Discontinued Operations

6 Months Ended

Jun. 30, 2024

Discontinued Operations and Disposal Groups [Abstract]

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 Buyer agreed to purchase substantially all of the assets primarily relating to or primarily used in our Respiratory Health (“RH”) business (the “RH Divestiture”). On October 2, 2023, we closed the RH Divestiture for a total purchase price of $110 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 “Initial Closing”).

The RH Divestiture represents a key component of Avanos’ ongoing three-year transformation process, and is aimed at accelerating the Company’s efforts to focus its portfolio on markets where it is well positioned to succeed.

At or before the closing of 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. The services generally commenced on the closing date of the Divestiture and terminate no later than one to three years thereafter.

We have also entered into distribution agreements with Buyer under which we will remain a limited risk distributor for RH products on Buyer’s behalf for sales outside of the United States. As a result, we had $8.6 million of RH products included in “Prepaid expenses and other current assets” in the accompanying consolidated balance sheet as of June 30, 2024, compared to $11.9 million as of December 31, 2023. We anticipate the limited risk distributor arrangements will terminate no later than three years from the date of the Purchase Agreement.

As a result of the RH Divestiture, the results of operations from our RH business are reported as “Net Loss from discontinued operations, net of tax” and the related assets and liabilities are classified as “held for sale” in the condensed consolidated financial statements.

Pursuant to an agreement under which we provide manufacturing services for the Buyer, certain manufacturing facilities and equipment did not transfer to the Buyer upon the Initial Closing, and remained in “Assets Held for Sale” as of June 30, 2024 with a corresponding liability representing our obligation to transfer the manufacturing facilities and equipment to the buyer at a later date. Likewise, the results of operations from these manufacturing operations continue to be classified as “Net Loss from discontinued operations, net of tax. We expect the remaining manufacturing facilities and equipment to transfer to the buyer by the end of 2024.

The following table summarizes the financial results of our discontinued operations for all periods presented herein (in millions):


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Net Sales	$	13.6	$	30.4	$	30.5	$	62.8
Cost of products sold	15.6		18.6		31.5		37.9
Gross Profit	(2.0)		11.8		(1.0)		24.9
Research and development	—		0.2		—		0.6
Selling and general expenses	—		3.8		—		7.7
Pretax loss on classification as discontinued operations	—		72.3		—		72.3
Other expense, net	1.4		0.1		4.3		0.2
Loss from discontinued operations before income taxes	(3.4)		(64.6)		(5.3)		(55.9)
Income tax benefit (provision) from discontinued operations	0.9		0.8		1.4		(0.6)
Net Loss from discontinued operations, net of tax	$	(2.5)	$	(63.8)	$	(3.9)	$	(56.5)

Loss Per Share
Basic	$	(0.05)	$	(1.37)	$	(0.08)	$	(1.21)
Diluted	$	(0.05)	$	(1.37)	$	(0.08)	$	(1.21)

In accordance with accounting principles generally accepted in the United States (“GAAP”), only expenses specifically identifiable and related to a business to be disposed may be allocated to discontinued operations. Accordingly, the cost of products sold, research and development, selling and general expenses and other expense, net in discontinued operations include expenses incurred directly to solely support our respiratory health business.

Details on assets and liabilities classified as held for sale in the accompanying consolidated balance sheets are presented in the following table (in millions):


	June 30, 2024		December 31, 2023
Assets held for sale - discontinued operations
Inventories	$	25.7	$	17.5
Property, Plant and Equipment, net	44.0		43.9
Operating Lease Right-of-Use Assets	3.0		3.1
Total assets classified as held for sale	$	72.7	$	64.5
Liabilities held for sale - discontinued operations
Current Portion of Operating Lease Liabilities	$	0.8	$	0.8
Accrued expenses	50.8		61.3
Non-Current Operating Lease Liability	1.1		1.6
Total liabilities held for sale - discontinued operations	$	52.7	$	63.7

Assets and liabilities held for sale as of June 30, 2024 were classified as current since we expect the RH Divestiture to be completed within one year.

The following table provides operating and investing cash flow information for our discontinued operations (in millions):


	Six Months Ended June 30,
	2024		2023
Operating Activities:
Depreciation and amortization	$	—	$	2.6
Stock-based compensation expense	—		0.1
Investing Activities:
Capital expenditures	0.2		0.6