45.5 million used to repurchase shares of our common stock and $19.3 million of capital expenditures.
See “Income Taxes” in Note 9 to the consolidated financial statements in Item 8 of this Form 10-K for further details regarding our income taxes. 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 existing credit agreement.
See “Income Taxes” in Note 10 to the consolidated financial statements in Item 8 of this Form 10-K for further details regarding our income taxes. 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 existing credit agreement.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction Avanos is a medical technology company focused on delivering clinically superior medical device solutions that will help patients get back to the things that matter.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction Avanos is a medical technology company focused on delivering clinically superior medical device solutions that help patients get back to the things that matter.
See “Debt” in Note 8 to the consolidated financial statements in Item 8 of this Form 10-K for further discussion of our indebtedness, our Prior Credit Agreement and our new Credit Agreement.
See “Debt” in Note 9 to the consolidated financial statements in Item 8 of this Form 10-K for further discussion of our indebtedness, our Prior Credit Agreement and our new Credit Agreement.
At this time, the determination of deferred tax liabilities on the amount of financial reporting over tax basis is not practicable. Legal Matters A description of legal matters can be seen in “Commitments and Contingencies” in Note 13 to the consolidated financial statements in Item 8 of this Form 10-K.
At this time, the determination of deferred tax liabilities on the amount of financial reporting over tax basis is not practicable. Legal Matters A description of legal matters can be seen in “Commitments and Contingencies” in Note 14 to the consolidated financial statements in Item 8 of this Form 10-K.
On May 16, 2022, the Board of Directors approved a new one-year program authorizing us to repurchase up to $25.0 million of our common stock. In connection with such repurchase program, we established a pre-arranged trading plan in accordance with 24 Table of Contents Rule 10b5-1 which permitted common stock to be repurchased over a twelve-month period.
On May 16, 2022, the Board of Directors approved a new one-year program authorizing us to repurchase up to $25.0 million of our common stock. In connection with such repurchase program, we established a pre-arranged trading plan in accordance with Rule 10b5-1 which permitted common stock to be repurchased over a twelve-month period.
Interest Expense Interest expense was $10.0 million, $3.3 million and $15.6 million in the years ended December 31, 2022, 2021 and 2020, respectively. In the year ended December 31, 2022, interest expense includes an early extinguishment loss of $1.1 million incurred upon terminating our Prior Credit Agreement (as defined below) on June 24, 2022.
Interest Expense Interest expense was $15.0 million, $10.0 million and $3.3 million in the years ended December 31, 2023, 2022 and 2021, respectively. In the year ended December 31, 2022, interest expense includes an early extinguishment loss of $1.1 million incurred upon terminating our Prior Credit Agreement (as defined below) on June 24, 2022.
As of December 31, 2022, we were in compliance with all of our debt covenants. For further information regarding our debt arrangements, see “Debt” in Note 8 to the consolidated financial statements in Item 8 of this Form 10-K.
As of December 31, 2023, we were in compliance with all of our debt covenants. For further information regarding our debt arrangements, see “Debt” in Note 9 to the consolidated financial statements in Item 8 of this Form 10-K.
Our estimates are subject to uncertainties associated with the ongoing COVID-19 pandemic. Actual results could differ from these estimates, and the effect of the change could be material to our financial statements. Changes in these estimates are recorded when known.
Our estimates are subject to uncertainties associated with the 28 Table of Contents ongoing COVID-19 pandemic. Actual results could differ from these estimates, and the effect of the change could be material to our financial statements. Changes in these estimates are recorded when known.
Provision for Income Taxes The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), enacted in March 2020, allows for the carryback of U.S. net operating losses, which were expected to be used in future years to prior years, resulting in a $3.8 million, $2.8 million and $25.1 million benefit in the years ended December 31, 2022, 2021 and 2020, respectively.
Provision for Income Taxes The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), enacted in March 2020, allows for the carryback of U.S. net operating losses, which were expected to be used in future years to prior years, resulting in no benefit in the year ended December 31, 2023, and a $3.8 million and $2.8 million benefit in the years ended December 31, 2022 and 2021, respectively.
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 18 Table of Contents alternative to, the most directly comparable GAAP financial measures.
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.
As such, it is generally difficult for positive evidence regarding projected 25 Table of Contents future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses.
As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses.
These costs consisted of $2.6 million of consulting costs associated with evaluation of overall scope and alternatives for transforming our business, and $1.2 million for the impairment of certain assets associated with research and development projects that were cancelled. Litigation and legal : We incurred no costs for litigation matters in the year ended December 31, 2022.
These costs consisted of $2.6 million of consulting costs associated with evaluation of overall scope and alternatives for transforming our business, and $1.2 million for the impairment of certain assets associated with research and development projects that were cancelled. Litigation and legal : In the year ended December 31, 2023,we incurred $10.0 million of costs for litigation matters.
Acquisition and integration-related charges : We incurred $3.4 million, $1.6 million and $12.5 million of costs in connection with acquisition and integration activities for the years ended December 31, 2022, 2021 and 2020, respectively. Expenses incurred during 2022 were related to the acquisition of OrthogenRx. Expenses incurred in the prior periods were for integrations of earlier acquisitions.
Acquisition and integration-related charges : We incurred $3.3 million, $3.4 million and $1.6 million of costs in connection with acquisition and integration activities for the years ended December 31, 2023, 2022 and 2021, respectively. Expenses incurred during 2023 were related to the acquisition of Diros and OrthogenRx. Expenses incurred in the prior periods were for integrations of earlier acquisitions.
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 organizational design and alignment and other related activities.
We expect to incur up to $30.0 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.
Items impacting operating results include the following: COVID-19 related expenses : As a result of the ongoing COVID-19 pandemic, we have incurred incremental expenses for additional personal protective equipment for our manufacturing employees, sanitation at our facilities and other costs. We incurred no COVID-19 related costs in the year ended December 31, 2022.
Items impacting operating results include the following: COVID-19 related expenses : As a result of the recent COVID-19 pandemic, we incurred incremental expenses for additional personal protective equipment for our manufacturing employees, sanitation at our facilities and other costs. We incurred no COVID-19 related costs in the years ended December 31, 2023 and 2022.
Other items: In the year ended December 31, 2022, we incurred $3.8 million of expenses in connection with evaluating and planning for the Transformation Process.
Other items: In the year ended December 31, 2023, we incurred no costs associated with other items. In the year ended December 31, 2022, we incurred $3.8 million of expenses in connection with evaluating and planning for the Transformation Process.
The increase in amortization in the year ended December 31, 2022 is due to incremental amortization of intangibles acquired with OrthogenRx in early 2022. Our non-GAAP measures excludes certain items, as applicable, for the relevant time periods as indicated in the “Operating Profit” table above.
The increase in amortization in the year ended December 31, 2023 is due to incremental amortization of intangibles acquired with Diros in Q3 2023. Our non-GAAP measures excludes certain items, as applicable, for the relevant time periods as indicated in the “Operating Profit” table above.
As of December 31, 2022, we have accumulated undistributed earnings generated by our foreign subsidiaries of approximately $34.5 million. Certain earnings were previously subject to tax due to the one-time transition tax of the Tax Cuts and Jobs Act of 2017.
As of December 31, 2023, we have accumulated undistributed earnings generated by our foreign subsidiaries of approximately $33.6 million. Certain earnings were previously subject to tax due to the one-time transition tax of the Tax Cuts and Jobs Act of 2017.
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 6.5% as of December 31, 2022.
Unamortized debt discount 27 Table of Contents 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 6.6% as of December 31, 2023.
We incurred $15.0 million and $27.5 million of expenses for certain litigation matters in the years ended December 31, 2021 and 2020, 22 Table of Contents respectively, which are included in “Other expense, net.” In 2021, costs include amounts associated with a $22.2 million payment related to a Deferred Prosecution Agreement (the “DPA”) with the United Sates Department of Justice (the “DOJ”), which is described in “Commitments and Contingencies” in Note 13 to the consolidated financial statements in Item 8 of this Form 10-K.
We incurred no costs for litigation matters in the year ended December 31, 2022 and $15.0 million of expenses for certain litigation matters in the year ended December 31, 2021, which are included in “Other expense, net.” In 2021, costs include amounts associated with a $22.2 million payment related to a Deferred Prosecution Agreement (the “DPA”) with the United Sates Department of Justice (the “DOJ”), which is described in “Commitments and Contingencies” in Note 14 to the consolidated financial statements in Item 8 of this Form 10-K.
Operating Profit (Loss) (in millions) Year Ended December 31, 2022 2021 2020 Operating profit (loss) $ 74.0 $ 10.4 $ (48.5) Operating profit margin 9.0 % 1.4 % (6.8) % The items previously described drove operating profit to $74.0 million in the year ended December 31, 2022 compared to operating profit of $10.4 million and operating loss of $48.5 million, respectively, in the years ended December 31, 2021 and 2020. 21 Table of Contents Adjusted Operating Profit (Loss) A reconciliation of adjusted operating profit (loss), a non-GAAP measure, to operating profit (loss) is provided in the table below (in millions): Year Ended December 31, 2022 2021 2020 Operating profit (loss), as reported (GAAP) $ 74.0 $ 10.4 $ (48.5) COVID-19 related expenses — 0.3 7.9 2020 Restructuring charges — 12.4 27.6 Post-Divestiture restructuring and transition charges — 14.1 17.1 Acquisition and integration-related charges 3.4 1.6 12.5 EU MDR Compliance 6.9 4.0 — Other items 3.8 — — Litigation and legal — 15.0 27.5 Intangibles amortization 25.7 16.7 19.4 Adjusted Operating Profit (Loss) (non-GAAP) $ 113.8 $ 74.5 $ 63.5 The items noted in the table above are described below: On a GAAP basis, operating income increased compared to the prior year due to higher sales, lower legal costs and completion of restructuring activities, partially offset by higher selling costs.
Operating Profit (Loss) (in millions) Year Ended December 31, 2023 2022 2021 Operating profit (loss) $ 4.2 $ 35.5 $ (39.0) Operating profit margin 0.6 % 5.2 % (6.6) % The items previously described drove operating profit to $4.2 million in the year ended December 31, 2023 compared to operating profit of $35.5 million and operating loss of $39.0 million, respectively, in the years ended December 31, 2022 and 2021. 24 Table of Contents Adjusted Operating Profit (Loss) A reconciliation of adjusted operating profit (loss), a non-GAAP measure, to operating profit (loss) is provided in the table below (in millions): Year Ended December 31, 2023 2022 2021 Operating profit (loss), as reported (GAAP) $ 4.2 $ 35.5 $ (39.0) COVID-19 related expenses — — 0.3 2020 Restructuring charges — — 12.4 Post-Divestiture restructuring and transition charges — — 14.1 Acquisition and integration-related charges 3.3 3.4 1.6 Restructuring and transformation charges 28.2 — — Divestiture-related charges 6.0 — — EU MDR Compliance 3.7 6.9 4.0 Litigation and legal 10.0 — 15.0 Other items — 3.8 — Intangibles amortization 24.3 23.6 14.6 Adjusted Operating Profit (Loss) (non-GAAP) $ 79.7 $ 73.2 $ 23.0 The items noted in the table above are described below: On a GAAP basis, operating income increased compared to the prior year due to higher sales, lower legal costs and completion of restructuring activities, partially offset by higher selling costs.
In addition, with our borrowing capacity, we 23 Table of Contents 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 December 31, 2022, $54.7 million of our $127.7 million of cash and cash equivalents was held by foreign subsidiaries.
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 December 31, 2023, $48.4 million of our $87.7 million of cash and cash equivalents was held by foreign subsidiaries.
Other expense, net also includes litigation and legal costs of $15.0 million and $27.5 million in the years ended December 31, 2021 and 2020, respectively. Legal and litigation costs were incurred for matters described in “Commitments and Contingencies” in Note 13 to the consolidated financial statements in Item 8 of this Form 10-K.
Other expense, net includes litigation and legal costs of $15.0 million in the year ended December 31, 2021. Legal and litigation costs were incurred for matters described in “Commitments and Contingencies” in Note 14 to the consolidated financial statements in Item 8 of this Form 10-K.
We expect the acquisition of OrthogenRx will enhance our chronic pain portfolio. The initial purchase price was $130.0 million at closing less working capital adjustments, with up to an additional $30.0 million payable in contingent cash consideration based on OrthogenRx’s growth in net sales during 2022 and 2023.
The initial purchase price for the OrthogenRx Acquisition was $130.0 million at closing less working capital adjustments, with up to an additional $30.0 million payable in contingent cash consideration based on OrthogenRx’s growth in net sales during 2022 and 2023.
The excluded items include: • Incremental expenses associated with altering operations in response to the COVID-19 pandemic. • Expenses associated with restructuring activities, including IT-related charges. • Expenses associated with post-Divestiture transition activities. • Certain acquisition and integration charges related to the acquisitions of OrthogenRx, Game Ready, NeoMed, Summit and Endoclear. • Expenses associated with EU MDR compliance. • Expenses associated with other unusual items such as consulting costs associated with evaluating transformational restructuring or other strategies or asset impairment charges for cancelled research and development projects. • Expenses associated with certain litigation matters. • The amortization of intangible assets associated with prior business acquisitions.
The excluded items include: • Incremental expenses associated with altering operations in response to the COVID-19 pandemic. • Expenses associated with restructuring activities, including IT-related charges. • Expenses associated with post-RH Divestiture and post-S&IP divestiture transition activities. • Certain acquisition and integration charges related to the acquisitions of Diros, OrthogenRx and GameReady. • Expenses associated with our three-year restructuring initiative. • Expenses for accounting, legal and other professional fees associated with the divestiture of our RH business. • Expenses associated with EU MDR compliance. • Expenses associated with other unusual items such as consulting costs associated with evaluating transformational restructuring or other strategies or asset impairment charges for cancelled research and development projects. • Expenses associated with certain litigation matters. • The amortization of intangible assets associated with prior business acquisitions.
Research and Development (in millions) Year Ended December 31, 2022 2021 2020 Research and development $ 30.6 $ 32.3 $ 34.9 Percentage of net sales 3.7 % 4.3 % 4.9 % 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 (in millions) Year Ended December 31, 2023 2022 2021 Research and development $ 27.2 $ 29.2 $ 30.6 Percentage of net sales 4.0 % 4.3 % 5.2 % 23 Table of Contents 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.
We incurred $0.3 million and $7.9 million of COVID-19 related costs in the years ended December 31, 2021 and 2020, respectively. 2020 Restructuring charges : We incurred no 2020 Restructuring-related costs in the year ended December 31, 2022.
We incurred $0.3 million of COVID-19 related costs in the year ended December 31, 2021. 2020 Restructuring charges : We incurred no 2020 Restructuring-related costs in the years ended December 31, 2023 and 2022. We incurred $12.4 million of costs in the year ended December 31, 2021, in connection with the 2020 Restructuring.
For obligations under our purchase arrangements which consist mostly of open purchase orders and other commitments, as of December 31, 2022, we have amounts due in less than one year of $76.3 million, $14.3 million in one to three years, and zero thereafter.
For obligations under our purchase arrangements which consist mostly of open purchase orders and other commitments, as of December 31, 2023, we have amounts due in less than one year of $71.7 million, $7.0 million in one to three years, and $8.6 million thereafter.
(b) Other includes rounding. Product Category Descriptions Chronic care is a portfolio of products that include the following: • Digestive health products such as our MIC-KEY enteral feeding tubes, Corpak patient feeding solutions and NeoMed neonatal and pediatric feeding solutions.
(b) Other includes rounding. 22 Table of Contents Product Category Descriptions Digestive Health i s a portfolio of products such as our MIC-KEY enteral feeding tubes, Corpak patient feeding solutions and NeoMed neonatal and pediatric feeding solutions.
In the year ended December 31, 2022, we incurred $2.0 million of costs in connection with the OrthogenRx acquisition, which are included in “Selling and general expenses.” Subsequent Event 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”).
Restructuring Activities In January 2023, we initiated a three-year restructuring initiative pursuant to which we: (i) have combined our Chronic Care and Pain Management franchises into a single commercial organization focused on the Digestive Health and Pain Management and Recovery product categories; (ii) plan to rationalize our product portfolio, including certain low-margin, low-growth product categories, through targeted divestitures; (iii) have undertaken additional cost management activities aimed at enhancing the Company’s operating profitability; and (iv) plan to pursue efficient capital allocation strategies, including through acquisitions that meet the Company’s strategic and financial criteria (the “Transformation Process”).
Intangibles amortization : Intangibles amortization is related primarily to the amortization of intangibles acquired in prior business acquisitions and was $25.7 million, $16.7 million and $19.4 million, respectively, in the years ended December 31, 2022, 2021 and 2020.
Intangibles amortization : Intangibles amortization is related primarily to the amortization of intangibles acquired in prior business acquisitions and was $24.3 million, $23.6 million and $14.6 million, respectively, in the years ended December 31, 2023, 2022 and 2021.
Post-Divestiture restructuring and transition charges: These charges were associated with the Post-Divestiture Restructuring Plan, a multi-phase restructuring plan intended to align our organizational structure, IT platform, supply chain and distribution channels to be more appropriate for our business following the Divestiture. We incurred no costs associated with the Post-Divestiture Restructuring Plan in the year ended December 31, 2022.
Post-S&IP Divestiture restructuring and transition charges: These charges were associated with the post-S&IP Divestiture restructuring plan, a multi-phase restructuring plan intended to align our organizational structure, IT platform, supply chain and distribution channels to be more appropriate for our business following the divestiture of the Surgical and Infection Prevention (“S&IP”) business.
Selling and General Expenses (in millions) 20 Table of Contents Year Ended December 31, 2022 2021 2020 Selling and general expenses $ 341.9 $ 300.3 $ 332.6 Percentage of net sales 41.7 % 40.3 % 46.5 % Selling and general expenses increased from $300.3 million in 2021 to $341.9 million in 2022, driven by higher selling costs, along with consulting costs associated with evaluating and planning for the Transformation Process, compliance costs associated with the EU MDR and higher acquisition-related costs.
In the year ended December 31, 2022, selling and general expenses increased from $285.3 million in 2021 to $326.5 million in 2022, driven by higher selling costs, along with consulting costs associated with evaluating and planning for the Transformation Process, compliance costs associated with the EU MDR and higher acquisition-related costs.
As a result, as of December 31, 2022, we had $3.8 million of income tax receivables. Our overall effective tax rate was 22.5% for the year ended December 31, 2022 compared to a rate of 13.7% in 2021 and 53.9% in 2020. The primary driver in the change in our effective tax rate was the CARES Act in 2020.
As a result, as of December 31, 2023, we had $3.8 million of income tax receivables. 26 Table of Contents Our overall effective tax rate was (25.3)% for the year ended December 31, 2023 compared to a rate of 19.5% in 2022 and 26.6% in 2021.
Net Sales - 2022 Compared to 2021 19 Table of Contents Net sales increased by 10.1% to $820.0 million for the year ended December 31, 2022, primarily due to incremental revenue from the OrthogenRx acquisition. Digestive health products experienced strong demand and volume, which was offset by decreased demand and volume in respiratory health products.
Net Sales - 2022 Compared to 2021 Net sales increased by 16.5% to $684.1 million for the year ended December 31, 2022, primarily due to incremental revenue from the OrthogenRx acquisition and strong demand for Digestive Health products, in addition to 0.7% of favorable pricing, which was partially offset by 1.6% of unfavorable foreign currency translation effects.
Cost of products sold increased from $343.9 million to $378.8 million during the year ended December 31, 2021, primarily driven by higher freight costs, including air freight, associated with shipping products from China to the United States and delays in returning our manufacturing operations to pre-pandemic efficiency levels.
In the year ended December 31, 2023, gross profit margin decreased from 57.6% to 56.4%. Cost of products sold increased from $287.8 million to $289.9 million during the year ended December 31, 2022, primarily driven by higher freight costs and delays in returning our manufacturing operations to pre-pandemic efficiency levels.
We incurred $14.1 million and $17.1 million of costs in connection with the Post-Divestiture Restructuring Plan for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, these restructuring activities were substantially complete.
We incurred no costs associated with the post-S&IP divestiture restructuring plan in the years ended December 31, 2023 and 2022. We incurred $14.1 million of costs in connection with the post-S&IP divestiture restructuring plan for the year ended December 31, 2021.
Cash and equivalents increased by $9.2 million to $127.7 million as of December 31, 2022 compared to $118.5 million last year.
Cash and equivalents decreased by $40.0 million to $87.7 million as of December 31, 2023 compared to $127.7 million last year.
Other Expense, net (in millions) Year Ended December 31, 2022 2021 2020 Other expense, net $ 3.5 $ 22.8 $ 51.9 Percentage of net sales 0.4 % 3.1 % 7.3 % Other expense, net decreased from $22.8 million in 2021 to $3.5 million in 2022 primarily due to lower legal costs and completion of the 2020 Restructuring and Post-Divestiture Restructuring plans.
Other Expense, net (in millions) Year Ended December 31, 2023 2022 2021 Other expense, net $ 13.3 $ 3.0 $ 22.3 Percentage of net sales 2.0 % 0.4 % 3.8 % Other expense, net increased from $3.0 million in 2022 to $13.3 million in 2023 primarily due to litigation and legal costs of $10.0 million.
We incurred $6.9 million and $4.0 million of costs related to EU MDR compliance in the years ended December 31, 2022 and 2021, respectively. We expect the activities resulting in incremental costs associated with our initial compliance with the EU MDR to continue through 2024.
Incremental costs associated with EU MDR compliance are primarily related to re-certification of our products 25 Table of Contents under the enhanced standards. We incurred $3.7 million, $6.9 million and $4.0 million of costs related to EU MDR compliance in the years ended December 31, 2023, 2022 and 2021 respectively.
Net Sales by Geographic Region Net sales by region is presented in the table below (in millions): Year Ended December 31, 2022 2021 Change 2020 Change North America $ 650.5 $ 561.6 15.8 % $ 535.5 4.9 % EMEA 93.7 105.1 (10.8) 108.3 (3.0) Asia Pacific and Latin America 75.8 77.9 (2.7) 71.0 9.7 Total Net Sales $ 820.0 $ 744.6 10.1 % $ 714.8 4.2 % Gross Profit (in millions) Year Ended December 31, 2022 2021 2020 Net sales $ 820.0 $ 744.6 $ 714.8 Cost of products sold 370.0 378.8 343.9 Gross profit 450.0 365.8 370.9 Gross profit margin 54.9 % 49.1 % 51.9 % Cost of products sold decreased from $378.8 million to $370.0 million during the year ended December 31, 2022, primarily driven by favorable product mix and slightly improved manufacturing efficiencies, partially offset by higher costs across our supply chain.
Net Sales by Geographic Region Net sales by region is presented in the table below (in millions): Year Ended December 31, 2023 2022 Change 2021 Change North America $ 537.9 $ 552.0 (2.6) % $ 449.1 22.9 % Europe, Middle East and Africa 84.1 77.4 8.7 86.1 (10.1) Asia Pacific and Latin America 51.3 54.7 (6.2) 51.8 5.6 Total Net Sales $ 673.3 $ 684.1 (1.6) % $ 587.0 16.5 % Gross Profit (in millions) Year Ended December 31, 2023 2022 2021 Net sales $ 673.3 $ 684.1 $ 587.0 Cost of products sold 293.6 289.9 287.8 Gross profit 379.7 394.2 299.2 Gross profit margin 56.4 % 57.6 % 51.0 % Cost of products sold increased from $289.9 million to $293.6 million during the year ended December 31, 2023, primarily driven by unfavorable product mix, partially offset by improved manufacturing efficiencies.
In the year ended December 31, 2020, interest expense includes an early extinguishment loss of $1.3 million incurred upon redemption of our Senior Secured Notes on October 15, 2020. In each of the years ended December 31, 2022, 2021 and 2020, $0.1 million of interest was capitalized on long-term capital projects.
In the year ended December 31, 2023, $0.5 million of interest was capitalized on long-term capital projects. In the years ended December 31, 2022 and 2021, $0.1 million of interest was capitalized on long-term capital projects. Interest expense consists of interest accrued and amortization of debt discount and issuance costs on our long-term debt.
These amounts include between $6.0 million and $8.0 million of employee severance and benefits costs. We anticipate savings will total approximately $10.0 million in 2023. By 2025, we expect gross savings of between $45.0 million and $55.0 million, most of which will be achieved in 2024.
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.
In addition to volume, 0.7% of favorable pricing was offset by 1.9% of unfavorable foreign currency translation effects. Net Sales - 2021 Compared to 2020 Net sales increased by 4.2% to $744.6 million for the year ended December 31, 2021.
In addition to volume, 0.3% of favorable pricing was offset by 0.2% of unfavorable foreign currency translation effects.
The following will be discussed and analyzed: • Business Acquisition • Subsequent Event • Results of Operations and Related Information • Liquidity and Capital Resources • Critical Accounting Policies and Use of Estimates • Legal Matters Business Acquisition On January 20, 2022, we acquired all of the equity voting interests and completed the acquisition of OrthogenRx, which is focused on the development and commercialization of treatments for knee pain caused by osteoarthritis.
The purchase price for the Diros Acquisition was funded by proceeds from our Revolving Credit Facility. On January 20, 2022, we acquired all of the equity voting interests and completed the acquisition of OrthogenRx, which is focused on the development and commercialization of treatments for knee pain caused by osteoarthritis.
For the year ended December 31, 2020, acquisition and integration-related costs also includes $0.5 million of restructuring costs. EU MDR Compliance : The EU MDR became effective in 2021 and 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.
RH Divestiture related charges: In conjunction with the divestiture of our RH business, we incurred accounting, legal and other professional fees of approximately $6.0 million for the year ended December 31, 2023. EU MDR Compliance : The EU MDR became effective in 2021 and brings significant new requirements for many of our medical devices.
Under this program, during the second quarter of 2022 we repurchased $14.1 million of our common stock, and during the third quarter of 2022 we repurchased the remaining $10.9 million. For further information, see “Share Repurchase Program” in Note 16 to the consolidated financial statements in Item 8 of this Form 10-K.
Under this program, during the second quarter of 2022 we repurchased $14.1 million of our common stock, and during the third quarter of 2022 we repurchased the remaining $10.9 million. On July 28, 2023, the Board of Directors approved a new one-year program under which we may repurchase up to $25.0 million of our common stock.
In the years ended December 31, 2021 and 2020, our surgical pain products, which includes both On-Q and ambIT pumps, accounted for more than 10% of our consolidated net sales. • Interventional pain solutions, which provide minimally invasive pain relief therapies, such as our COOLIEF pain therapy and OrthogenRx’s knee osteoarthritis pain relief injection products.
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, OrthogenRx’s knee osteoarthritis HA pain relief injection products and Diros’ RFA products used to treat chronic pain conditions.
Cash and equivalents increased by $7.0 million to $118.5 million as of December 31, 2021 compared to $111.5 million as of December 31, 2020.
This was partially offset by $32.4 million of cash provided by operating activities, $55.0 million of proceeds from our revolving credit facility and $89.0 million of proceeds from the RH divestiture. Cash and equivalents increased by $9.2 million to $127.7 million as of December 31, 2022 compared to $118.5 million as of December 31, 2021.
Other expense, net decreased from $51.9 million in 2020 to $22.8 million in 2021 primarily due to lower restructuring costs. In 2020, other expense, net included $20.0 million of restructuring costs associated with our 2020 Restructuring.
Other expense, net decreased from $22.3 million in 2021 to $3.0 million in 2022 primarily due to lower legal costs and completion of a restructuring initiated in the fourth quarter of 2020 (the “2020 Restructuring”) and plans related to the divestiture of our Surgical and Infection Prevention (“S&IP”) business in 2018 (the “S&IP Divestiture”).
The increase was driven by $87.3 million of cash provided by operating activities and $20.0 million of proceeds from our revolving credit facility partially offset by $70.0 million of repayments on our revolving credit facility, $21.0 million of capital expenditures and $11.5 million used to purchase treasury stock.
The decrease was driven by $49.6 million of cash used for the acquisition of Diros, $15.0 million used to repurchase shares of our common stock, repayments of our debt, including $115.0 million on our revolving credit facility and $4.7 million on our secured term loan, $11.7 million of contingent consideration payments and $17.8 million of capital expenditures.
Removed
The purchase price was funded by available cash on hand and the proceeds of borrowings, including from the incurrence of a new incremental tranche of term loans of $125.0 million under the Company’s prior senior secured revolving credit facility.
Added
The following will be discussed and analyzed: • Restructuring Activities; • Divestiture of the Respiratory Health Business; • Discontinued Operations; • Business Acquisitions; • Results of Operations and Related Information; • Liquidity and Capital Resources; • Critical Accounting Policies and Use of Estimates; and • Legal Matters.
Removed
The accompanying consolidated income statement for the year ended December 31, 2022 includes $76.2 million of net sales from OrthogenRx since the closing of the acquisition.
Added
These amounts include between $6.0 million and $8.0 million of employee severance and benefits costs.
Removed
A reconciliation of the non-GAAP measure to the most directly comparable GAAP financial measures is provided under “Adjusted Operating (Loss) Profit.” Change in Accounting Principle During the third quarter of 2022, we changed our method of accounting for certain inventory from the Last-In, First-Out (“LIFO”) method to the First-In, First-Out (“FIFO”) method.
Added
The accompanying consolidated income statements for the year ended December 31, 2023 include $28.2 million of costs incurred in connection with the Transformation Process in “Selling and general expenses.” Divestiture of the Respiratory Health Business On October 2, 2023, we closed the sale of our Respiratory Health (“RH”) business to SunMed Group Holdings, LLC (“Buyer”) for a total purchase price of $110.0 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 and the chargebacks assumed by Buyer but that would otherwise have been payable by the Company and its subsidiaries on or after October 2, 2023 to distributors of the Company’s RH products located in the United States (the “RH Divestiture”).
Removed
The FIFO method of accounting for inventory is preferable because it conforms our entire inventory to a single method of accounting and improves comparability with our peers. The effects of the change in accounting method from LIFO to FIFO have been retrospectively applied to all periods presented in all sections of this Form 10-K, including this MD&A.
Added
The RH 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.
Removed
Refer to “Accounting Policies” in Note 1 to our consolidated financial statements in Item 8 of this Form 10-K for further information related to the change in accounting principle.
Added
In conjunction with the RH Divestiture, we and Buyer entered 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.
Removed
In the year ended December 31, 2022, our legacy enteral feeding tubes, which includes our MIC-KEY enteral feeding tubes accounted for more than 10% of our consolidated net sales.
Added
The services generally commenced on the closing date of the Divestiture and terminate no later than one to three years thereafter. 21 Table of Contents Discontinued Operations As a result of the RH 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 consolidated financial statements.
Removed
In the years ended December 31, 2021 and 2020, our legacy enteral feeding tubes and our Corpak feeding solutions each accounted for more than 10% of our consolidated net sales. • Respiratory health products such as our closed airway suction systems and other airway management devices under the Ballard, Microcuff and Endoclear brands.
Added
Net sales from discontinued operations were $100.9 million in the year ended December 31, 2023, compared to $135.9 million and $157.6 million in the years ended December 31, 2022 and 2021, respectively. The decrease in net sales was primarily driven by lower volume along with unfavorable currency effects.
Removed
In the years ended December 31, 2022, 2021 and 2020, our closed airway suction systems accounted for more than 10% of our consolidated net sales. Pain management is a portfolio of non-opioid pain solutions including: • Acute pain products such as ON-Q and ambIT surgical pain pumps and Game Ready cold and compression therapy systems.
Added
We recognized a loss on disposal of the RH business, and accordingly, we recorded impairment of $70.8 million against assets in the disposal group, which is included in “(Loss) income from discontinued operations, net of tax.” Business Acquisitions On June 17, 2023 we entered into a definitive agreement to acquire Diros Technology, Inc.
Removed
In the year ended December 31, 2022, none of our acute pain products individually accounted for more than 10% of our consolidated net sales.
Added
(“Diros”), a leading manufacturer of innovative radiofrequency (“RF”) products used to treat chronic pain conditions.
Removed
In the years ended December 31, 2022, 2021 and 2020, products associated with our COOLIEF pain therapy accounted for more than 10% of our consolidated net sales.
Added
On July 24, 2023, we closed the acquisition of Diros for approximately $53.0 million, consisting of $2.5 million cash paid upon entry into the definitive agreement and $50.5 million in cash at closing less working capital and other adjustments, with up to an additional $7.0 million payable in contingent cash consideration based on achievement of certain performance objectives defined in the purchase agreement.
Removed
Volume was driven by our pain management franchise due to the recovery of elective surgical procedures and favorable comparison to last year’s net sales which were negatively impacted by the COVID-19 pandemic.
Added
Net Sales - 2023 Compared to 2022 Net sales decreased by 1.6% to $673.3 million for the year ended December 31, 2023, primarily due to lower volume in the Pain Management and Recovery portfolio (primarily lower HA sales), partially offset by continued strong demand for Digestive Health products.
Removed
In addition, volume benefited from continued robust demand for digestive health, which was partially offset by lower volume in respiratory health due to pandemic-fueled demand experienced last year as well as by pricing/mix.
Added
In the year ended December 31, 2022, gross profit margin increased from 51.0% to 57.6% driven by high volume, primarily due to incremental revenue from the OrthogenRx acquisition and strong demand for digestive health products .
Removed
In the year ended December 31, 2022, gross profit margin increased from 49.1% to 54.9%.
Added
Selling and General Expenses (in millions) Year Ended December 31, 2023 2022 2021 Selling and general expenses $ 335.0 $ 326.5 $ 285.3 Percentage of net sales 49.8 % 47.7 % 48.6 % Selling and general expenses increased from $326.5 million in 2022 to $335.0 million in 2023, driven by higher selling costs, non-recurring expenses associated with the ongoing Transformation Process and the RH Divestiture, as well as compliance costs associated with the EU MDR.
Removed
We recorded inventory allowances of $6.8 million, which includes $3.4 million for Halyard-branded products and $3.4 million for inventory associated with restructuring activities. Accordingly, in the year ended December 31, 2021, gross profit margin decreased from 51.9% to 49.1%.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeThese 26 Table of Contents hypothetical adjustments in UTA are based on the difference between the December 31, 2022 exchange rates and the assumed rates. In the view of management, the above UTA adjustments resulting from these assumed changes in foreign currency exchange rates are not material to our consolidated financial position because they would not affect our cash flow.
Biggest changeIn the view of management, the above UTA adjustments resulting from these assumed changes in foreign currency exchange rates are not material to our consolidated financial position because they would not affect our cash flow. Commodity Price Risk We are subject to commodity price risk for certain raw materials used in the manufacture of our products.
As of December 31, 2022, a one percentage point increase in SOFR could result in $3.8 million of incremental interest expense if the senior secured revolving credit facility was fully drawn for the entire year. Foreign Currency Risk Foreign currency transactional exposures are sensitive to changes in foreign currency exchange rates.
As of December 31, 2023, a one percentage point increase in SOFR could result in $3.8 million of incremental interest expense if the senior secured revolving credit facility was fully drawn for the entire year. Foreign Currency Risk Foreign currency transactional exposures are sensitive to changes in foreign currency exchange rates.
These hypothetical effects on transactional exposures are based on the difference between the December 31, 2022 rates and the assumed rates. The translation of the balance sheets of non-U.S. operations from local currencies into U.S. dollars is also sensitive to changes in foreign currency exchange rates.
These hypothetical effects on transactional exposures are based on the difference between the December 31, 2023 rates and the assumed rates. The translation of the balance sheets of non-U.S. operations from local currencies into U.S. dollars is also sensitive to changes in foreign currency exchange rates.
In addition, we are subject to price risk for utilities and manufacturing inputs, which are used in our manufacturing operations. 27 Table of Contents
In addition, we are subject to price risk for utilities and manufacturing inputs, which are used in our manufacturing operations. 30 Table of Contents
As of December 31, 2022, a 10% change in the exchange rate of the U.S. dollar against the prevailing market rates of foreign currencies involving balance sheet transactional exposures would have an effect of $0.7 million to our consolidated financial position, results of operations and cash flows.
As of December 31, 2023, a 10% change in the exchange rate of the U.S. dollar against the prevailing market rates of foreign currencies involving balance sheet transactional exposures would have an effect of $1.4 million to our consolidated financial position, results of operations and cash flows.
Interest Rate Risk Our senior secured revolving credit facility under our Credit Agreement, which allows for borrowings up to $375.0 million, is subject to a variable interest rate based on SOFR.
Also included is a description of our commodity price risk. Interest Rate Risk Our senior secured revolving credit facility under our Credit Agreement, which allows for borrowings up to $375.0 million, is subject to a variable interest rate based on SOFR.
All foreign currency derivative instruments are entered into with major financial institutions. Our credit exposure under these arrangements is limited to agreements with a positive fair value at the reporting date. Credit risk with respect to the counterparties is actively monitored but is not considered significant.
All foreign currency derivative instruments are entered into with major financial institutions. Our credit exposure under these arrangements is limited to agreements with a positive fair value at the reporting date.
Presented below is a description of our risk together with a sensitivity analysis, performed annually, based on selected changes in market rates and prices. These analyses reflect management’s view of changes which are reasonably possible to occur over a one-year period. Also included is a description of our commodity price risk.
Credit risk with respect to the counterparties is actively monitored but is not considered significant. 29 Table of Contents Presented below is a description of our risk together with a sensitivity analysis, performed annually, based on selected changes in market rates and prices. These analyses reflect management’s view of changes which are reasonably possible to occur over a one-year period.
Commodity Price Risk We are subject to commodity price risk for certain raw materials used in the manufacture of our products. As previously discussed under “Risk Factors,” increases in commodities prices could adversely affect our earnings if selling prices are not adjusted or if such adjustments significantly trail the increases in commodities prices.
As previously discussed under “Risk Factors,” increases in commodities prices could adversely affect our earnings if selling prices are not adjusted or if such adjustments significantly trail the increases in commodities prices.
As of December 31, 2022, a 10% change in the exchange rate of the U.S. dollar against the prevailing market rates of our foreign currency translation exposures would have impacted stockholders’ equity by approximately $11.3 million.
As of December 31, 2023, a 10% change in the exchange rate of the U.S. dollar against the prevailing market rates of our foreign currency translation exposures would have impacted stockholders’ equity by approximately $13.6 million. These hypothetical adjustments in UTA are based on the difference between the December 31, 2023 exchange rates and the assumed rates.

Other AVNS 10-K year-over-year comparisons