# AVANOS MEDICAL, INC. (AVNS) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from AVANOS MEDICAL, INC.'s 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/1606498/000160649824000018/avns-20231231.htm Accession: 0001606498-24-000018 Filing date: 2024-02-21 Report date: 2023-12-31 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/ Previous year: /company/AVNS/mda/fy2022/ (FY 2022) Next year: /company/AVNS/mda/fy2024/ (FY 2024) 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 medical device solutions that help patients get back to the things that matter. 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. 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; •Divestiture of the Respiratory Health Business; •Discontinued Operations; •Business Acquisitions; •Results of Operations and Related Information; •Liquidity and Capital Resources; •Critical Accounting Policies and Use of Estimates; and •Legal Matters. Restructuring Activities In January 2023, we initiated a three-year restructuring initiative pursuant to which we: (i) have combined our Chronic Care and Pain Management franchises into a single commercial organization focused on the Digestive Health and Pain Management and Recovery product categories; (ii) plan to rationalize our product portfolio, including certain low-margin, low-growth product categories, through targeted divestitures; (iii) have undertaken additional cost management activities aimed at enhancing the Company’s operating profitability; and (iv) plan to pursue efficient capital allocation strategies, including through acquisitions that meet the Company’s strategic and financial criteria (the “Transformation Process”). By 2025, we expect total gross savings of between $45.0 million and $55.0 million compared to 2022, most of which will be achieved in 2024. We expect the Transformation Process will be substantially complete by the end of 2025. We expect to incur up to $30.0 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 organization design and alignment and other related activities. These amounts include between $6.0 million and $8.0 million of employee severance and benefits costs. The accompanying consolidated income statements for the year ended December 31, 2023 include $28.2 million of costs incurred in connection with the Transformation Process in “Selling and general expenses.” Divestiture of the Respiratory Health Business On October 2, 2023, we closed the sale of our Respiratory Health (“RH”) business to SunMed Group Holdings, LLC (“Buyer”) for a total purchase price of $110.0 million in cash, subject to certain adjustments as provided in the Purchase Agreement based on the indebtedness and inventory transferred to Buyer at the closing and the chargebacks assumed by Buyer but that would otherwise have been payable by the Company and its subsidiaries on or after October 2, 2023 to distributors of the Company’s RH products located in the United States (the “RH Divestiture”). The RH Divestiture represents a key component of the Transformation Process, and is aimed at accelerating the Company’s efforts to focus its portfolio on markets where it is well positioned to succeed. In conjunction with the RH Divestiture, we and Buyer entered into various transition services agreements pursuant to which we, Buyer and each company’s respective affiliates will provide to each other various transitional services, including, but not limited to, product manufacturing and distribution, facilities, order fulfillment, invoicing, quality assurance, regulatory support, audit support and other services. The services generally commenced on the closing date of the Divestiture and terminate no later than one to three years thereafter. [[GREPCENT_TABLE]] [["","21"]] [[/GREPCENT_TABLE]] Table of Contents Discontinued Operations As a result of the RH Divestiture, the results of operations from our RH business are reported as “(Loss) income from discontinued operations, net of tax” and the related assets and liabilities are classified as “held for sale” in the consolidated financial statements. Net sales from discontinued operations were $100.9 million in the year ended December 31, 2023, compared to $135.9 million and $157.6 million in the years ended December 31, 2022 and 2021, respectively. The decrease in net sales was primarily driven by lower volume along with unfavorable currency effects. We recognized a loss on disposal of the RH business, and accordingly, we recorded impairment of $70.8 million against assets in the disposal group, which is included in “(Loss) income from discontinued operations, net of tax.” Business Acquisitions On June 17, 2023 we entered into a definitive agreement to acquire Diros Technology, Inc. (“Diros”), a leading manufacturer of innovative radiofrequency (“RF”) products used to treat chronic pain conditions. On July 24, 2023, we closed the acquisition of Diros for approximately $53.0 million, consisting of $2.5 million cash paid upon entry into the definitive agreement and $50.5 million in cash at closing less working capital and other adjustments, with up to an additional $7.0 million payable in contingent cash consideration based on achievement of certain performance objectives defined in the purchase agreement. The purchase price for the Diros Acquisition was funded by proceeds from our Revolving Credit Facility. On January 20, 2022, we acquired all of the equity voting interests and completed the acquisition of OrthogenRx, which is focused on the development and commercialization of treatments for knee pain caused by osteoarthritis. The initial purchase price for the OrthogenRx Acquisition was $130.0 million at closing less working capital adjustments, with up to an additional $30.0 million payable in contingent cash consideration based on OrthogenRx’s growth in net sales during 2022 and 2023. Results of Operations and Related Information Use of Non-GAAP Measures In this section, “Adjusted Operating Profit (Loss),” which is a profitability measure that is not calculated in accordance with accounting principles generally accepted in the United States (“GAAP”), is referred to as a non-GAAP financial measure. We provide this non-GAAP measure because we use it to measure our operational performance and provide greater insight into our ongoing business operations. This measure is not intended to be, and should not be, considered separately from, or an alternative to, the most directly comparable GAAP financial measures. A reconciliation of the non-GAAP measure to the most directly comparable GAAP financial measures is provided under “Adjusted Operating (Loss) Profit.” Net Sales Our net sales are summarized in the following table for the years ended December 31, 2023, 2022 and 2021 (in millions): [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2023","","2022","","Change","","2021","","Change"],["Digestive Health","$","371.6","","","$","340.4","","","9.2","%","","$","322.2","","","5.6","%"],["Pain Management and Recovery:"],["Surgical pain and recovery","139.2","","","160.1","","","(13.1)","%","","162.7","","","(1.6)","%"],["Interventional pain","162.5","","","183.6","","","(11.5)","%","","102.1","","","79.8","%"],["Total Pain Management and Recovery","301.7","","","343.7","","","(12.2)","%","","264.8","","","29.8","%"],["Total Net Sales","$","673.3","","","$","684.1","","","(1.6)","%","","$","587.0","","","16.5","%"],["","Total","","Volume(a)","","Pricing/Mix","","Currency","","Other(b)"],["Net Sales - percentage change 2023 vs. 2022","(1.6)","%","","(1.7)","%","","0.3","%","","(0.2)","%","","\u2014","%"],["Net Sales - percentage change 2022 vs. 2021","16.5","%","","17.5","%","","0.7","%","","(1.6)","%","","(0.1)","%"]] [[/GREPCENT_TABLE]] ______________________________ (a)Volume includes incremental sales from acquisitions. (b)Other includes rounding. [[GREPCENT_TABLE]] [["","22"]] [[/GREPCENT_TABLE]] Table of Contents Product Category Descriptions Digestive Health is a portfolio of products such as our MIC-KEY enteral feeding tubes, Corpak patient feeding solutions and NeoMed neonatal and pediatric feeding solutions. Pain Management and Recovery is a portfolio of products including: •Surgical pain and recovery products such as ON-Q and ambIT surgical pain pumps and Game Ready cold and compression therapy systems; and •Interventional pain solutions, which provide minimally invasive pain relief therapies, such as our COOLIEF pain therapy, OrthogenRx’s knee osteoarthritis HA pain relief injection products and Diros’ RFA products used to treat chronic pain conditions. Net Sales - 2023 Compared to 2022 Net sales decreased by 1.6% to $673.3 million for the year ended December 31, 2023, primarily due to lower volume in the Pain Management and Recovery portfolio (primarily lower HA sales), partially offset by continued strong demand for Digestive Health products. In addition to volume, 0.3% of favorable pricing was offset by 0.2% of unfavorable foreign currency translation effects. Net Sales - 2022 Compared to 2021 Net sales increased by 16.5% to $684.1 million for the year ended December 31, 2022, primarily due to incremental revenue from the OrthogenRx acquisition and strong demand for Digestive Health products, in addition to 0.7% of favorable pricing, which was partially offset by 1.6% of unfavorable foreign currency translation effects. Net Sales by Geographic Region Net sales by region is presented in the table below (in millions): [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2023","","2022","","Change","","2021","","Change"],["North America","$","537.9","","","$","552.0","","","(2.6)","%","","$","449.1","","","22.9","%"],["Europe, Middle East and Africa","84.1","","","77.4","","","8.7","","","86.1","","","(10.1)"],["Asia Pacific and Latin America","51.3","","","54.7","","","(6.2)","","","51.8","","","5.6"],["Total Net Sales","$","673.3","","","$","684.1","","","(1.6)","%","","$","587.0","","","16.5","%"]] [[/GREPCENT_TABLE]] Gross Profit (in millions) [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2023","","2022","","2021"],["Net sales","$","673.3","","","$","684.1","","","$","587.0"],["Cost of products sold","293.6","","","289.9","","","287.8"],["Gross profit","379.7","","","394.2","","","299.2"],["Gross profit margin","56.4","%","","57.6","%","","51.0","%"]] [[/GREPCENT_TABLE]] Cost of products sold increased from $289.9 million to $293.6 million during the year ended December 31, 2023, primarily driven by unfavorable product mix, partially offset by improved manufacturing efficiencies. In the year ended December 31, 2023, gross profit margin decreased from 57.6% to 56.4%. Cost of products sold increased from $287.8 million to $289.9 million during the year ended December 31, 2022, primarily driven by higher freight costs and delays in returning our manufacturing operations to pre-pandemic efficiency levels. In the year ended December 31, 2022, gross profit margin increased from 51.0% to 57.6% driven by high volume, primarily due to incremental revenue from the OrthogenRx acquisition and strong demand for digestive health products . Research and Development (in millions) [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2023","","2022","","2021"],["Research and development","$","27.2","","","$","29.2","","","$","30.6"],["Percentage of net sales","4.0","%","","4.3","%","","5.2","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","23"]] [[/GREPCENT_TABLE]] Table of Contents 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. Selling and General Expenses (in millions) [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2023","","2022","","2021"],["Selling and general expenses","$","335.0","","","$","326.5","","","$","285.3"],["Percentage of net sales","49.8","%","","47.7","%","","48.6","%"]] [[/GREPCENT_TABLE]] Selling and general expenses increased from $326.5 million in 2022 to $335.0 million in 2023, driven by higher selling costs, non-recurring expenses associated with the ongoing Transformation Process and the RH Divestiture, as well as compliance costs associated with the EU MDR. In the year ended December 31, 2022, selling and general expenses increased from $285.3 million in 2021 to $326.5 million in 2022, driven by higher selling costs, along with consulting costs associated with evaluating and planning for the Transformation Process, compliance costs associated with the EU MDR and higher acquisition-related costs. Other Expense, net (in millions) [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2023","","2022","","2021"],["Other expense, net","$","13.3","","","$","3.0","","","$","22.3"],["Percentage of net sales","2.0","%","","0.4","%","","3.8","%"]] [[/GREPCENT_TABLE]] Other expense, net increased from $3.0 million in 2022 to $13.3 million in 2023 primarily due to litigation and legal costs of $10.0 million. Legal and litigation costs were incurred as the result of the settlement related to a customer claim. Other expense, net decreased from $22.3 million in 2021 to $3.0 million in 2022 primarily due to lower legal costs and completion of a restructuring initiated in the fourth quarter of 2020 (the “2020 Restructuring”) and plans related to the divestiture of our Surgical and Infection Prevention (“S&IP”) business in 2018 (the “S&IP Divestiture”). Other expense, net includes litigation and legal costs of $15.0 million in the year ended December 31, 2021. Legal and litigation costs were incurred for matters described in “Commitments and Contingencies” in Note 14 to the consolidated financial statements in Item 8 of this Form 10-K. Operating Profit (Loss) (in millions) [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2023","","2022","","2021"],["Operating profit (loss)","$","4.2","","","$","35.5","","","$","(39.0)"],["Operating profit margin","0.6","%","","5.2","%","","(6.6)","%"]] [[/GREPCENT_TABLE]] The items previously described drove operating profit to $4.2 million in the year ended December 31, 2023 compared to operating profit of $35.5 million and operating loss of $39.0 million, respectively, in the years ended December 31, 2022 and 2021. [[GREPCENT_TABLE]] [["","24"]] [[/GREPCENT_TABLE]] Table of Contents Adjusted Operating Profit (Loss) A reconciliation of adjusted operating profit (loss), a non-GAAP measure, to operating profit (loss) is provided in the table below (in millions): [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2023","","2022","","2021"],["Operating profit (loss), as reported (GAAP)","$","4.2","","","$","35.5","","","$","(39.0)"],["COVID-19 related expenses","\u2014","","","\u2014","","","0.3"],["2020 Restructuring charges","\u2014","","","\u2014","","","12.4"],["Post-Divestiture restructuring and transition charges","\u2014","","","\u2014","","","14.1"],["Acquisition and integration-related charges","3.3","","","3.4","","","1.6"],["Restructuring and transformation charges","28.2","","","\u2014","","","\u2014"],["Divestiture-related charges","6.0","","","\u2014","","","\u2014"],["EU MDR Compliance","3.7","","","6.9","","","4.0"],["Litigation and legal","10.0","","","\u2014","","","15.0"],["Other items","\u2014","","","3.8","","","\u2014"],["Intangibles amortization","24.3","","","23.6","","","14.6"],["Adjusted Operating Profit (Loss) (non-GAAP)","$","79.7","","","$","73.2","","","$","23.0"]] [[/GREPCENT_TABLE]] The items noted in the table above are described below: On a GAAP basis, operating income increased compared to the prior year due to higher sales, lower legal costs and completion of restructuring activities, partially offset by higher selling costs. Items impacting operating results include the following: COVID-19 related expenses: As a result of the recent COVID-19 pandemic, we incurred incremental expenses for additional personal protective equipment for our manufacturing employees, sanitation at our facilities and other costs. We incurred no COVID-19 related costs in the years ended December 31, 2023 and 2022. We incurred $0.3 million of COVID-19 related costs in the year ended December 31, 2021. 2020 Restructuring charges: We incurred no 2020 Restructuring-related costs in the years ended December 31, 2023 and 2022. We incurred $12.4 million of costs in the year ended December 31, 2021, in connection with the 2020 Restructuring. Post-S&IP Divestiture restructuring and transition charges: These charges were associated with the post-S&IP Divestiture restructuring plan, 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 of the Surgical and Infection Prevention (“S&IP”) business. We incurred no costs associated with the post-S&IP divestiture restructuring plan in the years ended December 31, 2023 and 2022. We incurred $14.1 million of costs in connection with the post-S&IP divestiture restructuring plan for the year ended December 31, 2021. Acquisition and integration-related charges: We incurred $3.3 million, $3.4 million and $1.6 million of costs in connection with acquisition and integration activities for the years ended December 31, 2023, 2022 and 2021, respectively. Expenses incurred during 2023 were related to the acquisition of Diros and OrthogenRx. Expenses incurred in the prior periods were for integrations of earlier acquisitions. Restructuring and transformation charges: In January 2023, we initiated the Transformation Process, a three-year restructuring initiative intended to align the Company under a single commercial organization, rationalize our product portfolio, undertake additional cost management activities to enhance the Company’s operating profitability and pursue efficient capital allocation strategies. In the year ended December 31, 2023, we incurred expenses of $28.2 million related to the Transformation Process which consisted of costs associated with program management consulting and employee retention expenses and employee severance and benefits costs. RH Divestiture related charges: In conjunction with the divestiture of our RH business, we incurred accounting, legal and other professional fees of approximately $6.0 million for the year ended December 31, 2023. 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 [[GREPCENT_TABLE]] [["","25"]] [[/GREPCENT_TABLE]] Table of Contents under the enhanced standards. We incurred $3.7 million, $6.9 million and $4.0 million of costs related to EU MDR compliance in the years ended December 31, 2023, 2022 and 2021 respectively. Other items: In the year ended December 31, 2023, we incurred no costs associated with other items. In the year ended December 31, 2022, we incurred $3.8 million of expenses in connection with evaluating and planning for the Transformation Process. These costs consisted of $2.6 million of consulting costs associated with evaluation of overall scope and alternatives for transforming our business, and $1.2 million for the impairment of certain assets associated with research and development projects that were cancelled. Litigation and legal: In the year ended December 31, 2023,we incurred $10.0 million of costs for litigation matters. This expense was for a settlement related to a customer claim and is included in “Other expense, net”. We incurred no costs for litigation matters in the year ended December 31, 2022 and $15.0 million of expenses for certain litigation matters in the year ended December 31, 2021, 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 (the “DPA”) with the United Sates Department of Justice (the “DOJ”), which is described in “Commitments and Contingencies” in Note 14 to the consolidated financial statements in Item 8 of this Form 10-K. Intangibles amortization: Intangibles amortization is related primarily to the amortization of intangibles acquired in prior business acquisitions and was $24.3 million, $23.6 million and $14.6 million, respectively, in the years ended December 31, 2023, 2022 and 2021. The increase in amortization in the year ended December 31, 2023 is due to incremental amortization of intangibles acquired with Diros in Q3 2023. 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-RH Divestiture and post-S&IP divestiture transition activities. •Certain acquisition and integration charges related to the acquisitions of Diros, OrthogenRx and GameReady. •Expenses associated with our three-year restructuring initiative. •Expenses for accounting, legal and other professional fees associated with the divestiture of our RH business. •Expenses associated with EU MDR compliance. •Expenses associated with other unusual items such as consulting costs associated with evaluating transformational restructuring or other strategies or asset impairment charges for cancelled research and development projects. •Expenses associated with certain litigation matters. •The amortization of intangible assets associated with prior business acquisitions. Interest Expense Interest expense was $15.0 million, $10.0 million and $3.3 million in the years ended December 31, 2023, 2022 and 2021, respectively. In the year ended December 31, 2022, interest expense includes an early extinguishment loss of $1.1 million incurred upon terminating our Prior Credit Agreement (as defined below) on June 24, 2022. In the year ended December 31, 2023, $0.5 million of interest was capitalized on long-term capital projects. In the years ended December 31, 2022 and 2021, $0.1 million 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 9 to the consolidated financial statements in Item 8 of this Form 10-K for further discussion of our indebtedness, our Prior Credit Agreement and our new Credit Agreement. 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 no benefit in the year ended December 31, 2023, and a $3.8 million and $2.8 million benefit in the years ended December 31, 2022 and 2021, respectively. As a result, as of December 31, 2023, we had $3.8 million of income tax receivables. [[GREPCENT_TABLE]] [["","26"]] [[/GREPCENT_TABLE]] Table of Contents Our overall effective tax rate was (25.3)% for the year ended December 31, 2023 compared to a rate of 19.5% in 2022 and 26.6% in 2021. See “Income Taxes” in Note 10 to the consolidated financial statements in Item 8 of this Form 10-K 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 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 expect our operating cash flow will be sufficient to meet our working capital requirements and fund capital expenditures in the next twelve months. 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, 2023, $48.4 million of our $87.7 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 decreased by $40.0 million to $87.7 million as of December 31, 2023 compared to $127.7 million last year. The decrease was driven by $49.6 million of cash used for the acquisition of Diros, $15.0 million used to repurchase shares of our common stock, repayments of our debt, including $115.0 million on our revolving credit facility and $4.7 million on our secured term loan, $11.7 million of contingent consideration payments and $17.8 million of capital expenditures. This was partially offset by $32.4 million of cash provided by operating activities, $55.0 million of proceeds from our revolving credit facility and $89.0 million of proceeds from the RH divestiture. Cash and equivalents increased by $9.2 million to $127.7 million as of December 31, 2022 compared to $118.5 million as of December 31, 2021. The increase was driven by $90.9 million of cash provided by operating activities, $250.0 of proceeds from our secured debt and $150.0 million of proceeds from our revolving credit facility partially offset by payments on our prior credit agreement including $126.6 million on our secured term loan and $170.0 million on our revolving credit facility, $116.1 million of cash used for the acquisition of OrthogenRx, $45.5 million used to repurchase shares of our common stock and $19.3 million of capital expenditures. Long-Term Debt 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 [[GREPCENT_TABLE]] [["","27"]] [[/GREPCENT_TABLE]] Table of Contents 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 6.6% as of December 31, 2023. 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”). The Credit Agreement requires compliance with certain customary operational and financial covenants. As of December 31, 2023, we were in compliance with all of our debt covenants. For further information regarding our debt arrangements, see “Debt” in Note 9 to the consolidated financial statements in Item 8 of this Form 10-K. 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 the first quarter of 2022, we repurchased the remaining $19.3 million. 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. Under this program, during the second quarter of 2022 we repurchased $14.1 million of our common stock, and during the third quarter of 2022 we repurchased the remaining $10.9 million. On July 28, 2023, the Board of Directors approved a new one-year program under which we may 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. Under this program, during the third quarter of 2023 we repurchased $9.2 million of our common stock, and during the fourth quarter of 2023 we repurchased the remaining $5.8 million. Additional repurchases under this program will be made from time to time at management’s discretion on the open market or through privately negotiated transactions in compliance with Rule 10b-18 under the Exchange Act, subject to market conditions, applicable legal requirements and other relevant factors. This share repurchase program does not obligate us to purchase any particular amount of common stock and may be suspended, modified or discontinued by us without prior notice. For further information, see “Share Repurchase Program” in Note 17 to the consolidated financial statements in Item 8 of this Form 10-K. 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 Form 10-K. For obligations under our purchase arrangements which consist mostly of open purchase orders and other commitments, as of December 31, 2023, we have amounts due in less than one year of $71.7 million, $7.0 million in one to three years, and $8.6 million 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 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 income taxes and potential income tax assessments. Our estimates are subject to uncertainties associated with the [[GREPCENT_TABLE]] [["","28"]] [[/GREPCENT_TABLE]] Table of Contents 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 Form 10-K. 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, 2023, we have accumulated undistributed earnings generated by our foreign subsidiaries of approximately $33.6 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 14 to the consolidated financial statements in Item 8 of this Form 10-K.