NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1
. Accounting Policies
Background and Basis of Presentation
Halyard Health, Inc. is a global business which seeks to advance health and healthcare by preventing infection, eliminating pain and speeding recovery. Our products and solutions are designed to address some of today’s most important healthcare needs, namely, preventing infections and reducing the use of narcotics while helping patients move from surgery to recovery. We market and support the efficacy, safety and economic benefit of our products with a significant body of clinical evidence. We operate in
two
business segments: Surgical and Infection Prevention (“S&IP”) and Medical Devices. References to “Halyard,” “Company,” “we,” “our” and “us” refer to Halyard Health, Inc.
Interim Financial Statements
We prepared the accompanying condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and the condensed consolidated financial statements in this Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended
December 31, 2015
. Our unaudited interim condensed consolidated financial statements contain all material adjustments which are of a normal and recurring nature necessary to fairly state our financial condition, results of operations and cash flows for the periods presented.
Use of Estimates
Preparation of our condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting periods. Estimates are used in accounting for, among other things, distributor rebate accruals, future cash flows associated with impairment testing for goodwill and long-lived assets, loss contingencies, deferred tax assets and potential income tax assessments. 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.
New Accounting Standards
In
March 2016
, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09,
Improvements to Employee Share-Based Payment Accounting.
This ASU simplifies several aspects of accounting for share-based payment transactions including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification on the statement of cash flows. Under this ASU, all excess tax benefits or deficiencies are recognized as income tax expense or benefit in the income statement and the pool of windfall tax benefits as a component of additional paid-in capital is eliminated. In regards to forfeitures, companies may make a one-time policy election to use an estimated forfeiture rate or account for forfeitures as they occur. The policy election regarding forfeitures applies only to instruments with service conditions; the requirement to estimate the probability of achieving performance conditions remains. For statutory tax withholding requirements, this ASU allows for net settlement up to the employer’s maximum statutory tax withholding requirement. Formerly, only the minimum statutory tax withholding requirement was allowed to be met through net settlement while retaining equity classification. This ASU is effective for annual periods, and interim periods within those annual periods beginning after
December 15, 2016
. Earlier adoption is permitted in any interim or annual period for which financial statements have not yet been issued. The application of this ASU in regards to the accounting for income taxes, forfeitures and statutory tax withholding requirements should be applied using a modified retrospective application with a cumulative effect adjustment to additional paid-in capital as of the beginning of the period of adoption. The presentation of employee taxes paid on the statement of cash flows should be applied retrospectively. The adoption of this ASU is not expected to have a material effect on our financial position, results of operations or cash flows.
In
February 2016
, the FASB issued ASU No. 2016-02,
Leases.
This ASU requires the recognition of assets and liabilities for leases with lease terms of more than
twelve months
. The recognition, measurement and presentation of expenses and cash flows arising from a lease will depend primarily on its classification as a finance or an operating lease, with the classification criteria for distinguishing between the two being similar to the classification criteria for distinguishing between capital and operating leases under current GAAP. However, unlike current GAAP, recognition of finance and operating leases on the balance sheet is required, and additional disclosures are required to help financial statement users to better understand the amount, timing and uncertainty of cash flows arising from leases. This ASU requires modified retrospective application for existing leases. This ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2018
, however, earlier application is permitted. The impact of this ASU on our financial position, results of operations and cash flows are not yet known.
In
January 2016
, the FASB issued ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Liabilities.
This ASU requires equity investments, except those accounted for under the equity method or those that result in consolidation of the equity investee, to be measured at fair value with changes in fair value recognized in net income. However, equity investments without readily determinable fair values may be measured at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments in the same issuer. In addition, this ASU provides for a qualitative impairment assessment for equity investments that do not have readily determinable fair values. This ASU also clarifies that entities should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. This ASU should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The provisions related to equity investments that do not have readily determinable fair values should be applied prospectively to such equity investments that exist as of the date of adoption. This ASU will be effective for fiscal years, and interim periods within those fiscal years beginning after
December 15, 2017
. Early adoption of this ASU is permitted. The impact of this ASU on our financial position, results of operations and cash flows are not yet known.
In
May 2014
, the FASB issued Accounting Standards Update 2014-09,
Revenue from Contracts with Customers
, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. Subsequently, the FASB provided additional guidance regarding revenue recognition through the issuance of ASU No. 2016-08,
Revenue from Contracts with Customers - Principal versus Agent Considerations,
and ASU 2016-10,
Revenue from Contracts with Customers - Identifying Performance Obligations and Licensing.
ASU 2016-08 requires an entity to determine whether the nature of its promise to customers is to provide the specified good or service itself (as a principal) or to arrange for that good or service to be provided by another party (as an agent). Notably, an entity is a principal if it controls the specified good or service prior to delivery of the specified good or service to the customer. Indicators of control include whether the entity is primarily responsible for fulfilling the promise to provide the specified good or service, whether the entity assumes inventory risk for the specified goods and whether the entity has discretion in establishing selling prices of the specified goods or services. ASU 2016-10 provides clarification on identifying performance obligations and the implementation of the licensing guidance. These ASUs are effective for public entities for annual and interim periods beginning after
December 15, 2017
. Adoption prior to interim periods beginning after
December 15, 2016
is not permitted. The guidance permits two implementation approaches, one requiring retrospective application of the new ASU with restatement of prior years and one requiring prospective application of the new ASU with disclosure of results under old standards. During
2016
, we expect to complete an evaluation of the effects adoption of this ASU may have on our financial position, results of operations and cash flows.
Note 2
. Business Acquisition
On
May 2, 2016
, Halyard acquired all of the issued and outstanding capital stock (the “Shares”) of Medsystems Holdings, Inc. (“Medsystems”) a Delaware corporation, for a purchase price of
$175 million
, net of cash acquired (the “Acquisition”). The Acquisition was funded with a combination of cash on hand and our Revolving Credit Facility (see
Note 5
, “Debt”). Medsystems owns and conducts its primary business through CORPAK Medsystems (“Corpak”). Corpak’s innovative enteral access solutions and portfolio of nasogastric feeding tubes complements our existing enteral feeding products and creates a complete offering of enteral feeding solutions within our Medical Devices segment.
In conjunction with the Acquisition, we identified intangible assets related to currently marketed products and in-process research and development (“IPR&D”) that we expect will yield economic benefits in the future. The identified intangible assets include technology, trademarks and customer relationships that were combined into composite intangible assets by product line in consideration of the following:
|
|
•
|
Our intent was to acquire the product portfolio and the related technology.
|
|
|
•
|
The trademarks will only be used to market the products associated with the existing technologies. Accordingly, their remaining economic lives are similar.
|
|
|
•
|
The customer base was considered, but was not identified as a separate intangible asset because the related cash flows are not separable from the related technology.
|
|
|
•
|
Low historical customer turnover rates supports longer lives for customer relationships which is consistent with the estimated remaining useful lives for the acquired technologies and trademarks.
|
The fair value amounts have been determined using preliminary estimates. A preliminary valuation was completed in July 2016 and we believe it will be finalized by the end of
2016
. The preliminary allocation of the purchase price was as follows (in millions):
|
|
|
|
|
|
Purchase Price
Allocation
|
Current assets acquired net of liabilities assumed
|
$
|
14.0
|
|
Property, plant and equipment
|
4.6
|
|
Identifiable intangible assets, excluding IPR&D
|
105.1
|
|
Identifiable IPR&D
|
5.7
|
|
Deferred tax liabilities
|
(39.5
|
)
|
Goodwill
|
85.2
|
|
Total
|
$
|
175.1
|
|
Identifiable IPR&D includes a number of products that we expect to launch in
2017
. Goodwill arising from the Acquisition is not fully tax deductible. The identifiable intangible assets, excluding IPR&D, include the following (in millions):
|
|
|
|
|
|
|
|
Fair Value
|
|
Weighted Average Useful Lives (Yrs)
|
Portfolio of disposables
|
$
|
102.9
|
|
|
15
|
Enteral access technology
|
2.2
|
|
|
6
|
Total
|
$
|
105.1
|
|
|
|
Corpak’s results have been included in the accompanying condensed consolidated income statement following the Acquisition on
May 2, 2016
. Corpak’s revenue of
$9 million
is included in “Net Sales” in the accompanying condensed consolidated income statements for each of the
three
and
six months
ended
June 30, 2016
. Due to the integration of Corpak’s portfolio of products into our existing digestive health products in the Medical Devices segment, earnings directly attributable to Corpak is not available.
The following unaudited pro forma information is presented in the table below for the
three
and
six months
ended
June 30, 2016
and
2015
as if the Acquisition had occurred on
January 1, 2015
(in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2016
(Unaudited)
|
|
2015
(Unaudited)
|
|
2016
(Unaudited)
|
|
2015
(Unaudited)
|
Net sales
|
$
|
404.5
|
|
|
$
|
402.6
|
|
|
$
|
802.3
|
|
|
$
|
809.5
|
|
|
|
|
|
|
|
|
|
Net income
|
8.9
|
|
|
8.6
|
|
|
21.6
|
|
|
28.5
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.19
|
|
|
$
|
0.18
|
|
|
$
|
0.46
|
|
|
$
|
0.61
|
|
Diluted
|
0.19
|
|
|
0.18
|
|
|
0.46
|
|
|
0.61
|
|
The pro forma financial information has been adjusted to include the effects of the Acquisition, including acquisition-related costs, amortization of acquired intangibles, incremental interest expense and related tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have been achieved had the Acquisition taken place as of
January 1, 2015
.
Upon Acquisition, we initiated activities to integrate the operations of Corpak into our company. These activities will include, but are not limited to, integration of corporate functions, information technology and alignment with our operations.
In
June 2016
, we initiated a restructuring plan to close the Medsystems corporate headquarters and operating facility in Buffalo Grove, Illinois and consolidate operations into our existing corporate and operational facilities by the third quarter of 2017 (the “Plan”). As of June 30, 2016, we have accrued
$3 million
for severance and benefits for employees impacted by the Plan. No cash payments for severance and benefits have been made through
June 30, 2016
.
For the three and six months ended
June 30, 2016
, we have incurred
$9 million
and
$10 million
, respectively, for the acquisition, integration and restructuring activities described above, which are included in “Cost of products sold” and “Selling and general expenses” in the accompanying condensed consolidated income statements.
Note 3
. Supplemental Balance Sheet Information
Accounts Receivable
Accounts receivable consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Accounts receivable
|
$
|
196.8
|
|
|
$
|
226.3
|
|
Allowances and doubtful accounts
|
(1.6
|
)
|
|
(1.6
|
)
|
Accounts receivable, net
|
$
|
195.2
|
|
|
$
|
224.7
|
|
Inventories
Inventories at the lower of cost (determined on the LIFO/FIFO or weighted-average cost methods) or market consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
LIFO
|
|
Non-
LIFO
|
|
Total
|
|
LIFO
|
|
Non-
LIFO
|
|
Total
|
Raw materials
|
$
|
51.8
|
|
|
$
|
0.8
|
|
|
$
|
52.6
|
|
|
$
|
49.7
|
|
|
$
|
1.1
|
|
|
$
|
50.8
|
|
Work in process
|
55.6
|
|
|
0.6
|
|
|
56.2
|
|
|
46.1
|
|
|
0.1
|
|
|
46.2
|
|
Finished goods
|
159.4
|
|
|
40.2
|
|
|
199.6
|
|
|
165.8
|
|
|
46.3
|
|
|
212.1
|
|
Supplies and other
|
—
|
|
|
13.3
|
|
|
13.3
|
|
|
0.1
|
|
|
11.6
|
|
|
11.7
|
|
|
266.8
|
|
|
54.9
|
|
|
321.7
|
|
|
261.7
|
|
|
59.1
|
|
|
320.8
|
|
Excess of FIFO or weighted-average cost over LIFO cost
|
(11.4
|
)
|
|
—
|
|
|
(11.4
|
)
|
|
(17.6
|
)
|
|
—
|
|
|
(17.6
|
)
|
Total
|
$
|
255.4
|
|
|
$
|
54.9
|
|
|
$
|
310.3
|
|
|
$
|
244.1
|
|
|
$
|
59.1
|
|
|
$
|
303.2
|
|
Property, Plant and Equipment
Property, plant and equipment consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Land
|
$
|
2.2
|
|
|
$
|
2.1
|
|
Buildings
|
87.2
|
|
|
86.7
|
|
Machinery and equipment
|
503.1
|
|
|
492.8
|
|
Construction in progress
|
18.0
|
|
|
18.3
|
|
|
610.5
|
|
|
599.9
|
|
Less accumulated depreciation
|
(337.9
|
)
|
|
(320.4
|
)
|
Total
|
$
|
272.6
|
|
|
$
|
279.5
|
|
Depreciation expense was
$11 million
and
$21 million
for the
three
and
six months
ended
June 30, 2016
, respectively, compared to
$9 million
and
$19 million
for the
three
and
six months
ended
June 30, 2015
, respectively.
Goodwill and Intangible Assets
The changes in the carrying amount of goodwill by business segment are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&IP
|
|
Medical Devices
|
|
Consolidated
|
|
Goodwill
|
|
Accumulated Impairment
|
|
Goodwill, net
|
|
Goodwill
|
|
Accumulated Impairment
|
|
Goodwill, net
|
|
Goodwill, net
|
Balance at December 31, 2015
|
$
|
740.8
|
|
|
$
|
(474.0
|
)
|
|
$
|
266.8
|
|
|
$
|
678.4
|
|
|
$
|
—
|
|
|
$
|
678.4
|
|
|
$
|
945.2
|
|
Goodwill acquired
|
—
|
|
|
—
|
|
|
—
|
|
|
85.2
|
|
|
—
|
|
|
85.2
|
|
|
85.2
|
|
Currency translation adjustment
|
0.2
|
|
|
—
|
|
|
0.2
|
|
|
1.0
|
|
|
—
|
|
|
1.0
|
|
|
1.2
|
|
Balance at June 30, 2016
|
$
|
741.0
|
|
|
$
|
(474.0
|
)
|
|
$
|
267.0
|
|
|
$
|
764.6
|
|
|
$
|
—
|
|
|
$
|
764.6
|
|
|
$
|
1,031.6
|
|
In connection with the Acquisition, we acquired
$6 million
of indefinite-lived intangible assets related to in-process research and development projects that we expect to launch in
2017
.
Intangible assets subject to amortization consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying Amount
|
Trademarks
|
$
|
126.5
|
|
|
$
|
(92.2
|
)
|
|
$
|
34.3
|
|
|
$
|
126.6
|
|
|
$
|
(90.3
|
)
|
|
$
|
36.3
|
|
Patents and acquired technologies
|
253.9
|
|
|
(124.5
|
)
|
|
129.4
|
|
|
149.1
|
|
|
(117.3
|
)
|
|
31.8
|
|
Other
|
55.5
|
|
|
(42.5
|
)
|
|
13.0
|
|
|
55.1
|
|
|
(40.6
|
)
|
|
14.5
|
|
Total
|
$
|
435.9
|
|
|
$
|
(259.2
|
)
|
|
$
|
176.7
|
|
|
$
|
330.8
|
|
|
$
|
(248.2
|
)
|
|
$
|
82.6
|
|
Amortization expense for intangible assets was
$5 million
and
$11 million
for the
three
and
six months
ended
June 30, 2016
, respectively, compared to
$6 million
and
$13 million
for the
three
and
six months
ended
June 30, 2015
, respectively. We estimate amortization expense for the remainder of
2016
and the following
four years
and beyond will be as follows (in millions):
|
|
|
|
|
|
For the years ending December 31,
|
|
|
2016
|
|
$
|
11.4
|
|
2017
|
|
21.4
|
|
2018
|
|
19.2
|
|
2019
|
|
15.4
|
|
2020
|
|
13.1
|
|
Thereafter
|
|
96.2
|
|
Total
|
|
$
|
176.7
|
|
Accrued Expenses
Accrued expenses consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Accrued rebates
|
$
|
56.0
|
|
|
$
|
73.9
|
|
Accrued salaries and wages
|
43.8
|
|
|
34.5
|
|
Accrued taxes - income and other
|
9.1
|
|
|
15.3
|
|
Other
|
27.4
|
|
|
28.3
|
|
Total
|
$
|
136.3
|
|
|
$
|
152.0
|
|
Other Long-Term Liabilities
Other long-term liabilities consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Taxes payable
|
$
|
3.0
|
|
|
$
|
1.3
|
|
Accrued compensation benefits
|
9.8
|
|
|
9.5
|
|
Other
|
17.4
|
|
|
17.0
|
|
Total
|
$
|
30.2
|
|
|
$
|
27.8
|
|
Note 4
. Fair Value Information
The following fair value information is based on a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels in the hierarchy used to measure fair value are:
Level 1—Unadjusted quoted prices in active markets accessible at the reporting date for identical assets and liabilities.
Level 2—Quoted prices for similar assets or liabilities in active markets. Quoted prices for identical or similar assets and liabilities in markets that are not considered active or financial instruments for which all significant inputs are observable, either directly or indirectly.
Level 3—Prices or valuations that require inputs that are significant to the valuation and are unobservable.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
In the
three
and
six months
ended
June 30, 2016
, there were no transfers among Level 1, 2 or 3 fair value determinations.
The derivative liabilities for foreign exchange contracts were
$1 million
and
$2 million
as of
June 30, 2016
and
December 31, 2015
, respectively and are included in the condensed consolidated balance sheet in accrued expenses. The derivative assets for foreign exchange contracts as of
June 30, 2016
were
$1 million
. Derivative assets for foreign exchange contracts were not significant as of
December 31, 2015
. These derivatives are classified as Level 2 of the fair value hierarchy. The fair values of derivatives used to manage foreign currency risk is based on published quotations of spot currency rates and forward points, which are converted into implied forward currency rates.
The following table includes the fair value of our financial instruments for which disclosure of fair value is required (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
Fair Value
Hierarchy
Level
|
|
Carrying
Amount
|
|
Estimated
Fair
Value
|
|
Carrying
Amount
|
|
Estimated
Fair
Value
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
1
|
|
$
|
79.2
|
|
|
$
|
79.2
|
|
|
$
|
129.5
|
|
|
$
|
129.5
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Senior Unsecured Notes, net of Unamortized Discount
|
1
|
|
246.2
|
|
|
244.1
|
|
|
245.9
|
|
|
252.5
|
|
Senior Secured Term Loan, net of Unamortized Discount
|
2
|
|
332.8
|
|
|
339.2
|
|
|
332.2
|
|
|
337.3
|
|
Cash equivalents are recorded at cost, which approximates fair value due to their short-term nature. The fair value of the Senior Unsecured Notes was based on observable quoted prices on an active primary exchange. The fair value of our Senior Secured Term Loan was based on observable quoted prices in a secondary market.
Note 5
. Debt
As of
June 30, 2016
and
December 31, 2015
, our debt balances were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Interest Rate
|
|
Maturities
|
|
June 30, 2016
|
|
December 31, 2015
|
Revolving Credit Facility
|
2.74
|
%
|
|
2019
|
|
$
|
45.0
|
|
|
$
|
—
|
|
Senior Secured Term Loan
|
4.00
|
%
|
|
2021
|
|
339.0
|
|
|
339.0
|
|
Senior Unsecured Notes
|
6.25
|
%
|
|
2022
|
|
250.0
|
|
|
250.0
|
|
Unamortized Debt Discounts and Issuance Costs:
|
|
|
|
|
|
|
|
Senior Secured Term Loan
|
|
|
|
|
(6.2
|
)
|
|
(6.8
|
)
|
Senior Unsecured Notes
|
|
|
|
|
(3.8
|
)
|
|
(4.1
|
)
|
Total Debt
|
|
|
|
|
$
|
624.0
|
|
|
$
|
578.1
|
|
Senior Secured Term Loan and Revolving Credit Facility
The senior secured term loan (the “Term Loan Facility”) is under a credit agreement that includes a
five
-year senior secured revolving credit facility allowing borrowings of up to
$250 million
, with a letter of credit sub-facility in an amount of
$75 million
and a swingline sub-facility in an amount of
$25 million
(the “Revolving Credit Facility”, and together with the Term Loan Facility, the “Senior Credit Facilities”). The Senior Credit Facilities are secured by substantially all of our assets located in the United States and a certain percentage of our foreign subsidiaries’ capital stock.
Borrowings under the Term Loan Facility bear interest, at our option, at either (i) a reserve-adjusted LIBOR rate, subject to a floor of
0.75%
, plus
3.25%
, or (ii) a base rate, subject to a floor of
0.75%
, (calculated as the greatest of (1) the prime rate, (2)
the U.S. federal funds effective rate plus
0.50%
or (3) the one month LIBOR rate plus
1.00%
) plus
2.25%
. As of
June 30, 2016
, the interest rate in effect for the Term Loan Facility was
4.00%
.
Borrowings under the Revolving Credit Facility bear interest, at our option, at either (i) a reserve-adjusted LIBOR rate, plus a margin ranging between
1.75%
to
2.50%
per annum, depending on our consolidated total leverage ratio, or (ii) the base rate plus a margin ranging between
0.75%
to
1.50%
per annum, depending on our consolidated total leverage ratio. The unused portion of the Revolving Credit Facility is subject to a commitment fee equal to (i)
0.25%
per annum, when our consolidated total leverage ratio is less than
2.25
to 1.00 or (ii)
0.40%
per annum, otherwise. As of
June 30, 2016
, we had
$45 million
of borrowings and letters of credit of
$3 million
outstanding under the Revolving Credit Facility, leaving
$202 million
available for borrowing.
On
May 2, 2016
, we borrowed
$72 million
under our Revolving Credit Facility to partially fund our acquisition of Medsystems. See
Note 2
, “Business Acquisition” for a description of this acquisition. By
June 30, 2016
, we had repaid
$27 million
of the borrowings on our Revolving Credit Facility. As of
June 30, 2016
, the interest rate in effect for the Revolving Credit Facility was
2.72%
.
Senior Unsecured Notes
The senior unsecured notes (the “Notes”) will mature on
October 15, 2022
and interest accrues at a rate of
6.25%
per annum and is payable semi-annually in arrears on
April 15
and
October 15
of each year.
Note 6
. Accumulated Other Comprehensive Income
The changes in the components of Accumulated Other Comprehensive Income (“AOCI”), net of tax, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Translation
|
|
Cash Flow
Hedges
|
|
Defined Benefit
Pension Plans
|
|
Accumulated
Other
Comprehensive
Income
|
Balance, December 31, 2015
|
$
|
(40.4
|
)
|
|
$
|
(1.2
|
)
|
|
$
|
(1.6
|
)
|
|
$
|
(43.2
|
)
|
Other comprehensive income
|
3.5
|
|
|
1.5
|
|
|
0.1
|
|
|
5.1
|
|
Balance, June 30, 2016
|
$
|
(36.9
|
)
|
|
$
|
0.3
|
|
|
$
|
(1.5
|
)
|
|
$
|
(38.1
|
)
|
The changes in the components of AOCI, including the tax effect, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Unrealized translation
|
$
|
(2.0
|
)
|
|
$
|
(3.0
|
)
|
|
$
|
3.5
|
|
|
$
|
(9.8
|
)
|
|
|
|
|
|
|
|
|
Defined benefit pension plans
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
Tax effect
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Defined benefit pension plans, net of tax
|
0.1
|
|
|
0.2
|
|
|
0.1
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
0.4
|
|
|
(0.8
|
)
|
|
1.9
|
|
|
(0.3
|
)
|
Tax effect
|
—
|
|
|
0.3
|
|
|
(0.4
|
)
|
|
0.1
|
|
Cash flow hedges, net of tax
|
0.4
|
|
|
(0.5
|
)
|
|
1.5
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
Change in AOCI
|
$
|
(1.5
|
)
|
|
$
|
(3.3
|
)
|
|
$
|
5.1
|
|
|
$
|
(9.8
|
)
|
Note 7
.
Stock-Based Compensation
Aggregate stock-based compensation expense for the
three
and
six months
ended
June 30, 2016
was
$6 million
and
$9 million
, respectively, compared to
$6 million
and
$11 million
, respectively, for the
three
and
six months
ended
June 30, 2015
. Stock-based compensation expense related to stock options was
$2 million
and
$3 million
, respectively for the
three
and
six months
ended
June 30, 2016
compared to
$3 million
and
$4 million
, respectively for the
three
and
six months
ended
June 30, 2015
. Stock-based compensation expense related to restricted share units was
$1 million
and
$4 million
, respectively, for the
three
and
six months
ended
June 30, 2016
compared to
$3 million
and
$7 million
, respectively, for the
three
and
six months
ended
June 30, 2015
.
In the
six months
ended
June 30, 2016
, we issued approximately
230,000
restricted share units for which vesting is conditioned on meeting a defined measure of total shareholder return (“TSR units”) over a restricted period of
three years
. Total shareholder return is measured as our stock price performance over the restricted period compared to a defined group of peer companies. The expense recognition for TSR units differs from awards with service and performance conditions in that the expense is recognized over the restricted period regardless of whether the total shareholder return target is met or not, while expense for awards with service and performance conditions is recognized based on the number of awards expected to vest. The fair value of restricted share units with a TSR vesting condition is determined using a Monte Carlo simulation which incorporates a volatility assumption based on the average stock price volatility for a peer group of companies over a period of three years, which matches the restricted period. For the awards granted in the
three
and
six months
ended
June 30, 2016
, the assumed volatility was
25%
and the weighted average fair value per TSR unit was
$38.64
. In the
three
and
six months
ended
June 30, 2016
, stock-based compensation expense related to TSR units was
$2 million
and
$2 million
, respectively.
Note 8
. Commitments and Contingencies
We are subject to various legal proceedings, claims and governmental inspections, audits or investigations pertaining to issues such as contract disputes, product liability, tax matters, patents and trademarks, advertising, governmental regulations, employment and other matters, including the matters described below. Under the terms of the distribution agreement we entered into with Kimberly-Clark Corporation (“Kimberly-Clark”) prior to our spin-off, legal proceedings, claims and other liabilities that are primarily related to our business are our responsibility and we are obligated to indemnify and hold Kimberly-Clark harmless for such matters (“Indemnification Obligation”). For the
three
and
six months
ended
June 30, 2016
, we have incurred
$6 million
and
$10 million
, respectively, for such matters. Amounts incurred related to these matters in the comparable prior year periods were not material.
The only exception to the Indemnification Obligation relates to the pain pump litigation referenced in this paragraph. We are one of several manufacturers of continuous infusion medical devices, such as our ON-Q PAINBUSTER pain pumps, that are involved in several different pending or threatened litigation matters from multiple plaintiffs alleging that use of the continuous infusion device to deliver anesthetics directly into a synovial joint after surgery resulted in postarthroscopic glenohumeral chondrolysis, or a disintegration of the cartilage covering the bones in the joint (typically, in the shoulder). Plaintiffs generally seek monetary damages and attorneys’ fees. While Kimberly-Clark is retaining the liabilities related to these matters, the distribution agreement between us and Kimberly-Clark provides that we will indemnify Kimberly-Clark for any such claims or causes of actions arising after the spin-off.
We have an Indemnification Obligation for, and have assumed the defense of, the matter styled
Bahamas Surgery Center, LLC v. Kimberly-Clark Corporation and Halyard Health, Inc., f/k/a Prime Healthcare Centinela, LLC, et al. v. Kimberly-Clark Corporation, et al.,
No. 2:14-cv-08390-DMG-SH (C.D. Cal.), filed on October 29, 2014. In that case, the plaintiff brings a putative class action asserting claims for common law fraud (affirmative misrepresentation and fraudulent concealment) and violation of California’s Unfair Competition Law in connection with our marketing and sale of MicroCool surgical gowns. On March 21, 2016, we moved to dismiss the non-California plaintiffs, and on May 26, 2016, the court issued an order dismissing them. On June 14, 2016, the court granted the plaintiffs’ unopposed motion to dismiss Prime Healthcare Centinela, LLC and one of the other two remaining California plaintiffs, leaving only the current named plaintiff, Bahamas Surgery Center, LLC. On June 1, 2016, the plaintiff moved for class certification of a California-only damages class and a California-only injunctive relief class. Although the plaintiff did not also move for certification of a nationwide class to determine liability, damages, or injunctive relief, it did move for certification of a nationwide “issue” class purporting to resolve certain issues allegedly “common” to members of that class. On July 8, 2016, we moved for summary judgment. The parties also remain engaged in discovery. We intend to continue our vigorous defense of the matter.
In June 2015, we were served with a subpoena from the Department of Veterans Affairs Office of the Inspector General (“VA OIG”) seeking information related to the design, manufacture, testing, sale and promotion of MicroCool and other Company surgical gowns, and, in July 2015, we also became aware that the subpoena and an earlier VA OIG subpoena served on Kimberly-Clark requesting information about gown sales to the federal government are related to a United States Department of Justice (“DOJ”) investigation. In May 2016, we were also served with a subpoena from the Department of Justice seeking further information related to Company gowns. We could be subject to litigation relating to this investigation, by either governmental agencies or private parties. If a claim is asserted against Kimberly-Clark relating to MicroCool gowns or other Company surgical gowns, we expect that such a claim would give rise to an Indemnification Obligation under the distribution agreement with Kimberly-Clark. The Company is cooperating with the VA OIG’s request and the DOJ investigation.
We have been served with a complaint in a matter styled
Jackson v. Halyard Health, Inc., Robert E. Abernathy, Steven E. Voskuil, et al.,
No. 1:16-cv-05093-LTS (S.D.N.Y.), filed on June 28, 2016. In that case, the plaintiff brings a putative class action against the Company, our Chief Executive Officer, our Chief Financial Officer and other defendants, asserting claims for violations of the Securities Exchange Act, Sections 10(b) and 20(a). The plaintiff alleges that the defendants made misrepresentations and failed to disclose certain information about the safety and effectiveness of our MicroCool gowns and
thereby artificially inflated the Company’s stock prices during the respective class periods. The alleged class period for purchasers of Kimberly-Clark securities who subsequently received Halyard Health securities is February 25, 2013 to October 21, 2014, and the alleged class period for purchasers of Halyard Health securities is October 21, 2014 to April 29, 2016. We intend to vigorously defend this matter.
We operate in an industry characterized by extensive patent litigation and competitors may claim that our products infringe upon their intellectual property. Resolution of patent litigation or other intellectual property claims is typically time consuming and costly and can result in significant damage awards and injunctions that could prevent the manufacture and sale of the affected products or require us to make significant royalty payments in order to continue selling the affected products. At any given time we may be involved as either a plaintiff or a defendant in a number of patent infringement actions, the outcomes of which may not be known for prolonged periods of time.
We maintain general and professional liability, product liability and other insurance in an amount that we believe is reasonably adequate to insulate us from material liability for claims. However, our insurance policies may not cover all of these matters and may not fully cover liabilities arising out of these matters. In addition, we may be obligated to indemnify our directors and officers against these matters. Although the results of litigation and claims cannot be predicted with certainty, we believe that the ultimate disposition of these matters, to the extent not previously provided for, will not have a material adverse effect, individually or in the aggregate, on our financial condition, results of operations or liquidity. However the above matters, regardless of the outcome, could disrupt our business and result in substantial costs and diversion of management attention.
We are subject to federal, state and local environmental protection laws and regulations with respect to our business operations and are operating in compliance with, or taking action aimed at ensuring compliance with, these laws and regulations. None of our compliance obligations with environmental protection laws and regulations, individually or in the aggregate, is expected to have a material adverse effect on our business, financial condition, results of operations or liquidity.
Note 9
. Derivative Financial Instruments
The derivative liabilities for foreign exchange contracts as of
June 30, 2016
and
December 31, 2015
were
$1 million
and
$2 million
, respectively, and are included in the condensed consolidated balance sheet in accrued expenses. The derivative assets for foreign exchange contracts as of
June 30, 2016
were
$1 million
. Derivative assets for foreign exchange contracts were not significant as of
December 31, 2015
.
For derivative instruments that are designated and qualify as cash flow hedges, gains or losses recognized to earnings were not significant in the
three
and
six months
ended
June 30, 2016
and
2015
. As of
June 30, 2016
, the aggregate notional values of outstanding foreign exchange derivative contracts designated as cash flow hedges were
$36 million
. Cash flow hedges resulted in no significant ineffectiveness in the
three
and
six months
ended
June 30, 2016
and
2015
. For the
three
and
six months
ended
June 30, 2016
and
2015
, no gains or losses were reclassified into earnings as a result of the discontinuance of cash flow hedges due to the original forecasted transaction no longer being probable of occurring. At
June 30, 2016
, amounts to be reclassified from AOCI during the next
twelve months
are not expected to be significant. The maximum maturity of cash flow hedges in place at
June 30, 2016
is
June 2017
.
Gains or losses on undesignated foreign exchange hedging instruments are immediately recognized in other income and expense, net. These gains or losses have not been significant for the
three
and
six months
ended
June 30, 2016
and
2015
. The effect on earnings from the use of these non-designated derivatives is substantially neutralized by the transactional gains and losses recorded on the underlying assets and liabilities. As of
June 30, 2016
, the notional amount of these undesignated derivative instruments was
$4 million
.
Note 10
. Earnings Per Share (“EPS”)
Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during each period. Diluted earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding and the effect of all dilutive common stock equivalents outstanding during each period, as determined using the treasury stock method.
The calculation of basic and diluted earnings per share for the
three
and
six months
ended
June 30, 2016
and
2015
is set forth in the following table (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net income
|
$
|
6.5
|
|
|
$
|
8.0
|
|
|
$
|
20.7
|
|
|
$
|
29.7
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding:
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
46.7
|
|
|
46.6
|
|
|
46.6
|
|
|
46.6
|
|
Dilutive effect of stock options and restricted share unit awards
|
0.2
|
|
|
0.2
|
|
|
0.2
|
|
|
0.2
|
|
Diluted weighted average shares outstanding
|
46.9
|
|
|
46.8
|
|
|
46.8
|
|
|
46.8
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
|
|
|
|
|
|
|
Basic
|
$
|
0.14
|
|
|
$
|
0.17
|
|
|
$
|
0.44
|
|
|
$
|
0.64
|
|
Diluted
|
$
|
0.14
|
|
|
$
|
0.17
|
|
|
$
|
0.44
|
|
|
$
|
0.63
|
|
For each of the
three
and
six months
ended
June 30, 2016
,
1.9 million
of potentially dilutive stock options and restricted share units were excluded from the computation of earnings per share as their effect would have been anti-dilutive.
Note 11
. Business Segment Information
Information concerning unaudited consolidated operations by business segment is presented in the following table (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net Sales
|
|
|
|
|
|
|
|
S&IP
|
$
|
256.7
|
|
|
$
|
255.3
|
|
|
$
|
511.4
|
|
|
$
|
510.1
|
|
Medical Devices
|
141.5
|
|
|
126.9
|
|
|
268.2
|
|
|
249.2
|
|
Corporate and Other
|
1.8
|
|
|
7.1
|
|
|
5.2
|
|
|
24.2
|
|
Total Net Sales
|
400.0
|
|
|
389.3
|
|
|
784.8
|
|
|
783.5
|
|
|
|
|
|
|
|
|
|
Operating Profit
|
|
|
|
|
|
|
|
S&IP
|
25.1
|
|
|
25.5
|
|
|
49.7
|
|
|
45.0
|
|
Medical Devices
|
29.0
|
|
|
33.3
|
|
|
58.7
|
|
|
58.1
|
|
Corporate and Other
(a)
|
(30.8
|
)
|
|
(36.0
|
)
|
|
(50.1
|
)
|
|
(51.4
|
)
|
Other (expense) and income, net
(b)
|
(5.7
|
)
|
|
(0.7
|
)
|
|
(7.6
|
)
|
|
11.3
|
|
Total Operating Profit
|
17.6
|
|
|
22.1
|
|
|
50.7
|
|
|
63.0
|
|
|
|
|
|
|
|
|
|
Interest income
|
0.1
|
|
|
0.1
|
|
|
0.3
|
|
|
0.2
|
|
Interest expense
|
(8.3
|
)
|
|
(8.9
|
)
|
|
(16.3
|
)
|
|
(17.2
|
)
|
Income before Income Taxes
|
$
|
9.4
|
|
|
$
|
13.3
|
|
|
$
|
34.7
|
|
|
$
|
46.0
|
|
______________________________
|
|
(a)
|
Corporate and Other for the
three
and
six months
ended
June 30, 2016
includes
$17 million
and
$32 million
, respectively, of general expenses,
$2 million
and
$5 million
, respectively, of post spin-related transition expenses,
$9 million
and
$10 million
, respectively, of acquisition, integration and restructuring expenses related to the Acquisition (See
Note 2
, “Business Acquisition”) and
$2 million
and
$3 million
, respectively of costs related to corporate sales. Corporate and Other for the
three
and
six months
ended
June 30, 2015
includes
$13 million
and
$22 million
, respectively, of general expenses and
$20 million
and
$30 million
, respectively, of post spin-related transition expenses and
$4 million
of costs and
$2 million
of profit, respectively, from corporate sales.
|
|
|
(b)
|
Other expense includes amounts incurred related to litigation matters. See
Note 8
, “Commitments and Contingencies.”
|
Note 12
. Supplemental Guarantor Financial Information
The Notes (described in
Note 5
, “Debt”) are guaranteed, jointly and severally by each of our domestic subsidiaries that guarantees the Senior Credit Facilities (each, a “Guarantor Subsidiary” and collectively, the “Guarantor Subsidiaries”). The guarantees are full and unconditional, subject to certain customary release provisions as defined in the Indenture dated
October 17, 2014
. Each Guarantor Subsidiary is directly or indirectly
100%
-owned by Halyard Health, Inc. Each of the guarantees of the Notes is a general unsecured obligation of each Guarantor Subsidiary and ranks equally in right of payment with all existing and future indebtedness and all other obligations (except subordinated indebtedness) of each Guarantor Subsidiary.
The following condensed consolidating balance sheets as of
June 30, 2016
and
December 31, 2015
and the condensed statements of income for the
three
and
six months
ended
June 30, 2016
and
2015
and cash flows for the
six months
ended
June 30, 2016
and
2015
provide condensed consolidating financial information for Halyard Health, Inc. (“Parent”), the Guarantor Subsidiaries on a combined basis, the non-guarantor subsidiaries on a combined basis and the Parent and its subsidiaries on a consolidated basis. The following condensed consolidating financial information contains preliminary purchase accounting allocations.
The Parent and the Guarantor Subsidiaries use the equity method of accounting to reflect ownership interests in subsidiaries that are eliminated upon consolidation. Eliminating entries in the following condensed consolidating financial information represent adjustments to (i) eliminate intercompany transactions between or among the Parent, the Guarantor Subsidiaries and the non-guarantor subsidiaries and (ii) eliminate the investments in subsidiaries.
HALYARD HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME AND COMPREHENSIVE INCOME STATEMENTS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Net Sales
|
$
|
—
|
|
|
$
|
372.3
|
|
|
$
|
110.8
|
|
|
$
|
(83.1
|
)
|
|
$
|
400.0
|
|
Cost of products sold
|
—
|
|
|
247.7
|
|
|
94.7
|
|
|
(83.1
|
)
|
|
259.3
|
|
Gross Profit
|
—
|
|
|
124.6
|
|
|
16.1
|
|
|
—
|
|
|
140.7
|
|
Research and development
|
—
|
|
|
9.5
|
|
|
—
|
|
|
—
|
|
|
9.5
|
|
Selling and general expenses
|
11.1
|
|
|
81.5
|
|
|
15.3
|
|
|
—
|
|
|
107.9
|
|
Other (income) and expense, net
|
(0.3
|
)
|
|
12.1
|
|
|
(6.1
|
)
|
|
—
|
|
|
5.7
|
|
Operating (Loss) Profit
|
(10.8
|
)
|
|
21.5
|
|
|
6.9
|
|
|
—
|
|
|
17.6
|
|
Interest income
|
0.1
|
|
|
—
|
|
|
0.7
|
|
|
(0.7
|
)
|
|
0.1
|
|
Interest expense
|
(8.4
|
)
|
|
(0.6
|
)
|
|
—
|
|
|
0.7
|
|
|
(8.3
|
)
|
(Loss) Income Before Income Taxes
|
(19.1
|
)
|
|
20.9
|
|
|
7.6
|
|
|
—
|
|
|
9.4
|
|
Income tax benefit (provision)
|
7.2
|
|
|
(8.7
|
)
|
|
(1.4
|
)
|
|
—
|
|
|
(2.9
|
)
|
Equity in earnings of consolidated subsidiaries
|
18.4
|
|
|
7.7
|
|
|
—
|
|
|
(26.1
|
)
|
|
—
|
|
Net Income
|
6.5
|
|
|
19.9
|
|
|
6.2
|
|
|
(26.1
|
)
|
|
6.5
|
|
Total other comprehensive loss, net of tax
|
(1.5
|
)
|
|
(0.5
|
)
|
|
(2.9
|
)
|
|
3.4
|
|
|
(1.5
|
)
|
Comprehensive Income
|
$
|
5.0
|
|
|
$
|
19.4
|
|
|
$
|
3.3
|
|
|
$
|
(22.7
|
)
|
|
$
|
5.0
|
|
HALYARD HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME AND COMPREHENSIVE INCOME STATEMENTS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2015
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Net Sales
|
$
|
—
|
|
|
$
|
364.6
|
|
|
$
|
113.5
|
|
|
$
|
(88.8
|
)
|
|
$
|
389.3
|
|
Cost of products sold
|
—
|
|
|
247.0
|
|
|
96.2
|
|
|
(88.8
|
)
|
|
254.4
|
|
Gross Profit
|
—
|
|
|
117.6
|
|
|
17.3
|
|
|
—
|
|
|
134.9
|
|
Research and development
|
—
|
|
|
6.3
|
|
|
—
|
|
|
—
|
|
|
6.3
|
|
Selling and general expenses
|
9.1
|
|
|
81.1
|
|
|
15.6
|
|
|
—
|
|
|
105.8
|
|
Other (income) and expense, net
|
(0.2
|
)
|
|
2.5
|
|
|
(1.6
|
)
|
|
—
|
|
|
0.7
|
|
Operating (Loss) Profit
|
(8.9
|
)
|
|
27.7
|
|
|
3.3
|
|
|
—
|
|
|
22.1
|
|
Interest income
|
0.3
|
|
|
—
|
|
|
1.7
|
|
|
(1.9
|
)
|
|
0.1
|
|
Interest expense
|
(10.0
|
)
|
|
(0.7
|
)
|
|
(0.1
|
)
|
|
1.9
|
|
|
(8.9
|
)
|
(Loss) Income Before Income Taxes
|
(18.6
|
)
|
|
27.0
|
|
|
4.9
|
|
|
—
|
|
|
13.3
|
|
Income tax benefit (provision)
|
13.4
|
|
|
(18.7
|
)
|
|
—
|
|
|
—
|
|
|
(5.3
|
)
|
Equity in earnings of consolidated subsidiaries
|
13.2
|
|
|
2.9
|
|
|
—
|
|
|
(16.1
|
)
|
|
—
|
|
Net Income
|
8.0
|
|
|
11.2
|
|
|
4.9
|
|
|
(16.1
|
)
|
|
8.0
|
|
Total other comprehensive loss, net of tax
|
—
|
|
|
(0.2
|
)
|
|
(3.1
|
)
|
|
—
|
|
|
(3.3
|
)
|
Comprehensive Income
|
$
|
8.0
|
|
|
$
|
11.0
|
|
|
$
|
1.8
|
|
|
$
|
(16.1
|
)
|
|
$
|
4.7
|
|
HALYARD HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME AND COMPREHENSIVE INCOME STATEMENTS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Net Sales
|
$
|
—
|
|
|
$
|
723.5
|
|
|
$
|
213.6
|
|
|
$
|
(152.3
|
)
|
|
$
|
784.8
|
|
Cost of products sold
|
—
|
|
|
479.9
|
|
|
180.0
|
|
|
(152.3
|
)
|
|
507.6
|
|
Gross Profit
|
—
|
|
|
243.6
|
|
|
33.6
|
|
|
—
|
|
|
277.2
|
|
Research and development
|
—
|
|
|
18.2
|
|
|
—
|
|
|
—
|
|
|
18.2
|
|
Selling and general expenses
|
20.7
|
|
|
150.8
|
|
|
29.2
|
|
|
—
|
|
|
200.7
|
|
Other (income) and expense, net
|
(0.4
|
)
|
|
20.0
|
|
|
(12.0
|
)
|
|
—
|
|
|
7.6
|
|
Operating (Loss) Profit
|
(20.3
|
)
|
|
54.6
|
|
|
16.4
|
|
|
—
|
|
|
50.7
|
|
Interest income
|
0.2
|
|
|
—
|
|
|
1.3
|
|
|
(1.2
|
)
|
|
0.3
|
|
Interest expense
|
(16.5
|
)
|
|
(1.0
|
)
|
|
—
|
|
|
1.2
|
|
|
(16.3
|
)
|
(Loss) Income Before Income Taxes
|
(36.6
|
)
|
|
53.6
|
|
|
17.7
|
|
|
—
|
|
|
34.7
|
|
Income tax benefit (provision)
|
13.8
|
|
|
(20.0
|
)
|
|
(7.8
|
)
|
|
—
|
|
|
(14.0
|
)
|
Equity in earnings of consolidated subsidiaries
|
43.5
|
|
|
12.4
|
|
|
—
|
|
|
(55.9
|
)
|
|
—
|
|
Net Income
|
20.7
|
|
|
46.0
|
|
|
9.9
|
|
|
(55.9
|
)
|
|
20.7
|
|
Total other comprehensive income, net of tax
|
5.1
|
|
|
4.5
|
|
|
2.7
|
|
|
(7.2
|
)
|
|
5.1
|
|
Comprehensive Income
|
$
|
25.8
|
|
|
$
|
50.5
|
|
|
$
|
12.6
|
|
|
$
|
(63.1
|
)
|
|
$
|
25.8
|
|
HALYARD HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME AND COMPREHENSIVE INCOME STATEMENTS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2015
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Net Sales
|
$
|
—
|
|
|
$
|
724.9
|
|
|
$
|
227.2
|
|
|
$
|
(168.6
|
)
|
|
$
|
783.5
|
|
Cost of products sold
|
—
|
|
|
490.6
|
|
|
194.5
|
|
|
(168.6
|
)
|
|
516.5
|
|
Gross Profit
|
—
|
|
|
234.3
|
|
|
32.7
|
|
|
—
|
|
|
267.0
|
|
Research and development
|
—
|
|
|
12.3
|
|
|
—
|
|
|
—
|
|
|
12.3
|
|
Selling and general expenses
|
18.2
|
|
|
154.3
|
|
|
30.5
|
|
|
—
|
|
|
203.0
|
|
Other (income) and expense, net
|
(0.4
|
)
|
|
4.8
|
|
|
(15.7
|
)
|
|
—
|
|
|
(11.3
|
)
|
Operating (Loss) Profit
|
(17.8
|
)
|
|
62.9
|
|
|
17.9
|
|
|
—
|
|
|
63.0
|
|
Interest income
|
0.3
|
|
|
—
|
|
|
1.8
|
|
|
(1.9
|
)
|
|
0.2
|
|
Interest expense
|
(17.8
|
)
|
|
(1.0
|
)
|
|
(0.3
|
)
|
|
1.9
|
|
|
(17.2
|
)
|
(Loss) Income Before Income Taxes
|
(35.3
|
)
|
|
61.9
|
|
|
19.4
|
|
|
—
|
|
|
46.0
|
|
Income tax benefit (provision)
|
13.4
|
|
|
(24.2
|
)
|
|
(5.5
|
)
|
|
—
|
|
|
(16.3
|
)
|
Equity in earnings of consolidated subsidiaries
|
51.6
|
|
|
16.1
|
|
|
—
|
|
|
(67.7
|
)
|
|
—
|
|
Net Income
|
29.7
|
|
|
53.8
|
|
|
13.9
|
|
|
(67.7
|
)
|
|
29.7
|
|
Total other comprehensive loss, net of tax
|
—
|
|
|
(0.3
|
)
|
|
(9.5
|
)
|
|
—
|
|
|
(9.8
|
)
|
Comprehensive Income
|
$
|
29.7
|
|
|
$
|
53.5
|
|
|
$
|
4.4
|
|
|
$
|
(67.7
|
)
|
|
$
|
19.9
|
|
HALYARD HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2016
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
16.6
|
|
|
$
|
9.3
|
|
|
$
|
53.3
|
|
|
$
|
—
|
|
|
$
|
79.2
|
|
Accounts receivable, net
|
3.4
|
|
|
490.9
|
|
|
223.7
|
|
|
(522.8
|
)
|
|
195.2
|
|
Inventories
|
—
|
|
|
273.1
|
|
|
37.2
|
|
|
—
|
|
|
310.3
|
|
Prepaid and other current assets
|
5.5
|
|
|
17.4
|
|
|
2.8
|
|
|
(0.7
|
)
|
|
25.0
|
|
Total Current Assets
|
25.5
|
|
|
790.7
|
|
|
317.0
|
|
|
(523.5
|
)
|
|
609.7
|
|
Property, Plant and Equipment, net
|
—
|
|
|
225.3
|
|
|
47.3
|
|
|
—
|
|
|
272.6
|
|
Investment in Consolidated Subsidiaries
|
2,032.1
|
|
|
285.5
|
|
|
—
|
|
|
(2,317.6
|
)
|
|
—
|
|
Goodwill
|
—
|
|
|
1,003.7
|
|
|
27.9
|
|
|
—
|
|
|
1,031.6
|
|
Other Intangible Assets, net
|
—
|
|
|
182.4
|
|
|
—
|
|
|
—
|
|
|
182.4
|
|
Other Assets
|
1.2
|
|
|
2.4
|
|
|
12.1
|
|
|
—
|
|
|
15.7
|
|
TOTAL ASSETS
|
$
|
2,058.8
|
|
|
$
|
2,490.0
|
|
|
$
|
404.3
|
|
|
$
|
(2,841.1
|
)
|
|
$
|
2,112.0
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
$
|
335.1
|
|
|
$
|
311.2
|
|
|
$
|
41.0
|
|
|
$
|
(518.7
|
)
|
|
$
|
168.6
|
|
Accrued expenses
|
8.4
|
|
|
106.2
|
|
|
26.4
|
|
|
(4.7
|
)
|
|
136.3
|
|
Total Current Liabilities
|
343.5
|
|
|
417.4
|
|
|
67.4
|
|
|
(523.4
|
)
|
|
304.9
|
|
Long-Term Debt
|
624.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
624.0
|
|
Other Long-Term Liabilities
|
1.8
|
|
|
83.7
|
|
|
8.1
|
|
|
—
|
|
|
93.6
|
|
Total Liabilities
|
969.3
|
|
|
501.1
|
|
|
75.5
|
|
|
(523.4
|
)
|
|
1,022.5
|
|
Total Equity
|
1,089.5
|
|
|
1,988.9
|
|
|
328.8
|
|
|
(2,317.7
|
)
|
|
1,089.5
|
|
TOTAL LIABILITIES AND EQUITY
|
$
|
2,058.8
|
|
|
$
|
2,490.0
|
|
|
$
|
404.3
|
|
|
$
|
(2,841.1
|
)
|
|
$
|
2,112.0
|
|
HALYARD HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
92.3
|
|
|
$
|
—
|
|
|
$
|
39.7
|
|
|
$
|
(2.5
|
)
|
|
$
|
129.5
|
|
Accounts receivable, net
|
3.0
|
|
|
440.8
|
|
|
221.7
|
|
|
(440.8
|
)
|
|
224.7
|
|
Inventories
|
—
|
|
|
258.4
|
|
|
44.8
|
|
|
—
|
|
|
303.2
|
|
Prepaid and other current assets
|
5.0
|
|
|
10.8
|
|
|
3.0
|
|
|
(0.2
|
)
|
|
18.6
|
|
Total Current Assets
|
100.3
|
|
|
710.0
|
|
|
309.2
|
|
|
(443.5
|
)
|
|
676.0
|
|
Property, Plant and Equipment, net
|
—
|
|
|
228.7
|
|
|
50.8
|
|
|
—
|
|
|
279.5
|
|
Investment in Consolidated Subsidiaries
|
1,750.8
|
|
|
277.7
|
|
|
—
|
|
|
(2,028.5
|
)
|
|
—
|
|
Goodwill
|
—
|
|
|
918.6
|
|
|
26.6
|
|
|
—
|
|
|
945.2
|
|
Other Intangible Assets, net
|
—
|
|
|
82.6
|
|
|
—
|
|
|
—
|
|
|
82.6
|
|
Other Assets
|
1.4
|
|
|
0.3
|
|
|
15.2
|
|
|
—
|
|
|
16.9
|
|
TOTAL ASSETS
|
$
|
1,852.5
|
|
|
$
|
2,217.9
|
|
|
$
|
401.8
|
|
|
$
|
(2,472.0
|
)
|
|
$
|
2,000.2
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
$
|
251.4
|
|
|
$
|
309.4
|
|
|
$
|
42.7
|
|
|
$
|
(440.3
|
)
|
|
$
|
163.2
|
|
Accrued expenses
|
6.6
|
|
|
115.4
|
|
|
33.4
|
|
|
(3.4
|
)
|
|
152.0
|
|
Total Current Liabilities
|
258.0
|
|
|
424.8
|
|
|
76.1
|
|
|
(443.7
|
)
|
|
315.2
|
|
Long-Term Debt
|
578.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
578.1
|
|
Other Long-Term Liabilities
|
1.8
|
|
|
41.6
|
|
|
8.2
|
|
|
—
|
|
|
51.6
|
|
Total Liabilities
|
837.9
|
|
|
466.4
|
|
|
84.3
|
|
|
(443.7
|
)
|
|
944.9
|
|
Total Equity
|
1,014.6
|
|
|
1,751.5
|
|
|
317.5
|
|
|
(2,028.3
|
)
|
|
1,055.3
|
|
TOTAL LIABILITIES AND EQUITY
|
$
|
1,852.5
|
|
|
$
|
2,217.9
|
|
|
$
|
401.8
|
|
|
$
|
(2,472.0
|
)
|
|
$
|
2,000.2
|
|
HALYARD HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
Cash (Used in) Provided by Operating Activities
|
$
|
(7.5
|
)
|
|
$
|
85.5
|
|
|
$
|
16.0
|
|
|
$
|
—
|
|
|
$
|
94.0
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
—
|
|
|
(11.6
|
)
|
|
(2.5
|
)
|
|
—
|
|
|
(14.1
|
)
|
Acquisition of business, net of cash acquired
|
(175.1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(175.1
|
)
|
Intercompany contributions
|
0.5
|
|
|
(65.0
|
)
|
|
1.8
|
|
|
62.7
|
|
|
—
|
|
Cash Used in Investing Activities
|
(174.6
|
)
|
|
(76.6
|
)
|
|
(0.7
|
)
|
|
62.7
|
|
|
(189.2
|
)
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
Intercompany contributions
|
62.3
|
|
|
—
|
|
|
(2.1
|
)
|
|
(60.2
|
)
|
|
—
|
|
Line of credit facility proceeds
|
72.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
72.0
|
|
Line of credit facility repayments
|
(27.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(27.0
|
)
|
Purchase of treasury stock
|
(0.9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.9
|
)
|
Cash Provided by (Used in) Financing Activities
|
106.4
|
|
|
—
|
|
|
(2.1
|
)
|
|
(60.2
|
)
|
|
44.1
|
|
Effect of Exchange Rate on Cash and Cash Equivalents
|
—
|
|
|
0.4
|
|
|
0.4
|
|
|
—
|
|
|
0.8
|
|
(Decrease) Increase in Cash and Cash Equivalents
|
(75.7
|
)
|
|
9.3
|
|
|
13.6
|
|
|
2.5
|
|
|
(50.3
|
)
|
Cash and Cash Equivalents, Beginning of Period
|
92.3
|
|
|
—
|
|
|
39.7
|
|
|
(2.5
|
)
|
|
129.5
|
|
Cash and Cash Equivalents, End of Period
|
$
|
16.6
|
|
|
$
|
9.3
|
|
|
$
|
53.3
|
|
|
$
|
—
|
|
|
$
|
79.2
|
|
HALYARD HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2015
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
Cash (Used in) Provided by Operating Activities
|
$
|
(18.9
|
)
|
|
$
|
22.4
|
|
|
$
|
52.2
|
|
|
$
|
—
|
|
|
$
|
55.7
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
—
|
|
|
(39.1
|
)
|
|
(6.1
|
)
|
|
—
|
|
|
(45.2
|
)
|
Proceeds from property dispositions
|
—
|
|
|
—
|
|
|
7.7
|
|
|
—
|
|
|
7.7
|
|
Cash (Used in) Provided by Investing Activities
|
—
|
|
|
(39.1
|
)
|
|
1.6
|
|
|
—
|
|
|
(37.5
|
)
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
Intercompany contributions
|
62.4
|
|
|
13.2
|
|
|
(75.6
|
)
|
|
—
|
|
|
—
|
|
Debt repayments
|
(51.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(51.0
|
)
|
Purchase of treasury stock
|
(1.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.0
|
)
|
Proceeds from the exercise of stock options
|
0.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.9
|
|
Cash Provided by (Used in) Financing Activities
|
11.3
|
|
|
13.2
|
|
|
(75.6
|
)
|
|
—
|
|
|
(51.1
|
)
|
Effect of Exchange Rate on Cash and Cash Equivalents
|
—
|
|
|
(0.1
|
)
|
|
(1.7
|
)
|
|
—
|
|
|
(1.8
|
)
|
Decrease in Cash and Cash Equivalents
|
(7.6
|
)
|
|
(3.6
|
)
|
|
(23.5
|
)
|
|
—
|
|
|
(34.7
|
)
|
Cash and Cash Equivalents, Beginning of Period
|
101.2
|
|
|
3.9
|
|
|
43.9
|
|
|
—
|
|
|
149.0
|
|
Cash and Cash Equivalents, End of Period
|
$
|
93.6
|
|
|
$
|
0.3
|
|
|
$
|
20.4
|
|
|
$
|
—
|
|
|
$
|
114.3
|
|