Executive Summary / Key Takeaways

• Strategic Reorientation Delivering Focus: Avanos Medical is undergoing a profound transformation, divesting non-core assets like its Respiratory Health and Hyaluronic Acid (HA) businesses to sharpen its focus on two high-potential segments: Specialty Nutrition Systems (SNS) and Pain Management and Recovery (PMR). This strategic pivot aims to optimize capital allocation and drive long-term value.
• Robust Growth in Core Segments: Despite broader market challenges, SNS continues to deliver above-market organic growth (5.1% in Q2 2025), driven by strong demand for enteral feeding and neonatal solutions, supported by product innovations like CORGRIP. The PMR segment, particularly Radiofrequency Ablation (RFA), also shows strong momentum (13.7% growth in Q2 2025) from generator sales and a refined Ambulatory Surgical Center (ASC) strategy.
• Navigating Tariff Headwinds with Mitigation: The company faces an estimated $15 million in incremental tariff-related manufacturing costs for 2025, primarily from Mexico and China. However, management is actively implementing mitigation strategies, including supply chain adjustments (e.g., exiting China-sourced NeoMed by H2 2026), pricing actions, and leveraging international agreements, which are critical to protecting profitability.
• Solid Financial Foundation and Outlook: Avanos reaffirmed its 2025 full-year revenue guidance of $665 million to $685 million and adjusted diluted EPS of $0.75 to $0.95, a testament to the strength of its core segments offsetting the HA divestiture and tariff impacts. The company maintains a strong balance sheet with $90.3 million cash and $105.1 million debt as of June 30, 2025, and anticipates approximately $40 million in free cash flow for the year.
• Technological Edge and Market Leadership: Avanos leverages differentiated technologies like its three-tiered RFA solutions (ESENTEC, TRIDENT, COOLIEF) and advanced enteral feeding systems (MIC-KEY, CORTRAK, CORGRIP) to secure leading market positions. These innovations, coupled with a dedicated commercial approach, form a competitive moat, driving customer loyalty and procedural volume growth.

A Focused Future: Avanos' Strategic Transformation Unfolds

Avanos Medical, Inc. (NYSE:AVNS) is a medical technology company dedicated to delivering clinically superior solutions that enhance patient recovery and quality of life. Headquartered in Alpharetta, Georgia, Avanos has strategically sharpened its focus on two critical healthcare needs: providing vital nutrition support from hospital to home and reducing opioid reliance in pain management and recovery. This targeted approach, underpinned by a multi-year transformation, positions Avanos as a specialized player in a dynamic medical device landscape.

The company's journey began in 2014 as a spin-off from Kimberly-Clark (KMB), initially known as Halyard Health before rebranding to Avanos Medical in 2018. Early years saw the establishment of a diverse portfolio, including enteral feeding tubes, surgical pain pumps, and chronic pain products. A significant turning point arrived in January 2023 with the launch of a three-year "Transformation Process." This initiative aimed to streamline commercial operations, rationalize the product portfolio, enhance profitability through cost management, and optimize capital allocation. Key to this transformation was the acquisition of Diros Technology Inc. in July 2023, which brought the high-performing Trident Radiofrequency Ablation (RFA) product line into the fold.

Further solidifying its strategic pivot, Avanos divested its Respiratory Health (RH) business in October 2023, with final asset transfers completed by October 2024. This was followed by the "Post-RH Divestiture Plan," the final phase of its transformation, focusing on aligning the company's operational footprint with its remaining core businesses. In a decisive move post-Q2 2025, Avanos divested its Hyaluronic Acid (HA) product line on July 31, 2025, reinforcing its commitment to focused growth in its newly defined Specialty Nutrition Systems (SNS) and Pain Management and Recovery (PMR) segments. This resegmentation, effective Q1 2025, provides greater transparency and guides internal capital allocation decisions.

Technological Edge and Innovation as a Competitive Moat

Avanos' competitive strength is deeply rooted in its differentiated technology and continuous innovation, which are central to its market leadership and strategic positioning. The company's product portfolio is not merely a collection of devices but a suite of clinically superior solutions designed to offer tangible benefits over alternatives.

In the Specialty Nutrition Systems (SNS) segment, Avanos holds a number one position in long-term, short-term, and neonatal enteral feeding. Products like the MIC-KEY low-profile enteral feeding tubes are recognized for their patient comfort and ease of use, critical factors for long-term home care. The CORTRAK guided feeding tube placement system enhances safety and efficiency, while the newly launched CORGRIP tube retention system is designed to reduce the risk of tube migration and dislodgement, a common and serious complication. These innovations directly address patient safety and caregiver efficiency, translating into strong customer loyalty and sustained market share. Management is committed to further SNS product innovations, with one to three launches anticipated in 2025, primarily to secure and extend these leadership positions, rather than for immediate, significant revenue additions.

Within the Pain Management and Recovery (PMR) segment, Avanos positions itself as a dedicated "RF solution company" with a comprehensive three-tiered offering. The ESENTEC conventional RFA, TRIDENT tined RFA, and COOLIEF Cooled RFA products provide minimally invasive pain relief therapies. The TRIDENT product line, acquired in 2023, has exceeded internal growth expectations, with over 180 accounts converting to its technology, demonstrating its clinical efficacy and market acceptance. The company's RFA generator capital sales are a key driver, leading to higher procedure volumes and "material pull-through" of higher-margin probes, directly impacting profitability. This focus on a specialized, multi-faceted RFA portfolio differentiates Avanos from competitors with broader, less specialized pain offerings.

Furthermore, the ambIT electronic pain pump has capitalized on the procedural shift to Ambulatory Surgical Centers (ASCs), achieving double-digit growth in each quarter of 2024. This success highlights the product's suitability for outpatient settings and Avanos' effective ASC strategy. The ON-Q elastomeric pain pump, while facing recent supply challenges, is poised for potential growth with the implementation of the NOPAIN Act, which aims to improve reimbursement for non-opioid post-surgical pain relief. Avanos' investment in an AI solutions portfolio also signals a commitment to leveraging data for operational efficiencies, customer targeting, and future product innovation.

Competitive Landscape and Strategic Positioning

Avanos operates in a highly competitive medical technology market, vying with industry giants and specialized players alike. Its strategic positioning as a focused, innovative provider in Specialty Nutrition Systems and Pain Management and Recovery is a deliberate counterpoint to the diversified portfolios of larger competitors.

In the SNS segment, Avanos maintains a strong competitive advantage, consistently delivering above-market results and reaffirming its number one position. This leadership is sustained by continuous product innovation and a responsive approach to market needs, such as the strong demand for ENFit conversions for its NeoMed product line, which has also benefited from a competitor's backorder. While precise market share figures for all niche competitors are not publicly detailed, Avanos' consistent growth rates suggest effective competition against rivals.

The PMR segment, particularly RFA, is where Avanos truly differentiates itself. Management emphasizes that customers increasingly view Avanos as an "RF solution company," a testament to its deep specialization and comprehensive three-tiered RFA offering. This focused expertise allows Avanos to compete effectively against larger, more diversified players like Medtronic plc , Abbott Laboratories , Becton, Dickinson and Company (BDX), Johnson & Johnson , and Stryker Corporation (SYK). While these competitors possess greater scale, broader distribution networks, and larger R&D budgets, Avanos' dedicated approach to RFA, coupled with its clinically superior products, fosters strong customer loyalty and drives procedural volume.

For instance, Avanos' RFA solutions, with their specific three-tiered approach, offer a tailored experience that may provide qualitatively superior performance in targeted applications compared to the more generalized offerings from Medtronic or Abbott (ABT). This specialization allows Avanos to achieve strong growth in RFA generator sales and the associated pull-through of higher-margin probes, indicating a competitive edge in profitability within this niche. The ambIT product line's success in ASCs further demonstrates Avanos' ability to adapt to evolving healthcare delivery models, a strategic advantage against competitors who may be slower to capitalize on such shifts.

However, Avanos' smaller scale compared to industry behemoths like J&J (JNJ) and Medtronic (MDT) presents certain vulnerabilities. These larger players benefit from economies of scale, extensive global reach, and substantial financial resources for R&D and acquisitions. Avanos' HA business, now divested, faced significant pricing pressure, partly due to its presence primarily in the Medicaid market, highlighting a vulnerability to aggressive pricing strategies from competitors with broader market access. The company's strategic response has been to exit such low-margin, high-pressure areas, focusing instead on segments where its technological differentiation and dedicated commercial model can yield sustainable growth and profitability.

Financial Performance and Operational Resilience

Avanos' recent financial performance reflects a company in active transformation, demonstrating resilience in its core segments while strategically shedding less profitable ventures. The second quarter of 2025 saw net sales of $175.0 million, an increase from $171.7 million in the prior year period. For the first six months of 2025, net sales reached $342.5 million, up from $337.8 million in the same period of 2024. Adjusted for foreign exchange and strategic withdrawals, organic sales grew 2% in Q2 2025 and 2.8% in Q1 2025.

The Specialty Nutrition Systems (SNS) segment was a standout performer, with net sales of $102.7 million in Q2 2025, representing 5.1% growth year-over-year. This was driven by a 2.5% increase in enteral feeding and a robust 12.8% surge in neonate solutions. For the first half of 2025, SNS net sales were $203.8 million, growing 6.0%. SNS operating profit in Q2 2025 was nearly 18%, though impacted by tariffs and transient unfavorable cost absorption. In Q1 2025, SNS operating profit was nearly 21%, a 460 basis-point increase from the prior year, reflecting strong top-line growth and margin expansion from transformation initiatives.

The Pain Management and Recovery (PMR) segment also showed progress, with net sales of $61.0 million in Q2 2025, up 2.9%. This growth was primarily fueled by Radiofrequency Ablation (RFA) solutions, which posted an impressive 13.7% increase to $35.8 million. Surgical pain and recovery products, however, saw a 9.4% decline to $25.2 million, primarily due to lower volume. For the first half of 2025, PMR net sales were $117.2 million, growing 1.4%, with RFA up 11.0% and surgical pain down 9.3%. PMR operating profit in Q2 2025, excluding the goodwill impairment, grew nearly $2 million from a year ago.

The "Corporate and Other" segment, which included the now-divested HA business, saw net sales decline over 20% in Q2 2025 and over 30% in Q1 2025, primarily due to persistent pricing pressure. The divestiture of the HA product line on July 31, 2025, is not expected to materially impact the bottom line, as the business's challenge was primarily pricing, and its profitability impact was limited.

A significant non-cash goodwill impairment charge of $77.0 million was recorded in Q2 2025, specifically for the Pain Management and Recovery reporting unit, reflecting a decrease in market capitalization. This follows a larger $437 million goodwill impairment charge in Q4 2024. These impairments underscore the market's re-evaluation of certain asset values amidst the company's transformation and external pressures.

Cost of products sold increased in Q2 2025, driven by higher net sales and increased tariffs. Selling and general expenses, while up in Q2 2025 due to post-divestiture restructuring costs, showed a decrease for the first six months of 2025, reflecting savings from the Transformation Process and increased spending discipline.

Liquidity, Capital Allocation, and Outlook

Avanos maintains a robust financial position, providing strategic flexibility for its transformation. As of June 30, 2025, the company held $90.3 million in cash and cash equivalents, with total debt outstanding at $105.1 million. This translates to a healthy balance sheet, with management confirming compliance with all debt covenants.

Free cash flow for Q2 2025 was negative approximately $4 million, primarily due to the timing of tax payments and higher capital expenditures supporting supply chain initiatives. However, for the first six months of 2025, cash provided by operating activities was $32.5 million. The company anticipates generating approximately $40 million of free cash flow for the full year 2025, inclusive of tariff impacts. This is a revised figure from the earlier Q1 2025 estimate of $65 million (excluding tariffs), reflecting the updated tariff outlook. Capital expenditures are expected to be slightly higher in 2025, partly due to investments in moving NeoMed production out of China to mitigate future tariff risks.

Avanos' capital allocation strategy is focused on strategic M&A opportunities, particularly within the SNS segment, to build out a comprehensive "Specialty Nutrition ecosystem." The company has already closed two smaller transactions supporting this strategy in the first half of 2025. Opportunistic share repurchases are also part of the strategy, with a new $25 million program approved in November 2024, though no repurchases occurred in the first six months of 2025.

For the full year 2025, Avanos reaffirmed its revenue estimate of $665 million to $685 million. This is a significant reaffirmation, especially considering the HA divestiture, which removes five months of revenue. The company's ability to maintain this guidance is attributed to the strong performance of its strategic SNS and PMR segments and favorable currency positions. Adjusted diluted EPS guidance is also reaffirmed at $0.75 to $0.95.

The company anticipates approximately $15 million in incremental tariff-related manufacturing costs for 2025, primarily from Mexico and China. In Q2 2025 alone, over $8 million in tariffs were incurred, to be expensed in Q3. Management is actively pursuing mitigation strategies, including leveraging the USMCA, temporary tariff exemptions for neonatal feeding products, internal cost containment, and a strategic exit from China-sourced NeoMed products by the second half of 2026. While currency headwinds of approximately 100 basis points were initially factored in, conditions have improved.

Longer-term, Avanos remains committed to achieving a financial profile that includes gross margins greater than 60% and adjusted EBITDA margins of 20%, driven by consistent revenue growth in its strategic operating segments and continued cost management.

Conclusion

Avanos Medical is executing a decisive transformation, shedding non-core assets to concentrate on its high-growth Specialty Nutrition Systems and Pain Management and Recovery segments. This strategic focus, coupled with a commitment to technological differentiation and operational efficiency, forms the bedrock of its investment thesis. Despite facing macroeconomic headwinds, particularly from tariffs, the company's core businesses are demonstrating robust performance, driven by innovative products like the CORGRIP system and its three-tiered RFA solutions.

The reaffirmation of 2025 guidance, even after the HA divestiture, underscores management's confidence in its refined strategy and the underlying strength of its specialized portfolio. While tariff mitigation and the full realization of the NOPAIN Act's benefits for ON-Q remain critical watchpoints, Avanos' strong balance sheet and disciplined capital allocation strategy position it to pursue accretive M&A in its core areas. Investors should view Avanos as a company strategically pivoting towards a more focused, profitable, and technologically advanced future, with a clear roadmap to reignite margin expansion and deliver consistent growth in its chosen markets.