Avanos Medical today reported third-quarter 2019 results and revised its full-year 2019 outlook.
“Our COOLIEF business delivered another quarter of double-digit growth; nevertheless, we were disappointed that our overall third-quarter performance fell short of our expectations” stated Joe Woody, Avanos’ chief executive officer. “We were pleased to learn that the final CMS rules for 2020 announced last Friday makes COOLIEF procedures for the knee once again viable in the hospital, enabling patients suffering from osteoarthritis of the knee to continue to benefit from our leading non-opioid pain management therapy.”
Woody continued, “Our performance gap this quarter was due primarily to product backorders and supply chain challenges stemming from the implementation of our new IT system and an unexpected distributor inventory drawdown impacting our Chronic Care business. Our teams are working hard to address the implementation challenges of our new IT system. Overall, I’m confident the steps we’re taking will enable us to address those challenges, meet customer demands, and increase shareholder value, as we continue investing for growth, prudently managing expenses, and strategically deploying capital.”
Third Quarter 2019 Financial Highlights
- Net sales totaled $171 million, a 4 percent increase from the prior year.
- Net loss for the quarter was $12 million, compared to net income of $4 million in the prior year.
- Adjusted income from continuing operations totaled $14 million, compared to $18 million a year ago.
- Diluted earnings per share were $(0.24), compared to $0.09 a year ago.
- Adjusted diluted earnings per share from continuing operations were $0.30, compared to $0.37 in the prior year.
Operational and Business Highlights
- In September, a large retrospective study was published in the Pain Physician journal further demonstrating the clinical effectiveness of COOLIEF* Cooled RF in treating chronic knee pain and providing long-term pain relief.
- On September 19, the company completed the acquisition of Endoclear LLC, a developer and marketer of patented airway management devices and accessories, including its Liberator® System and Restore2™ proprietary products, for an initial purchase price of $3.5 million. This acquisition provides a strategic addition to Avanos’ market-leading Respiratory Health portfolio and generated $0.6 million in sales in 2018.
- The company entered into an operating partnership with DHL Supply Chain to optimize Avanos’ network to achieve greater productivity and maximize warehouse storage utilization.
Third Quarter 2019 Operating Results
Net sales totaled $171 million, a 4 percent increase compared to the prior year. The acquisitions of NeoMed and Summit contributed 6 percent growth. Continued solid demand in Interventional Pain from COOLIEF along with growth in Respiratory Health was offset by lower volume in Acute Pain, primarily due to IV Infusion and Digestive Health, resulting in less than 1 percent lower organic volume. Volume was impacted by an approximate $5 million increase in product backorders stemming from the company’s IT transformation. In addition, the company saw an unexpected draw down in distributor inventory levels in Chronic Care and a revenue shortfall to its plan for its international regions. One percent unfavorable product price and mix also affected performance.
Adjusted gross margin was 57 percent, which includes the impact from the required one week downtime in the company’s manufacturing sites to implement the new IT system, compared unfavorably to 65 percent last year.
Operating loss was $18 million compared to income of $7 million a year ago. On an adjusted basis, operating profit totaled $21 million, compared to $25 million a year ago. Higher sales volumes and cost savings were partially offset by lower gross margin and investments to fuel growth.
Adjusted EBITDA for the quarter was $25 million, compared to $28 million in the prior year.
First Nine Months 2019 Operating Results
Net sales totaled $508 million, a 5 percent increase compared to the comparable period in 2018, including Game Ready, NeoMed and Summit Medical. Excluding Game Ready, NeoMed and Summit Medical, which contributed 6 percent of growth, continued demand in Interventional Pain, Digestive Health and Respiratory Health, was partially offset by lower volume in Acute Pain, resulting in 1 percent organic volume growth. Performance was also impacted by 2 percent unfavorable product price and mix and less than 1 percent unfavorable currency exchange rates.
Adjusted gross margin was 60 percent compared to 61 percent in 2018. The contraction is primarily due to downtime at manufacturing sites related to the implementation of the new IT system.
Operating loss was $53 million compared to a profit of $9 million in the first nine months of 2018. On an adjusted basis, operating profit from continuing operations totaled $51 million compared to $42 million in 2018, which includes $37 million of costs previously allocated to the Surgical and Infection Prevention (S&IP) business. Volume growth was partially offset by increased investment for growth and lower gross margin.
In the first nine months, adjusted EBITDA was $62 million compared to $123 million in 2018.
Cash Flow and Balance Sheet
Cash from operations less capital expenditures, or free cash flow, for the third quarter was an outflow of $24 million compared to an outflow of $79 million a year ago. The outflow was due primarily to a net loss and an increase in working capital related to the IT implementation. The company’s cash balance was $214 million at the end of the quarter, compared to $385 million at year-end 2018.
Total debt at the end of the third quarter was $248 million, consisting of unsecured notes, even compared to year-end 2018.
2019 Key Planning Assumptions
The company’s third quarter performance was principally impacted by three factors: an approximate $5 million increase in product backorders across its domestic and international regions due to supply chain issues related to its IT implementation; an unexpected distributor inventory draw down in its Chronic Care business; and, a revenue shortfall to its plan for its international regions. The company anticipates that these factors will, in some part, also impact the fourth quarter.
As a result, the company revised its full-year 2019 outlook for net sales growth, in constant currency, from 8 to 10 percent to 5 to 7 percent, which includes Summit Medical and Endoclear, and adjusted diluted earnings per share from $1.15 to $1.25 to $1.00 to $1.10. The other key planning assumptions that it provided on its year-end 2018 conference call, on February 26, remain unchanged.
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 and 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.
- The gain on sale and associated expenses related to 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.
- Prior year charges associated with internal policy changes.
- Certain acquisition and integration charges related to the acquisition of Game Ready, NeoMed, Summit Medical, and Endoclear LLC.
- Benefit associated with regulatory tax reform.
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.
Avanos Medical, Inc. will host a conference call today at 9 a.m. ET. The conference call can be accessed live over the Internet at https://avanos.investorroom.com or via telephone by dialing 877-240-5772 in the United States. A replay of the call will be available at noon ET today by calling 877-344-7529 in the United States and entering passcode 10135464. A webcast of the call will also be archived in the Investors section on the Avanos website.