Halyard Health's net sales increase 2% to $439 million in fourth quarter 2014

Halyard Health, Inc. (NYSE: HYH) today reported year-end 2014 results and provided its 2015 outlook and related key planning assumptions.

"This is an exciting time for Halyard Health as we report our fourth quarter results, our first as an independent company," stated Robert Abernathy, Chairman and CEO. "We executed a smooth separation from Kimberly-Clark and I'm pleased with our early progress following the spin-off. We delivered sales growth and margin improvement in the fourth quarter while we remain focused on executing our plans to deliver strong returns to shareholders."

Executive Summary

• 2014 fourth quarter net sales were $439 million. On a constant currency basis, net sales increased 3 percent in the period.
• Net loss for the fourth quarter 2014 was $2.4 million compared to net income of $40 million in the fourth quarter of 2013. Fourth quarter adjusted net income was $74 million compared to adjusted net income of $44 million in the prior year.
• The fourth quarter net loss resulted in diluted earnings per share of $(0.05), compared to $0.86 diluted earnings per share in the fourth quarter of 2013. Adjusted diluted earnings per share in the quarter were $1.59, compared to adjusted diluted earnings per share of $0.95 in the prior year.
• Full-year net sales of $1.7 billion were even with the prior year. Net sales, on a constant currency basis, were also even.
• Net income in 2014 was $27 million, compared to net income of $155 million in 2013. Full-year 2014 adjusted net income was $191 million, compared to adjusted net income of $173 million in the prior year.
• The 2014 net income resulted in diluted earnings per share of $0.58, compared to $3.32 of diluted earnings per share in 2013. Adjusted diluted earnings per share for the year were $4.11, compared to adjusted diluted earnings per share of $3.71 in the prior year.
• 2015 full-year adjusted diluted earnings per share are expected to be $2.30 to $2.50. The outlook reflects expectations that net sales will be even to up 2 percent, on a constant currency basis.

"Our fourth quarter and full-year results reflect the overall strength of our business. Our foundation is strong, our balance sheet and cash flow are healthy and we have plenty of flexibility to invest in future growth. We expect to build on our 2014 results, execute our post-spin strategy of investing for long-term growth and deliver on our mission to advance health and healthcare by preventing infection, eliminating pain and speeding recovery," Abernathy added.

Fourth Quarter 2014 Operating Results

Net sales increased 2 percent to $439 million compared to $431 in the prior year, due to increased volume in facial protection, exam gloves and corporate sales to Kimberly-Clark Corporation. This growth was partially offset by unfavorable currency exchange rates and lower selling prices.

Operating profit was $24 million in the fourth quarter 2014 versus $58 million in 2013. On an adjusted basis, operating profit was $77 million compared to $65 million in the prior year. Adjusted results for 2014 exclude $30 million in pre-spin related charges, $15 million in post-spin related charges, and $8 million of intangible amortization expense.

Adjusted EBITDA for the fourth quarter, excluding pre- and post-spin related charges, depreciation and intangible asset amortization was $87 million compared to $74 million in the fourth quarter of 2013.

Fourth Quarter 2014 Business Segment Results

Surgical and Infection Prevention (S&IP)

S&IP net sales of $299 million increased 2 percent compared to the fourth quarter of 2013. On a constant currency basis, sales increased 4 percent. Performance was driven by increased volume in facial protection and exam gloves in all regions as customers responded to an earlier start of the cold and flu season as well as prepared for potential pandemics, while volume was down in surgical due to the loss of low-margin business in our Europe, Middle East and Africa region. Overall volume growth was partially offset by an unfavorable impact from currency exchange rates, and lower net selling prices in sterilization and exam gloves.

S&IP operating profit for the quarter was $48 million compared to $38 million in last year's fourth quarter. The increase was driven by higher sales volume, manufacturing cost savings, and lower selling and general expenses due to a strategic headcount reduction at the end of 2013.

Medical Devices

Net sales of Medical Devices in the fourth quarter 2014 declined 3 percent to $128 million compared to the fourth quarter 2013. On a constant currency basis, sales declined 2 percent. Performance was impacted primarily by lower volume in surgical pain driven by competitive activity and unfavorable currency exchange rates.

Operating profit for Medical Devices was $28 million in 2014 compared to $22 million in the prior year. The increase was driven by lower operating expenses as a result of reduced administrative and selling expenses.

Full-Year 2014 Results

Full-year 2014 net sales of $1.7 billion were even compared to 2013. On a constant currency basis, net sales were also even.

Operating profit was $94 million in 2014 versus $225 million in 2013. On an adjusted basis, 2014 operating profit was $288 million, up 13 percent compared to adjusted operating profit of $255 million in the prior year.

Adjusted EBITDA for 2014, excluding pre- and post-spin related charges, depreciation and intangible asset amortization was $326 million compared to $295 million in 2013.

The company's 2014 tax rate was primarily impacted by foreign cash repatriation and non-deductible transaction costs associated with the spin-off from Kimberly-Clark. For the year, the tax rate was 70.3 percent, and 113.3 percent for the fourth quarter, compared to 32.1 percent and 32.0 percent in the prior year periods. The full-year adjusted effective tax rate, which excludes the effect of the previously mentioned adjustments to earnings per share, was 32.8 percent and (3.9) percent for the quarter, compared to the 2013 tax rates of 32.9 percent and 32.7 percent.

Full-Year 2014 Business Segment Results

Surgical and Infection Prevention

S&IP net sales decreased 1 percent to $1,139 million, compared to net sales of $1,153 million a year ago. On a constant currency basis, net sales were even. Volume increased overall during the year with gains in facial protection, sterilization and surgical partially offset by a decline in volume in exam gloves and apparel. Countering volume growth was a decline in selling prices for the year across the majority of our categories. Finally, currency was a drag on net sales due to weakening in the Australian dollar, Japanese yen and Canadian dollar.

S&IP operating profit was $166 million compared to $151 million in 2013, driven by manufacturing cost savings and reduced operating expenses, primarily due to a strategic headcount reduction at the end of 2013.

Medical Devices

Net sales of Medical Devices in 2014 increased 1 percent to $502 million compared to $499 million in 2013. On a constant currency basis, sales increased 1 percent. Volume grew in digestive health, respiratory health and interventional pain, while down in surgical pain due to competitive activity. Selling prices were slightly lower in digestive and respiratory health in North America and in Europe, Middle East and Africa as a result of efforts to speed growth of our surgical pain category. Finally currency was unfavorable due to a weakening in the Australian dollar and Japanese yen.

Operating profit was $105 million compared to $86 million in 2013. The increase was driven by lower operating expenses primarily related to lower administrative and selling expenses.

Cash Flow and Balance Sheet

Cash from operations less capital expenditures, or free cash flow, for the fourth quarter was $22 million compared to $66 million a year ago. For the year, free cash flow was $69 million compared to $175 million in the prior year. The decrease was driven by transaction costs associated with executing the spin-off from Kimberly-Clark as well as post-spin transition costs. At year-end 2014, the company's cash balance was $149 million.

Capital spending for the fourth quarter was $18 million compared to $11 million in 2013, while full-year 2014 capital spending totaled $79 million compared to $49 million in the prior year. The increase for the quarter and for the full-year spending was related to the spin-off from Kimberly-Clark.

Prior to the spin-off, Halyard Health borrowed $640 million, consisting of a $390 million secured term loan and $250 million in unsecured notes. Proceeds from the term loan and unsecured notes, along with cash on hand, were used to fund a cash distribution of $680 million to Kimberly-Clark immediately prior to the spin-off. Total debt at the end of 2014 was $636 million, consisting of a secured term loan and unsecured notes, compared to total debt of $12 million at the end of 2013, which consisted primarily of intercompany debt.

2015 Outlook and Key Planning Assumptions

Based on current trends, the company expects net sales growth, on a constant currency basis, to be even to up 2 percent in 2015 compared to 2014. Adjusted earnings per diluted share including the after-tax intangible amortization expense of approximately $0.34 per share, are anticipated to be in the range of $2.30 to $2.50 for the full year. This outlook reflects certain key assumptions, which are listed below:

• S&IP net sales, on a constant currency basis, are expected to range from a decline of 1 percent to even.
• Medical Devices net sales, on a constant currency basis, are expected to increase 2 to 4 percent.
• We expect a negative foreign currency translation impact to net sales of 2.5 to 3.5 percent compared to the prior year. Currency will negatively impact operating profit $10 to $15 million.
• Deflation in key cost inputs of $25 to $30 million. The company anticipates costs of oil-based commodities, primarily nitrile and polymer to be down year-over-year, although less than the anticipated decline in oil prices.
• Research and development investment is expected to range from $30 to $35 million, to support the company's focus on product innovation.
• Spin-off related transitional costs are expected to be $45 to $55 million in 2015.The adjusted effective tax rate is anticipated to be between 37.0 and 39.0 percent.
• Capital spending of $55 to $60 million, which is slightly above the company's long-range target of approximately 3 percent of net sales.
• Share repurchases to offset potential dilution from equity awards are expected to total $30 to $35 million, subject to market conditions and board approval.