NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Accounting Policies
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. Headquartered in Alpharetta, Georgia, we are committed to addressing some of today’s most important healthcare needs, including providing a vital lifeline for nutrition to patients from hospital to home, and reducing the use of opioids while helping patients move from surgery to recovery. We develop, manufacture and market our recognized brands globally and hold leading market positions in multiple categories across our portfolio. Unless the context indicates otherwise, the terms “Avanos,” “the Company,” “we,” “our” and “us” refer to Avanos Medical, Inc. and its consolidated subsidiaries.
Principles of Consolidation
The consolidated financial statements include our net assets, results of our operations and cash flows. All intercompany transactions and accounts within our consolidated businesses have been eliminated. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Use of Estimates
Preparation of consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting periods. Estimates are used in accounting for, among other things, distributor rebate accruals, future cash flows associated with impairment testing for goodwill and long-lived assets, loss contingencies, and deferred tax assets and potential income tax assessments. Our estimates are subject to uncertainties associated with the ongoing COVID-19 pandemic which has caused volatility and adverse effects in global markets. 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.
Cash Equivalents
Cash equivalents are short-term investments with an original maturity date of three months or less. We maintain cash balances and short-term investments in excess of insurable limits in a diversified group of major banks that are selected and monitored based on ratings by the major rating agencies in accordance with our treasury policy.
Inventories and Distribution Costs
U.S. and non-U.S. inventories are valued at the lower of cost, using the First-In, First-Out (“FIFO”) method, or market. Refer to “Change in Accounting Principle” below for additional information regarding our inventory balance. Distribution costs are classified as cost of products sold.
Property, Plant and Equipment and Depreciation
Property, plant and equipment are stated at cost and depreciated on the straight-line method. Buildings are depreciated over their estimated useful lives, primarily 40 years. Machinery and equipment are depreciated over their estimated useful lives, primarily ranging from 16 to 20 years. Leasehold improvements are depreciated over the assets’ estimated useful lives, or the remaining lease term, whichever is shorter. Purchases of computer software, including external costs and certain internal costs (including payroll and payroll-related costs of employees) directly associated with developing significant computer software applications for internal use, are capitalized. Computer software costs are amortized on the straight-line method over the estimated useful life of the software, which is generally three to nine years. Depreciation expense is recorded in cost of products sold, research and development and selling and general expenses.
Estimated useful lives are periodically reviewed, and when warranted, changes are made to them. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss would be indicated when estimated undiscounted future cash flows from the use and eventual disposition of an asset group, which are identifiable and largely independent of the cash flows of other asset groups, are less than the carrying amount of the asset group. Measurement of an impairment loss would be based on the excess of the carrying amount of the asset group over its fair value. Fair value is measured using discounted cash flows or independent appraisals, as appropriate. When property is sold or retired, the cost of the property and the related accumulated depreciation are removed from the consolidated balance sheet and any gain or loss on the transaction is included in income.
Goodwill and Other Intangible Assets
We test goodwill for impairment annually or more frequently whenever events or circumstances more likely than not indicate that the fair value of the reporting unit may be below its carrying value. We operate as a single reportable operating segment
with one reporting unit. The fair value of our reporting unit was estimated using a combination of income (discounted cash flow analysis) and market approaches. The income approach is dependent upon several assumptions regarding future periods such as sales growth and a terminal growth rate. A weighted average cost of capital (“WACC”) was used to discount future estimated cash flows to their present values. The WACC was based on externally observable data considering market participants’ cost of equity and debt, optimal capital structure and risk factors specific to us. The market approach estimates the value of our company using a market capitalization methodology.
We completed our annual goodwill impairment test as of July 1, 2022, and determined that the fair value of our reporting unit exceeds the net carrying amount. There can be no assurance that the assumptions and estimates made for purposes of the annual goodwill impairment test will prove to be accurate. Volatility in the equity and debt markets, or increases in interest rates, could result in a higher discount rate. Changes in sales volumes, selling prices and costs of goods sold, and increases in interest rates could cause changes in our forecasted cash flows. Unfavorable changes in any of the factors described above could result in a goodwill impairment charge in the future.
Intangible assets with finite lives are amortized over their estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Estimated useful lives range from 7 to 30 years for trademarks, 7 to 17 years for patents and acquired technologies, and 2 to 16 years for other intangible assets. An impairment loss would be indicated when estimated undiscounted future cash flows from the use of the asset are less than its carrying amount. An impairment loss would be measured as the difference between the fair value (based on discounted future cash flows) and the carrying amount of the asset.
Revenue Recognition and Accounts Receivable
Sales revenue is recognized at the time of product shipment or delivery of our products to unaffiliated customers, depending on shipping terms. Accordingly, control of the products transfers to the customer in accordance with the transaction’s shipping terms. Sales revenue is recognized for the amount of consideration that we expect to be entitled to receive in exchange for our products. Sales are reported net of returns, rebates, incentives, each as described below, and freight allowed. Taxes imposed by governmental authorities on our revenue-producing activities with customers, such as sales taxes and value-added taxes, are excluded from net sales.
We provide medical products to distributors or end-user customers under supply agreements under which customers may place purchase orders for a variety of our products at specified pricing over a specified term, usually three years. While our sales and marketing efforts are directed to hospitals or other healthcare providers, our products are generally sold through third-party distribution channels.
Under our contracts with customers, our performance obligations are normally limited to shipment or delivery of products to a customer upon receipt of a purchase order. We bill our customers, depending on shipping terms, upon shipment or delivery of the products to the customer.
Amounts billed are typically due within 30 days, with a 1% discount allowed for distributors if payments are made within 15 days. We estimate cash discounts based on historical experience and record the cash discounts as an allowance to trade receivables. The allowance for this cash discount is disclosed in “Supplemental Balance Sheet Information” under “Accounts Receivable” in Note 4. The differences between estimated and actual cash discounts are generally not material.
We allow for returns within a specified period of time, based on our standard terms and conditions, following customers’ receipt of the goods and estimate a liability for returns based on historical experience. The liability for estimated returns was $0.1 million as of December 31, 2022 and 2021. The differences between estimated and actual returns are generally not material.
Our contracts provide for forms of variable consideration including rebates, incentives and pricing tiers, each of which are described below:
Distributor Rebates - Sales to distributors, on a global basis, represents approximately 52% of our consolidated net sales. We provide for rebates on gross sales to distributors for differences between list prices and average end-user customer prices. Rebate rates vary widely (typically between 10% and 35%) between our product families. A liability for distributor rebates is estimated based on a moving average of rebate rates, specific customer trends, contractual provisions, historical experience and other relevant factors. The liability for estimated rebates was $14.5 million and $14.3 million, respectively, as of December 31, 2022 and 2021. Differences between our estimated and actual costs are generally not material and recognized in earnings in the period in the period such differences are determined.
Incentives - Globally, approximately 32% of our consolidated net sales are contracted through group purchasing organizations (“GPOs”). Incentives include fees paid to GPOs or small percentage rebates to distributors in conjunction with the sales volume of our products to end-user customers. A liability for incentives is estimated based on average incentive rates over a period of time. The liability for estimated incentives was $12.4 million and $10.2 million, respectively, as of December 31, 2022 and
2021. Differences between estimated and actual incentives are generally not material and recognized in earnings in the period such differences are determined.
Pricing tiers - In certain of our contracts, pricing is dependent on volumes purchased, with lower pricing given upon meeting certain established purchase volumes. Customers are placed in a pricing tier based on expected purchase volume, which is developed primarily using the customer’s purchase history. Depending on the customer’s purchases, we may move the customer up or down a tier, upon meeting or failing to meet certain established purchase volumes. Pricing in the new tier is applied to purchase orders prospectively. There are no retrospective adjustments based on movements between pricing tiers.
We had one customer who individually accounted for more than 10% of our consolidated accounts receivable balance as of December 31, 2022 and December 31, 2021. Bad debt expense was $1.4 million for the year ended December 31, 2022 compared to a net benefit of $0.5 million for the year ended December 31, 2021 and a net expense of $1.7 million for the year end December 31, 2020.
Foreign Currency Translation
The income statements of foreign operations are translated into U.S. dollars at rates of exchange in effect each month. The balance sheets of these operations are translated at period-end exchange rates, and the differences from historical exchange rates are reflected as unrealized translation adjustments in other comprehensive income.
Research and Development
Research and development expenses are expensed as incurred. Research and development expenses consist primarily of salaries and related expenses for personnel, product trial costs, outside laboratory and license fees, the costs of laboratory equipment and facilities and asset write-offs for equipment that does not reach success in product manufacturing certifications.
Stock-Based Compensation
We have a stock-based Equity Participation Plan, a Long Term Incentive Plan and an Outside Directors’ Compensation Plan that provide for awards of stock options, stock appreciation rights, restricted stock (and in certain limited cases, unrestricted stock), restricted stock units, performance units and cash awards to eligible employees (including officers who are employees), directors, advisors and consultants. Stock-based compensation is initially measured at the fair value of the awards on the grant date and is recognized in the financial statements over the period the employees are required to provide services in exchange for the awards, with forfeitures accounted for as they occur. The fair value of option awards is measured on the grant date using a Black-Scholes option-pricing model. The fair value of time-based and some performance-based restricted share awards is based on the Avanos stock price at the grant date and the assessed probability of meeting future performance targets. For performance-based restricted share units for which vesting is conditioned upon achieving a measure of total shareholder return, fair value is measured using a Monte Carlo simulation. Generally, new shares are issued to satisfy vested restricted stock units and exercises of stock options. See Note 12, “Stock-Based Compensation.”
Income Taxes
We account for income taxes under the asset and liability method of accounting, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Under this method, changes in tax rates and laws are recognized in income in the period such changes are enacted. The provision for federal, state, and foreign income taxes is calculated on income before income taxes based on current tax law and includes the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Such provision differs from the amounts currently payable because certain items of income and expense are recognized in different reporting periods for financial reporting purposes than for income tax purposes. Recording the provision for income taxes requires management to make significant judgments and estimates for matters whose ultimate resolution may not become known until the final resolution of an examination by the Internal Revenue Service (IRS) or state and foreign agencies. If it is more likely than not that some portion, or all, of a deferred tax asset will not be realized, a valuation allowance is recognized.
Recording liabilities for uncertain tax positions involves judgment in evaluating our tax positions and developing the best estimate of the taxes ultimately expected to be paid. We include any related tax penalties and interest in income tax expense.
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. Any additional impacts due with respect to the previously-taxed earnings, if repatriated, would generally be limited to foreign withholding tax, U.S. state income tax and the tax effect of certain foreign exchange adjustments. We intend, however, to indefinitely reinvest these earnings and expect future U.S. cash generation to be sufficient to meet U.S. cash needs. At this time, the determination of deferred tax liabilities on the amount of financial reporting over tax basis is not practicable.
Employee Defined Benefit Plans
We recognize the funded status of our defined benefit as an asset or a liability on our balance sheet. Actuarial gains or losses are a component of our other comprehensive income, which is then included in our accumulated other comprehensive income. Pension expenses are recognized over the period in which the employee renders service and becomes eligible to receive benefits. We make assumptions (including the discount rate and expected rate of return on plan assets) in computing the pension expense and obligations.
Recently Adopted Accounting Pronouncements
Effective January 1, 2022, we adopted Accounting Standards Update (“ASU”) No. 2021-04, Issuers Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This ASU is intended to clarify accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity-classified after modification or exchange. The accounting is determined based on whether the transaction was done to issue equity, issue or modify debt or for other reasons. Adoption of this ASU did not have a material effect on our financial position, results of operations or cash flows.
Effective January 1, 2021, we adopted ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU removed certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. Adoption of this ASU did not have a material effect on our financial position, results of operations or cash flows.
In December 2022, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2022-06, Reference Rate Reform. This ASU was prompted by the planned cessation of the London Interbank Offer Rate (“LIBOR”). This ASU applies to contract modifications that replace a reference rate and contemporaneous modifications of other contract terms related to the replacement of the reference rate. Under this ASU, modifications to debt agreements may be accounted for by prospectively adjusting the effective interest rate. This ASU is effective as of issuance on December 21, 2022 and defers the sunset date of Topic 848, Reference Rate Reform from December 31, 2022 to December 31, 2024. This ASU may be applied as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Adoption of this ASU did not have a material effect on our financial position, results of operations or cash flows.
Recently Issued Accounting Pronouncements
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU pertains to acquired revenue contracts with customers in a business combination and addresses diversity in practice and inconsistency related to recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. This ASU is to be applied prospectively for years beginning after December 15, 2022. Adoption of this ASU is not expected to have a material effect on our financial position, results of operations or cash flows.
Change in Accounting Principle
During the third quarter of 2022, we elected to change our method of accounting for U.S. inventory from the Last-In, First-Out (“LIFO”) method to the First-In, First-Out (“FIFO”) method. We believe the FIFO method of accounting for inventory is preferable because it provides for an inventory balance that more closely reflects the inventory’s current cost, improves efficiency and enhances 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 Management's Discussion and Analysis.
As a result of the accounting change, accumulated deficit as of January 1, 2022 improved from $310.3 million, as reported under the LIFO method to $303.6 million using the FIFO method. Accumulated deficit as of January 1, 2021 improved from $315.5 million, as reported under the LIFO method to $309.9 million using the FIFO method. Accumulated deficit as of January 1, 2020 improved from $288.3 million, as reported under the LIFO method to $280.9 million using the FIFO method.
Due to the change in accounting principle, the following financial statement line items within the accompanying consolidated financial statements were adjusted as follows:
| | | | | | | | | | | | | | | | | |
Consolidated Income Statements |
(in millions, except per share amounts) | | | | |
| Year Ended December 31, 2022 |
| As Calculated (LIFO) | | As Reported (FIFO) | | Effect of Change |
Cost of products sold | $ | 370.7 | | | $ | 370.0 | | | $ | (0.7) | |
Income before income taxes | 64.5 | | | 65.2 | | | 0.7 | |
Income tax provision | (14.6) | | | (14.7) | | | (0.1) | |
Net income | 49.9 | | | 50.5 | | | 0.6 | |
Earnings per share: | | | | | |
Basic | $ | 1.06 | | | $ | 1.08 | | | $ | 0.02 | |
Diluted | $ | 1.05 | | | $ | 1.07 | | | $ | 0.02 | |
| | | | | |
| Year Ended December 31, 2021 |
| As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Cost of products sold | $ | 380.3 | | | $ | 378.8 | | | $ | (1.5) | |
Income before income taxes | 5.8 | | | 7.3 | | | 1.5 | |
Income tax provision | (0.6) | | | (1.0) | | | (0.4) | |
Net income | 5.2 | | | 6.3 | | | 1.1 | |
Earnings per share: | | | | | |
Basic | $ | 0.11 | | | $ | 0.13 | | | $ | 0.02 | |
Diluted | $ | 0.11 | | | $ | 0.13 | | | $ | 0.02 | |
| | | | | |
| Year Ended December 31, 2020 |
| As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Cost of products sold | $ | 341.5 | | | $ | 343.9 | | | $ | 2.4 | |
Loss before income taxes | (60.5) | | | (62.9) | | | (2.4) | |
Income tax benefit | 33.3 | | | 33.9 | | | 0.6 | |
Net loss | (27.2) | | | (29.0) | | | (1.8) | |
Loss per share: | | | | | |
Basic | $ | (0.57) | | | $ | (0.61) | | | $ | (0.04) | |
Diluted | $ | (0.57) | | | $ | (0.61) | | | $ | (0.04) | |
| | | | | | | | | | | | | | | | | |
Consolidated Statements of Comprehensive (Loss) Income |
(in millions) | | | | |
| Year Ended December 31, 2022 |
| As Calculated (LIFO) | | As Reported (FIFO) | | Effect of Change |
Net income | $ | 49.9 | | | 50.5 | | $ | 0.6 | |
Comprehensive income | 47.9 | | | 48.5 | | 0.6 | |
| | | | | |
| Year Ended December 31, 2021 |
| As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Net income | $ | 5.2 | | | 6.3 | | $ | 1.1 | |
Comprehensive (loss) income | (0.5) | | | 0.6 | | 1.1 | |
| | | | | |
| Year Ended December 31, 2020 |
| As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Net loss | $ | (27.2) | | | $ | (29.0) | | | $ | (1.8) | |
Comprehensive loss | (23.3) | | | (25.1) | | | (1.8) | |
| | | | | | | | | | | | | | | | | |
Consolidated Balance Sheets |
(in millions) | | | | |
| As of December 31, 2022 |
| As Calculated (LIFO) | | As Reported (FIFO) | | Effect of Change |
Inventories | $ | 180.6 | | | $ | 190.3 | | | $ | 9.7 | |
Deferred tax liabilities | 23.0 | | | 25.4 | | | 2.4 | |
Accumulated deficit, end of period | (260.4) | | | (253.1) | | | 7.3 | |
| | | | | |
| As of December 31, 2021 |
| As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Inventories | $ | 150.3 | | | $ | 159.3 | | | $ | 9.0 | |
Deferred tax liabilities | 9.6 | | | 11.9 | | | 2.3 | |
Accumulated deficit, end of period | (310.3) | | | (303.6) | | | 6.7 | |
| | | | | | | | | | | | | | | | | |
Consolidated Statements of Stockholders’ Equity |
(in millions) | | | | |
| Year Ended December 31, 2022 |
| As Calculated (LIFO) | | As Reported (FIFO) | | Effect of Change |
Accumulated deficit, beginning of period | $ | (310.3) | | | $ | (303.6) | | | $ | 6.7 | |
Net income | 49.9 | | | 50.5 | | | 0.6 | |
Total stockholders' equity | 1,283.8 | | | 1,291.2 | | | 7.4 | |
| | | | | |
| Year Ended December 31, 2021 |
| As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Accumulated deficit, beginning of period | $ | (315.5) | | | $ | (309.9) | | | $ | 5.6 | |
Net income | 5.2 | | | 6.3 | | | 1.1 | |
Total stockholders' equity | 1,263.9 | | | 1,270.6 | | | 6.7 | |
| | | | | |
| Year Ended December 31, 2020 |
| As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Accumulated deficit, beginning of period | $ | (288.3) | | | $ | (280.9) | | | $ | 7.4 | |
Net loss | (27.2) | | | (29.0) | | | (1.8) | |
Total stockholders' equity | 1,256.5 | | | 1,262.1 | | | 5.6 | |
| | | | | | | | | | | | | | | | | |
Consolidated Cash Flow Statements |
(in millions) | | | | | |
| Year Ended December 31, 2022 |
| As Calculated (LIFO) | | As Reported (FIFO) | | Effect of Change |
Net income | $ | 49.9 | | | $ | 50.5 | | | $ | 0.6 | |
Inventories | (30.2) | | | (30.9) | | | (0.7) | |
Deferred income taxes and other | (4.4) | | | — | | | 4.4 | |
| | | | | |
| Year Ended December 31, 2021 |
| As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Net income | $ | 5.2 | | | $ | 6.3 | | | $ | 1.1 | |
Inventories | 17.2 | | | 15.7 | | | (1.5) | |
Deferred income taxes and other | (3.4) | | | (3.0) | | | 0.4 | |
| | | | | |
| Year Ended December 31, 2020 |
| As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Net loss | $ | (27.2) | | | $ | (29.0) | | | $ | (1.8) | |
Inventories | (21.8) | | | (19.4) | | | 2.4 | |
Deferred income taxes and other | 13.8 | | | 13.2 | | | (0.6) | |
Note 2. Restructuring
During the year ended December 31, 2022, we had no restructuring expenses. Our restructuring expenses for the years ended December 31, 2021 and 2020 are summarized in the table below (in millions):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
Post-Divestiture Restructuring Plan | $ | 10.2 | | | $ | 2.2 | |
Integration and Restructuring of Business Acquisitions | — | | | 0.5 | |
2020 Restructuring | 12.4 | | | 27.6 | |
Total Restructuring Costs | $ | 22.6 | | | $ | 30.3 | |
Post-Divestiture Restructuring Plan
In conjunction with the sale of our Surgical and Infection Prevention (“S&IP) business (the “Divestiture”), we began a multi-phase restructuring plan intended to align our organizational structure, information technology platform and supply chain and distribution channels to be more appropriate for the size and scale of our business. The post-divestiture restructuring plan has been completed, and costs incurred were included in “Cost of products sold”, “Selling and general expenses” and “Other expense, net.”
Integration of Business Acquisitions
During the third quarter of 2019, we initiated activities to integrate the asset and business acquisitions completed in 2019 and 2019 into our operations, and where appropriate, re-align our organization accordingly. This includes Cool Systems, Inc. (“Game Ready”), which was acquired in 2018 and the 2019 acquisitions of Endoclear, LLC and Summit Medical Products, Inc. The integration of these acquisitions has been completed and costs incurred were included in “Selling and general expenses.”
2020 Restructuring
In the fourth quarter of 2020, we initiated activities to reduce the size of our senior leadership team, consolidate certain operations within our pain management franchise, exit unprofitable lines of business and reduce the size of our office space to align with expected requirements following the COVID-19 pandemic. Costs were primarily associated with operating lease right-of-use asset impairments or lease terminations, impairment of intangible and other assets and employee severance and benefits. The 2020 Restructuring has been completed and costs incurred were included in “Cost of products sold,” “Selling and general expenses” and “Other expense, net.”
Restructuring Liability
Our liability for costs associated with our restructuring activities as of December 31, 2022 and 2021 is summarized below (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
Balance, beginning of year | $ | 0.1 | | | $ | 7.2 | |
Total restructuring costs, excluding non-cash charges | — | | | 12.6 | |
Payments and adjustments, net | (0.1) | | | (19.7) | |
Balance, end of year | $ | — | | | $ | 0.1 | |
Note 3. Goodwill
We test goodwill for impairment annually or more frequently whenever events or circumstances more likely than not indicate that the fair value of the reporting unit may be below its carrying amount. We operate as a single operating segment with one reporting unit, and accordingly, our annual goodwill impairment test was based on an evaluation of the fair value of our Company as a whole.
We completed our annual impairment test as of July 1, 2022, and based on a combination of income and market capitalization approaches, we determined that our fair value exceeded the net carrying value of our reporting unit.
The changes in the carrying amount of goodwill are as follows (in millions):
| | | | | |
Balance at December 31, 2020 | $ | 802.5 | |
| |
| |
Currency translation adjustment | (0.9) | |
Balance at December 31, 2021 | 801.6 | |
Goodwill acquired(a) | 19.3 | |
Currency translation adjustment | (1.5) | |
Balance at December 31, 2022 | $ | 819.4 | |
_____________________________________________
(a)We acquired $19.3 million of goodwill in conjunction with the acquisition of OrthogenRx described in Note 5, “Business Acquisition.” Goodwill was allocated to our existing medical devices reporting segment.
Note 4. Supplemental Balance Sheet Information
Accounts Receivable
Accounts receivable consist of the following (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
Accounts Receivable | $ | 162.1 | | | $ | 122.0 | |
Income tax receivable | 12.2 | | | 13.0 | |
Allowances and doubtful accounts | | | |
Doubtful accounts | (6.1) | | | (3.6) | |
Sales discounts | (0.3) | | | (0.2) | |
Accounts receivable, net | $ | 167.9 | | | $ | 131.2 | |
Losses on receivables are estimated based on known troubled accounts and historical experience. Receivables are considered impaired and written off when it is probable that payments due will not be collected. Bad debt expense was $1.4 million for the year ended December 31, 2022 compared to a net benefit of $0.5 million for the year ended December 31, 2021 and a net expense of $1.7 million for the year end December 31, 2020. .
Inventories
Inventories at the lower of cost (determined on the FIFO method) or net realizable value consists of the following (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
Raw materials | $ | 53.6 | | | $ | 47.7 | |
Work in process | 31.2 | | | 33.2 | |
Finished goods | 97.7 | | | 71.6 | |
Supplies and other | 7.8 | | | 6.8 | |
Total Inventory | 190.3 | | | 159.3 | |
We may distribute products bearing the Halyard brand through 2023 under a royalty agreement we have with Owens & Minor, Inc. As of December 31, 2022, we had $1.9 million of inventory bearing the Halyard brand. For the years ended December 31, 2022, 2021 and 2020 we wrote-off $1.1 million, $3.4 million and $5.9 million, respectively, of Halyard-branded inventory.
Property, Plant and Equipment
Property, plant and equipment consists of the following (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
Land | $ | 1.1 | | | $ | 1.1 | |
Buildings and leasehold improvements | 50.8 | | | 48.0 | |
Machinery and equipment | 239.1 | | | 223.2 | |
Construction in progress | 27.9 | | | 32.0 | |
| 318.9 | | | 304.3 | |
Less accumulated depreciation | (155.0) | | | (136.2) | |
Total | $ | 163.9 | | | $ | 168.1 | |
Property, plant and equipment includes $0.1 million of interest that was capitalized in both the years ended December 31, 2022 and 2021. There were $3.9 million and $5.6 million of capital expenditures in accounts payable as of December 31, 2022 and 2021, respectively.
Depreciation expense was $22.0 million, $21.6 million and $23.5 million, respectively, in the years ended December 31, 2022, 2021 and 2020.
Intangible Assets
Intangible assets subject to amortization consist of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2022 | | 2021 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Trademarks | | $ | 92.5 | | | $ | (67.2) | | | $ | 25.3 | | | $ | 90.9 | | | $ | (64.0) | | | $ | 26.9 | |
Patents and acquired technologies | | 278.8 | | | (195.3) | | | 83.5 | | | 271.7 | | | (177.7) | | | 94.0 | |
Other | | 187.6 | | | (45.4) | | | 142.2 | | | 61.2 | | | (40.9) | | | 20.3 | |
Total | | $ | 558.9 | | | $ | (307.9) | | | $ | 251.0 | | | $ | 423.8 | | | $ | (282.6) | | | $ | 141.2 | |
In the first quarter of 2022, we acquired $135.6 million of identified intangibles in conjunction with our acquisition of OrthogenRx, as described in Note 5, “Business Acquisition.” Amortization expense for intangible assets is included in “Cost of products sold” and “Selling and general expenses” and was $25.7 million, $16.7 million and $19.4 million for the years ended December 31, 2022, 2021 and 2020, respectively. In the year ended December 31, 2020, we recorded $7.8 million of impairment on certain acquired patents and technologies which was included in “Other expense, net”.
We estimate amortization expense for the next five years and beyond will be as follows (in millions):
| | | | | | | | |
For the years ending December 31, | | |
2023 | | $ | 25.4 | |
2024 | | 25.3 | |
2025 | | 24.7 | |
2026 | | 24.3 | |
2027 | | 24.2 | |
Thereafter | | 127.1 | |
Total | | $ | 251.0 | |
Accrued Expenses
Accrued expenses consist of the following (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
Accrued rebates | $ | 26.9 | | | $ | 24.5 | |
Accrued salaries and wages | 34.6 | | | 29.3 | |
Accrued taxes and other | 21.2 | | | 3.0 | |
Other | 16.2 | | | 11.3 | |
Total | $ | 98.9 | | | $ | 68.1 | |
Other Long-Term Liabilities
Other long-term liabilities consist of the following (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| | | |
Accrued compensation benefits | 4.8 | | | 4.4 | |
Other (a) | 18.7 | | | 4.7 | |
Total | $ | 23.5 | | | $ | 9.1 | |
__________________________________________________
(a)For the December 31, 2022 period presented, amounts primarily relate to contingent consideration and indemnification liability associated with the OrthogenRx acquisition as described in Note 5, “Business Acquisition.”
Note 5. Business Acquisition
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 and will enhance our chronic pain portfolio. The total purchase price paid was $130.0 million in cash at closing less working capital adjustments, with 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 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 which is described further in Note 8, “Debt”. 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. 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.”
We accounted for the OrthogenRx acquisition under the acquisition method of accounting for business combinations. Accordingly, the purchase price paid was allocated to the underlying net assets in proportion to their respective fair values. The fair value of the net assets acquired are based on estimates and assumptions relating to certain intangible assets acquired, liabilities assumed, income taxes and loss contingencies, which are subject to change during the measurement period (up to one year from the acquisition date). The primary areas that are subject to change relate to the estimated deferred tax liability, which may continue to be adjusted as additional information is received and certain tax returns are finalized. Any excess of the purchase price over the estimated fair values was recorded as goodwill. Fair values of assets acquired and liabilities assumed were determined using discounted cash flow analyses, and the fair value of the contingent cash consideration was estimated using a Monte Carlo simulation. The purchase price allocation, net of cash acquired, is shown in the table below (in millions):
| | | | | |
Accounts receivable, net | $ | 13.7 | |
Inventory | 2.8 | |
Other current assets | 0.4 | |
Accounts payable | (5.4) | |
Other current liabilities | (13.0) | |
Contingent consideration | (9.2) | |
Other non-current assets (liabilities) | (5.6) | |
Deferred tax liability | (22.5) | |
Identifiable intangible assets | 135.6 | |
Goodwill | 19.3 | |
Total | $ | 116.1 | |
As a result of our year-end tax provision process, current period adjustments related to a decrease of $3.9 million in certain indemnification liabilities acquired and a decrease of $1.2 million in the estimated deferred tax liability which was recorded as a $5.1 million decrease to goodwill.
Goodwill from the OrthogenRx acquisition is not fully tax deductible and is attributable to future earnings potential and the strategic fit within our interventional pain portfolio as it allows for providing a greater continuum of care for patients.
The identifiable intangible assets relating to the OrthogenRx acquisition include the following (in millions, except years):
| | | | | | | | |
| Identifiable Intangible Asset Amount | Weighted Average Useful Lives (Years) |
Trademarks | $ | 1.3 | | 10 |
Other | 134.3 | | 14 |
Total | $ | 135.6 | | |
Other intangible assets includes $126.0 million related to the OrthogenRx products that we currently market and distribute, combined into one composite intangible asset that includes customer relationships and exclusive distribution rights and $8.3 million related to OrthogenRx non-compete agreements.
The following unaudited pro forma financial information is presented in the table below for the year ended December 31, 2022 and 2021 as if the acquisition had occurred on January 1, 2021 (in millions, except per share amounts):
| | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2022 (Unaudited) | | 2021 (Unaudited) | | | | |
Net sales | $ | 822.3 | | | $ | 815.5 | | | | | |
| | | | | | | |
Net income | $ | 53.9 | | | $ | 17.7 | | | | | |
| | | | | | | |
Earnings (Loss) Per Share: | | | | | | | |
Basic | $ | 1.15 | | | $ | 0.37 | | | | | |
Diluted | $ | 1.14 | | | $ | 0.36 | | | | | |
Note 6. Leases
Our lease obligations relate primarily to our principal executive offices along with various manufacturing, warehouse and distribution facilities located throughout the world. For leases with terms greater than twelve months, we record a right of use (“ROU”) asset and corresponding lease obligation. As of December 31, 2022, all our leasing arrangements were operating leases. Many of our leases include escalating rent payments, renewal options and termination options, which are considered in our determination of straight-line rent expense when appropriate. Many of our leases also include additional amounts for common area maintenance and taxes. We have elected not to separate lease and non-lease components in the determination of straight-line rent expense. For a majority of our leases, an implicit lease rate is not available. Accordingly, we use a rate that approximates our incremental secured borrowing rate.
The table below summarizes information related to ROU assets and lease liabilities that are included in the accompanying consolidated balance sheet (dollars in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
Assets | | | |
Operating lease right-of-use assets | $ | 30.6 | | | $ | 38.6 | |
| | | |
Liabilities | | | |
Current portion of operating lease liabilities | 12.8 | | | 14.7 | |
Operating lease liabilities | 34.7 | | | 42.8 | |
Total Operating Lease Liabilities | $ | 47.5 | | | $ | 57.5 | |
| | | |
Weighted average remaining lease term | 5.6 years | | 6.1 years |
Weighted average discount rate | 4.0 | % | | 4.4 | % |
The table below summarizes costs and cash flows arising from our lease arrangements for the year ended December 31, 2022 (in millions):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
Operating lease cost | $ | 13.1 | | | $ | 13.5 | |
Short-term lease cost | 0.3 | | | 0.5 | |
Variable lease cost | 1.0 | | | 0.8 | |
Total lease cost | $ | 14.4 | | | $ | 14.8 | |
| | | |
Cash paid for amounts included in the measurement of lease liabilities | $ | 16.2 | | | $ | 16.4 | |
Right-of-use assets obtained in exchange for operating lease liabilities | $ | 3.0 | | | $ | 1.5 | |
The future minimum obligations under operating leases having non-cancelable terms in excess of one year for the next five years and beyond will be (in millions):
| | | | | | | | |
For the years ending December 31, | | Amount |
2023 | | $ | 13.0 | |
2024 | | 9.2 | |
2025 | | 7.7 | |
2026 | | 6.9 | |
2027 | | 5.5 | |
Thereafter | | 10.9 | |
Future minimum obligations | | $ | 53.2 | |
Note 7. Fair Value Information
The following fair value information is based on a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels in the hierarchy used to measure fair value are:
Level 1: Unadjusted quoted prices in active markets accessible at the reporting date for identical assets and liabilities.
Level 2: Quoted prices for similar assets or liabilities in active markets. Quoted prices for identical or similar assets and liabilities in markets that are not considered active or financial instruments for which all significant inputs are observable, either directly or indirectly.
Level 3: Prices or valuations that require inputs that are significant to the valuation and are unobservable.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The following table includes the fair value of our financial instruments for which disclosure of fair value is required (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | December 31, 2022 | | December 31, 2021 |
| | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
Assets | | | | | | | | | |
Cash and cash equivalents | 1 | | $ | 127.7 | | | $ | 127.7 | | | $ | 118.5 | | | $ | 118.5 | |
Liabilities | | | | | | | | | |
Revolving Credit Facility | 2 | | $ | 110.0 | | | $ | 110.0 | | | $ | 130.0 | | | $ | 130.0 | |
Term Loan Facility | 2 | | 122.5 | | | 122.5 | | | — | | | — | |
Contingent consideration related to acquisition | 3 | | 9.2 | | | 9.2 | | | — | | | — | |
Cash equivalents are recorded at cost, which approximates fair value due to their short-term nature.
The fair value of amounts borrowed under our Revolving Credit Facility and Term Loan Facility (as defined below) approximates carrying value because borrowings are subject to a variable rate as described in Note 8, “Debt”. The fair value amount of the contingent consideration was determined using a Monte Carlo simulation using assumptions regarding net sales volatility, discount rate and others. See further discussion of the acquisition of OrthogenRx in Note 5, “Business Acquisition.”
For the years ended December 31, 2022 and 2021, there were no transfers among Level 1, 2 or 3 fair value determinations. Transfers between levels occur when there are changes in the observability of inputs. Changes between levels are assumed to occur at the beginning of the year.
Note 8. Debt
As of December 31, 2022 and 2021, our debt balances were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Weighted- Average Interest Rate | | Maturity | | As of December 31, |
| 2022 | | 12/31/2021(a) |
| | | | | | | |
Revolving Credit Facility | 6.32% | | 2027 | | $ | 110.0 | | | $ | 130.0 | |
Term Loan Facility | 6.32% | | 2027 | | 123.4 | | | — | |
| | | | | 233.4 | | | 130.0 | |
Unamortized debt issuance costs | | | | | (0.9) | | | — | |
Current portion of long-term debt | | | | | (6.2) | | | — | |
Total Long-Term Debt, net | | | | | $ | 226.3 | | | $ | 130.0 | |
| | | | | | | |
| | | | |
____________________________________________
(a)Borrowings for this period presented were under the Prior Credit Agreement (as defined below).
On June 24, 2022, we entered into a credit agreement (the “Credit Agreement”) with certain lenders which established credit facilities in an aggregate principal amount of $500.0 million, consisting of a five-year senior secured term loan of $125.0 million (the “Term Loan Facility”) and a five-year senior secured revolving credit facility allowing borrowings of up to $375.0 million, with a letter of credit sub-facility in an amount of $75.0 million (the “Revolving Credit Facility”). All obligations under the Credit Agreement and certain hedging agreements and cash management arrangements thereunder are: (i) guaranteed by each of the Company’s direct and indirect, existing and future, material wholly owned domestic subsidiaries (“Guarantors”) and (ii) secured by a first priority lien on substantially all the assets of the Company and the Guarantors. The Credit Agreement contains an accordion feature that allows us to incur incremental term loans under the Term Loan Facility or under new term loan facilities or to increase the amount of the commitments under the Revolving Credit Facility, including through the establishment of one or more tranches under the Revolving Credit Facility. The Credit Agreement will mature on June 24, 2027.
Borrowings under the Term Loan Facility and Revolving Credit Facility bear interest at our option at either: (i) an adjusted term secured overnight financing rate (“SOFR”), plus a margin ranging between 1.50% to 2.00% per annum, depending on our
consolidated total leverage ratio; (ii) an adjusted daily simple SOFR rate, plus a margin ranging between 1.50% to 2.00% per annum, depending on our consolidated total leverage ratio; or (iii) a base rate (calculated as the greatest of (a) the prime rate, (b) the NYFRB rate (being the greater of the federal funds effective rate or the overnight bank funding rate) plus 0.50%, and (c) the one month adjusted term SOFR rate plus 1.00%), plus a margin ranging between 0.50% to 1.00% per annum, depending on our consolidated total leverage ratio. The unused portion of the Revolving Credit Facility will be subject to a commitment fee ranging between 0.20% to 0.25% per annum, depending on our consolidated total leverage ratio. 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.
On January 20, 2022, we incurred $125.0 million of term loans (the “Tranche A Term Loans”) under an incremental agreement dated as of December 22, 2021, which supplemented the prior credit agreement. The proceeds of the Tranche A Term Loans were used to fund a portion of the purchase price and to pay fees and expenses related to the OrthogenRx, Inc. acquisition which is described further in Note 5, “Business Acquisition”.
In connection with entering into the Credit Agreement, we terminated the Amended and Restated Credit Agreement dated as of October 30, 2018 by and among the Company, the lenders thereunder and Citibank N.A., as administrative agent (as amended and supplemented, the “Prior Credit Agreement”) and we incurred a debt extinguishment loss of $1.1 million, which is included in “Interest expense” in the accompanying consolidated income statement.
Debt Payments
The Credit Agreement requires quarterly principal installment payments on the Term Loan Facility of 10% of the total principal borrowed for the first eight quarters following funding and then quarterly installment payments of 20% of the total principal borrowed, at which time the remaining unpaid principal amount of the Term Loan Facility is due and payable by the Company upon the maturity date of June 24, 2027. The current portion of the Term Loan Facility is $6.2 million. Interest is payable quarterly. We are permitted to prepay all or a portion of the Term Loan Facility and the Revolving Credit Facility at any time without premium or penalty. Interest is payable at the same rates set forth above for the Revolving Credit Facility.
During the year ended December 31, 2022, we repaid $1.6 million of the Term Loan Facility. During the year ended December 31, 2022, we repaid $20.0 million of the Revolving Credit Facility.
As of December 31, 2022, the aggregate amounts of long-term debt that will mature during each of the next four years and thereafter are as follows (in millions):
| | | | | | | | |
| | Amount |
2023 | | $ | 6.2 | |
2024 | | 7.0 | |
2025 | | 9.4 | |
2026 | | 10.2 | |
Thereafter | | 200.6 | |
Total | | $ | 233.4 | |
Debt Covenants
The Credit Agreement requires compliance with certain customary operational and financial covenants. In addition, we are subject to covenants in the Credit Agreement that, among other things, limit our ability and the ability of certain of our subsidiaries to:
•incur additional indebtedness, guarantee indebtedness or issue disqualified stock or preferred stock;
•pay dividends on, repurchase or make distributions in respect of our capital stock or prepay certain subordinated indebtedness;
•make certain investments or acquisitions;
•sell, transfer or otherwise convey certain assets;
•create liens;
•enter into agreements restricting certain subsidiaries’ ability to pay dividends or make other intercompany transfers;
•consolidate, merge, sell or otherwise dispose of all or substantially all of our and our subsidiaries’ assets; and
•enter into transactions with affiliates.
Pursuant to the restrictive covenants that limit our ability to pay dividends, we have the ability to pay dividends, repurchase stock and make investments up to an “Available Amount,” as defined in the credit agreement, provided that we are in compliance with all required covenants, there are no events of default and upon meeting certain financial ratios.
The Credit Agreement also includes financial covenants which require us not to exceed a certain consolidated net secured leverage ratio and to maintain a consolidated interest coverage ratio above a certain level. These financial covenants are tested quarterly. As of December 31, 2022, we were in compliance with all of our debt covenants.
As of December 31, 2022, our repayment requirements in the next five years includes any balance remaining on our Revolving Credit Facility and Term Loan Facility, which are due on June 24, 2027.
Note 9. Income Taxes
Our income taxes are calculated using the asset and liability method of accounting, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.
The provision for income taxes includes federal, state and foreign taxes currently payable and those deferred because of net operating losses and temporary differences between the consolidated financial statements and tax bases of assets and liabilities.
The components of income (loss) before income taxes, and the provision (benefit) for income taxes are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Income (loss) before income taxes | | | | | |
United States | $ | 59.3 | | | $ | 4.3 | | | $ | (53.2) | |
Foreign | 5.9 | | | 3.0 | | | (9.7) | |
Total | 65.2 | | | 7.3 | | | (62.9) | |
Income tax provision (benefit): | | | | | |
Current: | | | | | |
United States | 12.9 | | | (5.2) | | | (47.0) | |
State | 3.6 | | | 0.8 | | | 0.4 | |
Foreign | 1.9 | | | 1.5 | | | 1.7 | |
Total | 18.4 | | | (2.9) | | | (44.9) | |
Deferred: | | | | | |
United States | (3.9) | | | 3.9 | | | 12.8 | |
State | 0.6 | | | (0.1) | | | (1.9) | |
Foreign | (0.4) | | | 0.1 | | | 0.1 | |
Total | (3.7) | | | 3.9 | | | 11.0 | |
Total income tax provision (benefit) | $ | 14.7 | | | $ | 1.0 | | | $ | (33.9) | |
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020. The CARES Act 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 that was recognized in the years ended December 31, 2022, 2021 and 2020, respectively.
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 2017 Tax Cuts and Jobs Act. Any additional impacts due with respect to the previously-taxed earnings, if repatriated, would generally be limited to foreign withholding tax, U.S. state income tax and the tax effect of certain foreign exchange adjustments. We intend, however, to indefinitely reinvest these earnings and expect future U.S. cash generation to be sufficient to meet U.S. cash needs. At this time, the determination of deferred tax liabilities on the amount of financial reporting over tax basis is not practicable.
Major differences between the federal statutory rate and the effective tax rate are as follows: | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Federal statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
Rate of state income taxes, net of federal tax benefit | 5.3 | | | 8.0 | | | 2.3 | |
Statutory rate other than U.S. statutory rate | 1.1 | | | 1.6 | | | 5.0 | |
| | | | | |
Foreign tax credit carryback | — | | | 27.8 | | | — | |
Valuation allowance | 0.5 | | | 16.2 | | | (9.3) | |
Uncertain tax positions | — | | | (5.9) | | | — | |
Capital Loss Carryback | — | | | (66.4) | | | — | |
CARES Act | (5.9) | | | (38.5) | | | 39.9 | |
DOJ Deferred Prosecution Agreement | — | | | 38.2 | | | — | |
Nondeductible officer’s compensation | 2.3 | | | 17.6 | | | (1.9) | |
U.S. federal research and development credit | (4.3) | | | (18.0) | | | 2.4 | |
Share based compensation windfall tax deduction | 1.7 | | | 7.3 | | | (2.4) | |
| | | | | |
Other, net | 0.8 | | | 4.8 | | | (3.1) | |
Effective tax rate | 22.5 | % | | 13.7 | % | | 53.9 | % |
The following is a summary of the significant components of the Company’s deferred tax assets and liabilities (in millions): | | | | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
Deferred tax assets | | | |
Accrued liabilities | $ | 9.2 | | | $ | 7.9 | |
Stock-based compensation | 5.5 | | | 5.6 | |
Net Operating Losses | 18.3 | | | 18.1 | |
| | | |
Section 174 Research Capitalization | 10.7 | | | — | |
Foreign Tax Credits | 3.7 | | | 18.6 | |
Federal Research Tax Credits | 0.4 | | | 4.8 | |
Operating Lease Obligations | 7.3 | | | 9.6 | |
Other | 4.2 | | | 4.0 | |
| 59.3 | | | 68.6 | |
Valuation allowance | (9.0) | | | (8.4) | |
Total deferred tax assets | 50.3 | | | 60.2 | |
| | | |
Deferred tax liabilities | | | |
Intangibles, net | 56.5 | | | 28.1 | |
Operating Lease Right of Use Assets | 3.5 | | | 5.1 | |
Inventories | 2.9 | | | 9.4 | |
Property, plant and equipment, net | 7.9 | | | 18.7 | |
Other | 0.3 | | | 0.8 | |
Total deferred tax liabilities | 71.1 | | | 62.1 | |
Net deferred tax assets (liabilities) | $ | (20.8) | | | $ | (1.9) | |
Valuation allowances increased $0.6 million during the year ended December 31, 2022. Valuation allowances at the end of 2022 and 2021 primarily relate to tax credits and income tax loss carryforwards.
Realization of income tax loss carryforwards is dependent on generating sufficient taxable income prior to expiration of these carryforwards. Although realization is not assured, we believe it is more likely than not that all of the deferred tax assets, net of applicable valuation allowances, will be realized. The amount of the deferred tax assets considered realizable could be reduced
or increased due to changes in the tax environment or if estimates of future taxable income change during the carryforward period.
At December 31, 2022, we have credit carryforwards for federal income tax purposes of $4.3 million, all of which will expire between 2028 and 2038. We also have net operating loss carryforwards for federal income tax purposes of $40.1 million, of which $5.0 million will expire between 2031 and 2037. The remaining net operating losses are available for carryforward indefinitely.
At December 31, 2022, we have credit carryforwards for state income tax purposes of $0.8 million, of which $0.5 million will expire between 2025 and 2028. We also have net operating loss carryforwards for state income tax purposes of $80.0 million, some of which will expire between 2024 and 2040 and others that will remain available for carryforward indefinitely. We also have certain foreign subsidiaries with net operating loss carryforwards for income tax purposes of $20.4 million, of which all are available for carryforward indefinitely.
A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
Beginning of year | $ | — | | | $ | 0.5 | |
Gross increases for tax positions of prior years | — | | | — | |
Gross decreases for tax positions of prior years | — | | | — | |
Decreases for settlements with taxing authorities | — | | | — | |
Decreases for lapse of the applicable statute of limitations | — | | | (0.5) | |
End of year | $ | — | | | $ | — | |
The amount, if recognized, that would affect our effective tax rate for December 31, 2022 and 2021 is zero.
We classify interest and penalties on uncertain tax benefits as income tax expense. As of each year ended December 31, 2022 and 2021, before any tax benefits, we had no accrued interest and penalties on unrecognized tax benefits.
Federal and state income tax returns are generally subject to examination for a period of three to five years after filing of the respective returns. The state effect of any changes to filed federal positions remains subject to examination by various states for a period of up to two years after formal notification to the states.
Note 10. Employee Benefit Plans
Defined Contribution Plans
Eligible employees participate in our defined contribution plans. Our 401(k) plan and supplemental plan provide for a matching contribution of a U.S. employee’s contributions and accruals, subject to predetermined limits. Avanos also has defined contribution pension plans for certain employees outside the U.S. in which eligible employees may participate. We recognized $6.5 million, $6.6 million and $7.9 million, respectively, of expense for our matching contributions to the 401(k) plan in the years ended December 31, 2022, 2021 and 2020, respectively. Our matching contributions to the 401(k) plan are recognized in cost of products sold, research and development and selling and general expenses in our consolidated income statements.
Defined Benefit Plans
Certain plans in our international operations are our direct obligation, and therefore, the related funded status has been recorded within our consolidated balance sheet. These plans are primarily unfunded and the aggregated projected benefit obligation was $4.0 million and $3.8 million as of December 31, 2022 and 2021, respectively. Net periodic pension cost for the years ended December 31, 2022, 2021 and 2020 was $0.7 million, $0.8 million and $0.7 million, respectively. Over the next ten years, we expect gross benefit payments to be $2.4 million in total for the years 2023 through 2027, and $4.2 million in total for the years 2028 through 2032.
Note 11. Accumulated Other Comprehensive Income
The changes in the components of Accumulated Other Comprehensive Income (“AOCI”), net of tax, are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized Translation | | Cash Flow Hedges | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive Income |
Balance, December 31, 2019 | $ | (31.5) | | | $ | 0.1 | | | $ | (0.6) | | | $ | (32.0) | |
Other comprehensive income (loss) | 3.8 | | | (0.1) | | | 0.2 | | | 3.9 | |
Balance, December 31, 2020 | (27.7) | | | — | | | (0.4) | | | (28.1) | |
Other comprehensive (loss) income | (6.1) | | | — | | | 0.4 | | | (5.7) | |
Balance, December 31, 2021 | (33.8) | | | — | | | — | | | (33.8) | |
Other comprehensive (loss) income | (2.3) | | | — | | | 0.3 | | | (2.0) | |
Balance, December 31, 2022 | $ | (36.1) | | | $ | — | | | $ | 0.3 | | | $ | (35.8) | |
The net changes in the components of AOCI, including the tax effect, are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Unrealized translation | $ | (2.3) | | | $ | (6.1) | | | $ | 3.8 | |
| | | | | |
Defined benefit pension plans | 0.4 | | | 0.5 | | | 0.3 | |
Tax effect | (0.1) | | | (0.1) | | | (0.1) | |
Defined benefit pension plans, net of tax | 0.3 | | | 0.4 | | | 0.2 | |
| | | | | |
Cash flow hedges | — | | | — | | | (0.1) | |
Tax effect | — | | | — | | | — | |
Cash flow hedges, net of tax | — | | | — | | | (0.1) | |
| | | | | |
Change in AOCI | $ | (2.0) | | | $ | (5.7) | | | $ | 3.9 | |
Note 12. Stock-Based Compensation
The Avanos Medical, Inc. Equity Participation Plan, the Avanos Medical, Inc. Long Term Incentive Plan and the Avanos Medical, Inc. Outside Directors’ Compensation Plan (together, the “Equity Plans”) provide for awards of stock options, stock appreciation rights, restricted stock (and in certain limited cases, unrestricted stock), restricted stock units, performance units and cash awards to eligible employees (including officers who are employees), directors, advisors and consultants of Avanos or its subsidiaries. A maximum of 3.9 million shares of Avanos common stock may be issued under the Equity Plans, and there were 1.0 million shares remaining available for issuance as of December 31, 2022.
The Avanos Medical, Inc. Employee Stock Purchase Plan (“ESPP”) allows for employee contributions to purchase shares of the Company’s common stock at a 15% discount off the lower of the closing prices at the beginning or end of each offering period. The ESPP is available to all employees meeting the eligibility requirements defined in the ESPP. Offering periods will generally be six month periods ending on June 30 and December 31 of each year. Employees may contribute up to 25% of their compensation, subject to a maximum of $25,000 into the ESPP each year. A maximum of 1.0 million common shares may be issued under the ESPP, and there were 0.8 million shares remaining available as of December 31, 2022.
Stock-based compensation expense is included in “Cost of products sold,” “Research and development,” and “Selling and general expenses.” Stock-based compensation expense for the years ended December 31, 2022, 2021 and 2020 is shown in the table below (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Stock options | $ | 1.1 | | | $ | 1.9 | | | $ | 2.7 | |
Time-based restricted share units | 11.6 | | | 8.9 | | | 6.3 | |
Performance-based restricted share units | 3.0 | | | 2.1 | | | 2.8 | |
Employee stock purchase plan | 0.2 | | | 0.3 | | | 0.3 | |
Total stock-based compensation | $ | 15.9 | | | $ | 13.2 | | | $ | 12.1 | |
Stock Options
Stock options are granted at an exercise price equal to the fair market value of our common stock on the date of grant. Stock options are generally subject to graded vesting whereby options vest 30% at the end of each of the first two 12-month periods following the grant and 40% at the end of the third 12-month period and have a term of 10 years.
The fair value of stock option awards was determined using a Black-Scholes option-pricing model utilizing a range of assumptions related to volatility, risk-free interest rate, expected term and dividend yield. Expected volatility was based on historical weekly closing stock price volatility for a peer group of companies. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant. The expected term was based on historical observed settlement behavior. The dividend yield was based on the expectation that no dividends are expected to be paid on our common stock.
There were no options awarded in the years ended December 31, 2022 and 2021. The weighted-average fair value of options granted during the year ended December 31, 2020 was $9.82, based on the following assumptions:
| | | | | | | |
| | | Year Ended December 31, |
| | | 2020 |
Volatility | | | 41% |
Risk-free rate | | | 0.3% |
Expected term (Years) | | | 4 |
Dividend Yield | | | 0% |
A summary of stock option activity is presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares (in thousands) | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value (in millions) |
Outstanding at December 31, 2021 | 1,290 | | | $ | 39.40 | | | | | |
Exercises | (4) | | | 26.04 | | | | | |
Forfeitures | (180) | | | 41.52 | | | | | |
Outstanding at December 31, 2022 | 1,106 | | | $ | 39.11 | | | 4.82 | | $ | — | |
Vested and exercisable at December 31, 2022 | 1,008 | | | $ | 40.11 | | | 4.57 | | $ | — | |
The following table summarizes information about options outstanding as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | Options Exercisable |
Range of Exercise Prices | Shares (in thousands) | | Weighted-Average Remaining Contractual Term (Years) | | Shares (in thousands) | | Weighted-Average Exercise Price |
$25.00 | to | $35.00 | 374 | | | 5.8 | | 275 | | | $ | 29.44 | |
$35.00 | to | $45.00 | 470 | | | 4.5 | | 470 | | | 40.89 | |
$45.00+ | 263 | | | 4.0 | | 263 | | | 49.90 | |
| | | 1,107 | | | 4.8 | | 1,008 | | | $ | 40.11 | |
No options were exercised during the year ended December 31, 2022. Options with aggregate intrinsic values of $1.6 million and $0.7 million were exercised in the years ending December 31, 2021 and 2020, respectively. The tax benefits from exercises were not material in 2021 or 2020. For stock options outstanding at December 31, 2022, we expect to recognize an additional $0.3 million of expense over the remaining average service period of less than one year.
Restricted Share Units
Restricted shares, time-vested restricted share units (“RSUs”) and performance-based RSUs granted to employees and directors are valued at the closing market price of our common stock on the grant date with vesting conditions determined upon approval of the award. Time-vested RSUs are subject to a minimum service period of generally three years.
A summary of time-vested RSU activity is presented below:
| | | | | | | | | | | |
| Shares (in thousands) | | Weighted Average Fair Value |
Outstanding at December 31, 2021 | 840 | | | $ | 36.84 | |
Granted | 389 | | | 32.42 | |
Vested | (135) | | | 37.71 | |
Forfeited | (62) | | | 34.87 | |
Outstanding at December 31, 2022 | 1,032 | | | $ | 35.17 | |
For time-vested RSUs outstanding at December 31, 2022, we expect to recognize an additional $14.1 million of expense over the remaining average service period of two years.
Performance-based RSUs are subject to achievement of certain service and performance targets over a restricted period of three years. A summary of performance-based RSU activity is presented below:
| | | | | | | | | | | |
| Shares (in thousands) | | Weighted Average Fair Value |
Outstanding at December 31, 2021 | 56 | | | $ | 47.94 | |
Granted | 193 | | | 33.39 | |
Forfeited | (10) | | | 37.92 | |
Outstanding at December 31, 2022 | 239 | | | $ | 36.63 | |
For performance-based RSUs outstanding at December 31, 2022, we expect to recognize an additional $5.5 million of expense over the remaining average service period of less than one year.
We issued restricted share units for which vesting is conditioned on meeting a defined measure of total shareholder return (“TSR units”) over a restricted period of three years. Total shareholder return is measured as our stock price performance over the restricted period compared to defined group of peer companies. No TSR units were awarded in the years ended December 31, 2022, 2021 or 2020.
A summary of TSR unit activity is presented below.
| | | | | | | | | | | |
| Shares (in thousands) | | Weighted Average Fair Value |
Outstanding at December 31, 2021 | 89 | | | $ | 52.36 | |
Forfeited | (89) | | | 52.36 | |
Outstanding at December 31, 2022 | — | | | $ | — | |
Note 13. Commitments and Contingencies
Legal Matters
We are subject to various legal proceedings, claims and governmental inspections, audits or investigations pertaining to issues such as contract disputes, product liability, tax matters, patents and trademarks, advertising, governmental regulations, employment and other matters. Under the terms of the distribution agreement we entered into with Kimberly-Clark Corporation (“Kimberly-Clark”) prior to our 2014 spin-off from Kimberly-Clark, legal proceedings, claims and other liabilities that are primarily related to our business are our responsibility and we are obligated to indemnify and hold Kimberly-Clark harmless for such matters. For the year ended December 31, 2022, we incurred no costs with respect to such indemnification matters compared to $15.0 million and $27.5 million in the years ended December 31, 2021 and December 31, 2020, respectively. Expenses incurred are included in “Other expense, net.”
Government Investigation
In June 2015, we were served with a subpoena from the Department of Veterans Affairs Office of the Inspector General (the “VA OIG”) seeking information related to the design, manufacture, testing, sale and promotion of MicroCool and other surgical gowns produced by the Company. In July 2015, we became aware that the VA OIG subpoena and an earlier VA OIG subpoena served on Kimberly-Clark requesting information about gown sales to the federal government were related to a United States Department of Justice (the “DOJ”) investigation. In May 2016, April 2017 and September 2018, we received additional subpoenas from the DOJ seeking further information related to the Company’s surgical gowns.
On July 6, 2021, we entered into a Deferred Prosecution Agreement (the “DPA”) with the DOJ that resolved their criminal investigation related to our MicroCool surgical gowns. Pursuant to the terms of the DPA, in July 2021 the Company made a payment of $22.2 million. We continue to comply with the terms of the DPA.
Patent Litigation
We operate in an industry characterized by extensive patent litigation. Competitors may claim that our products infringe upon their intellectual property. Resolution of patent litigation or other intellectual property claims is typically time consuming and costly and can result in significant damage awards and injunctions that could prevent the manufacture and sale of the affected products or require us to make significant royalty payments in order to continue selling the affected products.
At any given time, we may be involved as either a plaintiff or a defendant in a number of patent infringement actions, the outcomes of which may not be known for prolonged periods of time.
On November 4, 2019, we filed the matter styled Avanos Medical Sales LLC v Medtronic Sofamor Danek USA, Inc., et al. (No. 2:19-cv-02754-JPM-TMP (W.D. Tenn.)), alleging that Medtronic’s manufacture, marketing, sale and importation of the Accurian cooled radiofrequency ablation system infringes certain claims of U.S. Patent 8,822,755. On June 1, 2020, Medtronic petitioned the U.S. Patent and Trademark Office (“USPTO”) for an inter partes review (“IPR”) of the patent at issue in the litigation. On October 23, 2020, the USPTO instituted an IPR. On August 27, 2021, the USPTO issued a Final Written Decision upholding the patentability of our patent.
On October 15, 2021, the parties resolved the dispute between them by signing a settlement and license agreement (“Medtronic Settlement Agreement”). Pursuant to the Medtronic Settlement Agreement, Medtronic paid Avanos an undisclosed amount and the parties dismissed the pending actions between them related to U.S. Patent 8,822,755.
General
While we maintain general and professional liability, product liability and other insurance, our insurance policies may not cover all of these matters and may not fully cover liabilities arising out of these matters. In addition, we may be obligated to indemnify our directors and officers against these matters.
We record provisions in the consolidated financial statements for pending litigation when we determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. For any matters that are reasonably possible to result in loss and for which no possible loss or range of loss is disclosed in this Form 10-K, management has determined that it
is unable to estimate the possible loss or range of loss because, in each case, at least the following facts applied: (a) the matter is at an early stage of the proceedings; (b) the damages are indeterminate, unspecified or determined to be immaterial; and (c) significant factual issues have yet to be resolved. At present, although the results of litigation and claims cannot be predicted with certainty, we believe that the ultimate resolution of any pending legal proceeding to which we are a party will not have a material adverse effect on our business, financial condition, results of operations or liquidity.
Environmental Compliance
We are subject to federal, state and local environmental protection laws and regulations with respect to our business operations. We believe we are operating in compliance with, or are taking action aimed at ensuring compliance with, these laws and regulations. None of our compliance obligations with environmental protection laws and regulations, individually or in the aggregate, is expected to have a material adverse effect on our business, financial condition, results of operations or liquidity.
Note 14. Earnings Per Share (“EPS”)
Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during each period. Diluted earnings per share is calculated by dividing net income by the number of common shares outstanding and the effect of all dilutive common stock equivalents outstanding during each period, as determined using the treasury stock method.
The calculation of basic and diluted EPS for each of the three years ended December 31, 2022, 2021 and 2020 is set forth in the following table (in millions, except per share amounts):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| | | | | |
Net income (loss) | $ | 50.5 | | | $ | 6.3 | | | $ | (29.0) | |
| | | | | |
Weighted Average Shares Outstanding: | | | | | |
Basic weighted average shares outstanding | 46.9 | | | 48.1 | | | 47.8 | |
Dilutive effect of stock options and restricted share unit awards | 0.4 | | | 0.5 | | | — | |
Diluted weighted average shares outstanding | 47.3 | | | 48.6 | | | 47.8 | |
| | | | | |
Earnings (Loss) Per Share: | | | | | |
| | | | | |
| | | | | |
| | | | | |
Basic Earnings (Loss) Per Share | $ | 1.08 | | | $ | 0.13 | | | $ | (0.61) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Diluted Earnings (Loss) Per Share | $ | 1.07 | | | $ | 0.13 | | | $ | (0.61) | |
RSUs contain provisions allowing for the equivalent of any dividends paid on common stock during the restricted period to be reinvested into additional RSUs at the then fair market value of the common stock on the date dividends are paid. Such awards are to be included in the EPS calculation under the two-class method. Currently we do not anticipate any cash dividends for the foreseeable future and our outstanding RSU awards are not material in comparison to our weighted average shares outstanding. Accordingly, all EPS amounts reflect shares as if they were fully vested and the disclosures associated with the two-class method are not presented herein.
For the year ended December 31, 2022, 2.1 million of potentially dilutive stock options and restricted share unit awards were excluded from the computation of earnings per share as their effect would have been anti-dilutive.
Note 15. Business and Products Information
We conduct our business in one operating and reportable segment that provides our medical device products to healthcare providers and patients globally with manufacturing facilities in the United States and Mexico.
We provide a portfolio of innovative product offerings focused on pain management and chronic care to improve patient outcomes and reduce the cost of care. Our management evaluates net sales by product category within our single reportable segment as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Chronic Care: | | | | | |
Digestive health | $ | 340.4 | | | $ | 322.2 | | | $ | 294.1 | |
Respiratory health | 135.9 | | | 157.6 | | | 177.1 | |
Total Chronic Care | 476.3 | | | 479.8 | | | 471.2 | |
Pain Management: | | | | | |
Acute pain | 160.1 | | | 162.7 | | | 157.4 | |
Interventional pain | 183.6 | | | 102.1 | | | 86.2 | |
Total Pain Management | 343.7 | | | 264.8 | | | 243.6 | |
Total Net Sales | $ | 820.0 | | | $ | 744.6 | | | $ | 714.8 | |
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. 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 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. 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. 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 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. 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.
Liabilities for estimated returns, rebates and incentives as of December 31, 2022 and 2021 are presented in the table below (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
Accrued rebates | $ | 14.5 | | | $ | 14.3 | |
Accrued incentives | 12.4 | | | 10.2 | |
Accrued rebates and incentives (See Note 1) | 26.9 | | | 24.5 | |
Accrued sales returns(a) | 0.1 | | | 0.1 | |
Total estimated liabilities | $ | 27.0 | | | $ | 24.6 | |
__________________________________________________
(a)Accrued sales returns are included in “Other” in the accrued expenses table in “Supplemental Balance Sheet Information” in Note 4.
For the years ended December 31, 2022, 2021 and 2020, net sales to external customers in the United States were $560.7 million, $521.6 million and $481.6 million, respectively. Globally, two customers accounted for 10% or more of our consolidated net sales in the year ended December 31, 2022. Globally, three customers accounted for 10% or more of our
consolidated net sales in the year ended December 31, 2021. Globally, two customers accounted for more than 10% of our consolidated net sales in the year ended December 31, 2020.
Due to the nature of our business, we receive purchase orders for products under supply agreements which are normally fulfilled within three to four weeks. Our performance obligations under purchase orders are satisfied and revenue is recognized at a point in time, which is upon shipment or upon delivery of our products, depending on shipping terms. Accordingly, we normally do not have transactions that give rise to material unfulfilled performance obligations.
Property, plant and equipment held domestically and in foreign countries is as follows (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
Domestic | $ | 94.5 | | | $ | 101.4 | |
Foreign | 69.4 | | | 66.7 | |
Total Property, Plant and Equipment | $ | 163.9 | | | $ | 168.1 | |
Note 16. Share Repurchase Program
On December 15, 2021, we announced that our Board of Directors had approved a share repurchase program authorizing us to repurchase up to $30.0 million of our common stock. In connection with such repurchase program, we established a pre-arranged trading plan in accordance with Rule 10b5-1 of the Exchange Act (“Rule 10b5-1”) which permitted common stock to be repurchased over a twelve-month period. In the fourth quarter of 2021, we repurchased $10.7 million of our common stock and during the first quarter of 2022, we repurchased an additional $19.3 million of our common stock. As a result of such repurchases, no additional shares of common stock may be repurchased under this repurchase plan.
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. As a result of repurchases made during the second and third quarters of 2022, no additional shares of common stock may be repurchased under this repurchase plan.
Purchases of common stock under the 10b5-1 trading plans for the years ended December 31, 2021 and December 31, 2022 are summarized in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Shares Repurchased | | Aggregate Purchase Price (in millions) | | Average Price per Share | | Amount Remaining in Program for Purchase (in millions) |
| | # of Shares | | Program to Date | | | |
Fourth quarter of 2021 | | 323,140 | | | 323,140 | | | $ | 10.7 | | | $ | 33.04 | | | $ | 19.3 | |
First quarter of 2022 | | 588,293 | | | 911,433 | | | $ | 19.3 | | | $ | 32.85 | | | $ | — | |
Second quarter of 2022 | | 522,162 | | | 522,162 | | | $ | 14.1 | | | $ | 27.00 | | | $ | 10.9 | |
Third quarter of 2022 | | 399,957 | | | 922,119 | | | $ | 10.9 | | | $ | 27.25 | | | $ | — | |
In addition to the share repurchase program, we withheld 42,365 shares of common stock for $1.2 million in taxes associated with stock-based compensation transactions in the year ended December 31, 2022.
Note 17. Subsequent Events
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”).
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. 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.