NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1
. Accounting Policies
Background and Basis of Presentation
Halyard Health, Inc. is a medical technology company focused on eliminating pain, speeding recovery and preventing infection for healthcare providers and patients. We are committed to addressing some of today’s most important healthcare needs, such as reducing the use of opioids while helping patients move from surgery to recovery. We operate through our Medical Devices business segment. References to “Halyard,” “Company,” “we,” “our” and “us” refer to Halyard Health, Inc. and its consolidated subsidiaries.
Principles of Consolidation
The consolidated financial statements include our net assets, results of our operations and cash flows. All intercompany transactions and accounts within our consolidated businesses have been eliminated. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Use of Estimates
Preparation of 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, and 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.
Cash Equivalents
Cash equivalents are short-term investments with an original maturity date of three months or less. We maintain cash balances and short-term investments in excess of insurable limits in a diversified group of major banks that are selected and monitored based on ratings by the major rating agencies in accordance with our treasury policy.
Inventories and Distribution Costs
Most U.S. inventories are valued at the lower of cost, using the Last-In, First-Out (“LIFO”) method, or market. The balance of the U.S. and non-U.S. inventories are valued at the lower of cost (determined on the First-In, First-Out (“FIFO”) or weighted-average cost methods) or market. Distribution costs are classified as cost of products sold.
Property, Plant and Equipment and Depreciation
Property, plant and equipment are stated at cost and depreciated on the straight-line method. Buildings are depreciated over their estimated useful lives, primarily
40 years
. Machinery and equipment are depreciated over their estimated useful lives, primarily ranging from
16
to
20 years
. Leasehold improvements are depreciated over the assets’ estimated useful lives, or the remaining lease term, whichever is shorter. Purchases of computer software, including external costs and certain internal costs (including payroll and payroll-related costs of employees) directly associated with developing significant computer software applications for internal use, are capitalized. Computer software costs are amortized on the straight-line method over the estimated useful life of the software, which is generally
three
to
five years
. Depreciation expense is recorded in cost of products sold, research and development and selling and general expenses.
Estimated useful lives are periodically reviewed, and when warranted, changes are made to them. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss would be indicated when estimated undiscounted future cash flows from the use and eventual disposition of an asset group, which are identifiable and largely independent of the cash flows of other asset groups, are less than the carrying amount of the asset group. Measurement of an impairment loss would be based on the excess of the carrying amount of the asset group over its fair value. Fair value is measured using discounted cash flows or independent appraisals, as appropriate. When property is sold or retired, the cost of the property and the related accumulated depreciation are removed from the consolidated balance sheet and any gain or loss on the transaction is included in income.
Goodwill and Other Intangible Assets
Goodwill is tested for impairment annually and whenever events and circumstances indicate that impairment may have occurred. The evaluation of goodwill involves comparing the current fair value of a reporting unit to its carrying value, including goodwill. We used a combination of income and market approaches to estimate current fair value. The fair value determination utilized key assumptions regarding the growth of the business, each of which required management judgment, including estimated future sales volumes, selling prices and costs, changes in working capital and investments in property and equipment. These assumptions and estimates were based upon our historical experience and projections of future activity. In addition, the selection of the discount rate used to determine fair value was based upon a market participant’s view considering current market rates and our current cost of financing. There can be no assurance that the assumptions and estimates made for purposes of the annual goodwill impairment test will prove to be accurate. Volatility in the equity and debt markets, or increases in interest rates, could result in a higher discount rate. Changes in sales volumes, selling prices and costs of goods sold and increases in interest rates could cause changes in our forecasted cash flows. Unfavorable changes in any of the factors described above could result in a goodwill impairment charge in the future. We completed the required annual goodwill impairment test as of
July 1, 2017
, and the fair value was substantially in excess of net asset carrying value.
Intangible assets with finite lives are amortized over their estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Estimated useful lives range from
7
to
30 years
for trademarks,
7
to
17 years
for patents and acquired technologies, and
2
to
16 years
for other intangible assets. An impairment loss would be indicated when estimated undiscounted future cash flows from the use of the asset are less than its carrying amount. An impairment loss would be measured as the difference between the fair value (based on discounted future cash flows) and the carrying amount of the asset.
Revenue Recognition and Accounts Receivable
Sales revenue is recognized at the time of product shipment or delivery, depending on when title passes, to unaffiliated customers, and when all of the following have occurred: evidence of a sales arrangement is in place, pricing is fixed or determinable, and collection is reasonably assured. Sales are reported net of returns, rebates and freight allowed. Distributor rebates are estimated based on the historical cost difference between list prices and average end user contract prices and the quantity of products expected to be sold to specific end users. We maintain liabilities at the end of each period for the estimated rebate costs incurred but unpaid for these programs. Differences between estimated and actual rebate costs are normally not material and are recognized in earnings in the period such differences are determined. 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.
Net sales to
one
customer accounted for
10%
,
9%
and
9%
, respectively, of net sales in
2017
,
2016
and
2015
. No other customer accounted for more than
10%
of net sales in any of the periods presented herein. As of each year ended
December 31, 2017
and
2016
, we had
one
customer who individually accounted for more than 10% of our consolidated accounts receivable balance. The allowances for doubtful accounts, sales discounts and returns were
$2 million
as of each year ended
December 31, 2017
and
2016
, respectively. The provision for doubtful accounts was not material for the years ended
December 31, 2017
,
2016
and
2015
.
Foreign Currency Translation
The income statements of foreign operations are translated into U.S. dollars at rates of exchange in effect each month. The balance sheets of these operations are translated at period-end exchange rates, and the differences from historical exchange rates are reflected as unrealized translation adjustments in other comprehensive income.
Research and Development
Research and development expenses are expensed as incurred. Research and development expenses consist primarily of salaries and related expenses for personnel, product trial costs, outside laboratory and license fees, the costs of laboratory equipment and facilities and asset write-offs for equipment that does not reach success in product manufacturing certifications.
Stock-Based Compensation
We have a stock-based Equity Participation Plan and an Outside Directors’ Compensation Plan that provide for awards of stock options, stock appreciation rights, restricted stock (and in certain limited cases, unrestricted stock), restricted stock units, performance units and cash awards to eligible employees (including officers who are employees), directors, advisors and
consultants. Stock-based compensation is initially measured at the fair value of the awards on the grant date and is recognized in the financial statements over the period the employees are required to provide services in exchange for the awards. The fair value of option awards is measured on the grant date using a Black-Scholes option-pricing model. The fair value of time-based and some performance-based restricted share awards is based on the Halyard stock price at the grant date and the assessed probability of meeting future performance targets. For performance-based restricted share units for which vesting is conditioned upon achieving a measure of total shareholder return, fair value is measured using a Monte Carlo simulation. Generally, new shares are issued to satisfy vested restricted stock units and exercises of stock options. See
Note 12
, “Stock-Based Compensation.”
Income Taxes
We account for income taxes under the asset and liability method of accounting, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Under this method, changes in tax rates and laws are recognized in income in the period such changes are enacted. The provision for federal, state, and foreign income taxes is calculated on income before income taxes based on current tax law and includes the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Such provision differs from the amounts currently payable because certain items of income and expense are recognized in different reporting periods for financial reporting purposes than for income tax purposes. Recording the provision for income taxes requires management to make significant judgments and estimates for matters whose ultimate resolution may not become known until the final resolution of an examination by the Internal Revenue Service (IRS) or state and foreign agencies. If it is more likely than not that some portion, or all, of a deferred tax asset will not be realized, a valuation allowance is recognized.
Recording liabilities for uncertain tax positions involves judgment in evaluating our tax positions and developing the best estimate of the taxes ultimately expected to be paid. We include any related tax penalties and interest in income tax expense.
On
December 22, 2017
, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from
35%
to
21%
for tax years beginning after
December 31, 2017
, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. We have estimated our provision for income taxes in accordance with the Act and guidance available as of the date of this filing and as a result have recorded
$10 million
as additional income tax benefit in the fourth quarter of
2017
, the period in which the legislation was enacted. The provisional amount related to the re-measurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future, was
$16 million
of benefit. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was
$7 million
based on cumulative foreign earnings of
$101 million
. We also recorded a
$1 million
benefit related to the treatment of current year cash dividends in relation to the repatriation tax.
On
December 22, 2017
, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, we have determined that the
$16 million
of the deferred tax benefit recorded in connection with the re-measurement of certain deferred tax assets and liabilities, the
$7 million
of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings and the
$1 million
benefit related to the treatment of current year cash dividends in relation to the repatriation tax are provisional amounts and reasonable estimates at
December 31, 2017
. The impact of the Act may differ from this estimate, possibly materially, due to, among other things, changes in interpretations we have made, guidance that may be issued and actions we may take as a result of the Act. Additional work is necessary for a more detailed analysis of our deferred tax assets and liabilities and our historical foreign earnings as well as potential correlative adjustments. We have not accounted for the tax impacts related to the Global Intangible Low Tax Income, Base Erosion Anti Abuse Tax or Foreign Derived Intangible Income regimes or any of the other provisions of the tax legislation that are not effective until fiscal year
2018
. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of
2018
when the analysis is complete.
At
December 31, 2017
, prior to the calculation of the transition tax on the mandatory deemed repatriation, U.S. income taxes and foreign withholding taxes had not been provided on
$151 million
of current and prior year undistributed earnings of subsidiaries operating outside the U.S. These earnings, which are considered to be invested indefinitely, would become subject
to income tax if they were remitted as dividends, were lent to one of our U.S. entities or if we were to sell our stock in the subsidiaries.
While the provisional transition tax of approximately
$7 million
resulted in the reduction of the excess amount of financial reporting over the tax basis in our foreign subsidiaries, we have not completed our analysis of the Act’s impact as an actual repatriation from our non-U.S. subsidiaries could still be subject to additional foreign withholding taxes and U.S. state taxes. We have not completed our analysis of our global working capital and cash requirements and the potential tax liabilities attributable to a repatriation. Therefore, we have not made a provisional estimate of the deferred taxes attributable to repatriation. We will record the tax effects of any change in our prior assertion with respect to these investments, and disclose any unrecognized deferred tax liability for temporary differences related to our foreign investments, if practicable, in the period that we are first able to make a reasonable estimate, no later than December 2018. While we otherwise intend to maintain the indefinite reinvestment exception, we have provided for a deferred tax asset of
$5 million
representing our tax basis over book basis in our investment in certain investments in connection with the proposed divestiture of our S&IP business.
Employee Defined Benefit Plans
We recognize the funded status of our defined benefit as an asset or a liability on our balance sheet. Actuarial gains or losses are a component of our other comprehensive income, which is then included in our accumulated other comprehensive income. Pension expenses are recognized over the period in which the employee renders service and becomes eligible to receive benefits. We make assumptions (including the discount rate and expected rate of return on plan assets) in computing the pension expense and obligations.
Recently Adopted Pronouncements
Effective
January 1, 2017
, we adopted Accounting Standards Update (“ASU”) No. 2016-09,
Improvements to Employee Share-Based Payment Accounting,
and elected to account for forfeitures as they occur rather than applying an estimated forfeiture rate. The adoption of this ASU did not have a material effect on our financial position, results of operations or cash flows.
Effective
July 1, 2017
, we adopted ASU No. 2017-04,
Simplifying the Test for Goodwill Impairment,
that replaced the two-step goodwill impairment test with a simplified one-step process. This ASU provides that goodwill impairment will be measured as the excess of the reporting unit’s carrying value over its fair value and abandons the second step that requires the measurement of goodwill impairment by comparing the implied value of a reporting unit’s goodwill to the goodwill’s carrying amount. Adoption of this ASU did not have a material effect on our financial position, results of operations or cash flows.
Recently Issued Pronouncements
In
August 2017
, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-12,
Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities.
This ASU is intended to improve the financial reporting and presentation of hedging relationships and the economic results of risk management activities in financial statements. The amendments in ASU 2017-12 better align risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. In addition, the amendments permit hedge accounting for risk components involving non-financial and interest rate risks and contains other targeted improvements to simplify the application of hedge accounting. This ASU is effective for annual periods, and interim periods within those annual periods beginning after
December 15, 2018
, with early adoption permitted in any interim period following the issuance of this ASU. The provisions of this ASU should be applied to existing hedging relationships as of the beginning of the fiscal year of adoption. All other presentation and disclosure requirements are to be applied prospectively. We do not expect adoption of this ASU to have a material effect on our financial position, results of operations or cash flows.
In
May 2017
, the FASB issued ASU No. 2017-09,
Stock Compensation - Scope of Modification Accounting.
This ASU is intended to provide clarity and reduce both (i) diversity in practice and (ii) cost and complexity when applying the modification accounting guidance in Topic 718,
Compensation - Stock Compensation.
Specifically, modification accounting is applied to any changes in stock-based awards unless (i) the fair value of the modified award is the same as the fair value of the original award immediately before modification, (ii) the vesting conditions of the modified award are the same as the original award before modification and (iii) the equity or liability classification of the modified award is the same as the original award. This ASU is to be prospectively applied for annual periods, and interim periods within those annual periods beginning after
December 15, 2017
, with early adoption permitted for any interim period for which financial statements have not yet been issued. As this ASU
is intended to bring consistency in practice but does not change any fair value measurement methodologies, it is not expected to have a material effect on our financial position, results of operations or cash flows.
In
March 2017
, the FASB issued ASU No. 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post Retirement Benefit Cost.
This ASU requires that current service cost be reported in the same line item as other compensation costs arising from services rendered by employees during the period. The other components of net benefit cost are to be presented separately in the income statement and below operating income, if operating income is presented. This ASU is effective for annual periods, and interim periods within those annual periods beginning after
December 15, 2017
, with retrospective application required. Earlier adoption is permitted in any interim or annual period for which financial statements have not yet been issued. The adoption of this ASU is not expected to have a material effect on our financial position, results of operations or cash flows.
In
January 2017
, the FASB issued ASU 2017-01,
Clarifying the Definition of a Business,
which provides guidance in evaluating whether transactions involve the acquisition (or disposal) of assets or a business. A business has been defined as having three elements: inputs, processes and outputs. While an integrated set of assets and activities (a “set”) that is a business
usually
has outputs, outputs are not required to be present. Additionally, the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. This ASU provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. It is expected that this ASU will reduce the number of transactions that are treated as business combinations. This ASU is to be adopted prospectively for annual periods, and interim periods within those annual periods beginning after
December 15, 2017
. Adoption of the ASU is not expected to have a material effect on our financial position, results of operations or cash flows.
In
August 2016
, the FASB issued ASU No. 2016-15,
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments.
This ASU provides guidance on the presentation and classification of certain specific cash receipts and payments in the statement of cash flows and is intended to reduce diversity in practice. This ASU is effective for annual periods, and interim periods within those annual periods beginning after
December 15, 2017
, but earlier adoption is permitted. This ASU is to be adopted using a retrospective transition method to each period presented. 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 adoption of this ASU will require us to recognize assets and liabilities for operating leases we have entered into for our principal executive offices as well as certain warehouse, manufacturing and distribution facilities globally. We have not yet determined the impact recognition of such assets and liabilities will have on our financial position, results of operations or cash flows.
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 adoption of this ASU is not expected to have a material effect on our financial position, results of operations or cash flows.
In
May 2014
, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which, along with subsequent amendments, provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most existing revenue recognition guidance. ASU 2014-09 provides for a principles-based, five-step approach to measure and recognize revenue from contracts with customers. ASU 2014-09 is effective for public entities for annual and interim periods beginning after
December 15, 2017
. Early adoption for periods beginning after
December 15, 2016
is 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. Based on the results of our review, we do not expect adoption of this ASU will have a material effect on our financial position, results of operations or cash flows. We will apply this ASU using the modified retrospective method.
Note 2
. Discontinued Operations
On
October 31, 2017
, we entered into a Purchase Agreement (“Purchase Agreement”) by and among us and certain of our affiliates and Owens & Minor, Inc., (“Buyer”). The Purchase Agreement provides for the sale to Buyer, subject to the terms and conditions of the Purchase Agreement, of substantially all of our S&IP business, as well as our name “Halyard Health” (and all variations of our name and related intellectual property rights) and our IT system (the “Divestiture”). The total purchase price payable by the Buyer for the Divestiture is
$710 million
in cash, subject to certain adjustments as provided in the Purchase Agreement based on cash, indebtedness and net working capital transferred to the Buyer and its affiliates at the closing. We expect the transaction to close in the second quarter of
2018
. The Divestiture is intended to accelerate our transformation into a pure-play medical devices business.
On or about the closing date, we will enter into certain commercial agreements, including a transition services agreement with the Buyer, pursuant to which we and the Buyer, and each company’s respective affiliates will provide to each other various transitional services, including an arrangement whereby we will remain a limited risk distributor for S&IP products on the Buyer’s behalf for sales outside of the United States and Canada. The services will generally commence on the closing date of the Divestiture and terminate no later than
two years
thereafter.
As a result of the Divestiture, the results of operations from our S&IP business are reported in the accompanying consolidated income statements as “Income (Loss) from discontinued operations” for the years ended
December 31, 2017
,
2016
and
2015
, and the related assets and liabilities are classified as held-for-sale as of
December 31, 2017
and
2016
in the accompanying balance sheet. The remaining business is managed with
one
operating segment, the Medical Devices business.
The following table summarizes the financial results of our discontinued operations for all periods presented herein (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net Sales
|
$
|
1,012.7
|
|
|
$
|
1,026.1
|
|
|
$
|
1,065.4
|
|
Cost of products sold
|
762.5
|
|
|
765.4
|
|
|
791.6
|
|
Research and development
|
2.9
|
|
|
2.7
|
|
|
4.7
|
|
Selling, general and other expenses
|
82.8
|
|
|
64.9
|
|
|
48.8
|
|
Goodwill impairment
|
—
|
|
|
—
|
|
|
474.0
|
|
Other (income) expense, net
|
(1.6
|
)
|
|
(1.4
|
)
|
|
(11.7
|
)
|
Income (Loss) from discontinued operations before income taxes
|
166.1
|
|
|
194.5
|
|
|
(242.0
|
)
|
Tax (provision) benefit from discontinued operations
|
(54.7
|
)
|
|
(71.4
|
)
|
|
(83.1
|
)
|
Income (Loss) from Discontinued Operations, net
|
$
|
111.4
|
|
|
$
|
123.1
|
|
|
$
|
(325.1
|
)
|
In accordance with accounting principles generally accepted in the United States (“GAAP”), only expenses specifically identifiable and related to a business to be disposed may be allocated to discontinued operations. Accordingly, certain expenses that were historically presented as a component of the S&IP were kept in continuing operations. These expenses, on a pre-tax basis, were
$116 million
in the year ended
December 31, 2017
,
$114 million
in
2016
and
$133 million
in
2015
.
Details on assets and liabilities classified as held for sale in the accompanying consolidated balance sheets are presented in the following table (in millions):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2016
|
Assets held for sale - discontinued operations
|
|
|
|
Accounts receivable, net of allowances
|
$
|
1.5
|
|
|
$
|
1.6
|
|
Inventories
|
198.3
|
|
|
191.8
|
|
Prepaid and other current assets
|
2.3
|
|
|
0.6
|
|
Current assets held for sale - discontinued operations
|
202.1
|
|
|
194.0
|
|
Property, plant and equipment, net
|
150.8
|
|
|
151.5
|
|
Goodwill
|
267.3
|
|
|
266.7
|
|
Other intangible assets, net
|
0.9
|
|
|
1.6
|
|
Non-current deferred tax assets
|
7.1
|
|
|
6.5
|
|
Other assets
|
0.4
|
|
|
0.6
|
|
Total assets held for sale - discontinued operations
|
628.6
|
|
|
620.9
|
|
Other assets classified as held for sale
|
3.9
|
|
|
—
|
|
Total assets classified as held for sale
|
632.5
|
|
|
620.9
|
|
Liabilities held for sale - discontinued operations
|
|
|
|
Accounts payable
|
$
|
15.5
|
|
|
$
|
12.5
|
|
Accrued expenses
|
11.2
|
|
|
12.9
|
|
Current liabilities held for sale - discontinued operations
|
26.7
|
|
|
25.4
|
|
Deferred tax liabilities
|
0.3
|
|
|
0.4
|
|
Other long-term liabilities
|
6.9
|
|
|
6.3
|
|
Total liabilities held for sale - discontinued operations
|
$
|
33.9
|
|
|
$
|
32.1
|
|
Assets and liabilities held for sale as of
December 31, 2017
are classified as current since we expect the Divestiture to be completed within one year. In the prior year, the assets and liabilities held for sale are classified separately as current or noncurrent because the noncurrent assets and liabilities do not meet the criteria for current classification as of
December 31, 2016
. Other assets and liabilities held for sale that are not related to discontinued operations relates primarily to our IT system.
The following table provides operating and investing cash flow information for our discontinued operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Operating Activities:
|
|
|
|
|
|
Depreciation and amortization
|
$
|
20.0
|
|
|
$
|
23.9
|
|
|
$
|
23.2
|
|
Stock-based compensation expense
|
0.5
|
|
|
0.6
|
|
|
0.5
|
|
Investing Activities:
|
|
|
|
|
|
Capital expenditures
|
1.6
|
|
|
1.3
|
|
|
1.6
|
|
Note 3
. Restructuring
In
December 2017
, in conjunction with the Divestiture (see
Note 2
, “Discontinued Operations”), we initiated the initial phase of a multi-year restructuring plan (the “Plan”). The initial phase of the Plan is intended to align our organizational and management structure with our remaining Medical Devices business.
We expect to incur between
$8 million
and
$10 million
of pre-tax costs, of which
$6 million
to
$7 million
is for employee severance and benefits and the remainder for third-party services and other related costs. These are cash costs that will be incurred as we execute the Plan, which we expect to substantially complete by the end of
2019
.
We have incurred
$5 million
of costs, primarily for employee severance and benefits. These costs are included in “Cost of products sold” and “Selling and general” expenses in the accompanying consolidated income statement for the year ended
December 31, 2017
. For the year ended
December 31, 2017
,
no
severance and benefits payments have been made and the remaining liability in “Accrued expenses” and “Other long-term liabilities” for employee severance and benefits was
$5 million
in the accompanying consolidated balance sheet as of
December 31, 2017
.
Note 4
. Goodwill
We test goodwill for impairment annually (as of July 1) or more frequently whenever events or circumstances more likely than not indicate that the fair value of the reporting unit may be below its carrying amount. The fair value of our reporting unit was estimated using a combination of income (discounted cash flow analysis) and market approaches. Both approaches are dependent upon several assumptions regarding future periods, including assumptions with respect to future sales growth, commodity costs and a terminal growth rate. A weighted average cost of capital (“WACC”) was used to discount future estimated cash flows to their present values. The WACC was based on externally observable data considering market participants’ cost of equity and debt, optimal capital structure and risk factors specific to our company. The market approach estimated the fair value of our business based on comparable publicly-traded companies in our industry. We completed the required annual goodwill impairment test as of
July 1, 2017
, and the fair value was substantially in excess of net asset carrying value.
The changes in the carrying amount of goodwill are as follows (in millions):
|
|
|
|
|
Balance at December 31, 2015
|
$
|
678.4
|
|
Goodwill acquired
(a)
|
84.1
|
|
Currency translation adjustment
|
(0.2
|
)
|
Balance at December 31, 2016
|
762.3
|
|
Currency translation adjustment
|
2.4
|
|
Balance at December 31, 2017
|
$
|
764.7
|
|
_____________________________________________
|
|
(a)
|
We acquired
$84 million
of goodwill in conjunction with our acquisition of Corpak (see
Note 6
, “Business Acquisition”).
|
Note 5
. Supplemental Balance Sheet Information
Accounts Receivable
Accounts receivable consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2016
|
Accounts Receivable
|
$
|
204.9
|
|
|
$
|
190.0
|
|
Allowances and doubtful accounts
|
(1.9
|
)
|
|
(1.5
|
)
|
Accounts receivable, net
|
$
|
203.0
|
|
|
$
|
188.5
|
|
Inventories
Inventories at the lower of cost (determined on the LIFO/FIFO or weighted-average cost methods) or market consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2016
|
|
LIFO
|
|
Non-
LIFO
|
|
Total
|
|
LIFO
|
|
Non-
LIFO
|
|
Total
|
Raw Materials
|
$
|
26.6
|
|
|
$
|
1.5
|
|
|
$
|
28.1
|
|
|
$
|
24.5
|
|
|
$
|
0.8
|
|
|
$
|
25.3
|
|
Work in process
|
20.4
|
|
|
0.3
|
|
|
20.7
|
|
|
16.2
|
|
|
0.1
|
|
|
16.3
|
|
Finished goods
|
40.0
|
|
|
9.6
|
|
|
49.6
|
|
|
37.1
|
|
|
8.2
|
|
|
45.3
|
|
Supplies and other
|
—
|
|
|
5.7
|
|
|
5.7
|
|
|
—
|
|
|
5.8
|
|
|
5.8
|
|
|
87.0
|
|
|
17.1
|
|
|
104.1
|
|
|
77.8
|
|
|
14.9
|
|
|
92.7
|
|
Excess of FIFO or weighted-average cost over LIFO cost
|
(13.0
|
)
|
|
—
|
|
|
(13.0
|
)
|
|
(12.0
|
)
|
|
—
|
|
|
(12.0
|
)
|
Total
|
$
|
74.0
|
|
|
$
|
17.1
|
|
|
$
|
91.1
|
|
|
$
|
65.8
|
|
|
$
|
14.9
|
|
|
$
|
80.7
|
|
Property, Plant and Equipment
Property, plant and equipment consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2016
|
Land
|
$
|
1.0
|
|
|
$
|
—
|
|
Buildings and leasehold improvements
|
41.0
|
|
|
39.1
|
|
Machinery and equipment
|
124.4
|
|
|
136.8
|
|
Construction in progress
|
21.5
|
|
|
16.4
|
|
|
187.9
|
|
|
192.3
|
|
Less accumulated depreciation
|
(78.0
|
)
|
|
(83.0
|
)
|
Total
|
$
|
109.9
|
|
|
$
|
109.3
|
|
There were
$3 million
and
$5 million
of capital expenditures in accounts payable as of
December 31, 2017
and
2016
, respectively.
As of the years ended
December 31, 2017
and
2016
, we held
$57 million
and
$58 million
, respectively, of net property, plant and equipment in the United States.
Depreciation expense was
$19 million
,
$20 million
and
$17 million
, respectively, in the years ended
December 31, 2017
,
2016
and
2015
.
Intangible Assets
Intangible assets subject to amortization consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2017
|
|
2016
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Trademarks
|
|
$
|
125.9
|
|
|
$
|
(97.6
|
)
|
|
$
|
28.3
|
|
|
$
|
125.9
|
|
|
$
|
(93.8
|
)
|
|
$
|
32.1
|
|
Patents and acquired technologies
|
|
253.0
|
|
|
(146.1
|
)
|
|
106.9
|
|
|
251.8
|
|
|
(131.1
|
)
|
|
120.7
|
|
Other
|
|
43.1
|
|
|
(35.1
|
)
|
|
8.0
|
|
|
42.9
|
|
|
(33.2
|
)
|
|
9.7
|
|
Total
|
|
$
|
422.0
|
|
|
$
|
(278.8
|
)
|
|
$
|
143.2
|
|
|
$
|
420.6
|
|
|
$
|
(258.1
|
)
|
|
$
|
162.5
|
|
As of
December 31, 2017
, we had
$6 million
of indefinite-lived intangible assets that we acquired in connection with the Acquisition related to in-process research and development projects. Amortization expense for intangible assets was
$21 million
,
$21 million
and
$25 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
We estimate amortization expense for the next
five years
and beyond will be as follows (in millions):
|
|
|
|
|
|
For the years ending December 31,
|
|
|
2018
|
|
$
|
18.2
|
|
2019
|
|
15.3
|
|
2020
|
|
13.1
|
|
2021
|
|
10.9
|
|
2022
|
|
10.4
|
|
Thereafter
|
|
75.3
|
|
Total
|
|
$
|
143.2
|
|
Accrued Expenses
Accrued expenses consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2016
|
Accrued rebates
|
$
|
64.4
|
|
|
$
|
55.7
|
|
Accrued salaries and wages
|
44.5
|
|
|
49.9
|
|
Accrued taxes - income and other
|
6.8
|
|
|
4.4
|
|
Other
|
29.2
|
|
|
28.4
|
|
Total
|
$
|
144.9
|
|
|
$
|
138.4
|
|
Other Long-Term Liabilities
Other long-term liabilities consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2016
|
Taxes payable
|
$
|
10.0
|
|
|
$
|
3.4
|
|
Accrued compensation benefits
|
4.6
|
|
|
4.4
|
|
Other
|
17.2
|
|
|
16.0
|
|
Total
|
$
|
31.8
|
|
|
$
|
23.8
|
|
Note 6
. Business Acquisition
On
May 2, 2016
, Halyard acquired all of the issued and outstanding capital stock of Medsystems Holdings, Inc. (“Medsystems”) a Delaware corporation, for a purchase price of
$175 million
, net of cash acquired (the “Acquisition”). Medsystems owns and conducts its primary business through CORPAK Medsystems (Medsystems and CORPAK Medsystems hereinafter referred to as “Corpak”).
The allocation of the purchase price was as follows (in millions):
|
|
|
|
|
|
Purchase Price
Allocation
|
Current assets acquired net of liabilities assumed
|
$
|
14.1
|
|
Property, plant and equipment
|
4.4
|
|
Identifiable intangible assets, excluding IPR&D
|
105.1
|
|
Identifiable IPR&D
|
5.7
|
|
Deferred tax liabilities
|
(38.4
|
)
|
Goodwill
|
84.1
|
|
Total
|
$
|
175.0
|
|
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
|
|
|
|
Restructuring
In
June 2016
, we initiated a restructuring plan to close the Corpak corporate headquarters and operating facility in Buffalo Grove, Illinois and consolidate operations into our existing corporate and operational facilities. For the year ended
December 31, 2017
, we have incurred
$8 million
of costs that are included in “Cost of products sold” and “Selling and general expenses” in the accompanying consolidated income statements. In the year ended
December 31, 2017
, we have paid
$3 million
to affected employees and the remaining accrual for severance and employee benefits was
not
material as of
December 31, 2017
.
Note 7
. 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.
The following table includes the fair value of our financial instruments for which disclosure of fair value is required (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Hierarchy
Level
|
|
December 31, 2017
|
|
December 31, 2016
|
|
|
Carrying
Amount
|
|
Estimated
Fair
Value
|
|
Carrying
Amount
|
|
Estimated
Fair
Value
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
1
|
|
$
|
219.7
|
|
|
$
|
219.7
|
|
|
$
|
113.7
|
|
|
$
|
113.7
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Senior unsecured notes
|
1
|
|
247.1
|
|
|
259.7
|
|
|
246.5
|
|
|
256.4
|
|
Debt
|
2
|
|
333.8
|
|
|
341.1
|
|
|
332.5
|
|
|
341.3
|
|
Cash equivalents are recorded at cost, which approximates fair value due to their short-term nature.
The fair value of our senior unsecured notes is determined using observable market prices based on trading activity on a primary exchange. For the years ended
December 31, 2017
and
2016
, there were no transfers among Level 1, 2 or 3 fair value determinations. Transfers between levels occur when there are changes in the observability of inputs. Changes between levels are assumed to occur at the beginning of the year.
Note 8
. Debt
As of
December 31, 2017
and
2016
, our debt balances were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
Average
Interest Rate
|
|
Maturities
|
|
As of December 31,
|
|
2017
|
|
2016
|
Senior Secured Term Loan
|
3.83%
|
|
2021
|
|
$
|
339.0
|
|
|
$
|
339.0
|
|
Senior Unsecured Notes
|
6.25%
|
|
2022
|
|
250.0
|
|
|
250.0
|
|
Total debt
|
|
589.0
|
|
|
589.0
|
|
Unamortized Debt Discounts and Issuance Costs
|
|
|
|
|
Senior Secured Term Loan
|
|
(5.2
|
)
|
|
(6.5
|
)
|
Senior Unsecured Notes
|
|
(2.9
|
)
|
|
(3.5
|
)
|
Total Debt, net
|
|
580.9
|
|
|
579.0
|
|
Less current portion of long-term debt
|
|
39.8
|
|
|
—
|
|
Total long-term debt
|
|
$
|
541.1
|
|
|
$
|
579.0
|
|
Senior Secured Term Loan and Revolving Credit Facility
The senior secured term loan (the “Term Loan Facility”) is under a credit agreement that also includes a 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. Unamortized debt discount 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
4.53%
as of
December 31, 2017
.
The credit agreement contains an excess cash flow provision that requires a mandatory principal prepayment of our Term Loan Facility if we generate cash in excess of a defined measure of cash flow. Accordingly, we are required to prepay
$40 million
under this prepayment requirement as we generated Excess Cash in the year ended
December 31, 2017
. This prepayment is classified as “Current portion of long-term debt” in the accompanying consolidated balance sheet and will be paid in the first quarter of
2018
.
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
2.75%
, 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
1.75%
. As of
December 31, 2017
, the interest rate in effect for the Term Loan Facility was
4.10%
.
Borrowings under the Revolving Credit Facility will 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 our Revolving Credit Facility will be 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 and (ii)
0.40%
per annum, otherwise.
To the extent we remain in compliance with certain financial covenants in our credit agreement. we have the ability to access our Revolving Credit Facility. As of
December 31, 2017
, we had
no
borrowings and letters of credit of
$3 million
outstanding under the Revolving Credit Facility. The maturity date for the Revolving Credit Facility is
October 31, 2019
.
Senior Unsecured Notes
The Senior Unsecured Notes (“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. The Notes are guaranteed, jointly and severally, by each of our domestic subsidiaries that guarantees the Senior Credit Facilities. Unamortized debt discount and issuance costs are being amortized to interest expense over the life of the credit agreement using the interest method, resulting in an effective interest rate of
6.53%
as of
December 31, 2017
.
Debt Covenants
The senior secured term loan and the Notes are subject to similar covenants that, among other things, limit our ability and the ability of certain of our subsidiaries to:
|
|
•
|
incur additional indebtedness, guarantee indebtedness or issue disqualified stock or, in the case of our restricted subsidiaries, preferred stock;
|
|
|
•
|
pay dividends on, repurchase or make distributions in respect of our capital stock;
|
|
|
•
|
make certain investments or acquisitions;
|
|
|
•
|
sell, transfer or otherwise convey certain assets;
|
|
|
•
|
enter into agreements restricting certain subsidiaries’ ability to pay dividends or make other intercompany transfers;
|
|
|
•
|
consolidate, merge, sell or otherwise dispose of all or substantially all of our and our subsidiaries’ assets;
|
|
|
•
|
enter into transactions with affiliates; and
|
|
|
•
|
prepay certain kinds of indebtedness.
|
We have the ability to divest significant assets, such as the Divestiture described in “Discontinued Operations” in
Note 2
. The credit agreement allows re-investment of the proceeds into the business through acquisition of another business or through capital expenditures. However, if no investments are made within a specified period of time, the proceeds are to be used to reduce amounts owed under the Senior Credit Facilities and the Notes.
Pursuant to the restrictive covenants that limit our ability to pay dividends, we have the ability to pay dividends, repurchase stock and make investments up to an “Available Amount,” as defined in the credit agreement governing the Senior Credit Facilities, provided that we are in compliance with all required covenants, there are no events of default and upon meeting certain financial ratios.
As of
December 31, 2017
, we were in compliance with all of our debt covenants. As of
December 31, 2017
, our repayment requirements in the next
five years
includes a mandatory prepayment of
$40 million
on our Term Loan facility in the first quarter of
2018
, with the remainder owed under our Term Loan Facility and the
$250 million
Notes due on their respective maturity dates, which are
October 31, 2021
and
October 15, 2022
.
Note 9
. Income Taxes
Our income taxes are calculated using the asset and liability method of accounting, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.
The provision for income taxes includes federal, state and foreign taxes currently payable and those deferred because of net operating losses and temporary differences between the consolidated financial statements and tax bases of assets and liabilities.
The components of income (loss) before income taxes, and the provision (benefit) for income taxes are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Income before income taxes
|
|
|
|
|
|
United States
|
$
|
(76.2
|
)
|
|
$
|
(140.5
|
)
|
|
$
|
(167.2
|
)
|
Foreign
|
4.0
|
|
|
1.3
|
|
|
(1.3
|
)
|
Total
|
(72.2
|
)
|
|
(139.2
|
)
|
|
(168.5
|
)
|
Income tax provision (benefit):
|
|
|
|
|
|
Current:
|
|
|
|
|
|
United States
|
(27.4
|
)
|
|
(30.6
|
)
|
|
(49.5
|
)
|
State
|
(4.6
|
)
|
|
(3.5
|
)
|
|
(4.2
|
)
|
Foreign
|
1.4
|
|
|
0.7
|
|
|
(0.2
|
)
|
Total
|
(30.6
|
)
|
|
(33.4
|
)
|
|
(53.9
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
United States
|
(9.0
|
)
|
|
(21.3
|
)
|
|
(12.5
|
)
|
State
|
(0.4
|
)
|
|
(1.0
|
)
|
|
(0.8
|
)
|
Foreign
|
(0.1
|
)
|
|
(0.2
|
)
|
|
(0.1
|
)
|
Total
|
(9.5
|
)
|
|
(22.5
|
)
|
|
(13.4
|
)
|
Total income tax benefit
|
$
|
(40.1
|
)
|
|
$
|
(55.9
|
)
|
|
$
|
(67.3
|
)
|
On
December 22, 2017
, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from
35%
to
21%
effective for tax years beginning after
December 31, 2017
, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of
December 31, 2017
. We have calculated our best estimate of the impact of the Act in its year end income tax provision in accordance with our understanding of the Act and guidance available as of the date of this filing and as a result have recorded
$10 million
as an additional income tax benefit in the fourth quarter of
2017
, the period in which the legislation was enacted. The provisional amount related to the re-measurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was
$16 million
of benefit. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was
$7 million
based on cumulative foreign earnings of
$101 million
. We also recorded a
$1 million
benefit related to the treatment of current year cash dividends in relation to the repatriation tax.
On
December 22, 2017
, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, we have determined that the
$16 million
of deferred tax benefit recorded in connection with the re-measurement of certain deferred tax assets and liabilities, the
$7 million
of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings and the
$1 million
benefit related to the treatment of current year cash dividends in relation to the repatriation tax are provisional amounts and reasonable estimates at
December 31, 2017
. The impact of the Act may differ from this estimate, possibly materially, due to, among other things, changes in interpretations we have made, guidance that may be issued and actions we may take as a result of the Act. Additional work is necessary for a more detailed
analysis of our deferred tax assets and liabilities and our historical foreign earnings as well as potential correlative adjustments. We have not accounted for the tax impacts related to the Global Intangible Low Tax Income, Base Erosion Anti Abuse Tax or Foreign Derived Intangible Income regimes or any of the other provisions of the tax legislation that are not effective until fiscal year
2018
. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of
2018
when the analysis is complete.
At
December 31, 2017
, prior to the calculation of the transition tax on the mandatory deemed repatriation, U.S. income taxes and foreign withholding taxes had not been provided on
$151 million
of current and prior year undistributed earnings of subsidiaries operating outside the U.S. These earnings, which are considered to be invested indefinitely, would become subject to income tax if they were remitted as dividends, were lent to one of our U.S. entities or if we were to sell our stock in the subsidiaries.
While the provisional transition tax of approximately
$7 million
resulted in the reduction of the excess amount of financial reporting over the tax basis in our foreign subsidiaries, we have not completed our analysis of the Act’s impact as an actual repatriation from our non-U.S. subsidiaries could still be subject to additional foreign withholding taxes and U.S. state taxes. We have not completed our analysis of our global working capital and cash requirements and the potential tax liabilities attributable to a repatriation. Therefore, we have not made a provisional estimate of the deferred taxes attributable to repatriation. We will record the tax effects of any change in our prior assertion with respect to these investments, and disclose any unrecognized deferred tax liability for temporary differences related to our foreign investments, if practicable, in the period that we are first able to make a reasonable estimate, no later than December 2018. While we otherwise intend to maintain the indefinite reinvestment exception, we have provided for a deferred tax asset of
$5 million
representing our tax basis over book basis in our investment in certain investments in connection with the proposed divestiture of our S&IP business.
Major differences between the federal statutory rate and the effective tax rate are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Federal statutory rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Rate of state income taxes, net of federal tax benefit
|
4.5
|
|
|
2.8
|
|
|
2.0
|
|
Statutory rate other than U.S. statutory rate
|
0.1
|
|
|
0.4
|
|
|
—
|
|
Sec. 987 regulation change, federal and state impact
|
—
|
|
|
1.2
|
|
|
—
|
|
U.S. federal research and development credit
|
3.0
|
|
|
1.5
|
|
|
1.0
|
|
Impacts of U.S. federal tax reform
|
14.2
|
|
|
—
|
|
|
—
|
|
Other, net
|
(1.2
|
)
|
|
(0.7
|
)
|
|
1.9
|
|
Effective tax rate
|
55.6
|
%
|
|
40.2
|
%
|
|
39.9
|
%
|
The following is a summary of the significant components of the Company’s deferred tax assets and liabilities (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2016
|
Deferred tax assets
|
|
|
|
Accrued liabilities
|
$
|
18.7
|
|
|
$
|
34.1
|
|
Investment in Joint Venture
|
5.3
|
|
|
—
|
|
Stock-based compensation
|
7.3
|
|
|
8.7
|
|
Transaction costs
|
5.8
|
|
|
—
|
|
Other
|
6.7
|
|
|
8.4
|
|
|
43.8
|
|
|
51.2
|
|
Valuation allowance
|
(1.3
|
)
|
|
(0.5
|
)
|
Total deferred assets
|
42.5
|
|
|
50.7
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
Intangibles, net
|
10.2
|
|
|
17.7
|
|
Inventories
|
12.8
|
|
|
13.0
|
|
Property, plant and equipment, net
|
29.4
|
|
|
45.8
|
|
Other
|
0.3
|
|
|
1.0
|
|
Total deferred tax liabilities
|
52.7
|
|
|
77.5
|
|
Net deferred tax liabilities
|
$
|
10.2
|
|
|
$
|
26.8
|
|
Valuation allowances increased
$0.8 million
during the year ended
December 31, 2017
, primarily relating to net operating losses that we believe will not be realizable as a result of the proposed disposition of our S&IP business. Valuation allowances at the end of
2017
and
2016
primarily relate to tax credits and income tax loss carryforwards.
Realization of income tax loss carryforwards is dependent on generating sufficient taxable income prior to expiration of these carryforwards. Although realization is not assured, we believe it is more likely than not that all of the deferred tax assets, net of applicable valuation allowances, will be realized. The amount of the deferred tax assets considered realizable could be reduced or increased due to changes in the tax environment or if estimates of future taxable income change during the carryforward period.
At
December 31, 2017
, we have credit carryforwards for state income tax purposes of
$3.0 million
, all of which will expire in
2025
. At
December 31, 2017
, certain foreign subsidiaries have net operating loss carryforwards for income tax purposes of
$12 million
, of which
$7 million
will expire in
2020
. The remaining net operating losses are available for carryforward indefinitely.
In connection with the proposed disposition of our S&IP business, we have recognized a deferred tax asset for our tax basis over book basis of
$5 million
relating to certain investments.
A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2016
|
Beginning of year
|
$
|
2.7
|
|
|
$
|
1.5
|
|
Gross increases for tax positions of prior years
|
0.1
|
|
|
1.5
|
|
Gross decreases for tax positions of prior years
|
—
|
|
|
(0.2
|
)
|
Decreases for settlements with taxing authorities
|
—
|
|
|
(0.1
|
)
|
Decreases for lapse of the applicable statute of limitations
|
(0.1
|
)
|
|
—
|
|
End of year
|
$
|
2.7
|
|
|
$
|
2.7
|
|
The amount, if recognized, that would affect our effective tax rate as of
December 31, 2017
and
2016
is
$3 million
and
$2 million
, respectively.
We classify interest and penalties on uncertain tax benefits as income tax expense. As of each year ended
December 31, 2017
and
2016
, before any tax benefits, we had
$1 million
of accrued interest and penalties on unrecognized tax benefits.
During the next
twelve months
, we do not expect the resolution of any tax audits which could potentially reduce unrecognized tax benefits by a material amount. In addition, no expiration of the statute of limitations for a tax year in which we have recorded uncertain tax benefits will occur in the next
twelve months
.
Federal and state income tax returns are generally subject to examination for a period of
three
to
five years
after filing of the respective returns. The state effect of any changes to filed federal positions remains subject to examination by various states for a period of up to two years after formal notification to the states. We have various federal and state income tax return positions in the process of examination, administrative appeals or litigation.
Note 10
. Employee Benefit Plans
Defined Contribution Plans
Eligible employees participate in our defined contribution plans. Our 401(k) plan and supplemental plan provide for a matching contribution of a U.S. employee’s contributions and accruals, subject to predetermined limits. Halyard also has defined contribution pension plans for certain employees outside the U.S. in which eligible employees may participate. We recognized
$7 million
of expense for our matching contributions to the 401(k) plan in each of the years ended
December 31, 2017
,
2016
and
2015
, respectively. Our matching contributions to the 401(k) plan are recognized in cost of products sold, research and development and selling and general expenses in our consolidated income statements.
Defined Benefit Plans
Certain plans in our international operations are our direct obligation, and therefore, the related funded status has been recorded within our consolidated balance sheet. These plans are primarily unfunded and the aggregated projected benefit obligation was
$3 million
and
$2 million
as of
December 31, 2017
and
2016
, respectively. Net periodic pension cost for each of the years ended
December 31, 2017
,
2016
and
2015
was
$1 million
. Over the next ten years, we expect gross benefit payments to be
$1 million
in total for the years
2018
through
2022
, and
$1 million
in total for the years
2023
through
2027
.
Note 11
. 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, 2014
|
$
|
(18.3
|
)
|
|
$
|
(0.5
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(19.1
|
)
|
Other comprehensive loss
|
(22.1
|
)
|
|
(0.7
|
)
|
|
(1.3
|
)
|
|
(24.1
|
)
|
Balance, December 31, 2015
|
(40.4
|
)
|
|
(1.2
|
)
|
|
(1.6
|
)
|
|
(43.2
|
)
|
Other comprehensive (loss) income
|
(8.3
|
)
|
|
0.8
|
|
|
0.6
|
|
|
(6.9
|
)
|
Balance, December 31, 2016
|
(48.7
|
)
|
|
(0.4
|
)
|
|
(1.0
|
)
|
|
(50.1
|
)
|
Other comprehensive (loss) income
|
17.1
|
|
|
1.2
|
|
|
0.5
|
|
|
18.8
|
|
Balance, December 31, 2017
|
$
|
(31.6
|
)
|
|
$
|
0.8
|
|
|
$
|
(0.5
|
)
|
|
$
|
(31.3
|
)
|
The net changes in the components of AOCI, including the tax effect, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Unrealized translation
|
$
|
17.1
|
|
|
$
|
(8.3
|
)
|
|
$
|
(22.1
|
)
|
|
|
|
|
|
|
Defined benefit pension plans
|
0.6
|
|
|
0.7
|
|
|
(1.9
|
)
|
Tax effect
|
(0.1
|
)
|
|
(0.1
|
)
|
|
0.6
|
|
Defined benefit pension plans, net of tax
|
0.5
|
|
|
0.6
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
Cash flow hedges
|
1.5
|
|
|
1.0
|
|
|
(1.0
|
)
|
Tax effect
|
(0.3
|
)
|
|
(0.2
|
)
|
|
0.3
|
|
Cash flow hedges, net of tax
|
1.2
|
|
|
0.8
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
Change in AOCI
|
$
|
18.8
|
|
|
$
|
(6.9
|
)
|
|
$
|
(24.1
|
)
|
Note 12
. Stock-Based Compensation
The Halyard Health, Inc. Equity Participation Plan and the Halyard Health, Inc. Outside Directors’ Compensation Plan (together, the “Equity Plans”) provide for awards of stock options, stock appreciation rights, restricted stock (and in certain limited cases, unrestricted stock), restricted stock units, performance units and cash awards to eligible employees (including officers who are employees), directors, advisors and consultants of Halyard or its subsidiaries. A maximum of
4.9 million
shares of Halyard common stock may be issued under the Equity Plans, and there are
1.9 million
shares remaining available for issuance as of
December 31, 2017
.
Aggregate stock-based compensation expense under the Equity Plans was
$13 million
,
$15 million
and
$14 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively, which includes amounts allocated to discontinued operations. Stock-based compensation expense included in continuing operations totals
$12 million
,
$14 million
and
$13 million
in the years ended
December 31, 2017
,
2016
and
2015
, respectively. Stock-based compensation expense described by award type below refers to expense in continuing operations only. Stock-based compensation expense is included in cost of sales, research and development expenses and selling and general expenses.
Stock Options
Stock options are granted at an exercise price equal to the fair market value of Halyard’s common stock on the date of grant. Stock options are generally subject to graded vesting whereby options vest
30%
at the end of each of the first two
12-month
periods following the grant and
40%
at the end of the third
12-month
period and have a term of
10 years
.
The fair value of stock option awards was determined using a Black-Scholes option-pricing model utilizing a range of assumptions related to volatility, risk-free interest rate, expected term and dividend yield. Expected volatility was based on historical weekly closing stock price volatility for a peer group of companies. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant. The expected term was based on historical observed settlement behavior. The dividend yield was based on the expectation that no dividends are expected to be paid on our common stock.
The weighted-average fair value of options granted in the years ended
December 31, 2017
,
2016
and
2015
was
$9.07
,
$7.70
and
$15.15
, respectively, based on the following assumptions:
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016(a)
|
|
2015
|
Volatility
|
24% to 25%
|
|
26%
|
|
25% to 34%
|
Risk-free rate
|
1.7% to 1.8%
|
|
1.2%
|
|
0.7% to 1.9%
|
Expected term (Years)
|
5
|
|
5
|
|
2 to 7
|
Dividend Yield
|
0%
|
|
0%
|
|
0%
|
________________________________________
|
|
(a)
|
In the year ended
December 31, 2016
, all stock options granted had uniform terms and were awarded on the same grant date.
|
Stock-based compensation expense related to stock options was
$3 million
,
$5 million
and
$6 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
A summary of stock option activity is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(in thousands)
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
Aggregate
Intrinsic
Value
(in millions)
|
Outstanding at December 31, 2016
|
1,526
|
|
|
$
|
37.42
|
|
|
|
|
|
Granted
|
558
|
|
|
37.59
|
|
|
|
|
|
Exercises
|
(136
|
)
|
|
34.80
|
|
|
|
|
|
Forfeitures
|
(278
|
)
|
|
40.38
|
|
|
|
|
|
Outstanding at December 31, 2017
|
1,670
|
|
|
$
|
37.20
|
|
|
6.9
|
|
$
|
15.0
|
|
Vested and exercisable at December 31, 2017
|
949
|
|
|
$
|
36.23
|
|
|
5.7
|
|
$
|
9.4
|
|
The following table summarizes information about options outstanding as of
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of
Exercise Prices
|
Shares (in thousands)
|
|
Weighted-Average
Remaining Contractual
Term (Years)
|
|
Shares (in thousands)
|
|
Weighted-Average Exercise Price
|
$25.00
|
to
|
$35.00
|
530
|
|
|
6.3
|
|
380
|
|
|
$
|
30.29
|
|
$35.00
|
to
|
$45.00
|
724
|
|
|
7.5
|
|
366
|
|
|
37.24
|
|
$45.00+
|
416
|
|
|
6.6
|
|
203
|
|
|
45.53
|
|
|
|
|
1,670
|
|
|
6.9
|
|
949
|
|
|
$
|
36.23
|
|
In the year ended
December 31, 2017
, options with an aggregate intrinsic value of
$1 million
were exercised resulting in an excess tax benefit of
$0.4 million
. In the years ended
December 31, 2016
and
2015
, the intrinsic value of exercised options and the resulting excess tax benefit were not material. For stock options outstanding at
December 31, 2017
, we expect to recognize an additional
$4 million
of expense over the remaining average service period of
one year
.
Restricted Share Units
Restricted shares, time-vested restricted share units and performance-based restricted share units granted to employees and directors are valued at the closing market price of our common stock on the grant date with vesting conditions determined upon approval of the award.
Stock-based compensation expense related to restricted stock units was
$4 million
,
$5 million
and
$8 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. A summary of restricted share unit activity is presented below:
|
|
|
|
|
|
|
|
|
Shares
(in thousands)
|
|
Weighted Average
Fair Value
|
Outstanding at December 31, 2016
|
528
|
|
|
$
|
39.12
|
|
Granted
|
123
|
|
|
38.16
|
|
Vested
|
(166
|
)
|
|
37.99
|
|
Forfeited
|
(56
|
)
|
|
40.51
|
|
Outstanding at December 31, 2017
|
429
|
|
|
$
|
39.10
|
|
For restricted share units outstanding at
December 31, 2017
, we expect to recognize an additional
$4 million
of expense over the remaining average service period of
one year
.
We also issue 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 defined group of peer companies. The expense recognition for TSR units differs from awards with service or 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 TSR units is determined using a Monte Carlo simulation with a volatility assumption based on the average stock-price volatility for a peer group of companies over the restricted period. For awards granted in the years ended
December 31, 2017
and
2016
, the assumed volatility was
25%
in each of the years and the weighted average fair value per TSR unit was
$42.24
and
$38.64
, respectively. For the years ended
December 31, 2017
and
2016
, stock-based compensation expense related to TSR units was
$5 million
and
$4 million
, respectively. There were no TSR units awarded before
2016
.
A summary of TSR unit activity is presented below.
|
|
|
|
|
|
|
|
|
Shares
(in thousands)
|
|
Weighted Average
Fair Value
|
Outstanding at December 31, 2016
|
224
|
|
|
$
|
38.60
|
|
Granted
|
231
|
|
|
42.24
|
|
Forfeited
|
(57
|
)
|
|
42.02
|
|
Outstanding at December 31, 2017
|
398
|
|
|
$
|
40.22
|
|
For TSR units outstanding at
December 31, 2017
, we expect to recognize an additional
$6 million
of expense over the weighted average remaining restricted period of
two years
.
Note 13
. Commitments and Contingencies
Legal Matters
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 the 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 years ended
December 31, 2017
,
2016
and
2015
, we have incurred
$21 million
,
$20 million
and
$17 million
, respectively, related to these matters.
Chondrolysis Litigation
An exception to our 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. Although Kimberly-Clark generally retained 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 action arising after the Spin-off.
Surgical Gown Litigation and Related Matters
Bahamas Surgery Center
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.,
No. 2:14-cv-08390-DMG-SH (C.D. Cal.) (
“Bahamas”
), filed on October 29, 2014. In that case, the plaintiff brought a putative class action asserting claims for common law fraud (affirmative misrepresentation and fraudulent concealment) and violation of California’s Unfair Competition Law (“UCL”) in connection with our marketing and sale of MicroCool surgical gowns.
On April 7, 2017, after a two-week trial, a jury returned a verdict for the plaintiff, finding that Kimberly-Clark was liable for
$4 million
in compensatory damages (not including prejudgment interest) and
$350 million
in punitive damages, and that Halyard was liable for
$0.3 million
in compensatory damages (not including prejudgment interest) and
$100 million
in punitive damages. Subsequently, the court also ruled on the plaintiff’s UCL claim and request for injunctive relief. The court found in favor of the plaintiff on the UCL claim but denied the plaintiff’s request for restitution. The court also denied the plaintiff’s request for injunctive relief.
On May 25, 2017, we filed
three
post-trial motions: a renewed motion for judgment as a matter of law; a motion to decertify the class; and a motion for new trial, remittitur, or amendment of the judgment. The renewed motion for judgment as a matter of law seeks to have the court reverse the jury’s verdict in whole or in part because it was based on insufficient facts and/or did not correctly apply the law. The motion to decertify the class seeks to have the court decertify the class on the basis that the evidence at trial did not support the Court’s initial class certification order and therefore the case should not have proceeded as a class action. The motion for new trial, remittitur or amendment of the judgment seeks, among other relief, to have the court reduce the jury’s punitive damages award because it was not supported by the facts and was excessive in violation of due process under the U.S. Constitution. The U.S. Supreme Court has stated that the Constitutional outer limit for the ratio between punitive damages and compensatory damages in cases such as ours is approximately
9
to 1 or lower, and we believe that in a case such as ours that, if there is any award of punitive damages (a premise we dispute), the ratio should be 1 to 1. We intend to continue our vigorous defense of the Bahamas matter.
Kimberly-Clark Corporation
We have notified Kimberly-Clark that we have reserved our rights to challenge any purported obligation to indemnify Kimberly-Clark for the punitive damages awarded against them. In connection with our reservation of rights, on May 1, 2017, we filed a complaint in the matter styled
Halyard Health, Inc. v. Kimberly-Clark Corporation
, Case No. BC659662 (County of Los Angeles, Superior Court of California). In that case, we seek a declaratory judgment that we have no obligation, under the Distribution Agreement or otherwise, to indemnify, pay, reimburse, assume, or otherwise cover punitive damages assessed against Kimberly-Clark in
Bahamas Surgery Center, LLC, et al. v. Kimberly-Clark Corporation and Halyard Health, Inc.
, No. 14-CV-08390 (C.D. Cal., originally filed on October 29, 2014), or any Expenses or Losses (as defined in the distribution agreement) associated with an award of punitive damages. On May 2, 2017, Kimberly-Clark filed a complaint in the matter styled
Kimberly-Clark Corporation v. Halyard Health, Inc.,
Case No. 2017-0332-AGB (Court of Chancery of the State of Delaware). In that case, Kimberly-Clark seeks a declaratory judgment that (1) we must indemnify them for all damages, including punitive damages, assessed against them in the
Bahamas
matter, (2) we have anticipatorily and materially breached the Distribution Agreement by our failure to indemnify them, and (3) we are estopped from asserting, or have otherwise waived, any claim that we are not required to indemnify them for all damages, including punitive damages, that may be awarded in the
Bahamas
matter. On May 26, 2017, we moved to dismiss or stay Kimberly-Clark’s Delaware complaint, and on June 16, 2017, Kimberly-Clark moved for summary judgment. On September 12, 2017, the Delaware court granted our motion to stay Kimberly-Clark’s complaint and therefore did not take any action on Kimberly-Clark’s motion for summary judgment. We intend to vigorously pursue our case against Kimberly-Clark in California and to vigorously defend against their case against us.
Government Investigation
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 and April 2017, we received additional subpoenas from the DOJ seeking further information related to Company gowns. The Company is cooperating with the DOJ investigation.
Shahinian and Edgett
On October 12, 2016, after the DOJ and various States declined to intervene in
two
qui tam matters, both matters were unsealed and the complaints were subsequently served on Kimberly-Clark and Halyard, as applicable. One of those matters is
U.S. ex rel. Shahinian, et al. v. Kimberly-Clark Corporation,
No. 2:14-cv-08313-JAK-JPR (C. D. Cal.) (“
Shahinian”
), filed on October 27, 2014. The other matter is
U.S. ex rel. Edgett, et al. v. Kimberly-Clark Corporation, Halyard Health, Inc., et al,
No. 3:15-cv-00434-B (N.D. Tex.) (
“Edgett”
), filed on February 9, 2015. Both cases allege, among other things, violations of the federal and various state False Claims Acts in connection with the marketing and sale of certain surgical gowns.
Shahinian:
On March 8, 2017, Kimberly-Clark moved to dismiss the Shahinian complaint, and on July 14, 2017, the California court granted Kimberly-Clark’s motion while also granting the plaintiff leave to amend his complaint. The plaintiff then filed a second amended complaint. On August 11, 2017, Kimberly-Clark moved to dismiss the complaint, and on November 30, 2017, the California court again granted Kimberly-Clark’s motion while also granting the plaintiff leave to amend his complaint. The plaintiff then filed a third amended complaint. On January 18, 2018, Kimberly-Clark moved to dismiss it.
Edgett:
On May 17, 2017, Kimberly-Clark and Halyard moved to dismiss the Edgett complaint. On September 22, 2017, the court granted Kimberly-Clark’s and Halyard’s motions to dismiss, and on November 6, 2017, the court entered final judgment dismissing the Edgett complaint. The plaintiff did not appeal the entry of judgment.
We may have an Indemnification Obligation for the
Shahinian
and
Edgett
matters under the distribution agreement with Kimberly-Clark and have notified Kimberly-Clark that we reserve our rights to challenge the obligation to indemnify Kimberly-Clark for any damages or penalties which are not indemnifiable under applicable law or public policy. We intend to vigorously defend the remaining claims.
Kromenaker
On March 17, 2017, the DOJ submitted a filing declining to intervene in another qui tam matter, and the complaint was unsealed and subsequently served on Kimberly-Clark and Halyard. That matter is styled
U.S. ex rel. Kromenaker v. Kimberly-Clark Corporation and Halyard Health, Inc.,
No. 1:15-cv-04413-SCJ (N. D. Ga.) (“Kromenaker”), filed on December 21, 2015. In that case, the plaintiff alleges, among other things, violations of the federal False Claims Act in connection with the marketing and sale of certain products, including feminine hygiene products, surgical gowns and endotracheal tubes. On June 12, 2017, Kimberly-Clark and Halyard moved to dismiss the complaint. On August 21, 2017, Kromenaker filed an amended complaint, and Kimberly-Clark and Halyard filed motions to dismiss the amended complaint on September 20, 2017. We may have an Indemnification Obligation for certain parts of this matter under the distribution agreement with Kimberly-Clark and have notified Kimberly-Clark that we reserve our rights to challenge the obligation to indemnify Kimberly-Clark for any damages or penalties which are not indemnifiable under applicable law or public policy. We intend to vigorously defend this matter.
Jackson
We were 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. On February 16, 2017, we moved to dismiss the case. We intend to continue our vigorous defense of this matter.
Richardson, Chiu and Pick
We were also served with a complaint in a matter styled
Margaret C. Richardson Trustee of the Survivors Trust Dated 6/12/84 for the Benefit of the H&M Richardson Revocable Trust v. Robert E. Abernathy, Steven E. Voskuil, et al.,
No. 1:16-cv-06296 (S.
D. N. Y.) (
“Richardson”
), filed on August 9, 2016. In that case, the plaintiff sues derivatively on behalf of Halyard Health, Inc., and alleges that the defendants breached their fiduciary duty, were unjustly enriched, and violated Section 14(A) of the Securities and Exchange Act in connection with Halyard Health, Inc.’s marketing and sale of MicroCool gowns. We were also served with a complaint in a matter styled
Kai Chiu v. Robert E. Abernathy, Steven E. Voskuil, et al
, No. 2:16-cv-08768 (C.D. Cal.), filed on November 23, 2016. In that case, the plaintiff sues derivatively on behalf of Halyard Health, Inc., and makes allegations and brings causes of action similar to those in
Richardson
, but the plaintiff also adds causes of action for abuse of control, gross mismanagement, and waste of corporate assets. We were also served with a complaint in a matter styled
Lukas Pick v. Robert E. Abernathy, Steven E. Voskuil, et al.
No. e:18-cv-00295 (D. Del.), filed of February 21, 2018. In that case, the plaintiff sues derivatively on behalf of Halyard Health, Inc., and makes allegations and brings causes of action similar to those in
Richardson
and
Chiu.
We intend to vigorously defend these matters.
Medline Industries
We were also served with a complaint in the matter styled
Medline Industries, Inc. v. Kimberly-Clark Corporation, Halyard Health, Inc., et al.
, No. 2:16-cv-08571 (C. D. Cal.), filed on November 17, 2016. In that case, the plaintiff makes allegations similar to those in
Bahamas
,
Shahinian
, and
Edgett
, and brings causes of action under federal and state false advertising laws and state unfair competition laws. On March 31, 2017, we moved to dismiss certain of Medline’s claims and to transfer any surviving claims from California to Georgia. On June 2, 2017, the court granted our motion to transfer the case to Georgia and denied without prejudice our motion to dismiss. On June 30, 2017, now before the court in Georgia and with the case re-styled as
Medline Industries, Inc. v. Kimberly-Clark Corporation, Halyard Health, Inc., et al.
, No. 1:17-cv-02032 (N. D. Ga.), Kimberly-Clark and Halyard filed renewed motions to dismiss certain of Medline’s claims. We may have an Indemnification Obligation for this matter under the distribution agreement with Kimberly-Clark and have notified Kimberly-Clark that we reserve our rights to challenge the obligation to indemnify Kimberly-Clark for any damages or penalties which are not indemnifiable under applicable law or public policy. We intend to vigorously defend this matter.
Naeyaert
On April 13, 2017, Kimberly-Clark was served with a complaint in the matter styled
Christopher Naeyaert v. Kimberly-Clark Corporation, et al.,
No. PSC 1603503 (County of Riverside, Superior Court of California), filed on July 21, 2016. In that case, the plaintiff makes allegations similar to those in
Bahamas
and brings causes of action similar to those in
Bahamas,
except the allegations and causes of action relate to the Ultra surgical gown. On June 5, 2017, Kimberly-Clark moved to dismiss the complaint. On August 21, 2017, Naeyaert filed an amended complaint and on September 18, 2017, Kimberly-Clark filed a motion to dismiss the amended complaint. We may have an Indemnification Obligation for this matter under the distribution agreement with Kimberly-Clark and have notified Kimberly-Clark that we reserve our rights to challenge the obligation to indemnify Kimberly-Clark for any damages or penalties which are not indemnifiable under applicable law or public policy. We intend to vigorously defend this matter.
Patent Litigation
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.
General
While we maintain general and professional liability, product liability and other insurance, 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 resolution of these matters will not materially impact our liquidity, access to capital markets or ability to conduct our daily operations.
As of
December 31, 2017
, we have an accrued liability for the matters described herein. The accrued liability is included in “Accrued Expenses” in the accompanying consolidated balance sheet. Our estimate of these liabilities is based on facts and circumstances existing at this time, along with other variables. Factors that may affect our estimate include, but are not limited to: (i) changes in the number of lawsuits filed against us, including the potential for similar, duplicate or “copycat” lawsuits
filed in multiple jurisdictions, including lawsuits that bring causes or action or allege violations of law with regard to additional products; (ii) changes in the legal costs of defending such claims; (iii) changes in the nature of the lawsuits filed against us, (iv) changes in the applicable law governing any legal claims against us; (v) a determination that our assumptions used in estimating the liability are no longer reasonable; and (vi) the uncertainties associated with the judicial process, including adverse judgments rendered by courts or juries. Thus, the actual amount of these liabilities for existing and future claims could be different than the accrued amount. Additionally, the above matters, regardless of the outcome, could disrupt our business and result in substantial costs and diversion of management attention.
Environmental Compliance
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.
Operating Leases
We have entered into operating leases for principal executive offices, located in Alpharetta, Georgia, as well as certain warehouse, manufacturing and distribution facilities. The future minimum obligations under operating leases, including those associated with discontinued operations, having a non-cancelable term in excess of one year are as follows (in millions):
|
|
|
|
|
|
Year
|
|
Amount
|
2018
|
|
$
|
18.0
|
|
2019
|
|
15.6
|
|
2020
|
|
11.2
|
|
2021
|
|
10.0
|
|
2022
|
|
9.2
|
|
Thereafter
|
|
39.2
|
|
Future minimum obligations
|
|
$
|
103.2
|
|
Rental expense under all operating leases, including those associated with discontinued operations, was
$24 million
,
$22 million
and
$22 million
in the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Note 14
. 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 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 EPS for each of the three years ended
December 31, 2017
,
2016
and
2015
is set forth in the following table (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net loss from continuing operations
|
$
|
(32.1
|
)
|
|
$
|
(83.3
|
)
|
|
$
|
(101.2
|
)
|
Net income (loss) from discontinued operations
|
111.4
|
|
|
123.1
|
|
|
(325.1
|
)
|
Net income (loss)
|
$
|
79.3
|
|
|
$
|
39.8
|
|
|
$
|
(426.3
|
)
|
|
|
|
|
|
|
Weighted Average Shares Outstanding:
|
|
|
|
|
|
Basic weighted average shares outstanding
|
46.8
|
|
|
46.6
|
|
|
46.6
|
|
Dilutive effect of stock options and restricted share unit awards
|
—
|
|
|
—
|
|
|
—
|
|
Diluted weighted average shares outstanding
|
46.8
|
|
|
46.6
|
|
|
46.6
|
|
Earnings (Loss) Per Share:
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
Continuing Operations
|
$
|
(0.69
|
)
|
|
$
|
(1.79
|
)
|
|
$
|
(2.17
|
)
|
Discontinued Operations
|
2.38
|
|
|
2.64
|
|
|
(6.98
|
)
|
Basic Earnings (Loss) Per Share
|
$
|
1.69
|
|
|
$
|
0.85
|
|
|
$
|
(9.15
|
)
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
Continuing operations
|
$
|
(0.69
|
)
|
|
$
|
(1.79
|
)
|
|
$
|
(2.17
|
)
|
Discontinued operations
|
2.38
|
|
|
2.64
|
|
|
(6.98
|
)
|
Diluted Earnings (Loss) Per Share
|
$
|
1.69
|
|
|
$
|
0.85
|
|
|
$
|
(9.15
|
)
|
Restricted share units (“RSUs”) contain provisions allowing for the equivalent of any dividends paid on common stock during the restricted period to be reinvested into additional RSUs at the then fair market value of the common stock on the date dividends are paid. Such awards are to be included in the EPS calculation under the two-class method. Currently we do not anticipate any cash dividends for the foreseeable future and our outstanding RSU awards are not material in comparison to our weighted average shares outstanding. Accordingly, all EPS amounts reflect shares as if they were fully vested and the disclosures associated with the two-class method are not presented herein.
For the year ended
December 31, 2017
,
1 million
of potentially dilutive stock options and restricted share unit awards were excluded from the computation of earnings per share as their effect would have been anti-dilutive.
Note 15
. Business Segment Information
Our Medical Devices operating segment, which is also our reportable global business segment, was determined in accordance with how our executive managers currently develop and execute global strategies to drive growth and profitability.
The Medical Devices segment provides a portfolio of innovative product offerings focused on pain management and respiratory and digestive health to improve patient outcomes and reduce the cost of care. These products include post-operative pain management solutions, minimally invasive interventional (or chronic) pain therapies, closed airway suction systems and enteral feeding tubes.
Information concerning operations of our business segment is presented in the following table (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net Sales
|
|
|
|
|
|
Medical Devices
|
$
|
611.6
|
|
|
$
|
566.2
|
|
|
$
|
509.0
|
|
Corporate and Other
|
—
|
|
|
—
|
|
|
—
|
|
Total Net Sales
|
611.6
|
|
|
566.2
|
|
|
509.0
|
|
Operating Profit (Loss)
|
|
|
|
|
|
Medical Devices
|
155.2
|
|
|
123.8
|
|
|
107.8
|
|
Corporate and Other
(a)(b)(c)
|
(178.2
|
)
|
|
(211.2
|
)
|
|
(227.3
|
)
|
Other (expense) income, net
(d)
|
(20.1
|
)
|
|
(19.7
|
)
|
|
(16.2
|
)
|
Total Operating Loss
|
(43.1
|
)
|
|
(107.1
|
)
|
|
(135.7
|
)
|
Interest income
|
2.5
|
|
|
0.6
|
|
|
0.3
|
|
Interest expense
|
(31.6
|
)
|
|
(32.7
|
)
|
|
(33.1
|
)
|
Loss before Income Taxes
|
$
|
(72.2
|
)
|
|
$
|
(139.2
|
)
|
|
$
|
(168.5
|
)
|
_______________________________________________
|
|
(a)
|
For the year ended
December 31, 2017
, Corporate and other costs included
$116 million
, respectively, of costs historically presented as a component of the S&IP business,
$55 million
of general expenses,
$5 million
of restructuring costs and
$8 million
of acquisition-related charges partially offset by a
$6 million
benefit related to realignment of internal policies for our post-divestiture business.
|
|
|
(b)
|
For the year ended
December 31, 2016
, Corporate and other costs included
$114 million
of costs historically presented as a component of the S&IP business,
$66 million
of general expenses,
$14 million
of post spin-related costs
$18 million
, respectively, of acquisition-related charges.
|
|
|
(c)
|
For the year ended
December 31, 2015
, Corporate and other costs included
$133 million
of costs historically presented as a component of the S&IP business,
$49 million
of general expenses and
$46 million
of post spin-related expenses.
|
|
|
(d)
|
Other expense, net is primarily costs related to litigation and legal matters.
|
For the year ended
December 31, 2017
,
2016
and
2015
, products in our surgical pain, interventional pain, digestive health and respiratory health categories each accounted for more than
10%
of our consolidated net sales. For the year ended
December 31, 2017
,
2016
and
2015
, net sales to external customers in the United States were
$467 million
,
$410 million
and
$389 million
, respectively.
Depreciation, amortization and capital expenditures are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Depreciation and Amortization
|
|
|
|
|
|
Medical Devices
|
$
|
27.4
|
|
|
$
|
30.4
|
|
|
$
|
30.8
|
|
Corporate and Other
(a)
|
32.1
|
|
|
34.8
|
|
|
34.6
|
|
Total Depreciation and Amortization
|
59.5
|
|
|
65.2
|
|
|
65.4
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
|
Medical Devices
|
$
|
21.9
|
|
|
$
|
17.7
|
|
|
$
|
23.2
|
|
Corporate and Other
(b)
|
21.3
|
|
|
11.4
|
|
|
47.2
|
|
Total Capital Expenditures
|
$
|
43.2
|
|
|
$
|
29.1
|
|
|
$
|
70.4
|
|
_______________________________________________
|
|
(a)
|
Depreciation and Amortization in Corporate and Other includes depreciation of corporate assets and depreciation and amortization of assets associated with discontinued operations (See “Discontinued Operations” in
Note 2
).
|
|
|
(b)
|
Corporate and other capital expenditures includes expenditures for corporate assets and expenditures associated with discontinued operations.
|
Information concerning assets by business segment is presented in the following table (in millions):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2016
|
Assets
|
|
|
|
Medical Devices
|
$
|
1,189.6
|
|
|
$
|
1,197.2
|
|
Corporate and Other
(a)
|
1,006.3
|
|
|
874.6
|
|
Total Assets
|
$
|
2,195.9
|
|
|
$
|
2,071.8
|
|
_______________________________________________
|
|
(a)
|
Corporate and other assets includes corporate assets, certain current assets and liabilities associated with discontinued operations that we will retain after closing the Divestiture and assets held for sale.
|
Note 16
. Supplemental Guarantor Financial Information
In
October 2014
, Halyard Health, Inc. (referred to below as “Parent”) issued the Notes (described in
Note 8
, “Debt”). The Notes 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 and ranks equally in right of payment with all existing and future indebtedness and all other obligations (except subordinated indebtedness) of each Guarantor.
The following condensed consolidating balance sheets as of
December 31, 2017
and
2016
and the condensed consolidating statements of income and cash flows for the years ended
December 31, 2017
,
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 consolidating basis.
The Parent and the Guarantor Subsidiaries use the equity method of accounting to reflect ownership interests in subsidiaries which 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Parent
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Net Sales
|
$
|
—
|
|
|
$
|
679.2
|
|
|
$
|
306.9
|
|
|
$
|
(374.5
|
)
|
|
$
|
611.6
|
|
Cost of products sold
|
—
|
|
|
385.7
|
|
|
263.5
|
|
|
(374.5
|
)
|
|
274.7
|
|
Gross Profit
|
—
|
|
|
293.5
|
|
|
43.4
|
|
|
—
|
|
|
336.9
|
|
Research and development expenses
|
—
|
|
|
38.2
|
|
|
—
|
|
|
—
|
|
|
38.2
|
|
Selling and general expenses
|
29.9
|
|
|
249.7
|
|
|
42.1
|
|
|
—
|
|
|
321.7
|
|
Other expense (income), net
|
0.7
|
|
|
34.5
|
|
|
(15.1
|
)
|
|
—
|
|
|
20.1
|
|
Operating (Loss) Profit
|
(30.6
|
)
|
|
(28.9
|
)
|
|
16.4
|
|
|
—
|
|
|
(43.1
|
)
|
Interest income
|
0.9
|
|
|
0.1
|
|
|
4.5
|
|
|
(3.0
|
)
|
|
2.5
|
|
Interest expense
|
(32.3
|
)
|
|
(2.2
|
)
|
|
(0.1
|
)
|
|
3.0
|
|
|
(31.6
|
)
|
(Loss) Income Before Income Taxes
|
(62.0
|
)
|
|
(31.0
|
)
|
|
20.8
|
|
|
—
|
|
|
(72.2
|
)
|
Income tax benefit (provision)
|
20.0
|
|
|
23.2
|
|
|
(3.1
|
)
|
|
—
|
|
|
40.1
|
|
Equity in earnings of consolidated subsidiaries
|
125.1
|
|
|
32.6
|
|
|
—
|
|
|
(157.7
|
)
|
|
—
|
|
Net Income (Loss) from Continuing Operations
|
83.1
|
|
|
24.8
|
|
|
17.7
|
|
|
(157.7
|
)
|
|
(32.1
|
)
|
(Loss) Income on discontinued operations, net of tax
|
(3.8
|
)
|
|
86.0
|
|
|
29.2
|
|
|
—
|
|
|
111.4
|
|
Net Income (Loss)
|
79.3
|
|
|
110.8
|
|
|
46.9
|
|
|
(157.7
|
)
|
|
79.3
|
|
Total other comprehensive income (loss), net of tax
|
18.8
|
|
|
13.1
|
|
|
18.3
|
|
|
(31.4
|
)
|
|
18.8
|
|
Comprehensive Income (Loss)
|
$
|
98.1
|
|
|
$
|
123.9
|
|
|
$
|
65.2
|
|
|
$
|
(189.1
|
)
|
|
$
|
98.1
|
|
HALYARD HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME AND COMPREHENSIVE INCOME STATEMENTS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Parent
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Net Sales
|
$
|
—
|
|
|
$
|
625.4
|
|
|
$
|
250.0
|
|
|
$
|
(309.2
|
)
|
|
$
|
566.2
|
|
Cost of products sold
|
—
|
|
|
356.7
|
|
|
221.5
|
|
|
(309.2
|
)
|
|
269.0
|
|
Gross Profit
|
—
|
|
|
268.7
|
|
|
28.5
|
|
|
—
|
|
|
297.2
|
|
Research and development expenses
|
—
|
|
|
38.0
|
|
|
0.4
|
|
|
—
|
|
|
38.4
|
|
Selling and general expenses
|
37.2
|
|
|
274.2
|
|
|
34.8
|
|
|
—
|
|
|
346.2
|
|
Other (income) expense, net
|
(0.8
|
)
|
|
36.4
|
|
|
(17.5
|
)
|
|
1.6
|
|
|
19.7
|
|
Operating (Loss) Profit
|
(36.4
|
)
|
|
(79.9
|
)
|
|
10.8
|
|
|
(1.6
|
)
|
|
(107.1
|
)
|
Interest income
|
0.3
|
|
|
0.1
|
|
|
2.5
|
|
|
(2.3
|
)
|
|
0.6
|
|
Interest expense
|
(33.1
|
)
|
|
(1.7
|
)
|
|
(0.2
|
)
|
|
2.3
|
|
|
(32.7
|
)
|
(Loss) Income Before Income Taxes
|
(69.2
|
)
|
|
(81.5
|
)
|
|
13.1
|
|
|
(1.6
|
)
|
|
(139.2
|
)
|
Income tax benefit (provision)
|
25.5
|
|
|
33.9
|
|
|
(3.5
|
)
|
|
—
|
|
|
55.9
|
|
Equity in earnings of consolidated subsidiaries
|
85.3
|
|
|
22.3
|
|
|
—
|
|
|
(107.6
|
)
|
|
—
|
|
Income (Loss) from Continued Operations
|
41.6
|
|
|
(25.3
|
)
|
|
9.6
|
|
|
(109.2
|
)
|
|
(83.3
|
)
|
(Loss) Income from discontinued operations, net of tax
|
(1.8
|
)
|
|
108.6
|
|
|
16.3
|
|
|
—
|
|
|
123.1
|
|
Net Income (Loss)
|
39.8
|
|
|
83.3
|
|
|
25.9
|
|
|
(109.2
|
)
|
|
39.8
|
|
Total other comprehensive loss, net of tax
|
(6.9
|
)
|
|
(6.3
|
)
|
|
(7.2
|
)
|
|
13.5
|
|
|
(6.9
|
)
|
Comprehensive Income
|
$
|
32.9
|
|
|
$
|
77.0
|
|
|
$
|
18.7
|
|
|
$
|
(95.7
|
)
|
|
$
|
32.9
|
|
HALYARD HEALTH, INC. AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATING INCOME AND COMPREHENSIVE INCOME STATEMENTS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
Parent
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Net Sales
|
$
|
—
|
|
|
$
|
591.2
|
|
|
$
|
266.4
|
|
|
$
|
(348.6
|
)
|
|
$
|
509.0
|
|
Cost of products sold
|
—
|
|
|
338.8
|
|
|
261.0
|
|
|
(348.6
|
)
|
|
251.2
|
|
Gross Profit
|
—
|
|
|
252.4
|
|
|
5.4
|
|
|
—
|
|
|
257.8
|
|
Research and development expenses
|
—
|
|
|
27.6
|
|
|
—
|
|
|
—
|
|
|
27.6
|
|
Selling and general expenses
|
30.6
|
|
|
274.4
|
|
|
44.7
|
|
|
—
|
|
|
349.7
|
|
Other (income) expense, net
|
(0.8
|
)
|
|
26.9
|
|
|
(9.9
|
)
|
|
—
|
|
|
16.2
|
|
Operating Loss
|
(29.8
|
)
|
|
(76.5
|
)
|
|
(29.4
|
)
|
|
—
|
|
|
(135.7
|
)
|
Interest income
|
0.3
|
|
|
—
|
|
|
3.1
|
|
|
(3.1
|
)
|
|
0.3
|
|
Interest expense
|
(33.8
|
)
|
|
(2.1
|
)
|
|
(0.3
|
)
|
|
3.1
|
|
|
(33.1
|
)
|
Loss Before Income Taxes
|
(63.3
|
)
|
|
(78.6
|
)
|
|
(26.6
|
)
|
|
—
|
|
|
(168.5
|
)
|
Income tax benefit (provision)
|
24.3
|
|
|
44.7
|
|
|
(1.7
|
)
|
|
—
|
|
|
67.3
|
|
Equity in (loss) earnings of consolidated subsidiaries
|
(389.5
|
)
|
|
22.4
|
|
|
—
|
|
|
367.1
|
|
|
—
|
|
(Loss) Income from Continued Operations
|
(428.5
|
)
|
|
(11.5
|
)
|
|
(28.3
|
)
|
|
367.1
|
|
|
(101.2
|
)
|
Income (Loss) from discontinued operations, net of tax
|
2.2
|
|
|
(366.4
|
)
|
|
39.1
|
|
|
—
|
|
|
(325.1
|
)
|
Net (Loss) Income
|
(426.3
|
)
|
|
(377.9
|
)
|
|
10.8
|
|
|
367.1
|
|
|
(426.3
|
)
|
Total other comprehensive loss, net of tax
|
—
|
|
|
(0.1
|
)
|
|
(24.0
|
)
|
|
—
|
|
|
(24.1
|
)
|
Comprehensive (Loss) Income
|
$
|
(426.3
|
)
|
|
$
|
(378.0
|
)
|
|
$
|
(13.2
|
)
|
|
$
|
367.1
|
|
|
$
|
(450.4
|
)
|
HALYARD HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
Parent
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
114.5
|
|
|
$
|
16.0
|
|
|
$
|
89.2
|
|
|
$
|
—
|
|
|
$
|
219.7
|
|
Accounts receivable, net
|
1.1
|
|
|
623.0
|
|
|
266.3
|
|
|
(687.4
|
)
|
|
203.0
|
|
Inventories
|
—
|
|
|
76.0
|
|
|
15.1
|
|
|
—
|
|
|
91.1
|
|
Prepaid and other current assets
|
0.6
|
|
|
11.7
|
|
|
2.1
|
|
|
—
|
|
|
14.4
|
|
Assets held for sale
|
0.3
|
|
|
546.7
|
|
|
85.5
|
|
|
—
|
|
|
632.5
|
|
Total Current Assets
|
116.5
|
|
|
1,273.4
|
|
|
458.2
|
|
|
(687.4
|
)
|
|
1,160.7
|
|
Property, Plant and Equipment, Net
|
—
|
|
|
92.9
|
|
|
17.0
|
|
|
—
|
|
|
109.9
|
|
Investment in Consolidated Subsidiaries
|
2,154.3
|
|
|
403.2
|
|
|
—
|
|
|
(2,557.5
|
)
|
|
—
|
|
Goodwill
|
—
|
|
|
738.1
|
|
|
26.6
|
|
|
—
|
|
|
764.7
|
|
Other Intangible Assets, net
|
—
|
|
|
139.5
|
|
|
9.4
|
|
|
—
|
|
|
148.9
|
|
Other Assets
|
0.3
|
|
|
6.0
|
|
|
5.4
|
|
|
—
|
|
|
11.7
|
|
TOTAL ASSETS
|
$
|
2,271.1
|
|
|
$
|
2,653.1
|
|
|
$
|
516.6
|
|
|
$
|
(3,244.9
|
)
|
|
$
|
2,195.9
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
$
|
39.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
39.8
|
|
Trade accounts payable
|
454.0
|
|
|
347.0
|
|
|
49.8
|
|
|
(679.6
|
)
|
|
171.2
|
|
Accrued expenses
|
11.6
|
|
|
113.9
|
|
|
27.4
|
|
|
(8.0
|
)
|
|
144.9
|
|
Liabilities held for sale
|
—
|
|
|
7.8
|
|
|
26.1
|
|
|
—
|
|
|
33.9
|
|
Total Current Liabilities
|
505.4
|
|
|
468.7
|
|
|
103.3
|
|
|
(687.6
|
)
|
|
389.8
|
|
Long-Term Debt
|
541.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
541.1
|
|
Other Long-Term Liabilities
|
9.2
|
|
|
36.1
|
|
|
4.3
|
|
|
—
|
|
|
49.6
|
|
Total Liabilities
|
1,055.7
|
|
|
504.8
|
|
|
107.6
|
|
|
(687.6
|
)
|
|
980.5
|
|
Total Equity
|
1,215.4
|
|
|
2,148.3
|
|
|
409.0
|
|
|
(2,557.3
|
)
|
|
1,215.4
|
|
TOTAL LIABILITIES AND EQUITY
|
$
|
2,271.1
|
|
|
$
|
2,653.1
|
|
|
$
|
516.6
|
|
|
$
|
(3,244.9
|
)
|
|
$
|
2,195.9
|
|
HALYARD HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
Parent
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
54.2
|
|
|
$
|
9.5
|
|
|
$
|
50.0
|
|
|
$
|
—
|
|
|
$
|
113.7
|
|
Accounts receivable, net
|
3.1
|
|
|
552.5
|
|
|
239.9
|
|
|
(607.0
|
)
|
|
188.5
|
|
Inventories
|
—
|
|
|
69.2
|
|
|
11.5
|
|
|
—
|
|
|
80.7
|
|
Prepaid and other current assets
|
5.0
|
|
|
10.1
|
|
|
1.8
|
|
|
(0.3
|
)
|
|
16.6
|
|
Assets held for sale
|
—
|
|
|
162.3
|
|
|
31.7
|
|
|
—
|
|
|
194.0
|
|
Total Current Assets
|
62.3
|
|
|
803.6
|
|
|
334.9
|
|
|
(607.3
|
)
|
|
593.5
|
|
Property, Plant and Equipment, Net
|
—
|
|
|
96.7
|
|
|
12.6
|
|
|
—
|
|
|
109.3
|
|
Investment in Consolidated Subsidiaries
|
2,029.5
|
|
|
328.7
|
|
|
—
|
|
|
(2,358.2
|
)
|
|
—
|
|
Goodwill
|
—
|
|
|
736.1
|
|
|
26.2
|
|
|
—
|
|
|
762.3
|
|
Other Intangible Assets, net
|
—
|
|
|
159.5
|
|
|
8.7
|
|
|
—
|
|
|
168.2
|
|
Other Assets
|
0.7
|
|
|
7.7
|
|
|
3.2
|
|
|
—
|
|
|
11.6
|
|
Assets Held for Sale
|
0.3
|
|
|
380.0
|
|
|
46.6
|
|
|
—
|
|
|
426.9
|
|
TOTAL ASSETS
|
$
|
2,092.8
|
|
|
$
|
2,512.3
|
|
|
$
|
432.2
|
|
|
$
|
(2,965.5
|
)
|
|
$
|
2,071.8
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
$
|
398.3
|
|
|
$
|
325.9
|
|
|
$
|
38.3
|
|
|
$
|
(601.9
|
)
|
|
$
|
160.6
|
|
Accrued expenses
|
11.1
|
|
|
108.5
|
|
|
24.2
|
|
|
(5.4
|
)
|
|
138.4
|
|
Liabilities held for sale
|
—
|
|
|
8.3
|
|
|
17.1
|
|
|
—
|
|
|
25.4
|
|
Total Current Liabilities
|
409.4
|
|
|
442.7
|
|
|
79.6
|
|
|
(607.3
|
)
|
|
324.4
|
|
Long-Term Debt
|
579.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
579.0
|
|
Other Long-Term Liabilities
|
1.9
|
|
|
52.9
|
|
|
4.4
|
|
|
—
|
|
|
59.2
|
|
Liabilities Held for Sale
|
—
|
|
|
1.5
|
|
|
5.2
|
|
|
—
|
|
|
6.7
|
|
Total Liabilities
|
990.3
|
|
|
497.1
|
|
|
89.2
|
|
|
(607.3
|
)
|
|
969.3
|
|
Total Equity
|
1,102.5
|
|
|
2,015.2
|
|
|
343.0
|
|
|
(2,358.2
|
)
|
|
1,102.5
|
|
TOTAL LIABILITIES AND EQUITY
|
$
|
2,092.8
|
|
|
$
|
2,512.3
|
|
|
$
|
432.2
|
|
|
$
|
(2,965.5
|
)
|
|
$
|
2,071.8
|
|
HALYARD HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Parent
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
Cash (Used in) Provided by Operating Activities
|
$
|
(43.3
|
)
|
|
$
|
137.2
|
|
|
$
|
50.3
|
|
|
$
|
—
|
|
|
$
|
144.2
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
—
|
|
|
(32.4
|
)
|
|
(10.8
|
)
|
|
—
|
|
|
(43.2
|
)
|
Proceeds from dispositions of property
|
—
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
Intercompany contributions
|
—
|
|
|
(98.8
|
)
|
|
—
|
|
|
98.8
|
|
|
—
|
|
Cash (Used in) Provided by Investing Activities
|
—
|
|
|
(131.1
|
)
|
|
(10.8
|
)
|
|
98.8
|
|
|
(43.1
|
)
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
Intercompany contributions
|
101.4
|
|
|
—
|
|
|
(2.6
|
)
|
|
(98.8
|
)
|
|
—
|
|
Purchase of treasury stock
|
(2.5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2.5
|
)
|
Proceeds and excess tax benefits from the exercise of stock options
|
4.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4.7
|
|
Cash Provided by (Used in) Financing Activities
|
103.6
|
|
|
—
|
|
|
(2.6
|
)
|
|
(98.8
|
)
|
|
2.2
|
|
Effect of Exchange Rate on Cash and Cash Equivalents
|
—
|
|
|
0.4
|
|
|
2.3
|
|
|
—
|
|
|
2.7
|
|
Increase in Cash and Cash Equivalents
|
60.3
|
|
|
6.5
|
|
|
39.2
|
|
|
—
|
|
|
106.0
|
|
Cash and Cash Equivalents, Beginning of Period
|
54.2
|
|
|
9.5
|
|
|
50.0
|
|
|
—
|
|
|
113.7
|
|
Cash and Cash Equivalents, End of Period
|
$
|
114.5
|
|
|
$
|
16.0
|
|
|
$
|
89.2
|
|
|
$
|
—
|
|
|
$
|
219.7
|
|
HALYARD HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Parent
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
Cash (Used in) Provided by Operating Activities
|
$
|
(33.0
|
)
|
|
$
|
207.7
|
|
|
$
|
15.8
|
|
|
$
|
(1.7
|
)
|
|
$
|
188.8
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
—
|
|
|
(22.7
|
)
|
|
(6.4
|
)
|
|
—
|
|
|
(29.1
|
)
|
Acquisition of business, net of cash acquired
|
(175.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(175.0
|
)
|
Proceeds from property dispositions
|
—
|
|
|
3.2
|
|
|
—
|
|
|
—
|
|
|
3.2
|
|
Intercompany contributions
|
0.5
|
|
|
(177.9
|
)
|
|
2.7
|
|
|
174.7
|
|
|
—
|
|
Cash (Used in) Provided by Investing Activities
|
(174.5
|
)
|
|
(197.4
|
)
|
|
(3.7
|
)
|
|
174.7
|
|
|
(200.9
|
)
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
Intercompany contributions
|
170.8
|
|
|
—
|
|
|
(0.3
|
)
|
|
(170.5
|
)
|
|
—
|
|
Line of credit facility proceeds
|
72.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
72.0
|
|
Line of credit facility repayments
|
(72.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(72.0
|
)
|
Debt issuance costs
|
(0.9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.9
|
)
|
Purchase of treasury stock
|
(0.9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.9
|
)
|
Proceeds and excess tax benefits from the exercise of stock options
|
0.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.4
|
|
Cash Provided by (Used in) Financing Activities
|
169.4
|
|
|
—
|
|
|
(0.3
|
)
|
|
(170.5
|
)
|
|
(1.4
|
)
|
Effect of Exchange Rate on Cash and Cash Equivalents
|
—
|
|
|
(0.8
|
)
|
|
(1.5
|
)
|
|
—
|
|
|
(2.3
|
)
|
(Decrease) Increase in Cash and Cash Equivalents
|
(38.1
|
)
|
|
9.5
|
|
|
10.3
|
|
|
2.5
|
|
|
(15.8
|
)
|
Cash and Cash Equivalents, Beginning of Period
|
92.3
|
|
|
—
|
|
|
39.7
|
|
|
(2.5
|
)
|
|
129.5
|
|
Cash and Cash Equivalents, End of Period
|
$
|
54.2
|
|
|
$
|
9.5
|
|
|
$
|
50.0
|
|
|
$
|
—
|
|
|
$
|
113.7
|
|
HALYARD HEALTH, INC. AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATING STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
Parent
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
Cash (Used in) Provided by Operating Activities
|
$
|
(44.7
|
)
|
|
$
|
110.5
|
|
|
$
|
34.3
|
|
|
$
|
(2.5
|
)
|
|
$
|
97.6
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
—
|
|
|
(61.3
|
)
|
|
(9.1
|
)
|
|
—
|
|
|
(70.4
|
)
|
Proceeds from property dispositions
|
—
|
|
|
—
|
|
|
7.8
|
|
|
—
|
|
|
7.8
|
|
Intercompany contributions
|
39.9
|
|
|
(53.1
|
)
|
|
1.3
|
|
|
11.9
|
|
|
—
|
|
Cash Provided by (Used in) Investing Activities
|
39.9
|
|
|
(114.4
|
)
|
|
—
|
|
|
11.9
|
|
|
(62.6
|
)
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
Intercompany contributions
|
46.5
|
|
|
—
|
|
|
(34.6
|
)
|
|
(11.9
|
)
|
|
—
|
|
Debt repayments
|
(51.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(51.0
|
)
|
Purchase of treasury stock
|
(1.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.0
|
)
|
Proceeds and excess tax benefits from the exercise of stock options
|
1.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.4
|
|
Cash Used in Financing Activities
|
(4.1
|
)
|
|
—
|
|
|
(34.6
|
)
|
|
(11.9
|
)
|
|
(50.6
|
)
|
Effect of Exchange Rate on Cash and Cash Equivalents
|
—
|
|
|
—
|
|
|
(3.9
|
)
|
|
—
|
|
|
(3.9
|
)
|
Decrease in Cash and Cash Equivalents
|
(8.9
|
)
|
|
(3.9
|
)
|
|
(4.2
|
)
|
|
(2.5
|
)
|
|
(19.5
|
)
|
Cash and Cash Equivalents, Beginning of Period
|
101.2
|
|
|
3.9
|
|
|
43.9
|
|
|
—
|
|
|
149.0
|
|
Cash and Cash Equivalents, End of Period
|
$
|
92.3
|
|
|
$
|
—
|
|
|
$
|
39.7
|
|
|
$
|
(2.5
|
)
|
|
$
|
129.5
|
|