# AVANOS MEDICAL, INC. (AVNS) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from AVANOS MEDICAL, INC.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1606498/000160649822000029/avns-20211231.htm
Accession: 0001606498-22-000029
Filing date: 2022-02-23
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/AVNS/
All MD&A years: /company/AVNS/mda/
Next year: /company/AVNS/mda/fy2022/ (FY 2022)

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

Avanos is a medical technology company focused on delivering clinically superior breakthrough medical device solutions to improve patients’ quality of life. We are committed to addressing some of today’s most important healthcare needs, such as reducing the use of opioids while helping patients move from surgery to recovery. We develop, manufacture and market clinically superior solutions in more than 90 countries.

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[["","15"]]
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This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide investors with an understanding of our recent performance, financial condition and prospects and should be read in conjunction with the consolidated financial statements contained in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. The following will be discussed and analyzed:

•Restructuring Activities

•Business Acquisition

•Results of Operations and Related Information

•Liquidity and Capital Resources

•Critical Accounting Policies and Use of Estimates

•Legal Matters

•Information Concerning Forward-Looking Statements

Restructuring Activities

Our restructuring expenses for the years ended December 31, 2021, 2020 and 2019 are summarized in the table below:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","2019"],["Post-Divestiture Restructuring Plan"],["Organizational Alignment and IT Transformation","$","\u2014","","","$","(0.6)","","","$","17.8"],["Cost Transformation","10.2","","","2.8","","","2.3"],["Total Post-Divestiture Restructuring Plan","10.2","","","2.2","","","20.1"],["Integration and Restructuring of Business Acquisitions","\u2014","","","0.5","","","9.1"],["2020 Restructuring","12.4","","","27.6","","","\u2014"],["Total Restructuring Costs","$","22.6","","","$","30.3","","","$","29.2"]]
[[/GREPCENT_TABLE]]
Post-Divestiture Restructuring Plan

In conjunction with the Divestiture, we began a multi-phase restructuring plan (the “Plan”) intended to align our organizational structure (“Organizational Alignment”), information technology platform (“IT Transformation”) and supply chain and distribution channels (“Cost Transformation”) to be more appropriate for the size and scale of our business. Organizational Alignment and IT Transformation are complete. Only the final phase of the Plan, Cost Transformation, remained in progress during the year ended December 31, 2021.

The Cost Transformation phase was initiated in June 2019, and is intended to optimize the Company’s procurement, manufacturing, and supply chain operations. Cost Transformation expenses were primarily consulting costs, noncash equipment write-offs and other expenses that were be expensed as incurred. From the initiation of the Cost Transformation phase through December 31, 2021, we incurred $15.3 million of costs that were expensed as incurred and $5.4 million of costs that were capitalized. The Cost Transformation phase was substantially complete as of December 31, 2021.

Integration of Business Acquisitions

During the third quarter of 2019, we initiated activities to integrate the asset and business acquisitions completed in 2019 and 2018 into our operations and, where appropriate, re-align our organization accordingly. This integration includes Game Ready, which was acquired in 2018 along with the 2019 Acquisitions. Costs incurred were primarily for employee retention, severance and benefits and lease termination costs. The integration of our acquisitions was complete as of December 31, 2020.

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 was substantially complete as of December 31, 2021.

Business Acquisition

On December 13, 2021, we entered into an agreement to acquire OrthogenRx, Inc. (“OrthogenRx”) for $130.0 million in cash at closing, subject to net working capital adjustments, plus up to an additional $30.0 million in contingent cash consideration based on OrthogenRx’s growth in net sales during 2022 and 2023. This acquisition closed on January 20, 2022.

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[["","16"]]
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Results of Operations and Related Information

Use of Non-GAAP Measures

In this section, “Adjusted Operating Profit (Loss),” which is a profitability measure that is not calculated in accordance with accounting principles generally accepted in the United States (“GAAP”) and is therefore referred to as non-GAAP financial measure. We provide this non-GAAP measure because we use it to measure our operational performance and provide greater insight into our ongoing business operations. This measure is not intended to be, and should not be, considered separately from, or an alternative to, the most directly comparable GAAP financial measures. A reconciliation of the non-GAAP measure to the most directly comparable GAAP financial measures is provided under “Adjusted Operating (Loss) Profit.”

Net Sales

Our net sales are summarized in the following table for the years ended December 31, 2021, 2020 and 2019 (in millions):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","Change","","2019","","Change"],["Chronic Care:"],["Digestive health","$","322.2","","","$","294.1","","","9.6","%","","$","266.9","","","10.2","%"],["Respiratory health","157.6","","","177.1","","","(11.0)","%","","146.8","","","20.6","%"],["Total Chronic Care","479.8","","","471.2","","","1.8","%","","$","413.7","","","13.9","%"],["Pain Management:"],["Acute pain","162.7","","","157.4","","","3.4","%","","184.0","","","(14.5)","%"],["Interventional pain","102.1","","","86.2","","","18.4","%","","99.9","","","(13.7)","%"],["Total Pain Management","264.8","","","243.6","","","8.7","%","","283.9","","","(14.2)","%"],["Total Net Sales","$","744.6","","","$","714.8","","","4.2","%","","$","697.6","","","2.5","%"],["","Total","","Volume(a)","","Pricing/Mix","","Currency","","Other(b)"],["Net Sales - percentage change 2021 vs. 2020","4","%","","4","%","","(1)","%","","1","%","","\u2014","%"],["Net Sales - percentage change 2020 vs. 2019","3","%","","3","%","","\u2014","%","","\u2014","%","","\u2014","%"]]
[[/GREPCENT_TABLE]]

______________________________

(a)Volume includes incremental sales from acquisitions.

(b)Other includes rounding.

Product Category Descriptions

Chronic care is a portfolio of products that include the following:

•Digestive health products such as our Mic-Key enteral feeding tubes, Corpak patient feeding solutions and NeoMed neonatal and pediatric feeding solutions. In the years ended December 31, 2021 and 2020, our legacy enteral feeding tubes, which includes our Mic-Key enteral feeding tubes and our Corpak feeding solutions each accounted for more than 10% of our consolidated net sales. In the year ended December 31, 2019, only our legacy digestive health products 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, 2021, 2020 and 2019, 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 years ended December 31, 2021, 2020 and 2019, 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. In the years ended December 31, 2021, 2020 and 2019, products associated with our Coolief pain therapy accounted for more than 10% of our consolidated net sales.

Net Sales - 2021 Compared to 2020

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[["","17"]]
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Net sales increased by 4.2% to $744.6 million for the year ended December 31, 2021. Volume was driven by our pain management franchise due to the recovery of elective surgical procedures and favorable comparison to last year’s net sales which were negatively impacted by the COVID-19 pandemic. In addition, volume benefited from continued robust demand for digestive health, which was partially offset by lower volume in respiratory health due to pandemic-fueled demand experienced last year as well as by pricing/mix.

Net Sales - 2020 Compared to 2019

Net sales increased by 2.5% to $714.8 million for the year ended December 31, 2020 primarily due to volume. Incremental volume from the NeoMed, Summit and Game Ready acquisitions contributed 4% of the volume growth. Volume growth also came from organic growth in interventional pain products, digestive health and respiratory health, but was mostly offset by lower volume in acute pain which was affected this year by an industry-wide drug shortage, pre-fill disruption and consolidation of IV infusion customers.

Net Sales by Geographic Region

The factors causing organic volume growth were consistent throughout our geographic regions. Net sales by region is presented in the table below (in millions):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in millions)","2021","","2020","","Change","","2019","","Change"],["North America","$","561.6","","","$","535.5","","","4.9","%","","$","534.7","","","0.1","%"],["EMEA","105.1","","","108.3","","","(3.0)","","","95.8","","","13.0"],["Asia Pacific and Latin America","77.9","","","71.0","","","9.7","","","67.1","","","5.8"],["Total Net Sales","$","744.6","","","$","714.8","","","4.2","%","","$","697.6","","","2.5","%"]]
[[/GREPCENT_TABLE]]

Gross Profit (in millions)

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","2019"],["Net sales","$","744.6","","","$","714.8","","","$","697.6"],["Cost of products sold","380.3","","","341.5","","","295.4"],["Gross profit","364.3","","","373.3","","","402.2"],["Gross profit margin","48.9","%","","52.2","%","","57.7","%"]]
[[/GREPCENT_TABLE]]

Cost of products sold increased from $341.5 million to $380.3 million primarily driven by higher freight costs, including air freight, associated with shipping products from China to the United States and delays in returning our manufacturing operations to pre-pandemic efficiency levels. We recorded inventory allowances of $6.8 million, which includes $3.4 million for Halyard-branded products, $3.4 million for inventory associated with restructuring activities. Accordingly, in the year ended December 31, 2021, gross profit margin decreased from 52.2% to 48.9%.

In the year ended December 31, 2020, our gross profit margin decreased to 52.2% from 57.7% in 2019 primarily due the pandemic-driven shift in demand for products that earn lower margins along with $4.9 million of incremental costs associated with our response to the COVID-19 pandemic and manufacturing inefficiencies driven by the COVID-19 pandemic. In addition, we recorded inventory allowances of $8.8 million, which includes $5.7 million for Halyard-branded products and $3.1 million for obsolescence.

Research and Development (in millions)

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","2019"],["Research and development","$","32.3","","","$","34.9","","","$","37.7"],["Percentage of net sales","4.3","%","","4.9","%","","5.4","%"]]
[[/GREPCENT_TABLE]]

Research and development consists primarily of compensation for personnel and expenses for product trial costs, outside laboratory and license fees, the cost of laboratory equipment and facilities and asset write-offs for equipment associated with unsuccessful product launches. Research and development has historically been between 4% and 6% of net sales.

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Selling and General Expenses (in millions)

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","2019"],["Selling and general expenses","$","300.3","","","$","332.6","","","$","399.1"],["Percentage of net sales","40.3","%","","46.5","%","","57.2","%"]]
[[/GREPCENT_TABLE]]

Selling and general expenses decreased from $332.6 million in 2020 to $300.3 million in 2021. In 2021, savings were realized from the restructuring activities undertaken in 2020 and continued discipline over spending throughout 2021. As described previously under “Restructuring Activities,” the savings realized include lower compensation costs as we reduced the size of our senior leadership team and lower operating costs as we consolidated certain operations within the pain management franchise and reduced our office space footprint. Selling and general expenses included $2.4 million of restructuring expenses in 2021 compared to $4.9 million in 2020.

In the year ended December 31, 2020, selling and general expenses decreased from $399.1 million in 2019 to $332.6 million in 2020. The decrease was driven by lower post divestiture separation costs, which were $7.7 million in 2020 compared to $53.1 million in 2019. Restructuring costs included in selling and general expenses were $4.9 million in 2020 compared to $17.2 million in 2019. The remainder of the decrease was driven by lower travel and other expenses associated with business activities curtailed or restricted during the COVID-19 pandemic.

Other Expense, net (in millions)

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","2019"],["Other expense, net","$","22.8","","","$","51.9","","","$","21.1"],["Percentage of net sales","3.1","%","","7.3","%","","3.0","%"]]
[[/GREPCENT_TABLE]]

Other expense, net decreased from $51.9 million in 2020 to $22.8 million in 2021 primarily due to lower restructuring costs. In 2020, other expense, net included $20.0 million of restructuring costs associated with our 2020 Restructuring as described under “Restructuring Activities.” Other expense, net also includes litigation and legal costs of $15.0 million and $27.5 million in the years ended December 31, 2021 and 2020, respectively. Legal and litigation costs were incurred for matters described in “Commitments and Contingencies” in Note 13 to the consolidated financial statements in Item 8.

Other expense, net increased from $21.1 million in 2019 to $51.9 million primarily due to $20.0 million of restructuring costs in 2020. Legal and litigation costs in 2019 were $15.6 million.

Operating Profit (Loss) (in millions)

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","2019"],["Operating profit (loss)","$","8.9","","","$","(46.1)","","","$","(55.7)"],["Operating profit margin","1.2","%","","(6.4)","%","","(8.0)","%"]]
[[/GREPCENT_TABLE]]

The items previously described drove operating profit to $8.9 million in the year ended December 31, 2021 compared to operating losses of $46.1 million and $55.7 million, respectively, in the years ended December 31, 2020 and 2019.

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[["","19"]]
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Adjusted Operating Profit (Loss)

A reconciliation of adjusted operating profit (loss), a non-GAAP measure, to operating profit (loss) is provided in the table below (in millions):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","2019"],["Operating profit (loss), as reported (GAAP)","$","8.9","","","$","(46.1)","","","$","(55.7)"],["COVID-19 related expenses","0.3","","","7.9","","","\u2014"],["2020 Restructuring charges","12.4","","","27.6","","","\u2014"],["Post divestiture restructuring charges","10.2","","","2.2","","","20.2"],["Post divestiture transition charges","3.9","","","14.9","","","56.3"],["Acquisition and integration-related charges","1.6","","","12.5","","","13.1"],["EU MDR Compliance","4.0","","","\u2014","","","\u2014"],["Litigation and legal","15.0","","","27.5","","","22.5"],["Intangibles amortization","16.7","","","19.4","","","20.0"],["Adjusted Operating Profit (Loss) (non-GAAP)","$","73.0","","","$","65.9","","","$","76.4"]]
[[/GREPCENT_TABLE]]

The items noted in the table above are described below:

On a GAAP basis, operating loss improved compared to the prior year due to higher sales and lower post-divestiture transition costs, partially offset by incremental expenses associated with restructuring activities undertaken in response to the effects the COVID-19 pandemic had on our business.

Items impacting operating results include:

COVID-19 related expenses: As a result of the ongoing COVID-19 pandemic, we have incurred incremental expenses for additional personal protective equipment for our manufacturing employees, sanitation at our facilities and other costs. We incurred $0.3 million and $7.9 million of COVID-19 related costs in the year ended December 31, 2021 and 2020, respectively.

2020 Restructuring charges: As previously described under “2020 Restructuring,” we incurred $12.4 million and $27.6 million in the years ended December 31, 2021 and 2020, respectively, for restructuring activities that we initiated in the fourth quarter of 2020.

Post divestiture restructuring charges: As previously described under “Restructuring Activities,” these charges were associated with a multi-phase restructuring plan intended to align our organizational structure, IT platform, supply chain and distribution channels to be more appropriate for our business following the divestiture. As of December 31, 2021, restructuring activities associated with the Plan were substantially complete.

Post divestiture transition charges: Post divestiture transition costs in 2021 are primarily related to rebranding activities. 2021 rebranding costs of $3.9 million includes $3.3 million of write-offs for Halyard-branded inventory that could not be sold after the transition to the Avanos brand. In 2020, costs included $7.6 million of rebranding costs, including $5.9 million of Halyard-branded inventory write-offs, $5.7 million of incremental IT and personnel costs incurred to provide accounting and administrative services to the buyer of the divested business under TSA arrangements, partially offset by $0.8 million billed to the buyer, and $2.4 million of IT separation and various other incremental transition costs. Costs in 2019 included $31.9 million of incremental personnel, IT and other costs incurred in the provision of accounting, administrative and other services to the buyer, partially offset by $3.7 million of billings to the buyer, $15.2 million of IT separation costs, $4.1 million of rebranding costs, including $0.5 million of Halyard-branded inventory write-offs, and $8.8 million to establish new distribution centers and other costs. All of the costs incurred for post-divestiture transition were incremental costs incurred to provide transition support to the divested business and do not include any costs to support our normal and recurring business requirements. All transition-related activities and costs were substantially complete by the end of 2021.

Acquisition and integration-related charges: We incurred $1.6 million, $12.5 million and $13.1 million of costs in connection with acquisition and integration activities for the years ended December 31, 2021, 2020 and 2019, respectively. For the years ended December 31, 2020 and 2019, acquisition and integration-related costs includes $0.5 million and $9.1 million, respectively, of restructuring costs that are previously described under “Integration of Business Acquisitions.” The acquisitions of Game Ready, EndoClear, Summit and NeoMed are previously described under “Business Acquisitions.”

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European Union Medical Device Regulation (“EU MDR”) Compliance: The EU MDR became effective in 2021 and brings significant new requirements for many of our medical devices. Incremental costs associated with EU MDR compliance are primarily related to re-certification of our products under the enhanced standards. We expect the activities resulting in incremental costs associated with our initial compliance with the EU MDR will be substantially complete by the end of 2022.

Litigation and legal: We incurred $15.0 million, $27.5 million and $22.5 million of expenses for certain litigation matters in the years ended December 31, 2021, 2020 and 2019, respectively, which are included in “Other expense, net.” In 2021, costs include amounts associated with a $22.2 million payment related to a Deferred Prosecution Agreement (“DPA”) with the United Sates Department of Justice (“DOJ”) described in “Commitments and Contingencies” in Note 13 to the consolidated financial statements in Item 8 of this report. In 2020, costs include incremental amounts associated with a $25.0 million payment to amicably resolve our dispute with Kimberly-Clark described in “Commitments and Contingencies” in Note 13 to the consolidated financial statements in Item 8 of this report.

Intangibles amortization: Intangibles amortization is related primarily to intangibles acquired in prior business acquisitions and was $16.7 million, $19.4 million and $20.0 million, respectively, in the years ended December 31, 2021, 2020 and 2019.

Our non-GAAP measures excludes certain items, as applicable, for the relevant time periods as indicated in the “Operating Profit” table above. The excluded items include:

•Incremental expenses associated with altering operations in response to the COVID-19 pandemic.

•Expenses associated with restructuring activities, including IT-related charges.

•Expenses associated with post-divestiture transition activities.

•The gain on sale and associated expenses related to the divestiture of the S&IP business.

•Certain acquisition and integration charges related to the acquisitions of Game Ready, NeoMed, Summit and Endoclear.

•Expenses associated with certain litigation matters.

•The amortization of intangible assets associated with prior business acquisitions.

Interest Expense

Interest expense was $3.3 million, $15.6 million and $15.0 million in the years ended December 31, 2021, 2020 and 2019, respectively. Interest expense for 2020 includes an early extinguishment loss of $1.3 million incurred upon redemption of our Senior Secured Notes on October 15, 2020. Accordingly, interest expense was lower in 2021 compared to 2020 and 2019. In the years ended December 31, 2021, 2020 and 2019, $0.1 million, $0.1 million and $1.8 million, respectively, of interest was capitalized on long-term capital projects. Interest expense consists of interest accrued and amortization of debt discount and issuance costs on our long-term debt. See “Debt” in Note 8 to the consolidated financial statements in Item 8 of this report for further discussion of our indebtedness.

Provision for Income Taxes

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), enacted in March 2020, allows for the carryback of U.S. net operating losses, which were expected to be used in future years to prior years, resulting in a $2.8 million benefit in the year ended December 31, 2021 and a $25.1 million benefit in the year ended December 31, 2020. As a result, as of December 31, 2020, we had $49.0 million of income tax receivables, most of which was collected in the year ended December 31, 2021. As of December 31, 2021, we had $5.1 million of income tax receivables.

Our overall effective tax rate was 10% for the year ended December 31, 2021 compared to a benefit of 55% in 2020 and 28% in 2019. The primary drivers in the change in our effective tax rate was the CARES Act in 2020. See “Income Taxes” in Note 9 to the consolidated financial statements in Item 8 of this report for further details regarding our income taxes.

Liquidity and Capital Resources

General

Our primary sources of liquidity are cash on hand provided by operating activities and amounts available with our senior secured revolving credit facility under our existing credit agreement. Our operating cash flow has historically been sufficient to meet our working capital requirements and fund capital expenditures. We anticipate that our current cash position and our ability to generate cash flows from domestic and international operations will provide sufficient liquidity to manage the

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business and fund working capital requirements during this uncertainty without using our available borrowing capacity. In addition, with our borrowing capacity, we expect to have the ability to fund capital expenditures and other investments necessary to grow our business for the foreseeable future for both our domestic and international operations.

As of December 31, 2021, $59.9 million of our $118.5 million of cash and cash equivalents was held by foreign subsidiaries. We consider the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested and currently do not have plans to repatriate such earnings. See further discussion below in “Critical Accounting Policies and Use of Estimates” under “Income Taxes.” We do not expect restrictions on repatriation of cash held outside of the United States to have a material effect on our overall liquidity, financial condition or results of operations for the foreseeable future.

Cash and equivalents increased by $7.0 million to $118.5 million as of December 31, 2021 compared to $111.5 million last year. The increase was driven by $87.3 million of cash provided by operating activities and $20.0 million of proceeds from our revolving credit facility partially offset by $70.0 million of repayments on our revolving credit facility, $21.0 million of capital expenditures and $11.5 million used to purchase treasury stock.

Cash and equivalents decreased by $93.8 million to $111.5 million as of December 31, 2020 compared to $205.3 million as of December 31, 2019. The decrease was driven by the retirement of our Senior Unsecured Notes (the “Notes”) for $249.8 million partially offset by $180.0 million of net line of credit facility proceeds, which were primarily used to retire the Notes.

Long-Term Debt

The amount available for borrowing with the senior secured revolving credit facility under the existing credit agreement is $250.0 million, with a letter of credit sub-facility of $25.0 million. As of December 31, 2021, we had $130.0 million owing and letters of credit of $1.3 million issued under the senior secured revolving credit facility. The senior secured revolving credit facility, which matures on October 30, 2023, requires compliance with certain customary operational and financial covenants. To the extent we remain in compliance with certain financial covenants in the senior secured revolving credit facility, we have the ability to access it.

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 existing 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 Item 8 of this report.

For further information regarding our debt arrangements, see “Debt” in Note 8 to the consolidated financial statements in Item 8 of this report.

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 million of our common stock. In the fourth quarter of 2021, we repurchased $10.7 million, and during January 2022 we repurchased the remaining $19.3 million. For further information, see “Share Repurchase Program” in Note 16 to the consolidated financial statements in Item 8 of this report.

Contractual Obligations

In the normal course of business, we enter into contracts and commitments that obligate us to make payments in the future. Information regarding our obligations under lease and debt arrangements and defined benefit plans are provided in Notes 6, 8, and 10, respectively, to the consolidated financial statements contained in Item 8 of this report. For obligations under our purchase arrangements which consist mostly of open purchase orders and other commitments, as of December 31, 2021, we have amounts due in less than one year of $16.6 million, $61.6 million in one to three years, and none thereafter.

Critical Accounting Policies and Use of Estimates

The preparation of financial statements in conformity with GAAP requires management 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 period. The critical accounting policies we used in the preparation of the consolidated and financial statements are those that are important both to the presentation of our financial condition and results of operations and require significant judgments by management with regard to estimates used. The critical judgments by management relate to distributor rebate accruals, future cash flows associated with impairment testing for goodwill and long-lived assets, loss contingencies and deferred income taxes and potential tax assessments.

Use of Estimates

We prepare our consolidated financial statements in accordance with GAAP, which requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported

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[["","22"]]
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amounts of net sales and expenses during the reporting periods. Estimates are used in accounting for, among other things, certain amounts included in discontinued operations, certain amounts included in assets and liabilities held for sale, 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. 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.

Revenue Recognition

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 considerations 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. Our contracts provide for forms of variable consideration including rebates, incentives and pricing tiers, each of which are described further in Note 1 “Accounting Policies” in Item 8 of this report.

Loss Contingencies

The outcome of loss contingencies, legal proceedings, indemnification matters and claims brought against us is subject to uncertainty. An estimated loss contingency is accrued by a charge to earnings if it is probable that an asset has been impaired or a liability has been incurred and the amount can be reasonably estimated. Determination of whether to accrue a loss requires evaluation of the probability of an unfavorable outcome and the ability to make a reasonable estimate. Changes in these estimates could affect the timing and amount of accrual of loss contingencies.

Income Taxes

We recognize tax benefits in our financial statements when our uncertain tax positions are more likely than not to be sustained upon audit. The amount we recognize is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

We recognize deferred tax assets for deductible temporary differences, operating loss carry-forwards and tax credit carry-forwards. We record valuation allowances to reduce deferred tax assets to amounts that are more likely than not to be realized. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses. This assessment, which is completed on a taxing jurisdiction basis, takes into account a number of types of evidence, including the nature, frequency, and severity of current and cumulative financial reporting losses, sources of future taxable income, taxable income in prior carryback year(s) and tax planning strategies.

If it is determined that we would be able to realize deferred tax assets in the future in excess of our net recorded amount, an adjustment to the net deferred tax asset would increase income in the period that such determination was made. Likewise, should we determine that we would not be able to realize all or part of the net deferred tax assets in the future, an adjustment to the net deferred tax asset would decrease income in the period such determination was made. We regularly evaluate the need for valuation allowances against its deferred tax assets.

As of December 31, 2021, 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.

Legal Matters

A description of legal matters can be seen in “Commitments and Contingencies” in Note 13 to the consolidated financial statements in Item 8 of this report.

Information Concerning Forward-Looking Statements

This Annual Report on Form 10-K and other materials we have filed or furnished or will file or furnish with the SEC (as well as information included in our oral or other written statements) contain, or will contain, certain “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995, regarding business strategies, market potential, future financial performance and other matters. Forward-looking statements include all statements that do not relate solely to

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historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “anticipate,” “plan” or “continue” and similar expressions, among others. The matters discussed in these forward-looking statements are based on the current plans and expectations of our management and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. These factors include, but are not limited to:

•general economic conditions particularly in the United States,

•fluctuations in global equity and fixed-income markets,

•risks related to the ongoing COVID-19 pandemic,

•the competitive environment,

•the loss of current customers or the inability to obtain new customers,

•litigation and enforcement actions,

•price fluctuations in key commodities,

•fluctuations in currency exchange rates,

•disruption in supply of raw materials or the distribution of finished goods,

•changes in governmental regulations that are applicable to our business,

•changes in asset valuations including write-downs of assets such as inventory, accounts receivable or other assets for impairment or other reasons, and

•the other matters described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of our management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. Any forward-looking statement made by us in this Annual Report on Form 10-K speaks only as of the date of this report. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws.