Avanos Medical, Inc. (NYSE: AVNS) today reported third quarter 2020 financial results.

"Thanks to the work of our team and their focus on execution, our momentum continued as we delivered results ahead of our expectations," stated Joe Woody, Avanos' chief executive officer. "Our performance was bolstered by the continued demand for our clinically-proven Respiratory Health products and the sequential acceleration of elective procedures."

Woody continued, "The team's resilient mindset along with the strategic steps we've enacted to reduce expenses and boost cash flow, have enabled us to effectively manage the business through this unparalleled environment. Further, we've resumed investing in our growth platforms to advance our strategy and position us for sales growth, margin expansion and positive free cash flow in 2021 and beyond."

Third Quarter 2020 Financial Highlights

• Net sales totaled $186 million, an 8 percent increase compared to the prior year.
• Net income for the quarter was $19 million, compared to net loss of $12 million a year ago.
• Adjusted net income totaled $10 million, compared to $14 million a year ago.
• Diluted earnings per share were $0.40, compared to $(0.24) a year ago.
• Adjusted diluted earnings per share were $0.21, compared to $0.30 in the prior year.

Operational and Business Highlights

• The company continues to strengthen its management team with the addition of Bill Haydon, senior vice president and general manager, to lead the Pain Management franchise and Michelle Scharfenberg, senior vice president and chief ethics and compliance officer, to lead the Compliance & Ethics program.
• The company demonstrated its commitment to open innovation with a minority investment into FUSMobile Inc., for the development of novel, non-invasive tissue ablation procedures, utilizing high intensity focused ultrasound technology, which complements its Pain Management franchise.
• The Journal of Bone & Joint Surgery, the official journal of the American Orthopedic Association, recently published a large, randomized, multicentered clinical trial demonstrating the superiority of COOLIEF* to hyaluronic acid for the management of knee pain caused by osteoarthritis. The results show tremendous consistency in response when compared to previously published trial data on COOLIEF*.

Third Quarter 2020 Operating Results

Net sales totaled $186 million, an 8 percent increase compared to the prior year. Volume increased 8 percent, driven by the continued global demand in Respiratory Health from Closed Suction Systems and Oral Care products related to the pandemic and in Digestive Health driven especially by double-digit demand for CORPAK and NeoMed products. This growth was offset by the expected lower volume in both Acute Pain and Interventional Pain, due to fewer elective procedures.

Gross margin was 52 percent, compared to 55 percent a year ago. Adjusted gross margin was 55 percent, due to product mix, the elevated costs associated with the company's COVID-19 efforts, and the write down of obsolete inventory and raw materials, compared to 57 percent last year.

Operating loss was $0.1 million compared to a loss of $18 million a year ago. Higher sales, lower post divestiture transition and restructuring costs and litigation expenses drove the improvement. On an adjusted basis, operating profit totaled $18 million, compared to $21 million a year ago. The decline was due to lower gross margin and higher operating expenses, partially offset by higher sales.

Adjusted EBITDA for the quarter was $24 million, compared to $25 million in the prior year.

First Nine Months 2020 Operating Results

Net sales totaled $530 million, a 4 percent increase compared to a year ago. The acquisitions of NeoMed and Summit contributed 5 percent of growth. Continued accelerated pandemic-related demand in Respiratory Health was offset by lower volume in both Acute Pain and Interventional Pain, resulting in 1 percent lower organic volume.

Gross margin was 54 percent, compared to 58 percent a year ago. Adjusted gross margin was 56 percent, due to product mix and the elevated costs associated with the company's COVID-19 efforts, compared to 60 percent last year.

Operating loss was $1 million compared to a loss of $53 million in the first nine months of 2019. Higher sales and lower post divestiture transition charges and litigation expenses drove the improvement. On an adjusted basis, operating profit totaled $45 million, compared to $51 million in 2019. Performance was impacted by lower gross margin, which was partially offset by higher sales.

Year to date, adjusted EBITDA was $63 million compared to $62 million in 2019.

Cash Flow and Balance Sheet

Total debt at the end of the third quarter was $249 million, compared to $248 million at year-end 2019. In October, the company drew down $180 million on its revolving credit facility and used a portion of available cash to redeem its 6.25 percent senior unsecured notes that were due October 2022.

Cash from operations less capital expenditures, or free cash flow, for the quarter was an outflow of $2 million compared to an outflow of $24 million a year ago. Improved operating results and working capital efficiencies drove performance. At the end of the quarter, the company's cash balance was $180 million, compared to $205 million at year-end 2019. The company anticipates that its current cash position will provide sufficient liquidity to manage the business during this period of uncertainty.

Update on Response to COVID-19

Due to the continuing uncertainty related to the ongoing pandemic, and its potential impact on the recovery of elective procedures, the company anticipates this headwind will continue into 2021. Despite these near-term challenges, the company continued to take strategic steps to ensure its Respiratory Health products remain available to customers, reduce operating expenses and minimize cash outflow to ensure it remains in a strong financial position in a post COVID-19 environment.

Full Year 2020 Outlook

On May 4, 2020, the company withdrew its previously announced full-year 2020 financial guidance, which was issued on February 25, 2020, due to the uncertainties associated with the impact of the COVID-19 pandemic. At this time, the company cannot fully quantify the extent or duration of the impact of the pandemic on its financial results. However, it will continue to monitor the situation and anticipates providing further updates in early 2021.

Non-GAAP Financial Measures

This press release and the accompanying tables include the following financial measures that have not been calculated in accordance with accounting principles generally accepted in the U.S., or GAAP, and are therefore referred to as non-GAAP financial measures:

• Adjusted net income
• Adjusted diluted earnings per share
• Adjusted gross margin
• Adjusted operating profit
• Adjusted effective tax rate
• Adjusted EBITDA
• Free cash flow

These non-GAAP financial measures exclude the following items, as applicable, for the relevant time periods as indicated in the accompanying non-GAAP reconciliations to the comparable GAAP financial measures:

• Expenses associated with restructuring activities, including IT-related charges.
• Expenses associated with the divestiture of the S&IP business.
• Expenses associated with the amortization of intangible assets associated with prior business acquisitions.
• The positive or negative effect of changes in currency exchange rates during the year.
• Expenses associated with certain litigation matters.
• Expenses associated with altering operations in response to the COVID-19 pandemic.
• Certain acquisition and integration charges related to the acquisition of Game Ready, NeoMed, Summit Medical, and Endoclear LLC.
• Benefit associated with regulatory tax reform and tax effects of the CARES Act.

The company provides these non-GAAP financial measures as supplemental information to its GAAP financial measures. Management and the company's Board of Directors use net sales on a constant currency basis, adjusted net income, adjusted diluted earnings per share, adjusted operating profit, adjusted EBITDA, and free cash flow to (a) evaluate the company's historical and prospective financial performance and its performance relative to its competitors, (b) allocate resources and (c) measure the operational performance of the company's business units and their managers. Management also believes that the use of an adjusted effective tax rate provides improved insight into the tax effects of our ongoing business operations.

Additionally, the Compensation Committee of the company's Board of Directors will use certain of the non-GAAP financial measures when setting and assessing achievement of incentive compensation goals. These goals are based, in part, on the company's net sales on a constant currency basis and adjusted EBITDA, which will be determined by excluding certain items that are used in calculating these non-GAAP financial measures.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the attached financial tables.

About Avanos Medical, Inc.

Avanos Medical (NYSE: AVNS) is a medical device company focused on delivering clinically superior breakthrough solutions that will help patients get back to the things that matter. Headquartered in Alpharetta, Georgia, Avanos is committed to creating the next generation of innovative healthcare solutions which will address our most important healthcare needs, such as reducing the use of opioids while helping patients move from surgery to recovery. Avanos develops, manufactures and markets its recognized brands in more than 90 countries. For more information, visit www.avanos.com and follow Avanos Medical on Twitter (@AvanosMedical), LinkedIn and Facebook.