Avanos Medical Navigates Tariff Headwinds with Resilient Core Businesses in Q1 2025

Avanos Medical, Inc. (AVNS) delivered a mixed performance in its Q1 2025 earnings report, showcasing strong growth in its core Specialty Nutrition Systems (SNS) segment while grappling with margin pressures from tariffs and strategic reclassifications. The company’s results highlight both operational resilience and the challenges of global trade dynamics, positioning it as a stock worth watching for investors willing to tolerate near-term volatility.

text2img>A close-up of Avanos Medical’s CORTRAK guided feeding system and COOLIEF radiofrequency ablation device, highlighting their innovative medical technologies

Financial Highlights: Growth Amid Marginal Pressures

• Revenue: Total net sales rose 0.8% to $167.5 million, driven by 6.9% organic growth in SNS.
• Profitability: Net income surged to $6.6 million (vs. $0.5 million in 2024), while adjusted diluted EPS improved to $0.26.
• Margin Challenges: Gross margin contracted to 53.6%, primarily due to unfavorable pricing for hyaluronic acid (HA) products, now classified under the loss-making "Corporate and Other" segment.

Segment Performance: Winners and Losers

1. Specialty Nutrition Systems (SNS):
2. Delivered $101.1 million in sales (+6.9% YoY), fueled by strong demand for enteral feeding solutions like CORTRAK and neonatal products like NEOMED.

3. Operating income jumped 37% to $21.1 million, with margins expanding to 20.9% due to volume-driven efficiencies.

4. Pain Management and Recovery (PMR):

5. Flat sales at $56.2 million, though radiofrequency ablation (RFA) products grew 8.2% on strong sales of COOLIEF and TRIDENT systems.

6. Surgical pain sales fell 9.3%, reflecting strategic exits of low-margin revenue streams.

7. Corporate and Other:

8. Sales collapsed 32.9% to $10.2 million due to HA pricing issues. The segment reported a $11.0 million loss, underscoring the need for cost discipline in non-core areas.

Tariff Impact and Mitigation Strategies

• Headwind: Tariffs could add $15 million in costs in 2025, primarily from China-sourced goods. This forced Avanos to revise its adjusted EPS guidance to $0.75–$0.95 (down from prior expectations).
• Mitigation:
• Transitioning neonatal syringe manufacturing out of China by mid-2026 to leverage USMCA trade agreements.
• Negotiating exemptions (e.g., for NEOMED) and implementing price increases to offset costs.

Balance Sheet and Liquidity

• Cash Reserves: $97 million (down slightly from $107.7 million in 2024), with debt reduced to $107.4 million.
• Free Cash Flow: Improved to $19.0 million (vs. an $12.1 million outflow in 2024), supporting its $65 million annual target.

Investment Considerations

• Strengths:
• SNS dominance: The segment’s mid-single-digit growth outlook and product innovations (e.g., CORGRIP) position Avanos to capture growing demand in enteral feeding.
• RFA momentum: PMR’s RFA business is poised for near-double-digit growth, benefiting from reimbursement tailwinds in markets like the U.K. and Japan.
• Risks:
• Tariff uncertainty: The 145% tariff rate on China imports remains a threat if mitigation efforts fall short.
• Margin compression: HA pricing and supply chain costs could further squeeze profitability in 2026.

Conclusion

Avanos Medical’s Q1 results underscore its ability to grow its core businesses despite macroeconomic headwinds. The SNS segment’s robust performance and RFA product strength provide a solid foundation for long-term growth. However, investors must weigh these positives against tariff risks and margin pressures.

Key Data Points to Watch:
- Q2 SNS sales: A potential dip due to distributor order timing should normalize, but sustained growth will depend on execution.
- Tariff resolution: A reduction in China tariff rates below 145% would significantly improve EPS guidance.

At current valuations, AVNS offers a high-risk, high-reward opportunity for investors focused on healthcare innovation. While the stock may face near-term volatility, its strong free cash flow and strategic focus on high-margin segments position it to rebound if trade tensions ease.

For conservative investors, patience is advised—monitoring tariff developments and Q3 results will be critical to assessing whether Avanos can turn its operational resilience into sustained profitability.